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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, 1997
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 2, 1998: $905,779,083.
Number of Shares of Common Stock outstanding as of March 2, 1998: 39,343,506
shares.
Debt Securities: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of December 31, 1997, $2,219,000 in principal amount of such Notes and
$1,038,000 in principal amount of such Debentures were outstanding.
Capital Securities: 9.98% Series B Capital Securities of Imperial Trust Capital
Trust I Due 2026. As of December 31, 1997, $73,314,000 in net principal amount
was outstanding.
Documents Incorporated By Reference: Sections of a Proxy Statement which will
be filed within 120 days of Fiscal Year Ended December 31, 1997, are
incorporated by reference into Part III hereof.
This report includes a total of 76 pages. Exhibit Index begins on page 75.
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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TABLE OF CONTENTS
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<S> <C>
Five Year Summary of Selected Financial Information..................4
Unaudited Pro Forma Financial Information............................5
Financial Review....................................................10
Average Balances, Yields and Rates Paid........................12
Interest Rate Sensitivity......................................17
Analysis of the Allowance for Loan Losses......................24
Allocated Allowance for Loan Losses............................24
Financial Statements
Consolidated Balance Sheet.....................................30
Consolidated Statement of Income...............................31
Consolidated Statement of Changes in Shareholders' Equity......32
Consolidated Statement of Cash Flows...........................33
Notes to Consolidated Financial Statements.....................34
Independent Auditors' Report...................................60
Selected Statistical Information
Securities.....................................................61
Maturity Distribution of Loans.................................61
Financial Ratios...............................................61
Common Stock and Shareholder Data..............................62
Quarterly Data.................................................62
Analysis of Changes in Net Interest Margin.....................64
Description of Business.............................................65
Directory...........................................................70
Signatures..........................................................73
Form 10-K Cross Reference Index.....................................74
Exhibits Index......................................................75
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3
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
IMPERIAL BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
===================================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income....................................... $ 282,972 $ 209,156 $ 174,779 $ 135,772 $ 139,704
Interest expense...................................... 81,637 68,054 60,154 37,415 36,280
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income................................. 201,335 141,102 114,625 98,357 103,424
Provision for loan losses............................. 22,892 6,881 16,122 12,174 41,977
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses. 178,443 134,221 98,503 86,183 61,447
Noninterest income.................................... 76,661 63,080 43,546 34,572 38,015
Gains - Imperial Credit Industries, Inc. stock........ 4,977 36,411 14,538
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating income................................ 260,081 233,712 142,049 120,755 114,000
Personnel expense..................................... 85,065 64,876 47,702 47,087 40,483
Other noninterest expense............................. 83,966 63,256 62,622 63,078 72,557
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Income before income taxes............................ 91,050 105,580 31,725 10,590 960
Income tax provision (benefit)...................... 36,502 43,278 10,071 3,968 (345)
Income from continuing operations..................... 54,548 62,302 21,654 6,622 1,305
Income (loss) from operations of discontinued
operation, net of tax................................ 629 (8,168) 1,523 21 (251)
Net income............................................ $ 55,177 $ 54,134 $ 23,177 $ 6,643 $ 1,054
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share/(1)/
Earnings per share from continuing operations....... $ 1.34 $ 1.59 $ 0.57 $ 0.18 $ 0.04
Earnings per share.................................. 1.36 1.38 0.61 0.18 0.03
- -----------------------------------------------------------------------------------------------------------------------------------
At year end
Assets................................................ $ 4,726,279 $ 3,350,170 $ 2,788,374 $ 2,378,709 $ 2,794,517
Net loans............................................. 2,737,465 2,026,997 1,661,945 1,335,074 1,431,959
Deposits.............................................. 4,174,598 2,950,277 2,363,616 1,959,710 2,387,759
Other borrowings...................................... 59,172 49,352 165,542 199,072 203,482
Capital securities.................................... 73,314
Shareholders' equity.................................. 352,024 286,351 228,236 197,776 185,205
Financial ratios
Return on average equity.............................. 17.53% 20.83% 11.03% 3.46% 0.57%
Return on average assets.............................. 1.51 1.94 1.00 0.30 0.04
Average equity-to-average assets...................... 8.62 9.33 9.04 8.64 7.02
Capital ratios for Imperial Bancorp
Tier I leverage ratio................................. 10.28% 9.32% 9.13% 9.17% 6.80%
Tier I capital ratio.................................. 11.14 9.96 9.96 10.70 9.50
Total capital ratio................................... 12.48 11.24 11.30 12.10 11.00
Average balances
Total assets.......................................... $ 3,653,267 $ 2,785,089 $ 2,326,308 $ 2,224,856 $ 2,645,492
Earning assets........................................ 3,247,448 2,449,148 2,031,551 1,887,389 2,207,159
Loans................................................. 2,397,626 1,836,864 1,540,940 1,361,630 1,481,231
Total deposits........................................ 3,136,189 2,412,150 2,006,737 1,903,203 2,258,201
Shareholders' equity.................................. 314,765 259,823 210,188 192,172 185,712
Common share and shareholder data/(1)/
Market price, end of year............................. $ 32.88 $ 14.55 $ 9.17 $ 4.50 $ 4.50
Book value, end of year............................... 8.97 7.52 6.18 5.49 5.34
Dilutive average common shares outstanding............ 40,715,220 39,208,034 38,046,205 37,202,343 36,495,343
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for stock dividends declared and paid in 1994 through first quarter 1997 and 3-for-2 stock splits effected in 1996
and first quarter 1998. Earnings per share for the current year and all prior periods presented reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
===================================================================================================================================
</TABLE>
4
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
On February 27, 1998, Imperial Bancorp ("the Company") received from the
Internal Revenue Service a private letter ruling favorable to the Company's
proposed spin off, in a tax-free distribution to shareholders, a portion of its
specialty lending and finance businesses into a newly formed corporation,
Imperial Financial Group, Inc. ("IFG"). The spin off is conditioned upon, among
other things, receipt of other required regulatory approvals and obtaining
necessary financing.
The unaudited pro forma earnings summary is presented to reflect the historical
operations of the Company as if IFG, together with all of its assets and
liabilities, had been spun off at the commencement of the period presented. The
unaudited pro forma balance sheet reflects the spin off as if it occurred at the
end of the year. The historical operations of IFG, as a part of the Company, are
adjusted to reflect the terms of the agreement between IFG and Imperial Bancorp
(the "Contribution Agreement") with respect to the businesses being contributed
to IFG. The pro forma adjustments represent IFG's historical financial
information adjusted to reflect the Contribution Agreement and the anticipated
contribution of certain assets and liabilities to IFG.
The unaudited pro forma financial information presented is not necessarily
indicative of the consolidated financial condition or results of future
operations of the Company or the actual results that would have been achieved
had the proposed spin off been completed prior to the period indicated.
Prior to distributing the common stock of IFG to the Company's shareholders, the
Company will contribute to IFG the following: (i) the assets and liabilities
relating to The Lewis Horwitz Organization, a division of Imperial Bank ("the
Bank") that specializes in motion picture and television financing, (ii) all of
the common stock of Imperial Trust Company, a California licensed trust company
that offers a wide range of trust and investment management services, (iii) all
of the common stock of a newly formed thrift and loan company, Crown American
Bank, that will hold the assets and liabilities of the Bank's Small Business
Administration lending group, a division of the Bank that provides loans to
small businesses, a portion of which are guaranteed as to repayment by the U.S.
Government, and (iv) the common stock owned by the Bank (representing
approximately 23% of all outstanding common stock as of December 31, 1997) in
Imperial Credit Industries, Inc. ("ICII"). It is anticipated that shareholders
would receive one share of IFG common stock for every two shares of Imperial
Bancorp stock owned on the record date. The Company anticipates that the spin
off will occur in the second quarter of 1998.
This pro forma information should be read in conjunction with the Company's
Consolidated Financial Statements for the fiscal year ended December 31, 1997,
included herein.
5
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PRO FORMA FINANCIAL INFORMATION FOR IMPERIAL BANCORP
(UNAUDITED)
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<CAPTION>
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FOR THE YEAR ENDED DECEMBER 31, 1997 ACTUAL PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) IMPERIAL ADJUSTMENTS IMPERIAL
BANCORP FOR SPIN OFF BANCORP
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRO FORMA EARNINGS SUMMARY:
Interest income...................................................... $ 282,972 $ (14,008)/(1)/ $ 268,964
Interest expense..................................................... 81,637 -- 81,637
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income.................................................. 201,335 (14,008) 187,327
Provision for loan losses............................................ 22,892 (2,243)/(1)/ 20,649
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 178,443 (11,765) 166,678
Noninterest income................................................... 56,401 (17,351)/(2)/ 39,050
Equity in net income of ICII......................................... 20,260 (20,260) --
Gains-sale of ICII stock............................................. 4,977 (4,977) --
Other noninterest expense............................................ 169,031 (27,449)/(3)/ 141,582
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes from continuing operations................ 91,050 (26,904) 64,146
Income tax provision................................................. 36,502 (9,836)/(4)/ 26,666
Income from continuing operations.................................... $ 54,548 $ (17,068) $ 37,480
- -----------------------------------------------------------------------------------------------------------------------------
Pro forma earnings per share:
Basic earnings per share from continuing operations........... $ 1.41 $ 0.97
Diluted earnings per share from continuing operations......... $ 1.34 $ 0.92
=============================================================================================================================
Weighted average number of shares:
Basic......................................................... 38,797,085 38,797,085
Diluted....................................................... 40,715,220 40,715,220
=============================================================================================================================
See accompanying notes to unaudited pro forma financial information.
=============================================================================================================================
</TABLE>
6
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PRO FORMA FINANCIAL INFORMATION FOR IMPERIAL BANCORP
(UNAUDITED)
<TABLE>
<CAPTION>
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AT DECEMBER 31, 1997 ACTUAL ADJUSTMENTS FOR PRO FORMA
(IN THOUSANDS) IMPERIAL BANCORP SPIN OFF IMPERIAL BANCORP
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<S> <C> <C> <C>
PRO FORMA BALANCE SHEET:
Cash............................................................... $ 316,600 $ (2,813) $ 313,787
Investments........................................................ 1,477,837 (9,790) 1,468,047
Loans, net......................................................... 2,737,465 (128,614)/(1)/ 2,608,851
Investment in ICII................................................. 75,001 (75,001) --
Other assets....................................................... 119,376 118,577/(5)/ 237,953
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TOTAL ASSETS $4,726,279 $ (97,641) $4,628,638
==========================================================================================================================
Deposits........................................................... $4,174,598 $ -- $4,174,598
Short-term borrowings.............................................. 55,915 -- 55,915
Long-term borrowings............................................... 76,571 -- 76,571
Other liabilities.................................................. 67,171 (37,946) 29,225
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TOTAL LIABILITIES $4,374,255 $ (37,946) $4,336,309
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock................................................ $ 236,186 $ -- $ 236,186
Unrealized gain, net of tax................................. 1,682 (231) 1,451
Retained earnings........................................... 114,156 (59,464)/(6)/ 54,692
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TOTAL SHAREHOLDERS' EQUITY $ 352,024 $ (59,695) $ 292,329
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,726,279 $ (97,641) $4,628,638
==========================================================================================================================
See accompanying notes to unaudited pro forma financial information.
==========================================================================================================================
</TABLE>
7
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
NOTE (1) INTEREST INCOME AND PROVISION FOR LOAN LOSSES
Adjustments to interest income and provision for loan losses and loans,
represent IFG's historical results net of amounts relating to certain mortgage
loans retained by Imperial Bank pursuant to the Contribution Agreement.
NOTE (2) NONINTEREST INCOME
Noninterest income includes trust fee income, gains on sales of SBA loans,
appreciation on donated ICII stock and letter of credit fee income.
NOTE (3) NONINTEREST EXPENSE
Noninterest expense includes salaries and benefits, occupancy, data processing,
professional fees and other expenses directly associated with the IFG
businesses. In addition, noninterest expense includes $1.6 million of allocated
administrative overhead costs.
NOTE (4) INCOME TAX PROVISION
IFG did not record income taxes in its historical operations. The pro forma
financial information reflects income taxes for IFG as if it had been a separate
entity for the period presented. The provision for income taxes was calculated
based on pretax income and current effective tax rates.
NOTE (5) OTHER ASSETS
Other assets represent the receivable due to the Company from IFG for the
funding of IFG's net assets.
NOTE (6) EQUITY
Reflects the proposed net assets to be spun off per the Contribution Agreement.
The Company and IFG have agreed that the Company will distribute net assets to
IFG of approximately $15.0 million plus the after-tax book value of ICII stock
which was approximately $45.0 million at December 31, 1997.
8
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PRO FORMA PERFORMANCE RATIOS
(UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================================
AT DECEMBER 31, 1997 OR FOR THE YEAR ENDED ACTUAL PRO FORMA
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average equity from continuing operations.................................. 17.33% 14.69%
Return on average assets from continuing operations.................................. 1.49 1.08
Net interest margin.................................................................. 6.20 5.99
CAPITAL RATIOS:
Equity to assets, end of period...................................................... 7.45% 6.32%
Average equity to average assets..................................................... 8.62 7.37
Tier I leverage:
Company............................................................................. 10.28% 9.25%
Bank................................................................................ 8.70 7.58
Tier I capital:
Company............................................................................. 11.14% 10.18%
Bank................................................................................ 9.40 8.31
Total capital:
Company............................................................................. 12.48% 11.53%
Bank................................................................................ 10.65 9.56/(1)/
ASSET QUALITY RATIOS:
Allowance for loan losses to total loans............................................. 1.83% 1.75%
Allowance for loan losses to nonperforming loans..................................... 483.48 755.21
Nonperforming loans to total loans................................................... 0.38 0.23
Nonperforming assets to total loans, plus other real estate.......................... 0.50 0.36
Net charge-offs to average loans..................................................... 0.33 0.31
====================================================================================================================
(1) In January 1998, the Company made an additional investment of $37.2 million in the Bank. As of February 28, 1998, the Bank and
the Company, after consideration of the spin, would maintain their regulatory capital classification of "well capitalized." The
Bank's pro forma total capital ratio at December 31, 1997, including the additional capital was 10.62%.
=====================================================================================================================
</TABLE>
9
<PAGE>
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
INCLUDES FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS.
FINANCIAL REVIEW
The following discussion provides information about the results of operations,
financial condition, liquidity and capital resources of Imperial Bancorp ("the
Company"). This information is intended to facilitate the understanding and
assessment of the financial condition of the Company and trends impacting future
operations. It should be read in conjunction with the audited Consolidated
Financial Statements of the Company and notes thereto.
PERFORMANCE SUMMARY
Net income for the year ended December 31, 1997, was $55.2 million, or $1.36 per
diluted share, compared to $54.1 million, or $1.38 per diluted share for 1996.
Net income for 1997 includes approximately $6.1 million after tax representing
the Company's share of non-core items recorded by Imperial Credit Industries,
Inc. ("ICII") (NASDAQ: ICII), and an after-tax gain of approximately $2.1
million on the sale of a merchant card transaction processing company. Net
income for 1996 includes an after-tax gain of $21.0 million realized from the
sale of a portion of the Company's investment in ICII, and an additional $6.8
million after-tax gain realized from ICII's gain associated with the sale of a
portion of its investment in Southern Pacific Funding Corporation ("SPFC")
(NYSE: SFC) through an initial public offering. These gains were partially
offset by losses of $8.2 million, net of tax, associated with the Company's
discontinued precious metals operation.
Core net income, which excludes non-core income from ICII, gains on sales of
ICII stock, gain on the sale of the merchant card company, discontinued
operations and donations of ICII stock to nonprofit organizations, increased
35.7% to $45.7 million for the year ended December 31, 1997, from $33.7 million
for 1996. Diluted earnings per share based on core net income increased to $1.12
for 1997 from $0.86 for 1996.
Earnings per share calculations have been adjusted for a 10% stock dividend paid
to shareholders of record on February 17, 1997, and for a three-for-two stock
split announced on January 21, 1998, payable to shareholders of record on
February 2, 1998.
The Company's return on average total assets was 1.51% for the twelve months
ended December 31, 1997, compared to 1.94% for 1996. From its core operations,
the Company's return on average total assets increased to 1.25% for 1997 from
1.21% for 1996. Return on average shareholders' equity was 17.53% for the year
ended December 31, 1997, compared to 20.83% for 1996. Core return on average
shareholders' equity increased to 14.53% for 1997 from 12.97% for 1996.
The increase in core earnings for the twelve months ended December 31, 1997,
compared to 1996, was primarily due to growth in loans, an improving net
interest margin and continued growth in fee-based services. Average loan
balances for 1997 increased approximately 31% over 1996. Core noninterest income
increased 25.7% for the twelve months ended December 31, 1997, compared to 1996.
Increases in net interest income and noninterest income for the year were
partially offset by increases in salaries and benefits expense, customer
services expense and professional fees.
Net interest income increased 42.7% to $201.3 million for the year ended
December 31, 1997, from $141.1 million for 1996. The increase in net interest
income is primarily due to growth in commercial loans. The Company's net
interest margin (net interest income expressed as a percentage of average-
earning assets) increased to 6.2% for 1997 from 5.8% for 1996.
Noninterest income for the year ended December 31, 1997, totaled $81.6 million
compared to $99.5 million for 1996. Core noninterest income increased to $59.8
million for the year ended December 31, 1997, from $47.6 million for 1996.
Excluding non-core items, the increasing noninterest income for the year was
primarily due to growth in fee-based services, particularly in item processing
fees and trade finance fees, and to the exercise and sale of stock warrants. The
increases in noninterest income for 1997 compared to 1996 were partially offset
by a decline in trust fee income.
Noninterest expense totaled $169.0 million for the year ended December 31, 1997,
compared to $128.1 million for 1996. The increase in noninterest expense for
1997 compared to 1996 occurred primarily in salaries and benefits, customer
services expense and professional fees. The increase in salaries and benefits
expense reflects the Company's growth achieved through expansion into new
geographic markets and through the introduction of new products. The increase in
customer services expense is directly related to the growth in deposit balances
generated by the Financial Services Group ("FSG") that services the real estate
industry. These deposits remain an important source of funding for the Company.
The increase in professional fees is due to the payment of fees associated with
a consulting agreement related to the Company's investment in ICII. This expense
was offset by gains on the sale of ICII stock included in noninterest income.
Total assets increased 41% to $4.7 billion at December 31, 1997, from $3.4
billion at December 31, 1996. Total loans increased 35% to $2.8 billion at
December 31, 1997, from $2.1 billion at December 31, 1996. Total deposits were
$4.2 billion at December 31, 1997, an increase of 42% over the $3.0 billion
reported at December 31, 1996. Noninterest-bearing
10
<PAGE>
demand balances comprised 57% of total deposits at December 31, 1997, compared
to 50% of total deposits at December 31, 1996. Shareholders' equity was $352.0
million at December 31, 1997, up from $286.4 million at December 31, 1996.
Nonaccrual loans decreased to $10.6 million, or 0.38% of total loans, at
December 31, 1997, from $20.4 million, or 0.99% of total loans, at December 31,
1996. Net loan charge-offs for the year ended December 31, 1997, were $7.8
million, or 0.33% of average loans, compared to $8.2 million, or 0.45% of
average loans for 1996. The loan loss provision increased to $22.9 million for
the year ended December 31, 1997, from $6.9 million for 1996. The increase in
the loan loss provision is primarily due to change in risk within the loan
portfolio due to new loan products and expansion into new geographic areas. At
December 31, 1997, the allowance for loan losses was $51.1 million, or 1.83% of
total loans and 483% of nonaccrual loans, compared to $36.1 million, or 1.75% of
total loans and 177% of nonaccrual loans, at December 31, 1996.
Imperial Bancorp is classified as "Well Capitalized" with leverage, Tier I and
total capital ratios at December 31, 1997, of 10.28%, 11.14% and 12.48%,
respectively, compared to 9.32%, 9.96% and 11.24%, respectively, the year
earlier.
11
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EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID /(1)/
<TABLE>
<CAPTION>
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1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
(IN THOUSANDS) BALANCE EXPENSE RATE %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Loans/(2)/................................................................. $2,397,626 $233,124/(3)/ 9.7%
Trading account securities................................................. 37,604 2,473 6.6
Securities available for sale.............................................. 564,563 33,239 5.9
Securities held to maturity................................................ 4,130 292 7.1
Federal funds sold and securities purchased under resale agreements........ 237,186 13,145 5.5
Loans held for sale........................................................ 6,339 699 11.0
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $3,247,448 $282,972 8.7%
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses................................................... (42,108)
Cash........................................................................ 269,772
Other assets................................................................ 178,155
---------------
Total assets............................................................... $3,653,267
===============
Interest-bearing liabilities:
Savings.................................................................... $ 20,923 $ 527 2.5%
Money market............................................................... 769,225 25,259 3.3
Time - under $100,000...................................................... 148,676 8,473 5.7
Time - $100,000 and over................................................... 706,684 38,527 5.5
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS $1,645,508 $ 72,786 4.4%
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................................................... 76,303 4,072 5.3
Long-term borrowings:
Floating rate notes and fixed rate debentures............................ 3,942 270 6.9
Capital securities....................................................... 50,803 4,509 8.9
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $1,776,556 $ 81,637 4.6%
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits............................................................ 1,490,681
Other liabilities.......................................................... 71,265
Shareholders' equity....................................................... 314,765
---------------
Total liabilities and shareholders' equity............................... $3,653,267
===============
Net interest income/net interest margin.................................... $201,335 6.2%
======================
===========================================================================================================================
</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 and amortization of $19.8 million, $9.7
million, $5.4 million and $4.4 million for the years ended December 31,
1997, 1996, 1995 and 1994, respectively.
NET INTEREST INCOME: The Company's operating results depend primarily on net
interest income. Net interest income is the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
interest-earning assets. For the year ended December 31, 1997, net interest
income increased to $201.3 million from $141.1 million for 1996. The increase
was primarily due to higher average loan balances which increased by $560.8
million to $2.4 billion for 1997 from $1.8 billion for 1996. The average yield
on loans increased to 9.7% for 1997 from 9.5% for 1996. The Company's base
lending rate, which is based on the national prime rate, averaged 8.44% for 1997
compared to an average of 8.29% for 1996.
The Company's net interest margin increased to 6.2% for 1997 from 5.8% for 1996
largely due to higher loan yields. The Company's cost of funds was favorably
impacted by a modest reduction in the cost of interest-bearing deposits to 4.4%
for 1997 from 4.6% for 1996 and by a $471.5 million increase in
12
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<TABLE>
<CAPTION>
===============================================================================================================================
1996
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
(IN THOUSANDS) BALANCE EXPENSE RATE %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Loans/(2)/................................................................. $ 1,836,864 173,734/(3)/ 9.5%
Trading account securities................................................. 59,767 2,971 5.0
Securities available for sale.............................................. 357,837 21,675 6.1
Securities held to maturity................................................ 4,313 306 7.1
Federal funds sold and securities purchased under resale agreements........ 185,659 9,970 5.4
Loans held for sale........................................................ 4,708 500 10.6
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 2,449,148 $ 209,156 8.5%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses................................................... (39,429)
Cash........................................................................ 249,341
Other assets................................................................ 126,029
------------
Total assets............................................................... $ 2,785,089
============
Interest-bearing liabilities:
Savings.................................................................... $ 18,277 $ 456 2.5%
Money market............................................................... 485,295 14,802 3.1
Time - under $100,000...................................................... 218,064 12,467 5.7
Time - $100,000 and over................................................... 671,357 36,826 5.5
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS $ 1,392,993 $ 64,551 4.6%
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................................................... 61,361 3,160 5.1
Long-term borrowings:
Floating rate notes and fixed rate debentures............................ 5,154 343 6.7
Capital securities....................................................... -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 1,459,508 $ 68,054 4.7%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits............................................................ 1,019,157
Other liabilities.......................................................... 46,601
Shareholders' equity....................................................... 259,823
------------
Total liabilities and shareholders' equity............................... $ 2,785,089
============
Net interest income/net interest margin.................................... $ 141,102 5.8%
=========================
===============================================================================================================================
1995
===============================================================================================================================
INTEREST
AVERAGE INCOME/ AVERAGE
(IN THOUSANDS) BALANCE EXPENSE RATE %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Loans/(2)/................................................................. $ 1,540,940 143,627/(3)/ 9.4%
Trading account securities................................................. 52,759 3,516 6.7
Securities available for sale.............................................. 265,422 17,349 6.5
Securities held to maturity................................................ 5,619 311 5.5
Federal funds sold and securities purchased under resale agreements........ 164,359 9,707 5.9
Loans held for sale........................................................ 2,452 269 11.0
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 2,031,551 $ 174,779 8.7%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses................................................... (39,993)
Cash........................................................................ 210,500
Other assets................................................................ 124,250
------------
Total assets............................................................... $ 2,326,308
============
Interest-bearing liabilities:
Savings.................................................................... $ 24,554 $ 613 2.5%
Money market............................................................... 442,702 12,614 2.8
Time - under $100,000...................................................... 233,726 14,682 6.3
Time - $100,000 and over................................................... 462,818 27,582 6.0
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS $ 1,163,800 $ 55,491 4.8%
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................................................... 72,077 4,135 5.7
Long-term borrowings:
Floating rate notes and fixed rate debentures............................ 7,260 528 7.3
Capital securities....................................................... -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 1,243,137 $ 60,154 4.8%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits............................................................ 842,937
Other liabilities.......................................................... 30,046
Shareholders' equity....................................................... 210,188
------------
Total liabilities and shareholders' equity............................... $ 2,326,308
============
Net interest income/net interest margin.................................... $ 114,625 5.7%
=========================
===============================================================================================================================
1994
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
(IN THOUSANDS) BALANCE EXPENSE RATE %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Loans/(2)/................................................................. $ 1,361,630 112,799/(3)/ 8.3%
Trading account securities................................................. 42,179 2,366 5.6
Securities available for sale.............................................. 295,283 12,459 4.2
Securities held to maturity................................................ 5,860 345 5.9
Federal funds sold and securities purchased under resale agreements........ 172,070 7,153 4.2
Loans held for sale........................................................ 10,367 650 6.3
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 1,887,389 $ 135,772 7.2%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses................................................... (41,869)
Cash........................................................................ 229,031
Other assets................................................................ 150,305
------------
Total assets............................................................... $ 2,224,856
============
Interest-bearing liabilities:
Savings.................................................................... $ 26,420 $ 654 2.5%
Money market............................................................... 465,755 11,129 2.4
Time - under $100,000...................................................... 174,655 7,575 4.3
Time - $100,000 and over................................................... 324,384 13,826 4.3
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS $ 991,214 $ 33,184 3.3%
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................................................... 99,208 3,606 3.6
Long-term borrowings:
Floating rate notes and fixed rate debentures............................ 9,176 625 6.8
Capital securities....................................................... -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 1,099,598 $ 37,415 3.4%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits............................................................ 911,989
Other liabilities.......................................................... 21,097
Shareholders' equity....................................................... 192,172
------------
Total liabilities and shareholders' equity............................... $ 2,224,856
============
Net interest income/net interest margin.................................... $ 98,357 5.2%
=========================
===============================================================================================================================
</TABLE>
the average balance of noninterest-bearing demand deposits. The reductions in
funding costs were partially offset by an increase in long-term borrowing costs
related to the issuance of capital securities. Average total interest-bearing
deposits increased to $1.6 billion for 1997 compared to $1.4 billion for 1996,
however, lower cost money market accounts ("MMDA") increased as a percentage of
total interest-bearing deposits compared to time certificate of deposit ("TCD")
balances. MMDAs increased to 47% of total interest-bearing deposits for 1997, up
from 35% of total interest-bearing deposits for 1996. TCDs declined to 52% of
total interest-bearing deposits for 1997, compared to 64% of interest-bearing
deposits for 1996.
The Analysis of Changes in Net Interest Margin located on page 64 illustrates
that the growth in net interest income and the net interest margin is
substantially due to growth in the loan portfolio.
The Company's derivative financial instruments resulted in a $507,300 increase
in net interest income and a 2 basis point increase in net interest margin for
1997. In 1996, the Company's derivative financial instruments resulted in a
$700,000 increase in net interest income and a 3 basis point increase in the net
interest margin.
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the Company's reported net interest income and noninterest expense would have
been reduced by $18.7 million and $11.2 million, respectively, for the years
ended December 31, 1997 and 1996. The net interest margin would have been 5.6%
for 1997 and 5.3% for 1996.
13
<PAGE>
NONINTEREST INCOME: Noninterest income totaled $81.6 million for 1997 compared
to $99.5 million for 1996. The table below provides the major components of
noninterest income for 1997 and 1996:
<TABLE>
<CAPTION>
=================================================================================
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts............ $ 5,473 $ 4,892
Trust fees..................................... 7,840 8,592
Gain on origination and sale of loans.......... 3,944 3,222
Equity in net income of Imperial Credit
Industries, Inc............................... 20,260 21,444
Other service charges and fees................. 10,622 4,981
Merchant and credit card fees.................. 3,570 2,395
International fees............................. 7,857 5,141
Gain on securities available for sale.......... 987 229
Gain on trading account securities............. 4,482 3,197
Gain on sale of investment in Imperial Credit
Industries, Inc............................... 4,977 25,650
Gain resulting from sale of stock by Imperial
Credit Industries, Inc........................ -- 10,761
Gain on exercise and sale of stock warrants.... 4,317 1,529
Gain on sale of equity investment.............. 3,544 311
Appreciation of donated Imperial Credit
Industries, Inc. common stock................. 2,816 3,698
Other income................................... 949 3,449
- ---------------------------------------------------------------------------------
TOTAL $81,638 $99,491
=================================================================================
</TABLE>
Noninterest income for the year ended December 31, 1997, includes $10.5 million
representing the Company's share of non-core items recorded by ICII and pretax
gains of $5.0 million and $3.5 million recognized on the sale of ICII stock and
a merchant card transaction processing company, respectively. The most
significant item of ICII non-core income was the completion of an initial public
offering of its subsidiary, Franchise Mortgage Acceptance Company ("FMAC"),
during the fourth quarter of 1997.
Noninterest income, excluding ICII's non-core items, gains on the sale of ICII
stock and the merchant card company, and appreciation on ICII stock increased to
$59.8 million for the year ended December 31, 1997, from $47.6 million for 1996.
Service charges on deposits increased by $581,000 over 1996, not a significant
increase compared to the growth in deposit balances. Management believes that
opportunities exist to grow service charges on deposit accounts during 1998. In
1997, the Company did experience solid growth in many of its other fee-based
services. The increase in other service charges and fees is due to item
processing fees ($3.4 million), factoring fees ($743,100), loan servicing fees
($576,400) and commissions on the sale of nonproprietary mutual funds
($408,000). Merchant card fees and international fees increased by $1.2 million
and $2.7 million, respectively. Other noninterest income categories that
increased in 1997 include gains on trading account securities ($1.3 million) and
gains on the exercise of stock warrants ($2.8 million). The increases in
noninterest income for 1997 compared to 1996 were partially offset by a $752,000
reduction in trust fee income generated by the Company's trust subsidiary,
Imperial Trust Company. Although total assets under management at Imperial Trust
Company increased to $8.7 billion at December 31, 1997, from $7.5 billion at
December 31, 1996, fees earned in conjunction with a custodial TCD business
declined from the prior year.
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 pretax 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
earnings of ICII in the second quarter of 1996. In June 1996, ICII sold
approximately 2.3 million shares of SPFC stock in connection with SPFC's initial
public offering of 5.7 million shares. ICII's sale of its SPFC stock resulted in
a pretax gain to ICII of $82.7 million. The Company's net equity in the gain
realized by ICII approximated $11.8 million. Noninterest income for 1996 also
included $3.7 million related to appreciation on donated ICII stock. The
appreciation related to donated shares is offset by a corresponding contribution
expense reflected in noninterest expense.
NONINTEREST EXPENSE: Noninterest expense totaled $169.0 million for the year
ended December 31, 1997, compared to $128.1 million for 1996. The table below
provides the major components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
=================================================================================
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Salary and employee benefits................... $ 85,065 $ 64,876
Net occupancy expense.......................... 9,077 9,165
Furniture and equipment........................ 6,702 5,048
Data processing................................ 7,525 6,419
Customer services.............................. 18,663 11,178
Net real estate and other assets
owned expense.................................. 615 1,876
Regulatory assessments......................... 597 298
Professional and legal fees.................... 11,892 5,967
Business development........................... 5,154 3,659
Charitable donations........................... 3,802 5,024
Other expense.................................. 19,939 14,622
- ---------------------------------------------------------------------------------
TOTAL $169,031 $128,132
=================================================================================
</TABLE>
The increase in noninterest expense for the year ended December 31, 1997,
compared to 1996 occurred primarily in salaries and employee benefits, customer
services, professional and legal fees, and organization costs associated with
the pending spin off of Imperial Financial Group ("IFG"). Salaries and bene-
14
<PAGE>
fits for the year ended December 31, 1997, reflect the full-year impact of new
offices opened during the second half of 1996 and additional offices opened in
1997. The average number of full-time equivalent staff ("FTE") increased to
approximately 923 for the year ended December 1997 compared to 787 for 1996. FTE
is a staff count that includes a fractional equivalent for part-time staff. The
Company opened a new loan production office in Bellevue, Washington, during the
second quarter of 1997, and the loan production office in Phoenix, Arizona,
(opened in 1996) was expanded into a full-service banking office. During 1996,
the Company opened a new banking office in Fresno, California, and loan
production offices in Boston, Massachusetts, and Austin, Texas. Incentive
compensation, which is tied to Company performance, increased $5.9 million for
the year ended December 31, 1997, compared to the prior year.
Customer services expense includes accounting, courier and other deposit-related
service costs associated with the demand deposits from the Company's Financial
Services Group that services the real estate industry. Customer services expense
is a function of the volume of these deposits and interest rates. Customer
services expense increased to $18.7 million for the year ended December 31,
1997, from $11.2 million for 1996. For 1997, the increase in customer services
expense was primarily due to growth in real estate deposit balances. The average
balance of real estate demand deposits increased approximately $306.2 million
for the year ended December 31, 1997, over 1996. Professional and legal fees
increased $5.9 million for the year ended December 31, 1997, compared to 1996.
Professional expense for 1997 includes $5.0 million for the payment of fees
associated with a consulting agreement related to the Company's investment in
ICII. This expense is offset by gains on the sale of ICII stock included in
noninterest income. Other noninterest expense increased $5.3 million in 1997
compared to 1996. The increase is primarily due to costs associated with the
upcoming spin off of IFG ($1.2 million); an accrual for the resolution of a
lawsuit ($1.1 million); increased postage and messenger costs related to the
Company's item processing business and the addition of new offices ($1.1
million); travel ($478,800); and telecommunications ($412,900). A $1.3 million
decrease in REO expense partially offset these increases in noninterest expense
for 1997.
INCOME TAXES
The Company recorded income tax expense of $36.5 million for the year ended
December 31, 1997, representing an effective tax rate of approximately 40.1%.
For 1996, the Company's income tax expense and effective tax rate approximated
$43.3 million and 41.0%. At December 31, 1997, the Company had a net deferred
tax receivable of $354,700, compared to a $1.8 million net deferred tax
liability at December 31, 1996.
The Company's net deferred tax receivable is supported by carryback and
carryforward provisions of the tax laws as well as the Company's projection of
taxable income for 1998.
DISCONTINUED OPERATION: The Company reported net income of $629,000 from
discontinued operations for the year ended December 31, 1997, compared to a net
loss of $8.2 million for 1996. In the second quarter of 1996, management made
the decision to discontinue the precious metals business which had been engaged
in the trading and leasing of precious metals in addition to making loans
secured by precious metals. The decision to exit this line of business was made
following operational losses for which the Company provided approximately $9.8
million, net of tax, for the year ended December 31, 1996. During the third
quarter of 1997, the Company recovered $1.2 million pretax related to previously
recorded losses. The Company may receive additional recoveries related to the
precious metals business, but not in substantial amounts. The net income (loss)
related to the precious metals business is reflected in the Consolidated
Statement of Income as "Income (loss) from operations of discontinued operation,
net of tax".
ASSET LIABILITY MANAGEMENT
LIQUIDITY: Liquidity management involves the Company's ability to meet the cash
flow requirements of its lending and deposit businesses. For the Company, as
with most commercial banking institutions, this involves an ongoing process of
managing the cash inflows and outflows associated with a commercial deposit
base. The Company's ability to acquire new deposits at pricing levels consistent
with management's targets is largely based upon its financial condition and
capital base.
The Company's liquid assets consist of cash and cash equivalents and investment
securities, excluding those pledged as collateral. The majority of the Company's
securities portfolio is held as available for sale. Securities available for
sale can be sold in response to liquidity needs or used as collateral under
reverse repurchase agreements. It is the Company's policy to maintain a minimum
liquidity ratio (liquid assets to liabilities) of 20% and to limit gross loans
to no more than 80% of deposits. The Company's liquidity ratio and loan to
deposit ratio averaged 32% and 67%, respectively, for the year ended December
31, 1997.
The overall liquidity position of the Company has been enhanced by a sizable
base of demand deposits resulting from the Company's long-standing relationship
with the real estate services industry which has provided a relatively stable
and low cost funding base. Demand deposits averaged $1.5 billion for the year
ended December 31, 1997, up from $1.0 billion for 1996. The Company's average
demand deposits and average shareholders' equity funded 49% and 46%,
respectively, of average total assets for the years ended December 31, 1997 and
1996.
These funding sources are augmented by payments of principal and interest on
loans, the routine liquidation of securities from the trading and available for
sale portfolios and Federal funds sold and securities purchased under resale
agreements. During 1997, the Company experienced a net cash outflow from its
investing activities of $1.4 billion. The net outflow from investing activities
can be attributed to growth in the Company's loan portfolio, a net $242.9
million increase in securities available
15
<PAGE>
for sale and a $408.0 million increase in Federal funds sold. The net outflow
from investing activities was offset by $1.3 billion provided by the Company's
financing activities. Net cash inflows from financing activities included a $1.2
billion increase in total deposits and $73.3 million provided by the issuance of
capital securities.
Imperial Bancorp's ("the Parent Company") liquidity is managed through the
purchase and sale of securities available for sale. This activity is directly
correlated to the 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, interest payments on its Junior Subordinated Debentures (see -
"Capital Securities") and other operating expenses is preferred and common stock
dividends received from the Bank. The dividends provide the Parent Company with
adequate funds to meet its obligations.
INTEREST RATE SENSITIVITY MANAGEMENT: The primary objective of the asset
liability management process is to manage the Company's exposure to interest
rate fluctuations while maintaining adequate levels of liquidity and capital. In
order to manage its interest rate sensitivity, the Company has adopted policies
which attempt to limit the change in pretax net interest income assuming various
interest rate scenarios. This is accomplished by adjusting the repricing
characteristics of the Company's assets and liabilities as interest rates
change. The Company's Asset Liability Committee ("ALCO") chooses strategies in
conformance with its policies to achieve an appropriate trade off between
interest rate sensitivity and the volatility of pretax net interest income and
net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
net interest margin by simulating various interest rate scenarios over future
time periods. Through the use of these simulations, the Company can approximate
the impact these projected rate changes may have on its entire on and off-
balance sheet position, on any particular segment of the balance sheet, and
overall profitability.
16
<PAGE>
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,
1997. The cumulative interest sensitivity gap ("gap") as reflected in the table
represents the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing, whichever is earlier, at a given point in
time and is not necessarily indicative of the position on other dates. The gap
is considered to be positive when interest-earning assets exceed interest-
bearing liabilities and negative when interest-bearing liabilities exceed
interest-earning assets.
<TABLE>
<CAPTION>
================================================================================================================================
NON-
0-3 >3-6 >6-12 >1-5 >5 INTEREST-
AT DECEMBER 31, 1997 (IN THOUSANDS) MONTHS MONTHS MONTHS YEARS YEARS BEARING TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Trading account securities/(1)/.................. $ 35,782 $ -- $ -- $ -- $ -- $ -- $ 35,782
Securities available for sale.................... 418,903 144,345 68,404 21,137 16,477 -- 669,266
Securities held to maturity...................... -- 966 3,060 -- -- -- 4,026
Federal funds sold and securities purchased under
resale agreements............................... 765,000 -- -- -- -- -- 765,000
Loans held for sale/(1)/......................... 3,763 -- -- -- -- -- 3,763
Loans:/(2)/
Commercial loans............................... 2,244,225 10,000 6,095 77,483 3,960 8,675 2,350,438
Real estate loans.............................. 220,843 12,841 31,972 114,320 25,842 1,903 407,721
Consumer loans................................. 30,063 9 19 358 -- -- 30,449
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $2,495,131 $ 22,850 $ 38,086 $ 192,161 $ 29,802 $ 10,578 $2,788,608
================================================================================================================================
Allowance for loan losses........................ -- -- -- -- -- (51,143) (51,143)
Non-earning assets............................... -- -- -- -- -- 509,401 509,401
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,718,579 $ 168,161 $ 109,550 $ 213,298 $ 46,279 $ 468,836 $4,724,703
================================================================================================================================
Sources of Funds:
Deposits:
Demand......................................... -- -- -- -- -- 2,378,830 2,378,830
Savings........................................ 23,375 -- -- -- -- -- 23,375
Money market................................... 939,086 -- -- -- -- -- 939,086
Time - under $100,000.......................... 59,409 28,404 37,069 3,661 -- -- 128,543
Time - $100,000 and over....................... 486,747 140,831 71,143 6,043 -- -- 704,764
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $1,508,617 $ 169,235 $ 108,212 $ 9,704 $ -- $2,378,830 $4,174,598
================================================================================================================================
Short-term borrowings............................ 55,915 -- -- -- -- -- 55,915
Long-term borrowings:
Floating rate notes and fixed rate debentures.. 2,219 -- -- 1,038 -- -- 3,257
Capital securities............................. -- -- -- -- 73,314 -- 73,314
Noninterest-bearing liabilities.................. -- -- -- -- -- 65,595 65,595
Equity........................................... -- -- -- -- -- 352,024 352,024
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,566,751 $ 169,235 $ 108,212 $ 10,742 $ 73,314 $2,796,449 $4,724,703
================================================================================================================================
Gap before derivative instruments................ 2,151,828 (1,074) 1,338 202,556 (27,035) -- --
Interest rate swaps - capital securities......... -- -- -- -- (75,000) -- --
Interest rate swaps - Time $100.00 and over...... 27,000 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
GAP ADJUSTED FOR DERIVATIVE INSTRUMENTS $2,178,828 $ (1,074)$ 1,338 $ 202,556 $ (102,035)$ -- $ --
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE INTEREST SENSITIVITY GAP $2,178,828 $2,177,754 $2,179,092 $2,381,648 $2,279,613 $ -- $ --
================================================================================================================================
(1) Trading account securities and loans held for sale are sold within 90 days.
(2) The noninterest-bearing column consists of nonaccrual loans.
================================================================================================================================
</TABLE>
At December 31, 1997, the Company maintained a positive one year gap of
approximately $2.2 billion. This positive cumulative gap position indicates that
the Company is asset sensitive. A positive gap tends to result in increased net
interest income during a period of rising interest rates, but also exposes the
Company to decreased interest income during a period of falling interest rates.
The Company had a positive cumulative one year gap of $1.1 billion at December
31, 1996. The increase in the positive cumulative one year gap for 1997 compared
to 1996 is primarily due to the growth in variable-rate
17
<PAGE>
commercial loans. In addition, growth in period-end demand deposits led to
increased short-term investments in Federal funds sold.
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the 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.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate floors and caps with strike prices that
generally adjust quarterly and range from 125-200 basis points below or above
(depending on the instrument) current market rates at the time the floors and
caps were purchased. At December 31, 1997, the Company owned exchange traded
floors totaling $5.2 billion that expire at the rate of approximately $1.0
billion per quarter through the first quarter of 1999. The floors provide the
Company protection in the event that the three-month LIBOR rate drops below
their respective strike prices. The floors have an average strike price of 4.6%.
The unrealized gain on the floors approximated $384,000 at December 31, 1997.
The unamortized premium relating to the floors was $388,000 at year end. The
Company owned no interest rate caps at December 31, 1997.
In the first quarter of 1997, the Company sold $27.0 million of ten-year
certificates of deposit with a fixed rate of 7.15%. These long-term certificates
of deposit are callable by the Company after one year and semi-annually after
that. In order to minimize the interest rate risk of paying out a fixed rate for
ten years, the Company executed an interest rate swap transaction with a
notional value of $27.0 million in the first quarter of 1997. The interest rate
swap requires the Company to pay three-month LIBOR less 10 basis points,
quarterly for ten years. Simultaneously, the Company will receive quarterly
interest payments at a fixed rate of 7.15% for ten years.
In April 1997, the Company issued $75.0 million of 9.98% capital securities and
entered into three fixed for floating interest rate swaps with a total notional
value of $75.0 million in order to convert the capital securities to a floating
rate. The swaps require the Company to pay three month LIBOR and receive 7.18%
on $25.0 million, 7.186% on $25.0 million and 7.187% on the remaining $25.0
million. The maturity and fixed payment due dates on the swaps coincide with the
call date and payment dates of the capital securities. The unrealized gain on
the swaps approximated $5.9 million at December 31, 1997.
The impact of the Company's derivative financial instruments discussed above was
a $507,300 increase in net interest income and a 2 basis point increase in net
interest margin for the year ended December 31, 1997. For the year ended
December 31, 1996, the economic impact of the Company's derivative financial
investments was a $700,000 increase in net interest income and a 3 basis point
increase in net interest margin.
The following table summarizes the Company's derivative instruments at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
===================================================================================================================================
NOTIONAL WEIGHTED
AT DECEMBER 31, 1997 (IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS PURCHASED
<S> <C> <C> <C>
Exchange traded................................ $5,250,000 n/a $1,000,000 expiring per quarter in first, second, third and
$fourth quarter 1998. $1,250,000 expiring first quarter 1999.
INTEREST RATE SWAPS
Time Deposits:
Pay-3 month LIBOR less 10 basis points........ 27,000 5.63% Matures first quarter 2007, callable by the Company first
quarter 1998 and semi-annually thereafter.
Receive-Fixed rate.......................... 27,000 7.15%
Capital securities:
Pay-3 month LIBOR........................... 75,000 5.75% Matures second quarter 2007.
Receive-Fixed rate.......................... 75,000 7.18%
- -----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996 (IN THOUSANDS)
INTEREST RATE CAPS PURCHASED
Exchange traded............................... $1,500,000 n/a $500,000 expiring per quarter in second, third and fourth
quarter 1997.
INTEREST RATE FLOORS PURCHASED
Exchange traded............................... 4,000,000 n/a $500,000 expiring per quarter in 1997. $1,000,000 maturing
per quarter in first and second quarter 1998.
Over the counter.............................. 500,000 n/a Expired unexercised in first quarter 1997.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and estimated
fair values for the instruments at December 31, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet financial
instruments.
<TABLE>
<CAPTION>
==================================================================================================================================
EXPECTED MATURITY DATE AT DECEMBER 31, 1997(1)
(IN THOUSANDS) 1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Trading account assets.................... $ 35,782 $ -- $ -- $ -- $ --
Average interest rate.................... 6.60% -- -- -- --
Investment securities..................... 275,650 21,087 50 -- --
Average interest rate.................... 5.41% 5.80% 7.99% -- --
Federal funds sold........................ 765,000 -- -- -- --
Average interest rate.................... 5.50% -- -- -- --
Loans held for sale....................... 3,763 -- -- -- --
Average interest rate.................... 11.02% -- -- -- --
Loans
Commercial............................... 476,338 179,811 146,690 842,728 96,341
Average interest rate.................. 9.39% 9.00% 8.89% 8.91% 8.98%
Real estate term......................... 76,787 18,474 66,902 19,747 18,199
Average interest rate.................. 9.10% 9.42% 8.88% 9.11% 8.86%
Real estate construction................. 144,775 29,992 -- -- --
Average interest rate.................. 9.91% 9.87% -- -- --
Consumer................................. 10,754 9,724 9,762 138 71
Average interest rate.................. 9.38% 9.32% 9.32% 7.70% 8.59%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS................. $1,788,849 $ 259,088 $223,404 $862,613 $114,611
===================================================================================================================================
FINANCIAL LIABILITIES:
Deposits:
Rate sensitive demand.................... $ 282,592 $ 226,073 $180,858 $144,687 $115,749
Savings and money market................. 144,369 134,745 125,120 115,495 105,871
Average interest rate.................. 3.26% 3.26% 3.26% 3.26% 3.26%
Time certificates of deposit -
under $100,000.......................... 124,881 3,662 -- -- --
Average interest rate.................. 5.70% 6.14% -- -- --
Time certificates of deposit -
over $100,000........................... 698,721 6,043 -- -- --
Average interest rate................. 5.50% 6.04% -- -- --
Short-term borrowings.................... 55,915 -- -- -- --
Average interest rate.................. 5.27% -- -- -- --
Long-term borrowings..................... 1,128 2,129 -- -- --
Average interest rate.................. 6.10% 7.41% -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL........................ $1,307,606 $ 372,652 $305,978 $260,182 $221,620
===================================================================================================================================
Off-balance sheet financial instruments:
Interest rate swaps....................... $ 27,000 $ -- $ -- $ -- $ --
Interest rate floors purchased............ 4,000,000 1,250,000 -- -- --
Spot and forwards to purchase foreign
currency................................. 76,055 -- -- -- --
Spot and forwards to sell foreign
currency................................. 75,731 -- -- -- --
===================================================================================================================================
<CAPTION>
======================================================================================================
EXPECTED MATURITY DATE AT DECEMBER 31, 1997
FAIR
(IN THOUSANDS) THEREAFTER TOTAL VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial assets:
Trading account assets.................... $ -- $ 35,782 $ 35,782
Average interest rate.................... --
Investment securities..................... 376,505 673,292 673,292
Average interest rate.................... 6.25%
Federal funds sold........................ -- 765,000 765,000
Average interest rate.................... --
Loans held for sale....................... -- 3,763 4,120
Average interest rate.................... --
Loans
Commercial............................... 608,530 2,350,438 2,377,887
Average interest rate.................. 8.88%
Real estate term......................... 32,845 232,954 220,155
Average interest rate.................. 7.57%
Real estate construction................. -- 174,767 177,877
Average interest rate.................. --
Consumer................................. -- 30,449 30,347
Average interest rate.................. --
- -----------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS................. $1,017,880 $4,266,445 $4,284,460
=====================================================================================================
FINANCIAL LIABILITIES:
Deposits:
Rate sensitive demand.................... $ 462,998 $1,412,957 $1,412,957
Savings and money market................. 336,861 962,461 962,461
Average interest rate.................. 3.26%
Time certificates of deposit -
under $100,000.......................... -- 128,543 128,545
Average interest rate --
Time certificates of deposit -
over $100,000........................... -- 704,764 704,366
Average interest rate --
Short-term borrowings.................... -- 55,915 55,915
Average interest rate
Long-term borrowings..................... 73,314 76,571 86,509
Average interest rate.................. 9.98%
- -----------------------------------------------------------------------------------------------------
TOTAL FINANCIAL LIABILITIES............ $ 873,173 $3,341,211 $3,350,753
=====================================================================================================
Off-balance sheet financial instruments:
Interest rate swaps....................... $ (75,000) -- $ 5,893
Interest rate floors purchased............ -- -- 384
Spot and forwards to purchase foreign
currency................................. -- -- (3,239)
Spot and forwards to sell foreign
currency................................. -- -- 3,573
================================================================================================================================
(1) Expected maturities are generally based upon contractual maturities adjusted for anticipated prepayments of principal, and
for commercial loans, anticipated renewals. For deposit liabilities, in accordance with standard industry practice, run off
factors ranging from 11%-20% per year have been applied depending upon deposit type. The Company categorizes its real estate
services demand deposits as rate sensitive because the level of real estate activity and the associated demand balances tend
to fluctuate inversely with the level of market interest rates. The actual maturities of the Company's financial instruments
could vary substantially depending on future changes in interest rates and economic conditions in its market areas.
================================================================================================================================
</TABLE>
19
<PAGE>
BALANCE SHEET ANALYSIS
CASH AND DUE FROM BANKS: Cash and due from banks consists of cash on hand,
deposits with correspondent banks and deposits with the Federal Reserve Bank.
The Company maintains balances with correspondent banks to cover daily
inclearings and other activity. In accordance with Federal Reserve regulations,
reserve balances of $16.7 million were maintained in the form of deposits with
the Federal Reserve Bank at December 31, 1997. On average, cash and due from
banks comprised approximately 7.4% of the Company's average total assets. Cash
and due from banks totaled 9% of average total assets in 1996.
SECURITIES: Trading account securities decreased to $35.8 million at December
31, 1997, from $64.9 million for the prior year. During 1997, the Company's
trading activity involved primarily SBA loan certificates and foreign
currencies. Prior to the closure of the precious metals business in 1996, the
Company did engage in trading of precious metals. Approximately $16.0 million of
the decrease in trading securities compared to 1996 is due to the termination of
precious metals trading activity. Additionally, the balance of SBA loan
certificates decreased approximately $11.0 million from the prior year. The
balance of trading securities at December 31, 1997, included $26.8 million of
SBA loan certificates.
The Company's investment securities portfolio consists primarily of SBA
securities, U.S. Treasury securities, U.S. Government agency securities, and
mutual funds invested in short-term government securities. The Company currently
classifies its entire investment portfolio as available for sale, with the
exception of a $4.0 million investment in Industrial Revenue Bonds, in order to
maintain flexibility in managing the portfolio and in meeting its liquidity
needs. Investment securities are reported in the Company's Consolidated Balance
Sheet at their estimated fair value. The unrealized gain on securities available
for sale increased to $2.9 million at December 31, 1997, from $1.9 million at
December 31, 1996.
The following table illustrates the carrying value of the Company's investment
portfolio for each of the past three years.
<TABLE>
<CAPTION>
===================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities held to maturity:
Industrial development bonds............... $ 4,026 $ 4,193 $ 4,376
Other securities........................... -- -- 599
- -----------------------------------------------------------------------------------
TOTAL $ 4,026 $ 4,193 $ 4,975
===================================================================================
Securities available for sale:
U.S. Treasury and federal agencies......... $615,207 $387,667 $245,919
Mutual funds invested in short-term
government securities..................... 37,532 31,095 43,052
Other securities........................... 16,527 7,574 6,341
- -----------------------------------------------------------------------------------
TOTAL $669,266 $426,336 $295,312
===================================================================================
</TABLE>
The balance of investment securities increased to $669.3 million at December 31,
1997, from $426.3 million at December 31, 1996. The average balance of
investment securities increased by $206.7 million for 1997 compared to 1996. The
Company also utilizes Federal funds sold and securities purchased under resale
agreements for short-term investments of excess liquidity. The balance of
Federal funds sold and securities purchased under resale agreements increased to
$765.0 million at December 31, 1997, from $357.0 million at December 31, 1996.
The average balance of these investments increased approximately $51.5 million
for 1997. The increase in the year-end and average balances of investment
securities and Federal funds sold is directly related to growth in demand
deposits during 1997.
LOANS HELD FOR SALE: Loans held for sale totaled $3.8 million and $5.5 million
at December 31, 1997 and 1996, respectively. The current year-end balance is
comprised of SBA loans originated by the Company. The Company sells the
guaranteed portion of these loans in the secondary market while retaining the
unguaranteed portion for its own portfolio as well as the servicing rights.
LOANS: The Company offers a broad range of products designed to meet the credit
needs of its borrowers in targeted industries. The Company's primary lending
activities include: commercial loans, asset-based loans, loan syndications,
loans to emerging growth companies, SBA loans, and medium-term real estate loans
secured by commercial properties and loan participations. The Company also
offers construction financing principally for entry level housing.
20
<PAGE>
The following table provides a summary of loans by type at the end of each of
the past five years, net of unearned discounts and deferred loan fees:
<TABLE>
<CAPTION>
==========================================================================================================================
AT DECEMBER 31, (IN MILLIONS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans.................................................... $2,350 $1,595 $1,238 $ 920 $1,002
Loans secured by real estate:
Real estate term loans............................................. 233 362 389 337 347
Interim construction loans......................................... 175 86 65 117 123
Consumer loans...................................................... 31 20 7 1 3
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $2,789 $2,063 $1,699 $1,375 $1,475
==========================================================================================================================
</TABLE>
The loan portfolio totaled $2.8 billion at December 31, 1997, an increase of
$726.0 million from the prior year end. Commercial loan balances increased by
$755.0 million, or 47%, for 1997 compared to 1996. The Company experienced
strong loan demand in its core California markets during 1997. The out-of-state
loan production offices opened in 1996 and 1997 also contributed to the
Company's loan growth. Management anticipates continued strong loan demand in
1998. The Company made no direct extensions of credit to companies located in
Asia during 1997. It did have approximately $10.0 million of government
guaranteed loans to the Export-Import Bank outstanding at December 31, 1997.
These loans are 90% guaranteed.
Commercial loans comprised 84% of the total loan portfolio at December 31, 1997,
an increase from 77% of the total portfolio at December 31, 1996. As illustrated
in the following table, the Company's commercial loan portfolio is broadly
diversified among many industries including entertainment, high technology,
manufacturing, entertainment, health care, real estate services and retail trade
with no significant concentrations. The Company experienced loan growth across
most industry sectors with substantial growth in loans to entertainment, high
technology, manufacturing and retail trade businesses.
The following table sets forth the distribution of average commercial loans by
industry type:
<TABLE>
<CAPTION>
===============================================================================================================
1997 1996
AVERAGE PERCENT OF AVERAGE PERCENT OF
(IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry type:
Manufacturing..................................... $ 293,410 15.23% $ 144,036 10.47%
Entertainment..................................... 234,479 12.17 157,603 11.46
Wholesale trade................................... 168,362 8.74 140,329 10.20
High technology................................... 164,175 8.52 116,206 8.45
Health care....................................... 136,283 7.07 94,364 6.86
Real estate services.............................. 122,734 6.37 127,313 9.26
Title/escrow...................................... 122,072 6.34 87,680 6.37
Professional services............................. 102,361 5.31 80,924 5.88
Retail trade...................................... 101,927 5.29 60,275 4.38
Gaming............................................ 77,355 4.02 44,717 3.25
Consumers......................................... 62,390 3.24 30,473 2.22
Distribution...................................... 60,167 3.12 45,846 3.33
Garment........................................... 58,481 3.04 63,641 4.63
Other............................................. 222,345 11.54 182,083 13.24
- --------------------------------------------------------------------------------------------------------------
TOTAL $1,926,541 100.00% $1,375,490 100.00%
==============================================================================================================
</TABLE>
Total real estate loans decreased $40.0 million to $408.0 million at December
31, 1997, from $448.0 million at December 31, 1996. A decrease in the Company's
term real estate loans, due primarily to loan payoffs, was partially offset by
increases in construction loans. Growth in the Company's construction loan
portfolio occurred primarily in the affordable housing segment of the market.
The Company's real estate loans, both term and construction, are secured by
first deeds of trust and are distributed among a variety of project types
including multi-family residential and retail facilities. While 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, 1997, 97% of the Company's
real estate loans were geographically concentrated in California and 3% were to
borrowers outside of California.
21
<PAGE>
A certain degree of risk is inherent in the extension of credit. The Company
assesses and manages credit risk on an ongoing basis through diversification,
lending limits, credit review, approval policies and internal monitoring. As a
part of the control process, an independent credit review function regularly
examines the Company's loan portfolio. In addition, the Company's lending
policies require extensive evaluation of new credit requests and continuing
internal review of existing credits in order to promptly identify and quantify
any evidence of deterioration of quality or potential loss. The Company seeks to
manage and control its risk through diversification of the loan portfolio by
type of loan, geographic and industry concentration and type of borrower.
Diversification helps to reduce risk by minimizing the adverse impact of any
single event or set of circumstances.
NONACCRUAL LOANS, RESTRUCTURED LOANS AND REAL ESTATE AND OTHER ASSETS OWNED: The
Company recognizes income principally on the accrual basis of accounting. In
determining income from loans, the Company generally adheres to a policy of not
accruing interest on loans on which a default of principal or interest has
existed for a period of 90 days or more. The Company's policy is to place a loan
on nonaccrual status if either (i) principal or interest payments are past due
in excess of 90 days; or (ii) the full collection of interest or principal
becomes uncertain, regardless of the length of past due status. When a loan
reaches nonaccrual status, any interest accrued on the loan is reversed and
charged against current income.
Nonaccrual loans totaled $10.6 million at December 31, 1997, compared to $20.4
million at year-end 1996. The decrease in nonaccrual loans from year-end 1996
was due to the sale of a $6.1 million real estate loan, gross charge-offs of
loans on nonaccrual status totaling $4.8 million and the receipt of payments on
nonaccrual loans totaling approximately $3.8 million. In addition, $1.7 million
of nonaccrual loans were transferred to real estate and other assets owned.
These decreases in nonaccrual loans compared to the prior year were offset in
part by $7.2 million of loans placed on nonaccrual status during 1997. Of the
loans placed on nonaccrual status in 1997, $6.7 million were commercial loans
and the remainder were mortgage loans. Interest forgone on nonaccrual loans
approximated $1.3 million for 1997 and $2.2 million for 1996.
Consistent with prior reporting periods, there were no loans past due 90 days or
more that were still accruing interest and all interest associated with
nonaccrual loans had been reversed. Interest collected on nonaccrual loans is
first applied to the outstanding principal balance unless the loan is returned
to accrual status.
Restructured loans, loans outstanding that have had their original terms
modified, totaled $24.0 million at December 31, 1997, a $4.7 million reduction
from the $28.7 million reported at December 31, 1996. The decrease in
restructured loans resulted from the payoff of a $2.5 million loan previously
classified as restructured, the removal of $1.6 million of loans from
restructured status that performed in accordance with their modified terms for
over a year, and the receipt of paydowns on restructured loans totaling $1.0
million. The reduction in restructured loans was offset in part by the addition
of a $1.3 million commercial loan during 1997.
Real estate and other assets owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the real estate or other collateral, less the
estimated costs of disposal, and the loan balance at the time of transfer to
OREO is reflected in the allowance for loan losses as a charge-off. Any
subsequent declines in the fair value of the OREO after the date of transfer are
recorded through a provision for writedowns on OREO. Routine holding costs, net
of any income and gains and losses on disposal, are reported as noninterest
expense. OREO totaled $3.3 million, net of a $1.1 million valuation allowance,
at December 31, 1997, and $2.1 million, net of a $769,000 valuation allowance,
at December 31, 1996. Additions to OREO totaling $2.7 million for 1997 included
real estate of $2.0 million and film distribution rights of $666,000, net of
valuation reserves. The Company sold five OREO properties during 1997. The book
value of the OREO sold was $1.2 million. The Company is actively marketing the
remaining properties.
22
<PAGE>
Detailed information regarding nonaccrual loans, restructured loans and real
estate and other assets owned is presented below.
<TABLE>
<CAPTION>
=================================================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial loans..................................................... $ 8,675 $ 9,382 $11,714 $10,884 $23,489
Real estate loans.................................................... 1,903 10,760 17,212 7,272 12,029
Consumer loans....................................................... -- 248 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL LOANS $10,578 $20,390 $28,926 $18,156 $35,518
=================================================================================================================================
Allowance for loan losses as a percent of
total nonaccrual loans............................................. 483.5% 176.8% 129.3% 220.7% 120.5%
Total nonaccrual loans as a percent of total loans outstanding........ 0.4 1.0 1.7 1.3 2.4
- ---------------------------------------------------------------------------------------------------------------------------------
RESTRUCTURED LOANS $23,970 $28,681 $33,608 $ 5,948 $ 4,662
=================================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross.......................... $ 4,373 $ 2,895 $15,015 $35,446 $58,334
Less valuation allowance........................................... (1,089) (769) (4,686) (6,475) (3,084)
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE AND OTHER ASSETS OWNED, NET $ 3,284 $ 2,126 $10,329 $28,971 $55,250
=================================================================================================================================
TOTAL $37,832 $51,197 $72,863 $53,075 $95,430
=================================================================================================================================
</TABLE>
The following tables provide information on impaired loans for the periods
indicated:
<TABLE>
<CAPTION>
====================================================================================
NET
CARRYING SPECIFIC NET
(IN THOUSANDS) VALUE ALLOWANCE BALANCE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997
Loans with specific
allowances.................... $ 85,612 $ (11,881) $ 73,731
Loans without specific
allowances.................... 7,374 -- 7,374
- ------------------------------------------------------------------------------------
TOTAL $ 92,986 $ (11,881) $ 81,105
====================================================================================
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
====================================================================================
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
===============================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current.................................... $79,109 $ 97,210
Past due................................... 3,299 --
Nonaccrual................................. 10,578 20,390
- -------------------------------------------------------------------------------
TOTAL $92,986 $117,600
===============================================================================
</TABLE>
At December 31, 1997 and 1996, the Company had classified $93.0 million and
$117.6 million, respectively, of its loans as impaired with specific reserves of
$11.9 million and $15.0 million, respectively. A significant portion, 83% at
December 31, 1997, and 77% at December 31, 1996, of the impaired loans were
secured by real estate. The Company's average recorded investment in impaired
loans for the years ended December 31, 1997 and 1996, was $101.3 million and
$131.0 million, respectively. During 1997 and 1996, total interest recognized on
impaired loans, on a cash basis, was $8.5 million and $10.3 million,
respectively.
ALLOWANCE AND PROVISION FOR LOAN LOSSES: A certain degree of risk is inherent in
the extension of credit. The allowance for loan losses is maintained at a level
considered by management to be adequate to absorb estimated known and inherent
risks in the existing portfolio. Management performs an ongoing assessment of
the risks inherent in the loan portfolio. The allowance for loan losses is
increased by the provision for loan losses which is charged against current
period operating results, and is decreased by the amount of net charge-offs
during the period. The Company's determination of the level of the allowance for
loan losses, and correspondingly, the provision for loan losses is based upon
various judgments and assumptions, including general economic conditions
(especially in California), loan portfolio composition and concentrations, prior
loan loss experience, collateral value, identification of problem and potential
problem loans and other relevant data to identify the risks in the loan
portfolio. While management believes that the allowance for loan losses is
adequate at December 31, 1997, future additions to the allowance will be subject
to continuing evaluation of inherent risk in the loan portfolio.
23
<PAGE>
At December 31, 1997, the allowance for loan losses amounted to $51.1 million,
or 1.83% of total loans, compared to $36.1 million, or 1.75% of total loans, at
December 31, 1996. The following table summarizes activity in the allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
===============================================================================================================================
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance, beginning of year............................ $ 36,051 $ 37,402 $ 40,072 $ 42,800 $ 39,219
Loans charged off:
Commercial............................................ (8,938) (7,265) (13,432) (9,120) (27,396)
Real estate........................................... (1,423) (3,734) (7,470) (8,506) (10,148)
Consumer.............................................. (4) (26) (60) (108) (704)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED OFF $ (10,365) $ (11,025) $ (20,962) $ (17,734) $ (38,248)
- -------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial............................................... 1,056 2,745 1,690 2,729 1,506
Real estate.............................................. 1,493 12 445 47 118
Consumer................................................. 19 21 35 56 191
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LOAN RECOVERIES $ 2,568 $ 2,778 $ 2,170 $ 2,832 $ 1,815
- -------------------------------------------------------------------------------------------------------------------------------
Net loans charged off.................................... (7,797) (8,247) (18,792) (14,902) (36,433)
Net effect of deconsolidation of
Imperial Credit Industries, Inc........................ -- -- -- -- (1,963)
Provision for loan losses................................ 22,892 6,881 16,122 12,174 41,977
Provision for loan losses of discontinued operation...... (3) 15 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 51,143 $ 36,051 $ 37,402 $ 40,072 $ 42,800
- -------------------------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING AT END OF YEAR $2,788,608 $2,063,048 $1,699,347 $1,375,146 $1,474,759
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE AMOUNT OF LOANS OUTSTANDING $2,397,626 $1,836,864 $1,540,940 $1,361,630 $1,481,231
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans................ 0.33% 0.45% 1.22% 1.09% 2.46%
Ratio of allowance for loan losses to average loans...... 2.13 1.96 2.43 2.94 2.89
Ratio of allowance for loan losses to loans
outstanding at end of year. ........................... 1.83 1.75 2.20 2.91 2.90
Ratio of provision for loan losses to net chargeoffs..... 294 83 86 82 115
===============================================================================================================================
</TABLE>
The provision for loan losses totaled $22.9 million for the year ended December
31, 1997, a substantial increase from $6.9 million for the year ended December
31, 1996. The increase in the provision is primarily due to the change in risk
within the loan portfolio due to new loan products and expansion into new
geographic areas. Net charge-offs totaled $7.8 million for 1997, down slightly
from $8.2 million for 1996. As a percentage of average loans outstanding, net
charge-offs were 0.33% and 0.45%, respectively, for the years ended December 31,
1997 and 1996.
Although the Company evaluates the adequacy of its allowance on an overall basis
rather than by specific categories of loans, the following table reflects
management's allocation of the allowance for loans losses by loan category and
the ratio of each loan category to total loans as of the dates indicated:
<TABLE>
<CAPTION>
===============================================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 % 1996 % 1995 % 1994 % 1993 %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............................ $22,889 84% $17,545 77% $17,365 73% $24,628 66% $29,196 67%
Real Estate........................... 13,120 15 16,248 22 16,773 26 11,515 33 10,161 32
Consumer.............................. 100 1 165 1 809 1 175 1 433 1
Unallocated........................... 15,034 -- 2,093 -- 2,455 -- 3,754 -- 3,010 --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $51,143 100% $36,051 100% $37,402 100% $40,072 100% $42,800 100%
===============================================================================================================================
</TABLE>
The allowance allocated to the loan categories shown above is based on previous
loan loss experience and management's evaluation of the current loan portfolio
and should not be interpreted as an indication that charge-offs will occur in
these amounts or proportions. Furthermore, the portion allocated to each loan
category is not the total amount available for future losses that might occur
within such categories as the total allowance is a general allowance applicable
to the entire portfolio.
24
<PAGE>
FUNDING SOURCES
DEPOSITS: Total deposits increased to $4.2 billion at December 31, 1997, from
$3.0 billion at December 31, 1996. Noninterest-bearing demand deposits comprised
57% and 50%, respectively, of total deposits at December 31, 1997 and 1996.
Average demand deposits were $1.5 billion for 1997, a $471.5 million, or 46%,
increase from 1996. Average interest-bearing time deposits grew $252.5 million,
or 18%, in 1997. A $283.9 million increase in average money market deposits
compared to the prior year was partially offset by a $34.1 million decrease in
the average balance of time certificates of deposit. The growth in average MMDA
balances for 1997 includes $100.9 million from bankruptcy accounts and
approximately $83.7 million from real estate services depositors.
OTHER BORROWINGS: The Company uses short-term borrowings as a means to manage
the interest rate sensitivity and liquidity position of the balance sheet.
Short-term borrowings generally consist of Federal funds purchased,
obligations under securities repurchase agreements, commercial paper and
Treasury, tax and loan notes. Average short-term borrowings totaled $76.3
million for 1997 compared to $61.4 million for 1996.
CAPITAL: Until 1997, the primary source of new capital for the Company, has been
retained earnings from operations, with the exception of its long-term debt
offering in 1979, and on a smaller scale, the exercise of employee stock
options. On April 23, 1997, Imperial Capital Trust, a wholly-owned subsidiary of
the Company, issued in a private placement transaction $75.0 million of 9.98%
capital securities. See - "Capital Securities." At December 31, 1997,
shareholders' equity totaled $352.0 million, a 23% increase over the $286.4
million reported at December 31, 1996. The Company recorded an additional $4.8
million in 1997 and $4.1 million in 1996 of shareholders' equity from the
exercise of employee stock options. The Company receives a tax deduction for the
difference between the option price and the market value of shares issued. The
tax benefit associated with shares exercised during 1997 and 1996, which is
recorded as a component of shareholders' equity, approximated $7.6 million in
1997 and $3.2 million in 1996.
Management is committed to maintaining capital at a level sufficient to assure
shareholders, customers and regulators that the Company and its bank
subsidiaries are financially sound. The Company and its bank subsidiaries are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. The risk-based capital guidelines assign risk weightings to
assets both on and off-balance sheet and place increased emphasis on common
equity. Federal law requires each Federal banking agency to take prompt
corrective action to resolve problems of insured depository institutions
including, but not limited to, those that fall below one or more prescribed
capital ratios. According to the regulations, institutions whose Tier I and
total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be
"well capitalized". Tier I capital basically consists of common shareholders'
equity and noncumulative perpetual preferred stock and minority interest of
consolidated subsidiaries minus intangible assets. Based on the guidelines, the
Company's Tier I and total capital ratios at December 31, 1997, were 11.14% and
12.48%, respectively, compared to 9.96% and 11.24%, respectively, for 1996. The
capital securities discussed above qualify as Tier 1 capital and therefore
contributed to the increase in the Company's capital ratios in 1997.
25
<PAGE>
The following table compares the Company's actual capital ratios at December 31,
1997 and 1996, to those required by regulatory agencies for capital adequacy and
well capitalized classification purposes.
<TABLE>
<CAPTION>
====================================================================================================================================
TO BE WELL CAPITALIZED UNDER
PROMPT CORRECTIVE ACTION
ACTUAL FOR CAPITAL ADEQUACY PURPOSES PROVISIONS
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997
Total capital (to risk weighted assets):
Company..................................... $471,898 12.48% > $302,542 >8.0% > $378,178 >10.0%
Bank........................................ 398,741 10.65 > 299,519 >8.0% > 374,398 >10.0%
Tier I capital (to risk weighted assets):
Company..................................... $421,321 11.14% > $151,271 >4.0% > $226,907 >6.0%
Bank........................................ 351,890 9.40 > 149,759 >4.0% > 224,639 >6.0%
Tier I capital (to average assets):
Company..................................... $421,321 10.28% > $122,973 >3.0% > $204,954 >5.0%
Bank........................................ 351,890 8.70 > 121,405 >3.0% > 202,342 >5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996
Total capital (to risk weighted assets):
Company..................................... $320,708 11.24% > $227,927 >8.0% > $284,909 >10.0%
Bank........................................ 296,024 10.48 > 226,013 >8.0% > 282,516 >10.0%
Tier I capital (to risk weighted assets):
Company..................................... $284,248 9.96% > $113,964 >4.0% > $170,945 >6.0%
Bank........................................ 260,654 9.23 > 113,006 >4.0% > 169,509 >6.0%
Tier I capital (to average assets):
Company..................................... $284,248 9.32% > $ 90,297 >3.0% > $151,042 >5.0%
Bank........................................ 260,654 8.66 > 90,297 >3.0% > 150,496 >5.0%
====================================================================================================================================
</TABLE>
In addition to the risk-weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3%. The leverage ratio is defined as Tier I capital divided by
average total assets for the most recent quarter. The minimum leverage ratio
applies to banking organizations that do not anticipate significant growth and
have well-diversified risk, excellent asset quality, high liquidity and good
earnings. Other banking organizations not in this category are expected to have
leverage ratios of at least 4% to 5%. The Company's leverage ratio was 10.28% at
December 31, 1997, compared to 9.32% for the prior year, well in excess of the
minimum regulatory requirement.
The Company's pro forma Tier I, total and leverage capital ratios at December
31, 1997, reflecting the spin off of IFG were 10.18%, 11.53% and 9.25%,
respectively. See - "Unaudited Pro Forma Financial Information."
CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly-owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98% capital securities (the "Capital Securities")
which represent undivided preferred beneficial interests in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust (the "Common Securities"), together with the
Capital Securities, (the "Trust Securities"). The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
9.98% junior subordinated deferrable interest debentures (the "Junior
Subordinated Debentures") issued by the Company and engaging in certain other
limited activities. The Junior Subordinated Debentures held by the Trust will
mature on December 31, 2026.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions, accumulating from April 23, 1997, the date of original issuance,
and payable semi-annually in arrears on June 30 and December 31 of each year,
commencing June 30, 1997, at an annual rate of 9.98% of the liquidation amount
of $1,000 per trust security. The Company has the right under certain
circumstances to defer payments of interest on the Junior Subordinated
Debentures at any time and from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period, provided
that no deferral period may end on a day other than an interest payment date or
extend beyond the stated maturity date of the junior subordinated debentures. If
and for so long as interest payments on the Junior Subordinated Debentures are
so deferred, cash distributions on the Trust Securities will also be deferred
and the Company will not be permitted, subject to certain exceptions, to declare
or pay any cash distributions with respect to the
26
<PAGE>
Company's capital stock (which includes common and preferred stock) or to make
any payment with respect to debt securities of the Company that rank equal with
or junior to the Junior Subordinated Debentures.
Upon the repayment on December 31, 2026, the stated maturity date, or prepayment
prior to this date of the Junior Subordinated Debentures, the proceeds from such
repayment or prepayment shall be applied to redeem the Trust Securities upon not
less than 30 nor more than 60 days notice of a date of redemption at the
applicable redemption price. At maturity, the redemption price shall equal the
principal of and accrued and unpaid interest on the Junior Subordinated
Debentures. Subject to the Company having received prior approval of the Board
of Governors of the Federal Reserve System, if then required under applicable
capital guidelines or policies of the Federal Reserve, the Junior Subordinated
Debentures will be prepayable prior to the maturity date at the option of the
Company on or after June 30, 2007, in whole or in part, at a prepayment price
equal to 105.113% of the principal amount thereof on the prepayment date,
declining ratably on each June 30 thereafter to 100% on or after June 30, 2017,
plus accrued and unpaid interest thereon to the date of prepayment.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at December 31, 1997.
The Company used $30.0 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make an additional investment in the Bank during
1997. An additional $37.2 million investment was made in the Bank in January
1998. The remainder of the proceeds will be used for general corporate purposes
or may be used for additional capital contributions to the Bank or to pursue
investment opportunities. The Capital Securities qualify as Tier I capital under
the capital guidelines of the Federal Reserve. The net principal balance of the
Capital Securities was $73.3 million at December 31, 1997.
YEAR 2000
To fulfill the Company's fiduciary responsibility and ensure compliance with
regulatory requirements, the Company has established a year 2000 project team
("the Team"). The Team has conducted a comprehensive review of the Company's
computer systems to identify the systems that could be affected by the year 2000
issue and is developing an implementation plan to ensure that date-sensitive
data continues to be processed correctly. Incorporated into the Team's mission
statement is to have the Company year 2000 compliant by year-end 1998. The year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Team presently believes that, with
modifications to existing software and minimal conversions to new software, the
year 2000 will not pose significant operational problems for the Company's
computer systems. Based on the Team's identification and analysis of necessary
year 2000 modifications and enhancements, the Company does not anticipate
incurring significant incremental costs related to the year 2000 project.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME: Statement of Financial Accounting
Standards No. 130 ("SFAS 130") establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION: SFAS No. 131 establishes standards for the way that public business
enterprise report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS Statement No.
14, "Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends SFAS
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
27
<PAGE>
SFAS No. 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.
SEC RULE ON DISCLOSURES ABOUT DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS: The
Securities and Exchange Commission has approved rule amendments to clarify and
expand existing disclosure requirements for derivative financial instruments.
The amendments require enhanced disclosure of accounting policies for derivative
financial instruments in the footnotes to the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information about market risk inherent in market risk sensitive
instruments. The required quantitative and qualitative information should be
disclosed outside the financial statements and related notes thereto. The
enhanced accounting policy disclosure requirements were effective for the
quarter ended June 30, 1997. The rule amendments that required expanded
disclosure of quantitative and qualitative information about market risk are
effective with the 1997 Form 10-K included herein.
COMPARISON OF 1996 VERSUS 1995
Net income for the year ended December 31, 1996, increased 134% to $54.1
million, or $1.38 per diluted share, from $23.2 million, or $0.61 per diluted
share for 1995. Net income for 1996 includes an after-tax gain of $21.0 million
realized from the sale of a portion of the Company's investment in ICII, and an
additional $6.8 million after-tax gain realized from ICII's gain associated with
the sale of a portion of its investment in Southern Pacific Funding Corporation
through an initial public offering. These gains were partially offset by losses
of $8.2 million, net of tax, associated with the Company's discontinued precious
metals operation. Net income for 1995 includes a $3.7 million after-tax gain on
the sale of merchant card accounts. Income as measured by the return on average
total assets was 1.94% for the twelve months ended December 31, 1996, compared
to 1.00% for the twelve months ended December 31, 1995. Return on average
shareholders' equity was 20.83% for the year ended December 31, 1996, a
significant increase from the 11.03% return on average shareholders' equity for
1995.
Core net income, income excluding gains on the sale of ICII and SPFC stock,
discontinued operations, donations of ICII stock to nonprofit organizations and
gains on the sale of merchant accounts, increased 88% to $33.7 million for the
year ended December 31, 1996, from $18.0 million for 1995. Diluted earnings per
share based on core net income was $0.86 and $0.47, respectively, for 1996 and
1995. Core net income as measured by the return on average total assets was
1.21% for the year ended December 31, 1996, compared to 0.77% for the year ended
December 31, 1995. Core net income as measured by the return on average
shareholders' equity was 12.97% for the year ended December 31, 1996, compared
to 8.55% for 1995.
Earnings per share calculations have been adjusted for a 10% stock dividend paid
to shareholders of record on February 17, 1997, and for a three-for-two stock
split announced on January 21, 1998, payable to shareholders of record on
February 2, 1998. Earnings per share data for the current year and all prior
periods presented reflects the adoption of SFAS No. 128, "Earnings Per Share."
At December 31, 1996, the Company's total assets were $3.4 billion, total loans
were $2.1 billion and shareholders' equity totaled $286.4 million. This compares
favorably to total assets of $2.8 billion, total loans of $1.7 billion and
shareholders' equity of $228.2 million at December 31, 1995.
Nonaccrual loans decreased to $20.4 million at December 31, 1996, from $28.9
million at December 31, 1995. Decreases in nonaccrual loans due to paydowns,
charge-offs and loans brought current approximating $16.9 million were partially
offset by $8.6 million of commercial loans placed on nonaccrual status during
1996. The balance of OREO, net of valuation allowances, decreased to $2.1
million at December 31, 1996, from $10.3 million at December 31, 1995. Total
OREO expense, net of gains (losses) on the sale of OREO, decreased to $1.9
million for 1996 from $8.5 million for 1995.
For the year ended December 31, 1996, the provision for loan losses decreased to
$6.9 million from $16.1 million for the year ended December 31, 1995. Net
charge-offs decreased to $8.2 million for 1996 from $18.8 million for 1995. As a
percentage of average loans outstanding, net charge-offs were 0.45% and 1.22%,
respectively, for the years ended December 31, 1996
28
<PAGE>
and 1995. The allowance for loan losses was $36.1 million or 1.75% of total
loans at December 31, 1996, compared to $37.4 million, or 2.2% of total loans,
at December 31, 1995.
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.
Net interest income and net interest margin were negatively impacted in 1995 by
derivative financial instruments. Derivatives resulted in 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, the net
interest margin decreased by approximately 32 basis points for 1996 compared to
1995. The decrease in net interest margin was primarily due to decreases in the
Company's base lending rate which averaged 8.29% for 1996 compared to 8.83% for
1995.
Excluding the impact of derivatives, net interest income increased $19.3 million
in 1996 over 1995. The increase in net interest income was achieved despite the
54 basis point decline in the Company's average base loan rate due to the growth
in loan balances. Average loan balances grew by $295.9 million for 1996 compared
to 1995.
Noninterest income for the year ended December 31, 1996, totaled $99.5 million,
compared to $43.5 million for 1995. As discussed above, the Company's
noninterest income for 1996 was significantly impacted by non-core items.
Excluding non-core items, noninterest income for 1996 increased $10.4 million or
28% over 1995. The increase in core noninterest income for 1996 is due to the
following: service charges on deposits increased $564,000, higher gains on the
origination and sale of SBA loans due to increased volume totaling $1.0 million;
trust fee income generated by Imperial Trust Company increased by $946,000 due
to an increase in assets under management and to fees associated with a
custodial TCD business; other service charges and fees increased by $3.0 million
due to loan processing and servicing fees, commissions on sales of
nonproprietary mutual funds and item processing fees, and international fees
increased $573,000. Partially offsetting the overall increase in noninterest
income was a $2.5 million decrease in merchant card processing fees that
resulted from the fourth quarter 1995 sale of a portion of the Company's
merchant card accounts.
Noninterest expense totaled $128.1 million for the year ended December 31, 1996,
compared to $110.3 million for 1995. The increase in noninterest expense was
partially attributable to the charitable donation of ICII stock during 1996 and
to a recovery of $1.1 million related to the settlement of a lawsuit in 1995.
Excluding these non-core items, noninterest expense increased $11.7 million in
1996 compared to 1995. The largest increase occurred in salaries and benefits
expense which grew $17.2 million over 1995. In 1996, the Company opened a new
banking office in Fresno, California, and loan production offices in Boston,
Massachusetts, Austin, Texas, and Phoenix, Arizona. Incentive compensation
expense, which is tied to Company performance, increased $4.8 million in 1996
compared to 1995. In addition, the Company adopted an additional deferred
compensation plan on January 1, 1996, that added approximately $3.2 million to
benefit expense for the year.
Customer services expense increased $2.3 million in 1996 compared to 1995. The
increase in customer services expense is directly related to the growth in
deposit balances maintained by the Company's real estate services depositors.
Professional and legal expense increased $2.4 million in 1996 over 1995.
Approximately $1.3 million of the increase was for outside consultants who
assisted with the development and implementation of revenue enhancement and cost
containment programs.
The increases in noninterest expense were partially offset by decreases in
several expense categories. Regulatory assessments decreased $2.9 million in
1996 due to a reduction in the FDIC deposit insurance premium. The $1.3 million
decrease in data processing costs in 1996 compared to 1995 is due in part to the
sale of the Company's merchant card accounts in the fourth quarter of 1995. OREO
expense decreased to $1.9 million for 1996 from $8.5 million for 1995 due to the
reduction in the number of OREO properties.
29
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
=================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES
AT DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................. $ 316,600 $ 325,014
Trading instruments..................................................................... 35,782 64,887
Securities available for sale........................................................... 669,266 426,336
Securities held to maturity (market value of $4,026 and
$4,193 for 1997 and 1996, respectively)...................................... 4,026 4,193
Federal funds sold and securities purchased under resale agreements..................... 765,000 357,000
Loans held for sale (market value of $4,120 and
$6,058 for 1997 and 1996, respectively)...................................... 3,763 5,531
Loans:
Loans, net of unearned income and deferred loan fees................................... 2,788,608 2,063,048
Less allowance for loan losses....................................................... (51,143) (36,051)
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET LOANS $2,737,465 $2,026,997
- ------------------------------------------------------------------------------------------------------------------
Premises and equipment, net............................................................. 23,091 18,413
Accrued interest receivable............................................................. 22,212 15,547
Real estate and other assets owned, net................................................. 3,284 2,126
Current income taxes receivable......................................................... 6,086 3,685
Deferred tax asset (liability).......................................................... 355 (1,792)
Investment in Imperial Credit Industries, Inc........................................... 75,001 57,736
Other assets............................................................................ 64,348 44,497
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,726,279 $3,350,170
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand................................................................................. $2,378,830 $1,465,324
Savings................................................................................ 23,375 17,324
Money market........................................................................... 939,086 596,967
Time - under $100,000.................................................................. 128,543 169,493
Time - $100,000 and over............................................................... 704,764 701,169
- ------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $4,174,598 $2,950,277
- ------------------------------------------------------------------------------------------------------------------
Accrued interest payable................................................................ 5,205 5,943
Short-term borrowings................................................................... 55,915 44,897
Long-term borrowings:
Floating rate notes and fixed rate debentures.......................................... 3,257 4,455
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely..................................... 73,314 -
junior subordinated deferrable interest debentures of the Company, net
Other liabilities....................................................................... 61,966 58,247
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $4,374,255 $3,063,819
- ------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stockno par, 50,000,000 shares authorized; 39,236,034 shares at December 31, 1997,
and 34,619,573 shares at December 31, 1996, issued and outstanding.................... 236,186 163,748
Unrealized gain on securities available for sale, net of taxes....................... 1,682 1,206
Retained earnings.................................................................... 114,156 121,397
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 352,024 $ 286,351
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,726,279 $3,350,170
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
==================================================================================================================
</TABLE>
30
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
================================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans........................................................................................ $233,124 $173,734 $143,627
Trading instruments.......................................................................... 2,473 2,971 3,516
Securities available for sale................................................................ 33,239 21,675 17,349
Securities held to maturity.................................................................. 292 306 311
Federal funds sold and securities purchased under resale agreements.......................... 13,145 9,970 9,707
Loans held for sale 699 500 269
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $282,972 $209,156 $174,779
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits..................................................................................... 72,786 64,551 55,491
Short-term borrowings........................................................................ 4,072 3,160 4,135
Long-term borrowings......................................................................... 4,779 343 528
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 81,637 $ 68,054 $ 60,154
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income........................................................................... 201,335 141,102 114,625
Provision for loan losses..................................................................... 22,892 6,881 16,122
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $178,443 $134,221 $ 98,503
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts.......................................................... 5,473 4,892 4,328
Trust fees................................................................................... 7,840 8,592 7,646
Gain on origination and sale of loans........................................................ 3,944 3,222 2,265
Equity in net income of Imperial Credit Industries, Inc...................................... 20,260 21,444 5,192
Other service charges and fees............................................................... 10,622 4,981 1,932
Merchant and credit card fees................................................................ 3,570 2,395 4,855
International fees........................................................................... 7,857 5,141 4,568
Gain on securities available for sale........................................................ 987 229 260
Gain on trading instruments.................................................................. 4,482 3,197 2,852
Gain on sale of merchant card accounts....................................................... - - 6,400
Gain on sale of investment in Imperial Credit Industries, Inc................................ 4,977 25,650 -
Gain resulting from sale of stock by Imperial Credit Industries, Inc......................... - 10,761 -
Gain on exercise and sale of stock warrants.................................................. 4,317 1,529 1,553
Gain on sale of equity investment............................................................ 3,544 311 -
Appreciation of donated Imperial Credit Industries, Inc. common stock........................ 2,816 3,698 -
Other income................................................................................. 949 3,449 1,695
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $ 81,638 $ 99,491 $ 43,546
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits................................................................. 85,065 64,876 47,702
Net occupancy expense........................................................................ 9,077 9,165 8,861
Furniture and equipment...................................................................... 6,702 5,048 4,935
Data processing.............................................................................. 7,525 6,419 7,738
Customer services............................................................................ 18,663 11,178 8,842
Net real estate and other assets owned expense............................................... 615 1,876 8,508
Regulatory assessments....................................................................... 597 298 3,225
Professional and legal fees.................................................................. 11,892 5,967 3,526
Business development......................................................................... 5,154 3,659 3,079
Charitable donations......................................................................... 3,802 5,024 142
Other expense................................................................................ 19,939 14,622 13,766
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $169,031 $128,132 $110,324
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes......................................... 91,050 105,580 31,725
Income tax provision.......................................................................... 36,502 43,278 10,071
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $ 54,548 $ 62,302 $ 21,654
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations of discontinued operation, net of tax........................... 629 (8,168) 1,523
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 55,177 $ 54,134 $ 23,177
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share from continuing operations.......................................... $1.41 $1.66 $0.60
Diluted earnings per share from continuing operations........................................ $1.34 $1.59 $0.57
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
============================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES NUMBER UNREALIZED TOTAL
OF SHARES COMMON GAIN (LOSS) RETAINED SHAREHOLDERS'
(IN THOUSANDS, EXCEPT NUMBER OF SHARES DATA) OUTSTANDING STOCK ON SECURITIES EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 19,248,914 $117,144 $ (847) $ 81,479 $197,776
============================================================================================================================
Net income-1995........................................ -- -- -- 23,177 23,177
Stock dividends........................................ 961,526 9,936 -- (9,947) (11)
Common stock issued under employee stock option plans.. 626,886 3,377 -- -- 3,377
Retirement of common stock............................. (105,638) (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 1,482,774 13,636 3,594 13,230 30,460
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 20,731,688 $130,780 $ 2,747 $ 94,709 $228,236
============================================================================================================================
Net income-1996........................................ -- -- -- 54,134 54,134
Stock splits and dividends............................. 13,198,389 27,417 -- (27,446) (29)
Common stock issued under employee stock option plans.. 804,018 4,140 -- -- 4,140
Retirement of common stock............................. (114,522) (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) 13,887,885 32,968 (1,541) 26,688 58,115
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 34,619,573 $163,748 $ 1,206 $121,397 $286,351
============================================================================================================================
Net income-1997........................................ -- -- -- 55,177 55,177
Stock splits and dividends............................. 3,482,784 62,400 -- (62,418) (18)
Common stock issued under employee stock option plans.. 1,277,619 4,787 -- -- 4,787
Retirement of common stock............................. (115,742) (1,928) -- -- (1,928)
Common stock repurchased............................... (28,200) (470) -- -- (470)
Tax benefit of employee stock options.................. -- 7,649 -- -- 7,649
Net change in unrealized gain on securities
available for sale, net of taxes..................... -- -- 476 -- 476
============================================================================================================================
NET INCREASE (DECREASE) 4,616,461 72,438 476 (7,241) 65,673
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 39,236,034 $236,186 $ 1,682 $114,156 $352,024
============================================================================================================================
See accompanying notes to consolidated financial statement
============================================================================================================================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
===============================================================================================================================
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 55,177 $ 54,134 $ 23,177
Adjustments for non-cash charges (credits):
Depreciation and amortization................................................... (14,155) (3,387) 1,775
Accretion of purchase loan discount............................................. (37) (227) (2,129)
Provision for loan losses....................................................... 22,892 6,881 16,122
Provision for operational losses in discontinued operation...................... -- 15,485 --
Provision for real estate and other assets owned................................ 556 476 4,547
Equity in net income of Imperial Credit Industries, Inc......................... (20,260) (21,444) (5,192)
Gains - Imperial Credit Industries, Inc. stock.................................. (4,977) (36,411) --
Gain on exercise and sale of stock warrants..................................... (4,317) (1,529) (1,553)
Gain on sale of equity investment............................................... 3,544 311 --
(Gain) loss on sale of real estate and other assets owned....................... (352) 151 (459)
Loss (gain) on sale of premises and equipment................................... 9 -- (27)
(Benefit) provision for deferred taxes.......................................... (2,147) 6,621 5,018
Write down for impairment of equity investment.................................. -- -- 1,500
Gain on securities available for sale........................................... (987) (229) (260)
Net change in trading instruments............................................... 29,105 (24,837) 33,978
Net change in loans held for sale............................................... 1,768 (2,883) (1,880)
Net change in accrued interest receivable....................................... (6,665) (263) (2,515)
Net change in accrued interest payable.......................................... (738) 367 367
Net change in income taxes receivable........................................... 2,401 (4,506) (5,453)
Net change in other liabilities................................................. 3,719 17,358 8,462
Net change in other assets (19,851) (11,552) (754)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 44,685 $ (5,484) $ 74,724
===============================================================================================================================
Cash flows from investing activities
Proceeds from securities held to maturity......................................... 167 183 170
Purchase of securities held to maturity........................................... -- -- (499)
Proceeds from sale of securities available for sale............................... 2,901,745 2,785,935 1,592,179
Proceeds from maturities of securities available for sale......................... 602,342 294,223 503,136
Purchase of securities available for sale......................................... (3,745,226) (3,208,635) (1,997,393)
Proceeds from sale of Imperial Credit Industries, Inc. common stock............... 7,156 35,079 --
Proceeds from exercise and sale of stock warrants................................. 4,458 1,529 1,553
Net change in Federal funds sold and securities
purchased under resale agreements............................................. (408,000) 68,300 (148,800)
Net change in loans............................................................... (716,649) (358,612) (336,201)
Capital expenditures.............................................................. (10,146) (6,425) (4,083)
Proceeds from sale of real estate and other assets owned.......................... 875 4,207 16,381
Proceeds from sale of premises and equipment...................................... 353 -- 21
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(1,362,925) $ (384,216) $ (373,536)
===============================================================================================================================
Cash flows from financing activities:
Net change in demand deposits, savings and money market accounts.................. 1,261,676 482,513 150,077
Net change in time deposits....................................................... (37,355) 104,148 253,829
Net change in short-term borrowings............................................... 11,018 (114,739) (31,283)
Proceeds from issuance of capital securities, net................................. 73,314 -- --
Retirement of long-term borrowings................................................ (1,198) (1,451) (2,247)
Proceeds from exercise of employee stock options.................................. 2,859 2,352 1,839
Repurchase of common stock........................................................ (470) -- --
Other............................................................................. (18) (27) (11)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,309,826 $ 472,796 $ 372,204
- -------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND DUE FROM BANKS $ (8,414) $ 82,996 $ 73,392
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 325,014 $ 242,018 $ 168,626
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF YEAR $ 316,600 $ 325,014 $ 242,018
===============================================================================================================================
See accompanying notes to consolidated financial statements.
===============================================================================================================================
</TABLE>
33
<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 1996 and 1995 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 located in California. All material intercompany
balances and transactions have been eliminated.
At December 31, 1997, the Company owned 8.9 million shares of Imperial Credit
Industries, Inc. ("ICII") stock at an equivalent book value of $8.21 per share,
representing approximately 23% 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 and other
assets owned. While management believes that these allowances are currently
adequate, future additions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as a part of their
examination process, periodically review the allowances for loan losses and real
estate and other assets owned. Such agencies may require the Company to
recognize additions to these allowances based on their judgments about
information available to them at the time of their examination.
(c) INVESTMENTS
Purchases and sales of investments are recorded on the trade date. Amortization
of premiums and accretion of discounts are recognized in interest income on
securities held to maturity and securities available for sale using the interest
method in the Consolidated Statement of Income.
TRADING ACCOUNTS
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."
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 shareholders' equity reflected as "Unrealized gain on securities
available for sale, net of taxes" in the Consolidated Balance Sheet and
Statement of Changes in Shareholders' 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.
(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.
34
<PAGE>
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. Interest
collected on nonaccrual loans is applied to the outstanding principal balance
unless the loan is returned to accrual status. In order to be returned to
accrual status, all past due payments must be received and the loan must be
paying in accordance with its payment terms.
A loan is impaired when it is "probable" that 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. Loans of $500,000 or more (excluding
nonaccrual loans) are evaluated for impairment on an individual basis. The
measurement of impairment may be based on (1) the present value of the expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired loan or
(3) the fair value of the collateral of a collateral-dependent loan. The amount
by which the recorded investment of the loan exceeds the measure of the impaired
loan is recognized by recording a valuation allowance with a corresponding
charge to provision for loan losses.
All loans on nonaccrual status are considered to be impaired, however, not all
impaired loans are on nonaccrual status. To remain on accrual status, payments
on an impaired loan must be current.
Loans deemed by management to be uncollectible are charged to the allowance for
loan losses. Recoveries on loans previously charged off are credited to the
allowance. Provisions for loan losses are charged to expense and added to the
allowance to maintain it at an appropriate level. In evaluating the adequacy of
the allowance, management considers numerous factors including economic
conditions, loan portfolio composition and risk, loan loss experience, ongoing
review of specific loans and 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 AND OTHER ASSETS OWNED
Real estate and other assets owned ("OREO") is transferred from the loan
portfolio at fair value as determined by an appraisal obtained at the time of
foreclosure. The excess carrying value, if any, of the loan over the estimated
fair value is charged to the allowance for loan losses. Estimated selling costs
and any subsequent impairments in value are recognized through a valuation
allowance. Subsequent increases in fair value are credited to income and reduce
the valuation allowance, but only to the extent that decreases in fair value
were recorded for the same property through the valuation allowance. Gains and
losses from sales of OREO and net operating expenses are recorded in "Net real
estate and other assets owned 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) FOREIGN EXCHANGE OPERATIONS
The Company engages in foreign exchange transactions on behalf of middle market
companies and financial institutions. Stated trading limits are maintained and
monitored to ensure efficient operations. The majority of all transactions are
settled on a cash and carry basis to minimize settlement risk to the Company.
The Company requires cash collateral or an approved line of credit on all
forward transactions.
(j) 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.
(k) 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.
(l) INTEREST RATE DERIVATIVE CONTRACTS
Interest rate derivative contracts, such as swaps, futures, and options
including interest rate caps and floors are used in conjunction with asset
liability management strategies to synthetically alter the interest income or
expense flows of certain assets or liabilities. Gains and losses on financial
futures and options
35
<PAGE>
used in asset liability management are recorded as a component of the interest
income or expense reported on the related asset or liability. Amounts payable
and receivable relating to interest rate swaps are accrued until settled, the
effect of which is included in the interest income or expense reported on the
asset or liability whose payment streams have been synthetically altered. Fees
paid for financial contracts are amortized over their contractual life as a
component of the interest reported on the related asset or liability.
(m) STOCK BASED COMPENSATION
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the intrinsic value method, to account for stock based
compensation. In accordance with Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"), the Company includes
pro forma disclosures reflecting the impact of the fair value method on net
income and income per share as if SFAS No. 123 had been adopted for purposes of
preparing its basic financial statements for stock options granted in years
after 1994.
(n) EARNINGS PER SHARE
For the year ended December 31, 1997, and for all prior periods presented, the
Company has adopted SFAS No. 128, "Earnings Per Share." The Company computes and
presents both basic and diluted earnings per share ("EPS"). Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted from issuance of common stock that then shared in earnings. The Company
presents both basic and diluted EPS in the Consolidated Statement of Income. A
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation are disclosed in
the notes to the Consolidated Financial Statements.
(o) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
The Company provides loans to small businesses ("SBA loans"), sells the
guaranteed portion of the loans, and retains the servicing rights and interest-
only strips relating to those loans. The portion of the contractually specified
servicing fee that exceeds the fee that a substitute servicer would demand to
assume the servicing on SBA loans sold after January 1, 1997, is recorded as a
servicing asset and amortized in proportion to the servicing income. A
substitute servicing fee is deemed to be 40 basis points for loans sold at par
or less and 100 basis points for loans sold in excess of par based on the 1993
National Association for Government Guaranteed Loans survey. Any cash flow
expected to be received in excess of the contractually specified servicing fees
is recorded as an interest-only strip receivable at its allocated carrying
amount and subsequently measured at fair value as either a security available
for sale or trading security under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The implementation of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as of January 1, 1997, did not have a material impact on the
Company's financial position.
(p) CAPITAL SECURITIES
In the second quarter of 1997, the Company established Imperial Capital Trust I
("the Trust"), a wholly-owned subsidiary which issued in a private placement
transaction $75.0 million of 9.98% capital securities ("Capital Securities")
which represent undivided preferred beneficial interest in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust. The purpose of issuing the Capital
Securities was to provide the Company with a cost effective means of obtaining
Tier I Capital for regulatory purposes. The Capital Securities are reflected in
the Consolidated Balance Sheet as "Capital Securities of subsidiary trust." The
Capital Securities were issued at a discount which is accreted to interest
expense using a method which approximates the effective yield method.
NOTE (2) STATEMENT OF CASH FLOWS
Cash and due from banks consists of cash and amounts due from banks with an
initial term of less than three months. The following information supplements
the statement of cash flows.
<TABLE>
<CAPTION>
=====================================================================================================================
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid...................................................................... $82,375 $67,687 $59,787
Taxes paid......................................................................... 34,807 30,902 13,506
Taxes refunded..................................................................... 431 244 1,089
Significant noncash transactions:
Loans transferred to real estate and other assets owned............................ 2,762 731 13,913
Loans made in conjunction with the sale of real estate owned....................... 211 4,100 14,206
Net change in unrealized gain (loss) on securities available for sale, net of taxes 476 (1,541) 3,594
=====================================================================================================================
</TABLE>
36
<PAGE>
NOTE (3) SECURITIES
The amortized cost and fair value of securities held to maturity and securities
available for sale at December 31, 1997, 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............................ $ -- $ -- $275,653 $275,650
Due after one year through five years.............. -- -- 21,103 21,137
Due after five years through ten years............. 2,297 2,689
Due after ten years................................ 4,026 4,026 367,310 369,790
- ----------------------------------------------------------------------------------------------------------------------
Total $4,026 $4,026 $666,363 $669,266
======================================================================================================================
</TABLE>
The carrying value of securities pledged to secure public deposits and for other
purposes as required or permitted by law totaled $391.0 million and $224.0
million as of December 31, 1997 and 1996, respectively.
(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
- ---------------------------------------------------------------------------------------------------------
December 31, 1997
<S> <C> <C> <C> <C>
Industrial development bonds..................... $4,026 $ -- $ -- $4,026
- --------------------------------------------------------------------------------------------------------
Total $4,026 $ -- $ -- $4,026
========================================================================================================
December 31, 1996
Industrial development bonds..................... $4,193 $ -- $ -- $4,193
- --------------------------------------------------------------------------------------------------------
Total $4,193 $ -- $ -- $4,193
========================================================================================================
</TABLE>
There were no gross realized gains or gross realized losses on securities held
to maturity for the years ended December 31, 1997 and 1996. For the year ended
December 31, 1995, gross realized losses were $1.5 million.
(b) SECURITIES AVAILABLE FOR SALE
The following is a summary for the major categories of securities available for
sale.
<TABLE>
<CAPTION>
======================================================================================================================
GROSS GROSS
UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1997
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies............................. $612,903 $2,378 $ (74) $615,207
Mutual funds................................................... 37,532 -- -- 37,532
Other securities............................................... 15,928 599 -- 16,527
- ----------------------------------------------------------------------------------------------------------------------
Total $666,363 $2,977 $ (74) $669,266
======================================================================================================================
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
======================================================================================================================
</TABLE>
Mutual funds at December 31, 1997 and 1996, were comprised of Monarch government
cash, cash and treasury funds. Other securities at December 31, 1997 and 1996,
were primarily comprised of interest-only strips associated with the guaranteed
portion of Small Business Administration loans.
The Bank's broker/dealer subsidiary, Imperial Securities Corp., receives fees
for performing certain distribution and service activities on behalf of Monarch
Funds (a family of mutual funds). These fees, totaling $1.7 million, $832,900
and $322,200 for the years ended December 31, 1997, 1996 and 1995, respectively,
are included in "Other service charges and fees" in the Consolidated Statement
of Income. Of the five
37
<PAGE>
trustees of the Monarch Funds, two are members of the Company's management. As
of December 31, 1997 and 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
$1,058,000 and $71,000, respectively, for the year ended December 31, 1997,
$274,000 and $45,000, respectively, for the year ended December 31, 1996, and
$423,000 and $163,000, respectively, for the year ended December 31, 1995. At
December 31, 1997 and 1996, the Company reported unrealized gains, net of tax,
of $1.7 million and $1.2 million, respectively, in the Consolidated Balance
Sheet.
The following table sets forth information with respect to Federal funds sold
and securities purchased under resale agreements.
<TABLE>
<CAPTION>
==============================================================================================================
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, end of year............................................................. $765,000 $357,000
Weighted average interest rate,
end of year...................................................................... 5.6% 6.0%
Average amount outstanding during
the year......................................................................... $237,186 $185,659
Weighted average interest rate
for the year..................................................................... 5.5% 5.4%
Maximum amount outstanding at
any month end.................................................................... $765,000 $500,000
==============================================================================================================
</TABLE>
Depending on the nature of the securities obtained under the resale agreements,
the collateral is held by a third party custodian or by the Company's custodian
under written agreements that recognize the Company's interest in the
securities. Interest income associated with Federal funds sold and securities
purchased under resale agreements totaled $13.1 million, $10.0 million and $9.7
million, respectively, for 1997, 1996 and 1995.
NOTE (4) LOANS
The carrying amount of loans, net of unearned income and deferred loan fees,
consisted of the following:
<TABLE>
<CAPTION>
==============================================================================================================
1997 1996
CARRYING CARRYING
AT DECEMBER 31, (IN THOUSANDS) AMOUNT AMOUNT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans................................................................ $2,350,438 $1,594,602
Loans secured by real estate:
Real estate term loans......................................................... 232,954 361,426
Interim construction loans..................................................... 174,767 86,416
Consumer loans.................................................................. 30,449 20,604
- --------------------------------------------------------------------------------------------------------------
Total loans..................................................................... 2,788,608 2,063,048
Less allowance for loan losses.................................................. (51,143) (36,051)
- --------------------------------------------------------------------------------------------------------------
NET LOANS $2,737,465 $2,026,997
==============================================================================================================
</TABLE>
Net deferred loan fees and costs, included in total loans, approximated $14.7
million and $8.7 million at December 31, 1997 and 1996, 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, 1997
Loans with specific allowances...................................... $ 85,612 $ (11,881) $ 73,731
Loans without specific allowances................................... 7,374 -- 7,374
- --------------------------------------------------------------------------------------------------------------
TOTAL $ 92,986 $ (11,881) $ 81,105
==============================================================================================================
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
==============================================================================================================
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
==============================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current................................................................................ $79,109 $ 97,210
Past due............................................................................... 3,299 --
Nonaccrual............................................................................. 10,578 20,390
- --------------------------------------------------------------------------------------------------------------
TOTAL $92,986 $117,600
==============================================================================================================
</TABLE>
Included in current impaired loans were restructured loans of $24.0 million at
December 31, 1997, and $26.5 million at December 31, 1996. A significant
portion, 83% at December 31, 1997, and 77% at December 31, 1996, of the impaired
loans were secured by real estate. Impaired loans averaged $101.3 million in
1997, $131.0 million in 1996 and $48.8 million in 1995. During 1997, 1996, and
1995, total interest recognized on the impaired loan portfolio, on a cash basis,
was $8.5 million, $10.3 million and $3.4 million, respectively.
At December 31, 1997, 1996 and 1995, total restructured loans were $24.0
million, $28.7 million and $33.6 million, respectively. At December 31, 1997,
restructured loans were performing in accordance with their modified terms.
There were no commitments to lend additional funds on restructured loans at
December 31, 1997. There were $327,000 of related commitments to lend additional
funds on restructured loans at December 31, 1996. In 1997, 1996 and 1995,
respectively, $2.3 million, $2.6 million and $2.8 million of gross interest
income would have been recorded had the loans been current in accordance with
their original terms compared to $2.3 million, $2.6 million and $2.7 million of
interest income which was included in net income for the same periods. The
average yield on restructured loans was 8.4% at both December 31, 1997, and
December 31, 1996.
Nonaccrual loans totaled $10.6 million, $20.4 million and $28.9 million at
December 31, 1997, 1996 and 1995, respectively. There were no commitments to
lend additional funds on nonaccrual loans at December 31, 1997. At December 31,
1996, the related commitments to lend additional funds approximated $319,000.
There was no recorded interest receivable on nonaccrual loans at December 31,
38
<PAGE>
1997 or 1996. Interest income foregone on nonaccrual loans approximated $1.3
million in 1997, $2.2 million in 1996 and $2.2 million in 1995. Interest income
recognized on nonaccrual loans was approximately $0.4 million in 1997, $1.1
million in 1996 and $2.0 million in 1995.
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 shareholders 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.
Commercial loans comprised 84% of the total loan portfolio at December 31, 1997,
an increase from 77% of the total portfolio at December 31, 1996. As illustrated
in the following table, the Company's commercial loan portfolio is broadly
diversified among many industries including entertainment, high technology,
manufacturing, entertainment, health care, real estate services and retail trade
with no significant concentrations. The Company experienced loan growth across
most industry sectors with substantial growth in loans to entertainment, high
technology, manufacturing and retail trade businesses.
The following table sets forth the distribution of average commercial loans by
industry type.
<TABLE>
<CAPTION>
=========================================================================================================================
1997 1996
AVERAGE PERCENT OF AVERAGE PERCENT OF
(IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry type:
Manufacturing..................................................... $ 293,410 15.23% $ 144,036 10.47%
Entertainment..................................................... 234,479 12.17 157,603 11.46
Wholesale trade................................................... 168,362 8.74 140,329 10.20
High technology................................................... 164,175 8.52 116,206 8.45
Health care....................................................... 136,283 7.07 94,364 6.86
Real estate services.............................................. 122,734 6.37 127,313 9.26
Title/escrow...................................................... 122,072 6.34 87,680 6.37
Professional services............................................. 102,361 5.31 80,924 5.88
Retail trade...................................................... 101,927 5.29 60,275 4.38
Gaming............................................................ 77,355 4.02 44,717 3.25
Consumers......................................................... 62,390 3.24 30,473 2.22
Distribution...................................................... 60,167 3.12 45,846 3.33
Garment........................................................... 58,481 3.04 63,641 4.63
Other............................................................. 222,345 11.54 182,083 13.24
- --------------------------------------------------------------------------------------------------------------------------
TOTAL $1,926,541 100.00% $1,375,490 100.00%
==========================================================================================================================
</TABLE>
The Company's real estate loans, both term and construction, are secured by
first deeds of trust. Term loans are distributed among a variety of projects.
Approximately 98% of the Company's construction loans are to builders of
affordable entry level residential tract homes.
At year-end 1997, real estate loans totaling $408.0 million do not include
commercial loans to real estate related customers totaling $138.9 million. At
December 31, 1997, these loans consisted of the following: $57.8 million to real
estate agents, operators and lessors, $14.9 million to subcontractors and
developers, $55.1 million to title and escrow companies and $11.1 million to
builders.
The principal amount of loans pledged to secure public deposits and for other
purposes required or permitted by law approximated $112.0 million and $102.0
million at December 31, 1997 and 1996, respectively.
NOTE (5) ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the periods indicated
is presented below:
<TABLE>
<CAPTION>
=============================================================================================================================
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year.............................................................. $ 36,051 $ 37,402 $ 40,072
Provision for losses.................................................................... 22,892 6,881 16,122
Provision for loan losses of discontinued operation..................................... (3) 15 --
Loans charged off....................................................................... (10,365) (11,025) (20,962)
Recoveries on loans previously charged off.............................................. 2,568 2,778 2,170
- -----------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS $ (7,797) $ (8,247) $ (18,792)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 51,143 $ 36,051 $ 37,402
=============================================================================================================================
</TABLE>
39
<PAGE>
NOTE (6) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
============================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Land............................................... $ 1,765 $ 1,765
Buildings & improvements........................... 3,803 3,737
Leasehold improvements............................. 7,358 7,110
Furniture, fixtures & equipment.................... 40,981 31,955
- ----------------------------------------------------------------------------
Less accumulated depreciation and
amortization...................................... (30,816) (26,154)
- ----------------------------------------------------------------------------
Premises and equipment, net........................ $ 23,091 $ 18,413
============================================================================
</TABLE>
NOTE (7) REAL ESTATE AND OTHER ASSETS OWNED
The following table presents real estate owned by type of project:
<TABLE>
<CAPTION>
=====================================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned:
Acquisition and land development............................................................... $ 2,719 $2,708
Single-family residential...................................................................... 988 187
- ---------------------------------------------------------------------------------------------------------------------
Total $ 3,707 $2,895
- ---------------------------------------------------------------------------------------------------------------------
Other assets owned:
Film distribution rights....................................................................... $ 666 $ --
- ---------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, gross $ 4,373 $2,895
- ---------------------------------------------------------------------------------------------------------------------
Less valuation allowance........................................................................ (1,089) (769)
- ---------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net $ 3,284 $2,126
=====================================================================================================================
</TABLE>
Net real estate and other assets owned expense was comprised of the following:
<TABLE>
<CAPTION>
=====================================================================================================================
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (gain) loss on sale of real
estate and other assets owned................................................. $ (352) $ 151 $ (384)
Valuation adjustments charged
to operations................................................................. 556 476 4,547
Direct holding costs........................................................... 411 1,249 4,345
- ---------------------------------------------------------------------------------------------------------------------
Net real estate and other assets owned expense $ 615 $1,876 $8,508
=====================================================================================================================
</TABLE>
The following table sets forth information regarding the Company's valuation
allowance for OREO.
<TABLE>
<CAPTION>
=====================================================================================================================
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year........................................................... $ 769 $ 4,686 $ 6,475
Provision for OREO................................................................... 556 476 4,547
OREO charged off..................................................................... (236) (4,393) (6,336)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $1,089 $ 769 $ 4,686
=====================================================================================================================
</TABLE>
NOTE (8) EARNINGS PER COMMON SHARE/COMMON STOCK OUTSTANDING
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") for the fiscal year ended December 31, 1997,
and for all prior periods presented.
SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings. SFAS 128 also requires dual presentation of basic and diluted EPS on
the face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation as presented in the following table.
40
<PAGE>
<TABLE>
<CAPTION>
===========================================================================
1997
- ---------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to shareholders:
Income from continuing
operations........................ $54,548 38,797,085 $ 1.41
Income (loss) from discontinued
operation, net of tax.............. 629 0.02
------- ------
Net income.......................... $55,177 $ 1.43
EFFECT OF DILUTIVE SECURITIES
Incremental shares - from
outstanding common stock options... 1,918,135
----------
DILUTED EPS
Income available to shareholders:
Income from continuing operations... $54,548 40,715,220 $ 1.34
Income (loss) from discontinued
operations, net of tax............. 629 0.02
------- ------
Net income $55,177 $ 1.36
===========================================================================
<CAPTION>
===========================================================================
1996
- ---------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to shareholders:
Income from continuing
operations........................ $62,302 37,565,350 $ 1.66
Income (loss) from discontinued
operation, net of tax.............. (8,168) (0.22)
------- ------
Net income.......................... $54,134 $ 1.44
EFFECT OF DILUTIVE SECURITIES
Incremental shares - from
outstanding common stock options... 1,642,684
----------
DILUTED EPS
Income available to shareholders:
Income from continuing operations... $62,302 39,208,034 $ 1.59
Income (loss) from discontinued
operations, net of tax............. (8,168) (0.21)
------- ------
Net income $54,134 $ 1.38
===========================================================================
<CAPTION>
===========================================================================
1995
- ---------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to shareholders:
Income from continuing
operations................... $21,654 36,448,047 $ 0.60
Income (loss) from discontinued
operation, net of tax.......... 1,523 0.04
------- ------
Net income $23,177 $ 0.64
EFFECT OF DILUTIVE SECURITIES
Incremental shares - from
outstanding common stock options..... 1,598,158
----------
DILUTED EPS
Income available to shareholders:
Income from continuing operations... $21,654 38,046,205 $ 0.57
Income (loss) from discontinued
operations, net of tax............. 1,523 0.04
------- ------
Net income $23,177 $ 0.61
===========================================================================
</TABLE>
The number of shares used to compute basic and diluted income per common share
was retroactively adjusted to reflect stock splits and dividends as appropriate.
On February 6, 1998, the Company split its common stock at the ratio of one new
share for every two shares outstanding. The number of common shares outstanding
for all periods presented has been adjusted to reflect this stock split. In the
first quarter of 1997, the Company declared and paid a 10% stock dividend. 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 1995, the Company declared
and paid a 5% stock dividend.
Securities that could potentially dilute basic earnings per share in the future
that were not included in the calculation of diluted earnings per share for 1997
because their effect was antidilutive totaled approximately 5,900 shares.
In the first quarter of 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. During 1997, 18,800 shares of common
stock were repurchased under the program.
NOTE (9) DEPOSITS
Interest expense on time certificates of deposit with balances of $100,000 or
more amounted to $38.5 million in 1997, $36.8 million in 1996 and $27.6 million
in 1995.
Included in the Company's noninterest bearing demand deposits are deposits of
customers in the real estate services industry. While these deposits are
noninterest bearing, the Company incurs customer services expense in the form of
payments to third parties who provide accounting, courier and other deposit
related services for these customers. The costs associated with these deposits
are included in "Customer services" in the accompanying Consolidated Statement
of Income. During 1997 and 1996, the average balances of such deposit accounts
were $1.1 billion and $670.5 million, respectively.
The following table shows the time remaining to maturity of time certificates of
deposit at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
===============================================================================================================
$100,000 AND OVER UNDER $100,000
(IN THOUSANDS) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3 months or less............................................... $486,747 $517,644 $ 59,409 $ 81,652
Over 3 through 6 months........................................ 140,831 100,959 28,403 29,509
Over 6 through 12 months....................................... 71,143 80,614 37,069 55,822
Over 12 months through 24 months............................... 6,043 1,952 3,662 2,510
- ---------------------------------------------------------------------------------------------------------------
TOTAL $704,764 $701,169 $128,543 $169,493
===============================================================================================================
</TABLE>
41
<PAGE>
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) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year................................................................ $39,000 $12,450 $126,500
Weighted average interest rate, end of year......................................... 5.39% 4.93% 4.31%
Average amount outstanding during the year.......................................... $27,353 $16,489 $ 19,121
Weighted average interest rate for the year......................................... 5.32% 5.04% 5.57%
Maximum amount outstanding at any month-end......................................... $80,300 $37,700 $156,930
========================================================================================================================
</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 $1.5 million, $0.8 million
and $1.1 million, respectively, for 1997, 1996 and 1995.
At December 31, 1997, the Company had unused borrowing capacity under Federal
funds lines of $180 million. Excluding the available Federal funds lines, no
short-term credit facilities existed at year end 1997. The Company incurred no
commitment fees relating to short-term credit lines during 1997. Federal funds
purchased and securities sold under agreements to repurchase outstanding at
December 31, 1997, matured on the next business day.
The Company issues commercial paper. The following table sets forth information
regarding the Company's outstanding commercial paper for the periods indicated:
<TABLE>
<CAPTION>
========================================================================================================================
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year.............................................................. $15,898 $ 8,011 $11,562
Weighted average interest rate, end of year....................................... 5.26% 5.11% 5.73%
Average amount outstanding during the year........................................ $13,960 $18,613 $ 7,849
Weighted average interest rate for the year....................................... 5.30% 5.45% 5.89%
Maximum amount outstanding at any month-end....................................... $19,931 $25,707 $11,861
========================================================================================================================
</TABLE>
Commercial paper outstanding at December 31, 1997, matured within 90 days.
The Bank is a designated depository for federal tax collections. These tax
collections, as set forth in the following table, bear interest at 25 points
below the Federal funds rate.
<TABLE>
<CAPTION>
=======================================================================================================================
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, end of year................................................................ $ 1,017 $24,436 $21,574
Weighted average interest rate, end of year......................................... 5.59% 6.01% 4.48%
Average amount outstanding during the year.......................................... $34,990 $26,259 $38,427
Weighted average interest rate for the year......................................... 5.35% 5.00% 5.60%
Maximum amount outstanding at any month-end......................................... $97,155 $89,579 $91,339
=======================================================================================================================
</TABLE>
NOTE (11) LONG-TERM BORROWINGS
(a) FLOATING RATE NOTES AND FIXED RATE DEBENTURES
In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes")
which mature on August 1, 1999. The Notes were convertible at the option of the
holder at any time prior to August 1, 1986, into an equivalent principal amount
of Debentures. At December 31, 1997, $2,219,000 in Notes and $1,038,000 in
Debentures were outstanding and the current interest rates on the Notes and
Debentures were 6.00% and 9.00%, respectively. At December 31, 1996, the
outstanding Notes and Debentures totaled $3,373,000 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 1997 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, 1997.
(b) CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly-owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98% capital securities (the "Capital Securities")
which represent undivided preferred beneficial interests in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust (the "Common Securities," together with the
Capital Securities, (the "Trust Securities"). The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
9.98% junior subordinated deferrable interest debentures (the "Junior
Subordinated Debentures") issued by the Company and engaging in certain other
limited activities. The excess of
42
<PAGE>
the stated redemption price at maturity of the Junior Subordinated Debentures
over their original issue price resulted in an original issue discount of $1.8
million. The Junior Subordinated Debentures held by the Trust will mature on
December 31, 2026, at which time the Company is mandatorily obligated to redeem
the Capital Securities.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions, accumulating from April 23, 1997, the date of original issuance,
and payable semi-annually in arrears on June 30 and December 31 of each year,
commencing June 30, 1997, at an annual rate of 9.98% of the liquidation amount
of $1,000 per Trust Security. The Company has the right under certain
circumstances to defer payments of interest on the Junior Subordinated
Debentures at any time and from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period, provided
that no deferral period may end on a day other than an interest payment date or
extend beyond the stated maturity date of the Junior Subordinated Debentures. If
and for so long as interest payments on the Junior Subordinated Debentures are
so deferred, cash distributions on the Trust Securities will also be deferred
and the Company will not be permitted, subject to certain exceptions, to declare
or pay any cash distributions with respect to the Company's capital stock (which
includes common and preferred stock) or to make any payment with respect to debt
securities of the Company that rank equal with or junior to the Junior
Subordinated Debentures.
Upon the repayment on December 31, 2026, the stated maturity date, or prepayment
prior to this date of the Junior Subordinated Debentures, the proceeds from such
repayment or prepayment shall be applied to redeem the Trust Securities upon not
less than 30 nor more than 60 days notice of a date of redemption at the
applicable redemption price. At maturity, the redemption price shall equal the
principal of and accrued and unpaid interest on the Junior Subordinated
Debentures. Subject to the Company having received prior approval of the Board
of Governors of the Federal Reserve System, if then required under applicable
capital guidelines or policies of the Federal Reserve, the Junior Subordinated
Debentures will be prepayable prior to the maturity date at the option of the
Company on or after June 30, 2007, in whole or in part, at a prepayment price
equal to 105.113% of the principal amount thereof on the prepayment date,
declining ratably on each June 30 thereafter to 100% on or after June 30, 2017,
plus accrued and unpaid interest thereon to the date of prepayment.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at December 31, 1997.
The unamortized discount on the Capital Securities was $1.7 million at December
31, 1997.
The Company used $30.0 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make an additional investment in the Bank during
1997. An additional $37.2 million investment was made in the Bank in January
1998. The remainder of the proceeds will be used for general corporate purposes
or may be used for additional capital contributions to the Bank or to pursue
acquisition opportunities. The Capital Securities qualify as Tier I capital
under the capital guidelines of the Federal Reserve. The net principal balance
of the Capital Securities was $73.3 million at December 31, 1997.
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) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) from:
Continuing operations................................................................. $36,502 $43,278 $10,071
Discontinued operations............................................................... 456 (6,000) 1,118
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $36,958 $37,278 $11,189
=========================================================================================================================
</TABLE>
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) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal..................................................................... $24,704 $19,897 $ 8,152
State....................................................................... 7,162 6,609 1,978
- ----------------------------------------------------------------------------------------------------------------
TOTAL $31,866 $26,506 $10,130
- ----------------------------------------------------------------------------------------------------------------
Deferred:
Federal..................................................................... (2,701) 4,485 2,880
State....................................................................... 554 2,136 2,138
- ----------------------------------------------------------------------------------------------------------------
TOTAL $(2,147) $ 6,621 $ 5,018
- ----------------------------------------------------------------------------------------------------------------
Total:
Federal..................................................................... 22,003 24,382 11,032
State....................................................................... 7,716 8,745 4,116
- ----------------------------------------------------------------------------------------------------------------
Taxes credited (charged) to shareholders' equity............................ 7,239 4,506 (792)
- ----------------------------------------------------------------------------------------------------------------
Reversal of overaccrued taxes from prior years.............................. -- (355) (907)
- ----------------------------------------------------------------------------------------------------------------
Change in valuation allowance for deferred tax receivable................... -- -- (2,260)
- ----------------------------------------------------------------------------------------------------------------
TOTAL $36,958 $37,278 $11,189
=================================================================================================================
</TABLE>
The amounts previously reported as the current and deferred portions of the tax
provision for 1996 were revised based upon determinations made when the 1996 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 1997 and 1996, the Company recorded a $0.4 million reduction of income
tax expense to reflect the finalization of prior years income tax issues.
43
<PAGE>
The Company had a current income tax receivable of $6.1 million at December 31,
1997, and a current income tax receivable of $3.7 million at December 31, 1996.
Of the $7.2 million tax benefit recorded directly to shareholders' equity in
1997, $7.6 million represents current taxes receivable associated with employee
stock options and $0.4 million represents the increase in deferred taxes
associated with the unrealized gain on securities available for sale.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following table
shows the primary components of the Company's net deferred tax asset
(liability):
<TABLE>
<CAPTION>
==================================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Components of the deferred tax asset:
<S> <C> <C>
Bad debt deduction...................................................................... $ 17,972 $ 12,335
Deferred compensation................................................................... 10,251 6,277
State franchise taxes................................................................... 3,571 3,260
Goodwill amortization................................................................... 1,143 831
Other................................................................................... 1,056 490
==================================================================================================================
Total $ 33,993 $ 23,193
- ------------------------------------------------------------------------------------------------------------------
Valuation allowance..................................................................... -- --
- ------------------------------------------------------------------------------------------------------------------
Deferred tax asset, net of valuation allowance $ 33,993 $ 23,193
==================================================================================================================
Components of the deferred tax liability:
Prepaid expense......................................................................... (454) (614)
Installment sale of real estate owned................................................... (5) (21)
Depreciation............................................................................ (207) (214)
Deferred loan fees...................................................................... (1,114) (847)
Investment in Imperial Credit Industries, Inc........................................... (30,306) (22,184)
Unrealized gain on securities available for sale........................................ (1,330) (883)
Other................................................................................... (222) (222)
- ------------------------------------------------------------------------------------------------------------------
Total $(33,638) $(24,985)
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 355 $ (1,792)
==================================================================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management believes that
it is more likely than not the Company will realize the benefits of these
deductible differences. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The total income tax provision differs from the amount computed by applying the
statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
================================================================================================================================
1997 1996 1995
-----------------------------------------------------------------
% 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........................ $31,867 35.0% $36,953 35.0% $11,104 35.0%
(Reduction) increase in taxes resulting from:
Tax exempt interest........................................... (102) (0.1) (167) (0.2) (146) (0.4)
Cash surrender value of officers life insurance............... (428) (0.4) (90) (0.1) (220) (0.7)
Appreciation of donated Imperial Credit
Industries, Inc. common stock........................... (986) (1.1) (1,294) (1.2) -- --
State franchise taxes, net of Federal income tax benefit...... 6,222 6.8 7,510 7.1 2,340 7.4
Change in valuation allowance................................. -- -- -- -- (2,260) (7.1)
Reversal of overaccrued taxes from prior year................. (410) (0.4) (355) (0.4) (907) (2.9)
Other......................................................... 339 0.3 721 0.8 160 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Total $36,502 40.1% $43,278 41.0% $10,071 31.7%
================================================================================================================================
</TABLE>
44
<PAGE>
NOTE (13) EMPLOYEE BENEFIT PLANS
The Company has established the following employee benefit plans.
IMPERIAL BANCORP PROFIT-SHARING/EMPLOYEE STOCK OWNERSHIP PLAN: The Company has
a noncontributory profit-sharing/employee stock ownership plan ("combined
plan") in which employees of the Company, Bank and certain subsidiaries are
eligible to participate at year-end if they have been employed for at least
1,000 hours during the year. Investments and distribution of vested benefits to
terminated participants are made in accordance with the contribution allocation
form signed by the employee. Distributions are made at the option of the Company
in either cash or common stock of the Company or a combination thereof.
Prior to 1997, the Company had both an employee stock ownership plan ("ESOP")
and a profit sharing plan. Effective December 31, 1996, the ESOP was merged with
the profit-sharing plan and all assets of the ESOP transferred to the profit-
sharing plan. The account of each participant or former participant in the ESOP
as of December 31, 1996, was transferred to the profit-sharing plan and will
continue to be held and administered under the terms of the profit-sharing plan
as a separate account in the name of the participant.
During 1997, there was a discretionary contribution to the combined plan of $2.0
million. An additional $1.5 million accrued in 1997 was contributed in the first
quarter of 1998 in recognition of the Company's performance in 1997. During
1996, the Company contributed $2.5 million to the ESOP while no contribution was
made to the profit sharing plan. The trusts created by the combined plan held
1,757,715 shares at December 31, 1997, and 2,010,638 shares at December 31,
1996. The shares held by the combined plan represented approximately 4.5% of the
Company's total shares outstanding at December 31, 1997.
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 $1,221,000 in 1997, $950,000 in
1996 and $453,000 in 1995. 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 710,736 shares
at December 31, 1997, and 745,598 shares at December 31, 1996.
SUPPLEMENTAL COMPENSATION PLANS
DEFERRED COMPENSATION PLAN: In 1992, the Company adopted a Deferred
Compensation Plan ("the 1992 Plan") in order to provide specified benefits to
certain key employees and directors. Participants are allowed to defer portions
of their compensation each plan year, subject to a minimum and a maximum dollar
amount of deferral. In any plan year, the Company will make a matching
contribution of not less than 10% nor more than 50% of the participants'
deferral for that year. The exact ratio will be determined by a formula based on
return on shareholders' equity. The matching contribution ratio as calculated
was 50% for both 1997 and 1996.
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 certain compensation deferred
under the 1992 Plan to the 1996 Plan when the 1992 Plan expires on December 31,
1998.
Each participant's "account balance" earns interest at a rate established
annually. Prior to September 1, 1997, the rate of interest for both the 1992 and
1996 Plan was based upon the Moody's Seasoned Corporate Bond Rate. The Company
amended both the 1992 and 1996 Plans effective September 1, 1997, to compute
interest based on the 10-Year Treasury Bond Yield plus 250 basis points. The
rates for 1997 were 7.41% for the period January 1, 1997, to August 29, 1997,
and 8.84% for the period September 1, 1997, to December 31, 1997. The rate for
1996 was 7.30% and the rate for 1998 will be 8.37%.
The expense of funding the deferred compensation plans totaled $2.9 million,
$2.3 million and $1.0 million, respectively, for the years ended December 31,
1997, 1996 and 1995.
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 (income) expense of the policies included in the accompanying
Consolidated Statement of Income approximated ($466,000) and $50,000 for the
years ended December 31, 1997 and 1996, respectively.
DEATH BENEFIT ONLY PLAN: The Death Benefit Only Plan ("DBO Plan") was
established in 1986 to provide certain death benefits to the Company's then
Chairman and Vice Chairman, so long as they 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 fifteen years (expected mortality).
The DBO Plan was designed such that, if the assumptions made with respect to
mortality experience,
45
<PAGE>
policy dividends and other factors are realized, the Company will recover all
costs including life insurance premiums and benefits paid by it, plus a factor
for the use of its money.
The Company's income related to the funding of the DBO Plan amounted to
$254,000, $276,000 and $277,000, respectively, for the years ended December 31,
1997, 1996 and 1995.
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 (income) expense of the policy in the Consolidated Statement of
Income for the years ended December 31, 1997 and 1996, approximated ($99,000)
and $350,000, respectively.
STOCK OPTION PLAN: The Company has a stock option plan for directors and
certain employees. Options are granted at the market price of the Company's
common stock at the date of grant, and become exercisable immediately for all
directors. Options which have been granted to employees are exercisable at
either 25% or 16.7% per year beginning one year after the date of grant.
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
=======================================================================================================================
(In Thousands) 1997* 1996* 1995*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding,
beginning of year...................................................... 4,777,989 3,909,099 4,732,599
Options granted......................................................... 382,498 2,114,106 323,428
Options exercised....................................................... (1,306,252) (1,152,825) (1,117,428)
Options cancelled....................................................... (4,440) (92,391) (29,500)
- -----------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 3,849,795 4,777,989 3,909,099
=======================================================================================================================
</TABLE>
There were 614,301* option shares available for future grants at December 31,
1997.
Information regarding stock option activity and prices of the shares is as
follows:
<TABLE>
<CAPTION>
=======================================================================================================================
AVERAGE
NUMBER OPTION OPTION
OF PRICE RANGE PRICE
SHARES* PER SHARE* PER SHARE*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option at:
December 31, 1997.................................................... 3,849,795 $2.43 - $32.33 $8.34
December 31, 1996.................................................... 4,777,989 2.43 - 13.33 6.24
December 31, 1995.................................................... 3,909,099 2.43 - 8.32 3.50
Options exercisable at:
December 31, 1997.................................................... 2,368,748 $2.42 - $30.92 $6.81
December 31, 1996.................................................... 3,064,352 2.42 - 11.06 5.22
December 31, 1995.................................................... 3,001,295 2.42 - 5.43 3.15
Options exercised during the year:
December 31, 1997.................................................... 1,306,252 $2.73 - $11.06 $3.71
December 31, 1996.................................................... 1,152,825 2.73 - 8.32 3.11
December 31, 1995.................................................... 1,117,428 5.61 - 8.98 2.98
=======================================================================================================================
</TABLE>
* Adjusted for stock dividend declared and paid first quarter 1997 and
3-for-2 stock splits effected in 1996 and first quarter 1998.
The Company recorded an additional $4.8 million in 1997 and $4.1 million in 1996
of shareholders' equity from the exercise of employee stock options. The Company
receives a tax deduction from the exercise of non-qualified stock options for
the difference between the option price and the market value of the shares
issued. The tax benefit associated with shares exercised which was recorded as a
component of shareholders' equity approximated $7.6 million in 1997 and $3.2
million in 1996. During 1997 and 1996, $1.9 million and $1.8 million of common
stock were exchanged and retired in conjunction with the exercise of stock
options.
46
<PAGE>
The Company applies APB 25 in accounting for the stock option plan and,
accordingly, no compensation cost has been recognized in the Consolidated
Financial Statements for the fair value of stock options granted. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
================================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations:
As reported................................................................................... $54,548 $62,302 $21,654
Pro forma..................................................................................... 52,317 60,735 21,568
Net income:
As reported................................................................................... $55,177 $54,134 $23,177
Pro forma..................................................................................... 52,946 52,567 23,091
Basic income per share from continuing operations:
As reported................................................................................... $ 1.41 $ 1.66 $ 0.60
Pro forma..................................................................................... 1.35 1.62 0.59
Basic net income per share:
As reported................................................................................... $ 1.43 $ 1.44 $ 0.64
Pro forma..................................................................................... 1.36 1.40 0.63
Diluted income per share from continuing operations:
As reported................................................................................. $ 1.34 $ 1.59 $ 0.57
Pro forma................................................................................... 1.28 1.54 0.57
Diluted net income per share:
As reported................................................................................. $ 1.36 $ 1.38 $ 0.61
Pro forma................................................................................... 1.30 1.34 0.61
================================================================================================================================
</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 the
years presented:
<TABLE>
<CAPTION>
=======================================================================================
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield -- -- --
Expected life of option (years):
Officers....................................................... 6.8 6.5 6.5
Directors...................................................... 2.8 3.5 --
Stock price volatility:
Officers....................................................... 42% 44% 44%
Directors...................................................... 39 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. A 10-year
rate was used for valuing officers' options and a 5-year rate was used for
valuing directors' options based upon the respective terms of the options. The
weighted average fair value at the date of grant for options granted during
1997, 1996 and 1995 was $10.94 per option, $5.62 per option and $4.22 per
option, respectively.
Pro forma income from continuing operations and pro forma net income reflect
only options granted in 1997, 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 shareholders
in 1984, the Company had $3,519,000 and $3,633,000 in loans to certain officers
and directors, outstanding at December 31, 1997 and 1996, 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 1997, additional loans made to officers were $89,000 and
payments received were $203,000. 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 3.6% for 1997 and will be 3.4% for 1998.
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' val-
47
<PAGE>
ues and interest rates. It is currently estimated that the related credit risk
of these investments is an immaterial percentage of the notional amounts. The
Company controls the credit risk of its interest rate cap, floor and swap
agreements and forward and financial futures contracts through credit approvals,
limits and monitoring procedures.
A summary of the contract or notional amounts of significant commitments and
contingent liabilities is as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit........................................................................... $2,072,020 $1,381,980
Standby letters of credit.............................................................................. 170,513 132,079
Commercial letters of credit........................................................................... 75,088 53,314
When-issued securities................................................................................. 2,730 2,416
Asset/liability management:
Interest rate swaps.................................................................................... 102,000 --
Interest rate caps purchased........................................................................... -- 1,500,000
Interest rate floors purchased......................................................................... 5,250,000 4,500,000
Trading contracts:
Spot and forwards to purchase foreign currency......................................................... 76,055 110,856
Spot and forwards to sell foreign currency............................................................. 75,731 105,960
Futures and forwards to purchase precious metals....................................................... -- 3
Futures and forwards to sell precious metals........................................................... -- 17,006
==================================================================================================================================
</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.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate floors and caps with strike prices that
generally adjust quarterly and range from 125-200 basis points below or above
(depending on the instrument) current market rates at the time the floors and
caps were purchased. At December 31, 1997, the Company owned exchange traded
floors totaling $5.2 billion that expire at the rate of approximately $1.0
billion per quarter through the first quarter of 1999. The floors provide the
Company protection in the event that the three-month LIBOR rate drops below
their respective strike prices. The floors have an average strike price of 4.6%.
The unrealized gain on the floors approximated $384,000 at December 31, 1997.
The unamortized premium relating to the floors was $388,000 at year end. The
Company owned no interest rate caps at December 31, 1997.
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 $500.0 million at December 31, 1996, expired
unexercised in the first quarter of 1997. In the first, second, and third
quarter of 1996, the Company purchased exchange traded interest rate floors
totaling $2.0 billion. The floors expired at the rate of $500.0 million per
quarter beginning in the first quarter of 1997. The floors that expired in the
first and second quarter of 1997 provided protection to the Company in the event
that the three month LIBOR dropped 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 on 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 expire at the rate of $1.0
billion per quarter beginning in the first 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 on 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 $500.0 million at December 31, 1996. The caps provided
protection in the event that the three month LIBOR increased above the 6.5%
strike price of the caps and expired 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 expired at the rate of $500.0 million per quarter
beginning in the third quarter of 1997 and provided the Company protection in
the event that the three month LIBOR increased above the 7.5% strike price. The
unrealized gain on 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.
48
<PAGE>
The following table summarizes the Company's derivative instruments for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
===================================================================================================================================
NOTIONAL WEIGHTED
AT DECEMBER 31, 1997 (IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate floors purchased
Exchange traded........................... $5,250,000 n/a $1,000,000 expiring per quarter in first, second, third and
fourth quarter 1998. $1,250,000 expiring first quarter 1999.
Interest rate swaps
Time deposits:
Pay-3 month LIBOR less 10 basis points... 27,000 5.63% Matures first quarter 2007, callable by the Company first
quarter 1998 and semi-annually thereafter.
Receive-fixed rate..................... 27,000 7.15
Capital securities:
Pay-3 month LIBOR...................... 75,000 5.75% Matures second quarter 2007.
Receive-fixed rate..................... 75,000 7.18
===================================================================================================================================
DECEMBER 31, 1996 (IN THOUSANDS)
===================================================================================================================================
Interest rate caps purchased
Exchange traded........................... $1,500,000 n/a $500,000 expiring per quarter in second, third and fourth
quarter 1997.
Interest rate floors purchased
Exchange traded........................... 4,000,000 n/a $500,000 expiring per quarter in 1997. $1,000,000 expiring
per quarter in the first and second quarter 1998.
Over the counter.......................... 500,000 n/a Expired unexercised in first quarter 1997.
===================================================================================================================================
</TABLE>
During 1994, 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 $200.0
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 $300.0 million of which a notional
value of $100.0 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 $300.0
million per quarter during the first three quarters of 1995 with the final
$100.0 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 was a $507,300 and
$700,000 increase in net interest income and a 2 basis point and 3 basis point
increase in net interest margin for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1995, the economic impact of the
Company's derivative financial instruments was a $7.2 million reduction in net
interest income and a 35 basis point reduction in net interest margin. 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 options in the fourth quarter of 1995.
As of December 31, 1997 and 1996, SBA loans serviced for others approximated
$81.1 million and $57.4 million, respectively. In the ordinary course of
business, the Company is exposed to liability under representations and
warranties made to purchasers of loans. Under certain circumstances, loans must
be repurchased if there has been a breach of representations or warranties.
The Company's wholly owned subsidiary, Imperial Trust Company, a California
licensed trust company, had total assets under management of approximately $8.7
billion and $7.8 billion at December 31, 1997 and 1996, respectively.
49
<PAGE>
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, 1997,
1996 and 1995, amounted to approximately $6.8 million, $6.3 million and $6.6
million, respectively.
Aggregate minimum rental commitments under these leases net of $1.1 million of
income to be received from noncancelable subleases are as follows:
<TABLE>
<CAPTION>
==============================================================================
(IN THOUSANDS) AMOUNTS
- ------------------------------------------------------------------------------
<S> <C>
1998 $ 6,211
1999 5,989
2000 4,681
2001 4,535
2002 4,001
Thereafter 16,886
- ------------------------------------------------------------------------------
Total $42,303
==============================================================================
</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 $3.3 million in 1997, $2.9 million in 1996 and $2.9 million in 1995
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>
1998 $ 2,272
1999 2,333
2000 2,337
2001 2,337
2002 1,364
- ------------------------------------------------------------------------------
Total $10,643
==============================================================================
</TABLE>
YEAR 2000:
To fulfill the Company's fiduciary responsibility and ensure compliance with
regulatory requirements, the Company has established a year 2000 project team
("the Team"). The Team has conducted a comprehensive review of the Company's
computer systems to identify the systems that could be affected by the year 2000
issue and is developing an implementation plan to ensure that date-sensitive
data continues to be processed correctly. Incorporated into the Team's mission
statement is to have the Company year 2000 compliant by year-end 1998. The year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Team presently believes that, with
modifications to existing software and minimal conversions to new software, the
year 2000 will not pose significant operational problems for the Company's
computer systems. Based on the Team's identification and analysis of necessary
year 2000 modifications and enhancements, the Company does not anticipate
incurring significant incremental costs related to the year 2000 project.
LEGAL ACTION:
The Company and its subsidiaries are defendants in various lawsuits arising from
the normal course of business. Management believes, based upon the opinion of
legal counsel, that the ultimate resolution of the pending litigation will not
have a material effect upon the Company.
NOTE (16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("SFAS 107") requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate. Such instruments include
securities, loans receivable, time deposits, borrowings and various off-balance
sheet items. Because no market exists for a significant portion of the Company's
loan portfolio, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration of these instruments and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
The fair value estimates presented do not include the value of anticipated
future business and the value of assets and liabilities that are not considered
to be financial instruments. For example, the value of the Company's fiduciary
contracts for trust services and the value of the Company's investment in
subsidiaries are not considered to be financial instruments; therefore, their
values are not incorporated into the fair value estimates. Additionally, there
is a value in the Company's core deposit base which is unrelated to the interest
rate assumptions used to compute the fair value estimates. Such demand deposits
are a significant source of low cost funds to the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER
RESALE AGREEMENTS: The carrying values reported in the balance sheet approximate
fair values due to the short-term nature of the assets.
50
<PAGE>
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.
51
<PAGE>
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
==================================================================================================================================
1997 1996
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................................................ $ 316,600 $ 316,600 $ 325,014 $ 325,014
Trading account assets................................................. 35,782 35,782 64,887 64,887
Securities available for sale.......................................... 669,266 669,266 426,336 426,336
Securities held to maturity............................................ 4,026 4,026 4,193 4,193
Federal funds sold and securities purchased under resale agreements.... 765,000 765,000 357,000 357,000
Loans held for sale.................................................... 3,763 4,120 5,531 6,058
Loans:
Commercial loans...................................................... 2,350,438 2,377,887 1,594,602 1,609,344
Real estate loans..................................................... 407,721 398,032 447,842 430,443
Consumer loans........................................................ 30,449 30,347 20,604 20,425
==================================================================================================================================
Total loans $2,788,608 $2,806,266 $2,063,048 $2,060,212
- ----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses........................................ $ (51,143) $ -- $ (36,051) $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans $2,737,465 $2,806,266 $2,026,997 $2,060,212
==================================================================================================================================
Financial liabilities:
Deposits:
Demand................................................................ $2,378,830 $2,378,830 $1,465,324 $1,465,324
Savings............................................................... 23,375 23,375 17,324 17,324
Money market.......................................................... 939,086 939,086 596,967 596,967
Time deposits - under $100,000........................................ 128,543 128,545 169,493 169,624
Time deposits - over $100,000......................................... 704,765 704,366 701,169 700,883
Short-term borrowings.................................................. 55,915 55,915 44,897 44,897
Long-term borrowings:
Floating rate notes and fixed rate debentures......................... 3,257 3,295 4,455 4,501
Capital securities.................................................... 73,314 83,214 -- --
==================================================================================================================================
Off-balance sheet financial instruments:
Asset/liability management:
Interest rate swaps/(1)/............................................... $ -- $ 5,893 $ -- $ --
Interest rate caps purchased/(1)/...................................... -- -- (95) 38
Interest rate floors purchased/(1)/.................................... (388) 384 (347) 200
Trading contracts:
Spot and forwards to purchase foreign currency......................... (3,239) (3,239) (170) (170)
Spot and forwards to sell foreign currency............................. 3,573 3,573 528 528
Futures and forwards to sell precious metals........................... -- -- (4) (4)
Credit instruments:
Commitment to extend credit............................................ -- (31,080) -- (20,730)
Standby letters of credit.............................................. -- (2,558) -- (1,981)
Commercial letters of credit........................................... -- (1,126) -- (800)
==================================================================================================================================
(1)Estimated fair value represents net unrealized gains (losses).
==================================================================================================================================
</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 1997 and 1996, the Bank maintained average reserves of approximately
$59.9 million and $81.4 million, respectively.
NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC.
At December 31, 1997, the Company owned 8,941,106 shares, approximately 23%, of
the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII) ("ICII").
52
<PAGE>
The following table illustrates the changes in the Company's investment in ICII
during 1997 and 1996:
<TABLE>
<CAPTION>
============================================================================================================
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares owned, beginning of year................................................ 9,396,106 5,801,052
Stock splits and stock dividends............................................... -- 5,281,658
Sale of shares................................................................. (320,000) (1,500,000)
Charitable donation of shares.................................................. (135,000) (186,604)
- ------------------------------------------------------------------------------------------------------------
Shares owned, end of year 8,941,106 9,396,106
============================================================================================================
</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 was obligated to pay commissions upon the sale of ICII shares.
Each individual would 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 be 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.
In connection with the settlement of one of the consulting agreements, the
Company sold 2.5%, or 231,528 shares, of its investment in ICII at various times
during 1997. An additional 88,472 shares were also sold to reduce the financial
impact of the transaction to the Company. As a result of the sales, the Company
recorded gains of $5.0 million in "Gain on sale of investment in Imperial Credit
Industries, Inc." in the Consolidated Statement of Income. Offsetting the gain
on sale was a $5.0 million consulting charge recorded in "Professional and legal
fees" which represented full satisfaction of the Company's obligation under one
of the consulting agreements. The agreement with the director remains an
obligation of the Company at December 31, 1997.
Based on the daily average market price for 1997 of $21.34 per share, less the
remaining individual's basis of $0.88 per share as of December 31, 1997, as
adjusted for stock splits and dividends, the liability relating to the remaining
agreement approximated $4.7 million at December 31, 1997. This liability is
being accrued over the vesting period and will be remeasured quarterly for
changes in the average market price.
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) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans held for sale......................................................... $ 162,571 $ 940,096 $1,341,810
Loans held for investment................................................... 1,266,719 1,068,599 668,771
Total assets................................................................ 2,102,094 2,470,639 2,510,635
Deposits.................................................................... 1,156,022 1,069,184 1,092,989
Total liabilities........................................................... 1,778,161 2,231,131 2,416,533
Retained earnings........................................................... 174,899 88,977 38,910
Total equity................................................................ 323,933 239,508 94,102
- ---------------------------------------------------------------------------------------------------------------------
Total revenues.............................................................. 308,688 256,933 85,309
Total expenses.............................................................. 149,512 99,049 61,180
Income before taxes, minority interest & extraordinary item................. 159,176 157,884 24,129
Minority interest........................................................... 10,513 12,026 (208)
Extraordinary item.......................................................... (3,995) -- --
Net income.................................................................. 85,921 75,984 14,193
=====================================================================================================================
</TABLE>
On February 20, 1997, the Company's Board of Directors approved a plan to spin
off to shareholders 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 which include the
Company owned shares of ICII will be transferred to Imperial Financial Group,
Inc. ("IFG"), a newly formed Delaware corporation and currently a wholly-owned
subsidiary of Imperial Bank. It is anticipated that the separation will occur in
the second quarter of 1998. See - Note 23 Spin Off.
NOTE (19) CAPITAL MATTERS
Imperial Bank and the Company are subject to various regulatory requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary-- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative 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 dollar amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, 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
53
<PAGE>
its last three fiscal years, less the amount of any distributions during such
period. The Indentures of the Notes, Debentures and Capital Securities also have
restrictions on distributions. At December 31, 1997, the Bank could distribute
at least $124.7 million.
As of December 31, 1997 and 1996, the then most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
Prompt Corrective Action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institution's
category under the risk-based capital guidelines.
The following table compares the Company's actual capital ratios at December 31,
1997 and 1996, to those required by regulatory agencies for capital adequacy and
well capitalized classification purposes:
<TABLE>
<CAPTION>
=============================================================================================================================
TO BE WELL CAPITALIZED UNDER
PROMPT CORRECTIVE ACTION
ACTUAL FOR CAPITAL ADEQUACY PURPOSES PROVISIONS
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997
Total capital (to risk weighted assets):
Company.................................. $471,898 12.48% $302,542 8.0% $378,178 10.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 398,741 10.65 299,519 8.0 374,398 10.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Tier I capital (to risk weighted assets):
Company.................................. $421,321 11.14% $151,271 4.0% $226,907 6.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 351,890 9.40 149,759 4.0 224,639 6.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Tier I capital (to average assets):
Company.................................. $421,321 10.28% $122,973 3.0% $204,954 5.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 351,890 8.70 121,405 3.0 202,342 5.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1996
Total capital (to risk weighted assets):
Company.................................. $320,708 11.24% $227,927 8.0% $284,909 10.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 296,024 10.48 226,013 8.0 282,516 10.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Tier I capital (to risk weighted assets):
Company.................................. $284,248 9.96% $113,964 4.0% $170,945 6.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 260,654 9.23 113,006 4.0 169,509 6.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Tier I capital (to average assets):
Company.................................. $284,248 9.32% $90,297 3.0% $151,042 5.0%
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
Bank..................................... 260,654 8.66 90,297 3.0 150,496 5.0
greater than greater than greater than greater than
or equal to or equal to or equal to or equal to
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's pro forma Tier I, total and leverage capital ratios at December
31, 1997, reflecting the spin off of IFG were 10.18%, 11.53% and 9.25%,
respectively. See - Note 23 Spin Off and Note 24 Pro Forma Financial Information
of Imperial Bancorp.
NOTE (20) DISCONTINUED OPERATION
In the second quarter of 1996, management of the Company decided to discontinue
the precious metals business which had been engaged in trading and leasing of
precious metals in addition to making loans secured by precious metals since
1993. The decision to exit this line of business was made in the wake of several
operational losses for which the Company provided approximately $9.8 million,
net of tax, in 1996. The provision, in addition to all of the results of
operations from this division, is reflected in the Consolidated Statement of
Income as "Income (loss) from operations of discontinued operation, net of tax."
In accordance with the Company's termination plan, customers of the precious
metals division were notified of the Company's decision to exit the business and
given an appropriate amount of time to liquidate their outstanding positions.
Substantially all of the activities of the precious metals division were
terminated as of December 31, 1996.
During 1997, the Company recovered approximately $1.6 million pre-tax related to
the precious metals business. The Company anticipates collecting additional
recoveries related to precious metals inventories written off, although not in
substantial amounts.
<TABLE>
<CAPTION>
===============================================================================================================
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations of discontinued
operation, net of income taxes of $456, $(6,000) and $1,118................ $ 629 $(8,168) $1,523
Loss on disposal of discontinued operation.................................... -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total $ 629 $(8,168) $1,523
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
Summary financial information pertaining to the precious metals division is
provided below:
<TABLE>
<CAPTION>
=========================================================================================================
AT DECEMBER 31, (IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans.................................................................................. $ 306 $ 3,797
Total assets........................................................................... 329 19,931
Total liabilities...................................................................... 183 14,769
=========================================================================================================
</TABLE>
NOTE (21) NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME: SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION: SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS Statement No.
14, "Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends SFAS
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.
SEC RULE ON DISCLOSURES ABOUT DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS: The
Securities and Exchange Commission has approved rule amendments to clarify and
expand existing disclosure requirements for derivative financial instruments.
The amendments require enhanced disclosure of accounting policies for derivative
financial instruments in the footnotes to the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information about market risk inherent in market risk sensitive
instruments. The required quantitative and qualitative information should be
disclosed outside the financial statement and related notes thereto.
55
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
=============================================================================================================
CONDENSED BALANCE SHEET
AT DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
- -------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash................................................................................. $ 2,365 $ 188
Interest-bearing time deposit at Imperial Bank....................................... 37,242 --
Securities available for sale........................................................ 14,412 14,022
Securities purchased under resale agreements from Imperial Bank...................... 7,925 3,200
Loans to officers.................................................................... 3,519 3,633
Investments in subsidiaries:
Imperial Bank....................................................................... 355,869 264,359
Other subsidiaries.................................................................. 13,842 4,447
Other assets......................................................................... 19,059 15,301
- -------------------------------------------------------------------------------------------------------------
Total assets $454,233 $305,150
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper...................................................................... $ 15,898 $ 8,011
Floating rate notes and fixed rate debentures......................................... 3,257 4,455
Junior subordinated debentures........................................................ 75,582 --
Other liabilities..................................................................... 7,472 6,333
- -------------------------------------------------------------------------------------------------------------
Total liabilities $102,209 $ 18,799
=============================================================================================================
Shareholders' equity:
Common stock, no par 50,000,000 shares authorized; 39,236,034
shares at December 31, 1997, and 34,619,573 shares at
December 31, 1996, issued and outstanding........................................ 236,186 163,748
Subsidiaries' unrealized gain on securities available for sale, net of tax........... 1,682 1,206
Retained earnings.................................................................... 114,156 121,397
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity $352,024 $286,351
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $454,233 $305,150
=============================================================================================================
</TABLE>
56
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
============================================================================================================================
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Dividends - Imperial Bank..................................... $ 1,120 $ 4,120 $ 2,367
Interest income:
Securities available for sale............................... 1,327 1,195 694
Securities purchased under resale agreements from
Imperial Bank.............................................. 166 141 12
Interest-bearing time deposit at Imperial Bank.............. 2,101 -- --
Loans to officers........................................... 131 119 199
Other income.................................................. 8 15 16
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue $ 4,853 $ 5,590 $ 3,288
- ----------------------------------------------------------------------------------------------------------------------------
Expense:
Salary........................................................ 171 137 137
Other employee benefits/(1)/.................................. (168) 206 (206)
Interest expense:
Commercial paper............................................ 740 1,015 463
Floating rate notes and subordinated debentures............. 270 343 528
Junior subordinated debentures, net......................... 4,669 -- --
Other expense................................................. 915 890 535
- ----------------------------------------------------------------------------------------------------------------------------
Total expense $ 6,597 $ 2,591 $ 1,457
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes.............................. (1,744) 2,999 1,831
Applicable income tax benefit.................................. (1,522) (603) (490)
- ----------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiaries (222) 3,602 2,321
- ----------------------------------------------------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries................. 55,399 50,532 20,856
- ----------------------------------------------------------------------------------------------------------------------------
Net income $55,177 $54,134 $23,177
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes the accrual for benefit costs associated with the deferred compensation plan and DBO Plan less the increase in
cash surrender value associated with the life insurance policies funding the plans (see - Note 13 Employee Benefit
Plans).
============================================================================================================================
</TABLE>
57
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
========================================================================================================================
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income................................................ $ 55,177 $ 54,134 $ 23,177
Adjustments for non-cash charges (credits):
Undistributed income of subsidiaries.................... (55,399) (50,532) (20,856)
Net change in other liabilities/(1)/...................... 3,164 1,198 798
Net change in other assets................................ (3,758) (1,034) (693)
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $ (816) $ 3,766 $ 2,426
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale....... 231,794 416,117 188,630
Purchase of securities available for sale................. (232,409) (413,471) (189,966)
Investment in time deposit at Imperial Bank............... (37,242) -- --
Investments in subsidiaries............................... (39,179) (1,750)
Net change in securities purchased under resale
agreements.............................................. (4,725) (3,200) --
Net change in loans made to officers...................... 114 605 244
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (81,647) $ (1,699) $ (1,092)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in commercial paper............................ 7,887 (3,551) (341)
Retirement of floating rate notes and subordinated
debentures.............................................. (1,198) (1,451) (2,247)
Issuance of junior subordinated debentures................ 75,540 -- --
Net proceeds from exercise of employee stock options...... 2,407 2,352 1,839
Other..................................................... 4 (29) (11)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 84,640 $ (2,679) $ (760)
- ------------------------------------------------------------------------------------------------------------------------
Net change in cash $ 2,177 $ (612) $ 574
- ------------------------------------------------------------------------------------------------------------------------
Cash, beginning of year $ 188 $ 800 $ 226
- ------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 2,365 $ 188 $ 800
========================================================================================================================
(1) The Parent Company recorded a tax benefit in shareholders' equity for its employee stock options of $2,025,000 in 1997,
$1,863,000 in 1996 and $153,000 in 1995.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1997, 1996 and 1995, the Parent Company paid $5.7 million, $1.4 million and
$1.0 million in interest, respectively.
Dividends received from the Bank are subject to certain limitations. See - Note
19 Capital Matters.
NOTE (23) SPIN OFF
On February 20, 1997, the Company's Board of Directors approved a plan to spin
off to shareholders 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
Imperial Financial Group, Inc. ("IFG"), a newly formed Delaware corporation and
currently a wholly-owned subsidiary of Imperial Bank.
The Bank will contribute to IFG (i) the assets and liabilities relating to The
Lewis Horwitz Organization, a division of the Bank that specializes in motion
picture and television financing; (ii) all of the common stock of Imperial Trust
Company, a California licensed trust company that offers a wide range of trust
and investment management services; (iii) all of the common stock of a newly
formed thrift and loan company, Crown American Bank, that will hold the assets
and liabilities of the Bank's Small Business Administration lending group
("SBA"), a division of the Bank that provides loans to small businesses, a
portion of which are guaranteed as to repayment by the U.S. Government; and (iv)
the common stock owned by the Bank (representing approximately 23% of all
outstanding common stock as of December 31, 1997) in ICII, a publicly traded,
diversified specialty finance company. In conjunction with the spin off, the
Company will retain certain mortgage loans.
On February 27, 1998, the Company received a private letter ruling from the
Internal Revenue Service favorable to the proposed spin off, in a tax free
distribution to shareholders. The spin off is conditioned upon, among other
things, receipt of other regulatory approvals and obtaining necessary financing.
It is anticipated that the separation will occur the second quarter of 1998.
NOTE (24) PRO FORMA FINANCIAL INFORMATION OF IMPERIAL BANCORP (UNAUDITED)
The pro forma impact of the spin off on selected income statement items is
reflected as if the spin off had occurred at the beginning of the period
presented. Selected balance sheet items are reflected as if the spin off had
occurred at the end of the period presented.
58
<PAGE>
<TABLE>
<CAPTION>
====================================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA) ACTUAL PRO FORMA
- ------------------------------------------------------------------------------------
Pro forma earnings summary:
<S> <C> <C>
Net interest income...................................$ 201,335 $ 187,327
Provision for loan losses............................. 22,892 20,649
- ------------------------------------------------------------------------------------
Net interest income after provision for loan
losses............................................... 178,443 166,678
Noninterest income.................................... 56,401 39,050
Equity in net income of ICII.......................... 20,260 --
Gains - sale of ICII stock............................ 4,977 --
Other noninterest expense............................. 169,031 141,582
- ------------------------------------------------------------------------------------
Income before income taxes from continuing
operations........................................... 91,050 64,146
Income tax provision.................................. 36,502 26,666
Income from continuing operations.....................$ 54,548 $ 37,480
- ------------------------------------------------------------------------------------
Pro forma earnings per share:
Basic earnings per share from continuing
operations........................................ $1.41 $0.97
Diluted earnings per share from continuing
operations........................................ $1.34 $0.92
====================================================================================
Weighted average number of shares:
Basic.............................................. 38,797,085 38,797,085
Diluted............................................ 40,715,220 40,715,220
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================
AT DECEMBER 31, 1997
(IN THOUSANDS) ACTUAL PRO FORMA
- ---------------------------------------------------------------------------------
Pro forma balance sheets summary:
<S> <C> <C>
Cash....................................... $ 316,600 $ 313,787
Investments................................ 1,477,837 1,468,047
Loans, net................................. 2,737,465 2,608,851
Investment in ICII......................... 75,001 --
Other assets............................... 119,376 237,953
- ---------------------------------------------------------------------------------
Total assets.............................. $4,726,279 $4,628,638
=================================================================================
Deposits................................... $4,174,598 $4,174,598
Short-term borrowings...................... 55,915 55,915
Long-term borrowings....................... 76,571 76,571
Other liabilities.......................... 67,171 29,225
- ---------------------------------------------------------------------------------
Total liabilities $4,374,255 $4,336,309
- ---------------------------------------------------------------------------------
Total shareholders' equity $ 352,024 $ 292,329
- ---------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $4,726,279 $4,628,638
=================================================================================
</TABLE>
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS'
IMPERIAL BANCORP:
We have audited the accompanying consolidated balance sheet of Imperial Bancorp
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 21, 1998, except as to Footnote 23 which is as of
February 27, 1998.
60
<PAGE>
SELECTED STATISTICAL INFORMATION
SECURITIES
The following table shows the maturities of securities held to maturity and
securities available for sale at December 31, 1997, and their weighted average
yields.
<TABLE>
<CAPTION>
================================================================================================================================
(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......... $ -- --% $ -- --% $ -- --% $ 4.0 7.1% $ 4.0 7.1%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ -- -- $ -- -- $ -- -- $ 4.0 7.1% $ 4.0 7.1%
================================================================================================================================
Securities available for sale:
U.S. Treasury and federal agencies... $238.2 5.4% $21.1 5.8% $ -- --% $356.0 6.2% $615.3 5.9%
Mutual funds......................... 37.5 5.6 -- -- -- -- -- -- 37.5 5.6
Other securities..................... -- -- -- -- 2.7 9.6 13.8 5.5 16.5 6.2
- --------------------------------------------------------------------------------------------------------------------------------
Total $275.7 5.4% $21.1 5.8% $2.7 9.6% $369.8 6.2% $669.3 5.9%
================================================================================================================================
</TABLE>
MATURITY DISTRIBUTION OF LOANS
The following table shows the maturity schedule of the Company's loan portfolio
at December 31, 1997, net of unearned income and deferred loan fees and costs.
<TABLE>
<CAPTION>
============================================================================================================================
Less than Greater than Greater than
(IN THOUSANDS) 1 YEAR 1 TO 5 YEARS 5 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Commercial loans:
<S> <C> <C> <C> <C>
Floating rate....................................................... $1,192,392 $ 754,609 $261,551 $2,208,552
Fixed rate.......................................................... 61,858 75,870 4,158 141,886
Real estate loans:
Floating rate....................................................... 152,760 55,739 8,994 217,492
Fixed rate.......................................................... 49,026 114,321 26,881 190,229
Consumer loans:
Floating rate....................................................... 29,924 57 -- 29,981
Fixed rate.......................................................... 73 395 -- 468
- ----------------------------------------------------------------------------------------------------------------------------
Total loans $1,486,033 $1,000,991 $301,584 $2,788,608
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses........................................... (51,143)
- ----------------------------------------------------------------------------------------------------------------------------
Net loans $2,737,465
============================================================================================================================
</TABLE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
=============================================================================================================================
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income as a percentage of:
Average shareholders' equity................................................... 17.53% 20.83% 11.03% 3.46% 0.57%
Average total assets........................................................... 1.51 1.94 1.00 0.30 0.04
Average earning assets......................................................... 1.70 2.10 1.14 0.35 0.05
Shareholders' equity at year-end as a percentage of:
Total assets at year-end....................................................... 7.45% 8.55% 8.19% 8.31% 6.63%
Total gross loans at year-end.................................................. 12.62 13.88 13.43 14.38 12.56
Total deposits at year-end..................................................... 8.43 9.71 9.66 10.09 7.76
Average shareholders' equity as a percentage of:
Average total assets........................................................... 8.62% 9.33% 9.04% 8.64% 7.02%
Average gross loans 13.13 14.14 13.64 14.11 12.54
Average total deposits......................................................... 10.04 10.77 10.47 10.10 8.22
=============================================================================================================================
</TABLE>
61
<PAGE>
COMMON STOCK AND SHAREHOLDER DATA
<TABLE>
<CAPTION>
===============================================================================================================================
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market price:
High for year............................................................... $33.08 $14.85 $ 9.17 $6.85 $5.09
Low for year................................................................ 14.02 8.32 4.27 4.32 2.99
At year end................................................................. 32.88 14.55 9.17 4.50 4.50
Book value at year end....................................................... 8.97 7.52 6.18 5.49 5.34
Market price/book value at year end.......................................... 366.6% 193.4% 148.4% 81.9% 84.1%
===============================================================================================================================
</TABLE>
On January 21, 1998, the Company announced a three-for-two stock split which was
effected on February 6, 1998, to shareholders of record on February 2, 1998.
On January 24, 1997, the Company declared a 10% stock dividend, payable on
February 24, 1997, to shareholders of record on February 17, 1997. In the fourth
quarter of 1996, the Company split its common stock at the ratio of one new
share for every two shares outstanding. The Company declared an 8% stock
dividend on January 25, 1996, payable on February 23, 1996, to shareholders of
record on February 15, 1996. In addition, 5% stock dividends were declared on
January 24, 1995, payable February 24, 1995, to shareholders of record on
February 15, 1995, and on January 20, 1994, payable February 28, 1994, to
shareholders of record on February 10, 1994. The ratios and amounts in the above
table have been adjusted for the effect of these dividends for all periods
presented.
The Company's common stock trades on the New York Stock Exchange ("NYSE") under
the stock symbol "IMP." During the first eleven months of 1996, the common stock
of the Company was traded in the over-the-counter market on the National Market
System and quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the ticker symbol "IBAN." As of March 2, 1998,
shareholders of record approximated 1,560 exclusive of shares held in street
name at brokerage firms.
QUARTERLY DATA
The following table sets forth the range of the high and low prices for the
calendar periods indicated as adjusted for a 10% stock dividend declared and
paid in the first quarter of 1997 and a 3-for-2 stock split effected in the
first quarter of 1998.
<TABLE>
<CAPTION>
======================================================================================
1997 1996
--------------------------------------------------------
STOCK MARKET QUOTATIONS HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $19.08 $14.02 $10.24 $ 8.32
Second Quarter 19.25 14.33 10.20 8.99
Third Quarter 24.92 18.96 11.92 8.99
Fourth Quarter 33.08 23.51 14.85 11.06
======================================================================================
</TABLE>
62
<PAGE>
Quarterly financial information for the Company and its subsidiaries for the
years ended December 31, 1997 and 1996, is summarized below.
<TABLE>
<CAPTION>
================================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================================================================
1997 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income................................................. $81,372 $74,372 $68,495 $58,733
Net interest income................................................... 59,491 53,844 47,839 40,161
Provision for loan losses............................................. 8,107 7,068 4,427 3,290
Noninterest income.................................................... 30,504 19,046 15,959 16,129
Income from continuing operations before taxes........................ 35,250 23,936 18,578 13,286
Income (loss) from operations of discontinued operation, net of tax... 150 690 (132) (79)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $21,392 $14,873 $10,959 $ 7,953
================================================================================================================================
Basic earnings from continuing operations per share................... 0.54 0.37 0.29 0.21
Basic earnings (loss) per share of discontinued operations............ 0.01 0.02 (0.01) --
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share.............................................. $ 0.55 $ 0.39 $ 0.28 $ 0.21
================================================================================================================================
Diluted earnings from continuing operations per share................. 0.52 0.35 0.27 0.20
Diluted earnings per share of discontinued operations................. 0.01 0.01 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.53 $ 0.36 $ 0.27 $ 0.20
================================================================================================================================
================================================================================================================================
1996 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
================================================================================================================================
Total interest income................................................. $56,227 $54,513 $50,326 $48,090
Net interest income................................................... 37,908 36,084 34,889 32,221
Provision for loan losses............................................. (2,948) 3,803 3,357 2,669
Noninterest income.................................................... 14,974 12,586 23,229 12,291
Gains - Imperial Credit Industries, Inc. stock........................ -- -- 36,411 --
Income from continuing operations before taxes........................ 21,368 14,347 58,185 11,680
(Loss) income from operations of discontinued operation, net of tax... (2,543) 373 (6,114) 116
- --------------------------------------------------------------------------------------------------------------------------------
Net income $10,009 $ 8,676 $28,653 $ 6,796
================================================================================================================================
Basic earnings from continuing operations per share................... $ 0.33 $ 0.22 $ 0.93 $ 0.18
Basic (loss) earnings per share of discontinued operation............. (0.07) 0.01 (0.16) --
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.26 $ 0.23 $ 0.77 $ 0.18
================================================================================================================================
Diluted earnings from continuing operations per share................. $ 0.31 $ 0.21 $ 0.88 $ 0.17
Diluted (loss) earnings per share of discontinued operations.......... (0.06) 0.01 (0.15) --
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.25 $ 0.22 $ 0.73 $ 0.18
================================================================================================================================
Per share data has been adjusted for a stock dividend declared and paid in 1997, and 3-for-2 stock splits effected in 1996 and
first quarter 1998. Earnings per share for the current year and all prior periods presented reflects the adoption of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share."
================================================================================================================================
</TABLE>
63
<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>
==================================================================================================================================
1997 OVER 1996 1996 OVER 1995
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)/................................. $ 53,038 $4,866 $1,486 $59,390 $27,817 $ 897 $1,393 $30,107
Trading instruments........................ (1,102) 960 (356) (498) 470 (912) (103) (545)
Securities available for sale.............. 12,522 (607) (351) 11,564 6,007 (1,175) (506) 4,326
Securities held to maturity................ (13) (1) -- (14) (72) 90 (23) (5)
Federal funds sold and securities purchased
under resale agreements................... 2,767 319 89 3,175 1,257 (871) (123) 263
Loans held for sale........................ 173 19 7 199 248 (9) (8) 231
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 67,385 $5,556 $ 875 $73,816 $35,727 $ (1,980) $ 630 $34,377
==================================================================================================================================
Savings.................................... 66 4 1 71 (157) (1) 1 (157)
Money market............................... 8,660 1,134 663 10,457 1,193 1,107 (112) 2,188
Time - under $100,000...................... (3,967) (40) 13 (3,994) (987) (1,362) 134 (2,215)
Time - $100,000 and over/(2)/.............. 1,938 (225) (12) 1,701 12,512 (2,382) (886) 9,244
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 6,697 $ 873 $ 665 $ 8,235 $12,561 $ (2,638) $ (863) $ 9,060
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................... 769 115 28 912 (611) (397) 33 (975)
Long-term borrowings:
Floating rate notes and subordinated
debentures.............................. (81) 10 (2) (73) (154) (47) 16 (185)
Capital securities/(3)/.................. 4,509 -- -- 4,509 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 11,894 $ 998 $ 691 $13,583 $11,796 $ (3,082) $ (814) $ 7,900
==================================================================================================================================
Changes in net interest income $ 55,491 $4,558 $ 184 $60,233 $23,931 $ 1,102 $1,444 $26,477
==================================================================================================================================
(1) The rate change for interest income on loans includes a $0.5 million and a $0.7 million positive impact of derivative
instruments for the years ended Decem ber 31, 1997 and 1996, respectively. Loans are net of unearned income and deferred loan
fees.
(2) The rate change for interest expense on time deposits under $100,000 includes a $0.4 million positive impact of derivative
instruments for the year ended December 31, 1997.
(3) The rate change for interest expense on capital securities includes a $0.7 million positive impact of derivative instruments
for the year ended December 31, 1997.
==================================================================================================================================
</TABLE>
64
<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 shareholder of Imperial Bank ("the Bank"), Imperial Bank Arizona ("IBAZ")
and it's non-bank subsidiaries. IBAZ was established as an Arizona bank in 1997
and is pursuing a similar strategy to that of the Bank in the Arizona market
with an office in downtown Phoenix. The Company 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 Bellevue, Washington. 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; accounts receivable
factoring; 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 middle market businesses with 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 Imperial
Entertainment Group, International Banking, Asset Based Lending, Financial
Services Group, Corporate Cash Management, Merchant Card Services, The Lewis
Horwitz Organization, Emerging Growth, Health Care and Small Business
Administration Lending. The Bank's loans and deposits are diversified across a
number of industries.
For individual customers, the Bank provides: personal checking, interest
checking and savings accounts; individual retirement accounts and Keogh Plans;
money market deposit accounts; certificates of deposit; auto, home improvement,
home equity and other types of consumer loans; 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 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 activities as permitted under applicable law.
As of December 31, 1997, the Bank and its subsidiaries had total assets of $4.7
billion and total deposits of $4.2 billion. Net income for 1997 was $55.2
million.
Competition - The Bank operates in highly competitive markets. 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
$8.7 billion at December 31, 1997. The Trust Company reported net income of
$958,000 for 1997.
65
<PAGE>
Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small
business investment company. IVI reported a net loss of $90,000 for 1997. As of
December 31, 1997, IVI had total assets of approximately $2.3 million.
Imperial Securities Corporation ("ISC"), a registered broker dealer, engages in
the purchase and resale of financial instruments to corporations, financial
institutions and high net worth individuals. ISC, organized as a broker dealer
in 1993, reported net income of $702,200 for 1997. As of December 31, 1997, ISC
had total assets of $5.0 million.
Pacific Bancard Association, Inc. ("PBA") was formed in 1976 to facilitate
merchant bankcard processing activities. In the fourth quarter of 1997, PBA sold
its 50% investment in American Heritage Pacific Bancard Association which was
formed in 1994. PBA recognized a $3.5 million pretax gain on the sale. PBA's
assets at December 31, 1997, consisted of deposits totaling $4.6 million at
Imperial Bank. PBA reported net income of $2.2 million for 1997.
Imperial Bank Arizona ("IBAZ") opened in August 1997 when the Bank's loan
production office located in Phoenix, Arizona was converted into to a full-
service business bank. At December 31, 1997, IBAZ had total assets of $17.8
million. IBAZ reported a net loss of $34,000 for the year.
NONBANK SUBSIDIARIES: In addition to the Bank and its subsidiaries, the Company
has three 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, 1997, Realty's total assets consisted of deposits
with Imperial Bank totaling $612,000. Net income in 1997 was approximately
$8,700.
Imperial Capital Trust I (the "Trust") is a statutory business trust formed in
April 1997. The Trust exists for the sole purpose of issuing 9.98% Capital
Securities and investing the proceeds thereof in 9.98% Junior Subordinated
Debentures issued by the Company. At December 31, 1997, the Trust had assets of
$75.7 million, of which $75.6 million reflects its investment in the Junior
Subordinated Debentures issued by the Company. The Trust had net income of
approximately $93,100 for 1997.
Imperial Creditcorp ("ICC") seeks to generate capital appreciation through
medium term equity investments made in financial sector businesses. As of
December 31, 1997, ICC's total assets approximated $5.0 million. Net income for
1997 approximated $148,100.
INVESTMENT IN IMPERIAL CREDIT INDUSTRIES, INC.: Imperial Credit Industries,
Inc. ("ICII"), capitalized in late 1991, is a diversified finance company. In
1992, ICII sold 2.3 million shares of stock in an initial public offering.
During the second quarter of 1993, the Bank sold 2.8 million shares of ICII
common stock reducing its ownership from 72.4% at December 31, 1992, to 40.3% at
December 31, 1993 and 1994. During 1995, ICII common stock was split at the
ratio of three new shares for every two shares outstanding. In addition, ICII
declared and paid a 10% stock dividend in February 1996 and effected a two-for-
one stock split in late 1996.
In the second quarter of 1996, the Company sold 1.5 million shares of its
investment in ICII. At the same time, ICII completed a secondary public offering
in which 2.8 million new shares were sold to the public. During 1997, the
Company sold and donated 455,000 shares of ICII stock reducing its investment to
approximately 23%.
As the Company exercises significant influence 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 27, 1998, the Company received from the Internal Revenue Service a
private letter ruling favorable to the Company's proposed spin off, in a tax
free distribution to shareholders, a portion of its specialty lending and
finance business, including its investment in ICII, into a newly formed
corporation, Imperial Financial Group, Inc. The spin off is conditioned upon,
among other things, receipt of other required regulatory approvals and obtaining
necessary financing. It is anticipated that the spin off will occur in 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,
66
<PAGE>
interstate banking is allowed in three different ways: (i) effective September
1995, a bank owned by a holding company may acquire a subsidiary bank anywhere
in the U.S., (ii) effective September 1995, a bank owned by a holding company
may act as an agent in accepting deposits or servicing loans, and (iii)
effective June 1, 1997, a bank may establish a branch or merge with a bank in
another state, but only if the bank's home state permits interstate mergers and
branches, and the other state has not passed a law to prohibit interstate
mergers or branches. The Riegle-Neal Act is subject to certain phase in and opt
out provisions.
The State of California has passed interstate banking legislation. Any out-of-
state bank holding company is permitted to acquire a California bank provided
that reciprocal rights are granted to California bank holding companies.
The BHC Act prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of 5% or more of the voting
shares of any company engaged in non-banking activities. The Board is authorized
to approve, among other things, a bank holding company's acquisition of control
of any company engaged in activities which the Board has determined to be
closely related to banking or managing or controlling banks. In making such
determination, the Board is required to weigh the expected benefits of the
acquisition to the public, such as greater convenience and increased competition
or gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts of
interest and unsound banking practices.
The Company and its non-banking subsidiaries are affiliates of the Bank within
the meaning of the Federal Reserve Act. Under the Federal Reserve Act there are
certain restrictions on loans by the Bank to the Company and to its 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 Financial Institution
Commissioner, 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 Commissioner 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
Commissioner and the FDIC, the policies of the Board so permeate the banking
industry as a whole, that the Bank, while not a member of the Fed, is to a large
degree subject to the same policies that affect member banks.
The Bank, as a California corporation, is limited in making distributions to its
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, Debentures
and Capital Securities also have restrictions on distributions. At December 31,
1997, the Bank could distribute at least $124.7 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 1998 is zero.
67
<PAGE>
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 is
occurring. 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 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," ("SFAS 114") should
be characterized as a general allowance (created against unidentified losses)
rather than a specific allowance (created against identified losses). As a
general allowance, the SFAS 114 allowance is includable in Tier 2 capital,
subject to existing regulatory capital limitations.
The Bank is subject to the Community Reinvestment Act of 1977 as amended
("CRA"). CRA requires the Bank to ascertain and meet the credit needs of the
communities it serves, including low and moderate income neighborhoods. The
Bank's compliance with CRA is monitored by the FDIC, which assigns the Bank a
publicly available CRA rating. An assessment of CRA compliance is required by
both the FDIC and the Board in connection with applications for approval of
certain activities, such as mergers with or acquisitions of other banks or bank
holding companies. In April 1995, the federal regulatory agencies issued a
comprehensive revision to the rules governing CRA compliance. In assigning a CRA
rating to a bank, the new regulations place greater emphasis on measurements of
performance in the areas of lending (specifically, the bank's home mortgage,
small business, small farm and community development loans), investment (the
bank's community development investments) and service (the bank's community
development services and the availability of its retail banking services),
although examiners are still given a degree of flexibility in taking into
account unique characteristics and needs of the bank's community and its
capacity and constraints in meeting such needs. The new regulations also require
increased collection and reporting of data regarding certain kinds of loans.
Although the new regulations became generally effective on July 1, 1995, various
provisions have different effective dates, and the new CRA evaluation criteria
went into effect for examinations beginning on July 1, 1997. Although management
cannot
68
<PAGE>
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 shareholders' equity and non-cumulative perpetual preferred stock and
minority interest in consolidated subsidiaries minus intangible assets. The
Bank's Tier I and total risk-weighted ratios at December 31, 1997, were 9.40%
and 10.65%, respectively.
In addition to the risk-weighted ratios, the highest rated banks are required to
maintain a minimum leverage ratio of 3%. All other banks are expected to
maintain higher leverage ratios, to be determined on an individual basis. This
ratio is defined as Tier I capital to average total assets for the most recent
quarter. The Bank's leverage ratio at December 31, 1997, was 8.70%.
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").
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 $6.8 million for
1997.
The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard,
Redondo Beach, California. The property is owned by the Bank.
69
<PAGE>
DIRECTORY
IMPERIAL BANCORP, SUBSIDIARIES AND ENTERPRISES
<TABLE>
<S> <C>
IMPERIAL BANCORP & IMPERIAL BANK EXECUTIVE OFFICES IMPERIAL CREDITCORP
Century Boulevard at the San Diego Freeway Century Boulevard at the San Diego Freeway
P. O. Box 92991 P. O. Box 92991
Los Angeles, California 90009 Los Angeles, California 90009
(310) 417-5600 (310) 417-5600
- -------------------------------------------------------- ------------------------------------------------------
IMPERIAL BANK REALTY COMPANY, INC. IMPERIAL FINANCIAL GROUP, INC.
Century Boulevard at the San Diego Freeway 1840 Century Park East, 10th Floor
P. O. Box 92991 Los Angeles, California 90067
Los Angeles, California 90009 (310) 712-8600
(310) 417-5600
- -------------------------------------------------------- ------------------------------------------------------
IMPERIAL CREDIT INDUSTRIES, INC. IMPERIAL BANK ARIZONA
23550 Hawthorne Blvd., Building 1, Suite #110 One Arizona Center
Torrance, CA 90505 400 E. Van Buren, Suite 900
(310) 373-1704 Phoenix, Arizona 85004
(602) 417-1100
- -------------------------------------------------------- ------------------------------------------------------
</TABLE>
DIRECTORS
<TABLE>
<S> <C>
GEORGE L. GRAZIADIO, JR. WILLIAM L. MACDONALD
Chairman of the Board, President and Chief Executive President and Chief Executive Officer,
Officer, Imperial Bancorp Compensation Resource Group
Chairman of the Board and Co-Founder, Imperial Bank Director, Imperial Bank
- -------------------------------------------------------- ------------------------------------------------------
NORMAN P. CREIGHTON DANIEL R. MATHIS
Vice Chairman and Chief Executive Officer, Imperial Bank President and Chief Operating Officer, Imperial Bank
Director, Imperial Bancorp and Imperial Bank Director, Imperial Bank
- -------------------------------------------------------- ------------------------------------------------------
JOHN A. ANDREINI LEE E. MIKLES
Andreini & Company Chairman, Mikles/Miller Management
Director, Imperial Bank Director, Imperial Bancorp and Imperial Bank
- -------------------------------------------------------- ------------------------------------------------------
RICHARD K. EAMER PAUL A. NOVELLY
Chairman Emeritus, Tenet Healthcare Corp. President, Apex Oil Co.
Director, Imperial Bancorp and Imperial Bank Director, Imperial Bancorp and Imperial Bank
- -------------------------------------------------------- ------------------------------------------------------
G. LOUIS GRAZIADIO, III CHARLES T. OWEN
President, Ginarra Holdings, Inc. President and Publisher, San Diego Business Journal
Director, Imperial Bancorp Director, Imperial Bank
- -------------------------------------------------------- ------------------------------------------------------
BERNARD G. LEBEAU
Retired Chairman of the Board, Imperial Bank
Director, Imperial Bancorp and Imperial Bank
- --------------------------------------------------------
</TABLE>
IMPERIAL BANK MANAGEMENT COMMITTEE
<TABLE>
<S> <C>
NORMAN P. CREIGHTON JAMES R. DALEY
Vice Chairman and Chief Executive Officer Executive Vice President
- -------------------------------------------------------- ------------------------------------------------------
DANIEL R. MATHIS ELDON K. LLOYD
President and Chief Operating Officer Executive Vice President and Chief Credit Officer
- -------------------------------------------------------- ------------------------------------------------------
J. RICHARD BARKLEY CHRISTINE M. MCCARTHY
Executive Vice President and Director, Human Resources Executive Vice President and Chief Financial Officer
- -------------------------------------------------------- ------------------------------------------------------
RICHARD J. CASEY ROBERT S. MUEHLENBECK
Executive Vice President Executive Vice President
- -------------------------------------------------------- ------------------------------------------------------
H.W. DUKE CHENOWETH MAHLON VIGESAA
Executive Vice President Senior Vice President and Manager, Central Operations
- -------------------------------------------------------- ------------------------------------------------------
</TABLE>
70
<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
. San Fernando Valley - 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) 451-8508
LOAN PRODUCTION OFFICES
. Austin, Texas
(512) 349-2333
. Bellevue, Washington
(425) 454-6604
. Boston, Massachusetts
(617) 521-9400
. San Gabriel Valley, California
(626) 810-1186
IMPERIAL BANK ARIZONA
Phoenix, Arizona
(602) 417-1100
SPECIALTY OFFICES
. Apparel and Textile Industries Group
Downtown Los Angeles
. Commercial Real Estate Mortgage Banking
Los Angeles
. Imperial Entertainment Group
Beverly Hills
. International, Foreign Exchange
Redondo Beach; San Diego; San Francisco; Hong Kong
. Wine Industry Group
Sacramento
IMPERIAL BANK -- SUBSIDIARIES & DIVISIONS
. Commercial Banking Division
. Corporate Cash Management
. Financial Institutions Division
. Financial Services Group:
Association Bank Services
Bankruptcy Deposit Division
Labor Management Division
Title/Escrow Division
. Imperial Financial Group:
Imperial Trust Company
Lewis Horwitz Organization
Small Business Lending
Costa Mesa; Emeryville; Las Vegas, NV; Phoenix, AZ; Riverside;
Sacramento; San Diego; Stockton
. Imperial Processing Division:
Gaming Industry Group
Imperial Technology Solutions
Merchant Card Processing
Pacific Bancard Association
US Audiotex, LLC
. Imperial Securities Corporation
. Imperial Ventures, Inc.
. Mortgage Warehouse Division
. Real Estate Division:
Portfolio Loan Administration
Residential Construction Lending
Fresno; Los Angeles; Sacramento; San Diego
. Special Markets Division:
Emerging Growth Industries
Austin, TX; Bellevue, WA; Boston MA; Menlo Park; San Diego
Financial Accounts Management Services (Factoring)
Merchant Banking Group
. Syndicated Finance
71
<PAGE>
SHAREHOLDER INFORMATION
Requests for financial information, annual reports, quarterly reports and SEC
filings should be addressed to:
IMPERIAL BANCORP
Investor Relations Department
P. O. Box 92991
Los Angeles, California 90009
(800) 957-8483
For other information visit our World Wide Web site:
http://www.imperialbank.com
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Co.
40 Wall Street
New York, NY 10025
(800) 937-5449
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
STOCK LISTINGS
Imperial Bancorp - NYSE - IMP
Imperial Credit Industries, Inc. - NASDAQ - ICII
72
<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 19, 1998, on its behalf by the undersigned, thereunto duly authorized.
Date
/s/ George L. Graziadio March 19, 1998
------------------------------------
George L. Graziadio, Jr.
Chief Executive Officer
/s/ Christine M. McCarthy March 19, 1998
------------------------------------
Christine M. McCarthy
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below on March 19, 1998 by the following persons on
behalf of the registrant and in the capacities indicated.
Date
/s/ George L. Graziadio, Jr. March 19, 1998
------------------------------------
George L. Graziadio, Jr.
Chairman of the Board, President and
Chief Executive Officer
/s/ Bernard G. LeBeau March 19, 1998
------------------------------------
Bernard G. LeBeau
Director
/s/ Norman P. Creighton March 19, 1998
------------------------------------
Norman P. Creighton
Director
/s/ G. Louis Graziadio, III March 19, 1998
------------------------------------
G. Louis Graziadio, III
Director
/s/ Richard K. Eamer March 19, 1998
------------------------------------
Richard K. Eamer
Director
/s/ Lee E. Mikles March 19, 1998
------------------------------------
Lee E. Mikles
Director
73
<PAGE>
FORM 10-K CROSS-REFERENCE INDEX
- ----------------------------------------------------------------------
Part I Page
- ----------------------------------------------------------------------
Item 1. Business
Unaudited Pro Forma Financial
Information.......................... 5-9
Financial Review...................... 10-29
Selected Statistical Information...... 4, 12-13, 17, 21,
23-24, 61-64
Market Risk........................... 19
Description of Business............... 65-69
Item 2. Properties............................ 69
Item 3. Legal Proceedings..................... 50
Item 4. Submission of Matters to a vote of
security holders..................... *
Executive Officers of the Registrant.. 70
- ----------------------------------------------------------------------
Part II. Page
- ----------------------------------------------------------------------
Item 5. Market for Registrant's Common
Equity and Related Shareholder
Matters.............................. 4, 62
Item 6. Selected Financial Data............... 4, 62
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations............ 10-29
Item 8. Financial Statements and
Supplementary Data
Imperial Bancorp and Subsidiaries -
Consolidated Financial Statements.... 30-33
Notes to Consolidated
Financial Statements................. 34-59
Independent Auditors' Report.......... 60
Selected Statistical Information...... 4, 12-13, 17, 21,
23-24, 61-64
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................. *
- ------------------------------------------------------------------------
Part III Page
- ------------------------------------------------------------------------
Item 10. Directors and Executive Officers
of the Registrant.................... **
Item 11. Executive Compensation................ **
Item 12. Security Ownership of Certain
Beneficial Owners and
Management........................... **
Item 13. Certain Relationships and
Related Transactions................. **
- ------------------------------------------------------------------------
Part IV+
- ------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for a listing
of all financial statements).
(2) Financial Statement Schedules
All schedules normally required by Form 10-K are
omitted since they either are not applicable or
the required information is shown in the financial
statements or notes thereto.
(3) Exhibits.
Exhibit 10. Special Compensation Agreements re:
George L. Graziadio, Jr. and Norman P.
Creighton.***
Exhibit 11. Computation of Earnings Per Share.
Exhibit 21. Subsidiaries of Registrant.
Exhibit 23. Independent Auditors' Consent.
Exhibit 27. Financial Data Schedule.
Exhibit 99. Undertakings.
Exhibit 99.1. Consulting Agreements.***
(b) No reports on Form 8-K have been filed during the
fourth quarter of the last year.
=========================================================================
* This item is omitted because it is either inapplicable or the answer thereto
is in the negative.
** Incorporated by reference from the Company's proxy statement which will be
filed within 120 days of fiscal year ended December 31, 1997.
*** 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.
74
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
================================================================================
Exhibit Number Description
- ------------------- ----------------------------------------------------
<S> <C>
11 Computation of Earnings Per Share
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
99 Undertakings
================================================================================
</TABLE>
75
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
As more fully described in Note 13 of the notes to Consolidated Financial
Statements herein, the Company has outstanding an employee stock option plan.
The shares and options within the plan have been determined to be common stock
equivalents for purposes of computing earnings per share.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") for the fiscal year ended December 31, 1997,
and for all prior periods presented.
SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings.
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, PER-SHARE PER-SHARE PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Income from continuing
operations........................ $54,548 38,797,085 $1.41 $62,302 37,565,350 $ 1.66 $21,654 36,448,047 $0.60
Income (loss) from discontinued
operation,
net of tax........................ 629 0.02 (8,168) (0.22) 1,523 0.04
------- ----- ------- ------ ------- -----
Net income......................... $55,177 $1.43 $54,134 $ 1.44 $23,177 $0.64
Effect of Dilutive Securities
Incremental shares-from
outstanding common
stock options..................... 1,918,135 1,642,684 1,598,158
---------- ---------- ----------
Diluted EPS
Income available to shareholders:
Income from continuing
operations........................ $54,548 40,715,220 $1.34 $62,302 39,208,034 $ 1.59 $21,654 38,046,205 $0.57
Income (loss) from discontinued
operations, net of tax............ 629 0.02 (8,168) (0.21) 1,523 0.04
------- ----- ------- ------ ------- -----
Net income $55,177 $1.36 $54,134 $ 1.38 $23,177 $0.61
=================================================================================================================================
</TABLE>
The weighted average number of shares used to compute earnings per share was
retroactively adjusted to reflect a 10% stock dividend declared and paid in the
first quarter of 1997, and 3-for-2 stock splits effected in the fourth quarter
of 1996 and first quarter of 1998, 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 Arizona Imperial Bancorp 100%
Imperial Bank Realty Company, Inc. Imperial Bancorp 100%
Imperial Capital Trust I Imperial Bancorp 100%
Imperial Creditcorp Imperial Bancorp 100%
Imperial Trust Company Imperial Bank 100%
Imperial Asset Advisors, Inc. Imperial Bank 100%
Imperial Ventures, Inc. Imperial Bank 100%
Imperial International Bank Imperial Bank 100%
Pacific Bancard Association, Inc. Imperial Bank 100%
Imperial Securities Corporation Imperial Bank 100%
Imperial Trade Services, Ltd. 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%
=================================================================================================================
</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 21, 1998, except as to footnote 23
which is as of February 27, 1998, relating to the consolidated balance sheet of
Imperial Bancorp and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997, which report appears in the December 31, 1997, annual report on Form 10-K
of Imperial Bancorp.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 316,600 325,014 242,018
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 765,000 357,000 425,300
<TRADING-ASSETS> 35,782 64,887 40,050
<INVESTMENTS-HELD-FOR-SALE> 669,266 426,336 295,312
<INVESTMENTS-CARRYING> 4,026 4,193 4,975
<INVESTMENTS-MARKET> 4,026 4,193 4,975
<LOANS> 2,788,608 2,063,048 1,699,347
<ALLOWANCE> (51,143) (36,051) (37,402)
<TOTAL-ASSETS> 4,726,279 3,350,170 2,788,374
<DEPOSITS> 4,174,598 2,950,277 2,363,616
<SHORT-TERM> 55,915 44,897 159,636
<LIABILITIES-OTHER> 61,966 58,247 25,404
<LONG-TERM> 76,571 4,455 5,906
0 0 0
0 0 0
<COMMON> 236,186 163,748 130,780
<OTHER-SE> 115,838 122,603 97,456
<TOTAL-LIABILITIES-AND-EQUITY> 4,726,279 3,350,170 2,788,374
<INTEREST-LOAN> 233,124 173,734 143,627
<INTEREST-INVEST> 36,004 24,952 21,176
<INTEREST-OTHER> 13,844 10,470 9,976
<INTEREST-TOTAL> 282,972 209,156 174,779
<INTEREST-DEPOSIT> 72,786 64,551 55,491
<INTEREST-EXPENSE> 81,637 68,054 60,154
<INTEREST-INCOME-NET> 201,335 141,102 114,625
<LOAN-LOSSES> 22,892 6,881 16,122
<SECURITIES-GAINS> 987 229 260
<EXPENSE-OTHER> 169,031 128,132 110,324
<INCOME-PRETAX> 91,050 105,580 31,725
<INCOME-PRE-EXTRAORDINARY> 54,548 62,302 21,654
<EXTRAORDINARY> 629 (8,168) 1,523
<CHANGES> 0 0 0
<NET-INCOME> 55,177 54,134 23,177
<EPS-PRIMARY> 1.41 1.66 0.60
<EPS-DILUTED> 1.34 1.59 0.57
<YIELD-ACTUAL> 6.20 5.8 5.7
<LOANS-NON> 10,578 20,390 28,926
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 23,970 28,681 33,608
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 36,051 37,402 40,072
<CHARGE-OFFS> 10,365 11,025 20,962
<RECOVERIES> 2,568 2,778 2,170
<ALLOWANCE-CLOSE> 51,143 36,051 37,402
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
<FN>
RESTATEMENT OF EARNINGS PER SHARE DATA FOR 1996 AND 1995 TO REFLECT THE ADOPTION
OF SFAS NO. 128, "EARNINGS PER SHARE." EARNINGS PER SHARE DATA IS FOR CONTINUING
OPERATIONS.
</FN>
</TABLE>
<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 shareholders 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 shareholders of the
registrant, at the time and in the manner such material is sent to its
shareholders, copies of all reports, proxy statements and other
communications distributed to its shareholders 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 shareholders 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.
