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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________________ to _____________
____________________________ Commission file number 0-7722
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2575576
(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK: Aggregate market value of Common Stock held by non affiliates
as of March 1, 1999: $569,865,829.
Number of Shares of Common Stock outstanding as of March 1, 1999: 41,888,374
shares.
DEBT SECURITIES: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of December 31, 1998, $1,106,000 in principal amount of such Notes and
$999,000 in principal amount of such Debentures were outstanding.
CAPITAL SECURITIES: 9.98% Series B Capital Securities of Imperial Trust
Capital Trust I Due 2026. As of December 31, 1998, $73,372,000 in net principal
amount was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Sections of a Proxy Statement which will
be filed within 120 days of Fiscal Year Ended December 31, 1998, are
incorporated by reference into Part III hereof.
This report includes a total of 79 pages. Exhibit Index begins on page 78.
INDICATE BY CHECKMARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORT(S)), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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TABLE OF CONTENTS
Five Year Summary of Selected Financial Information ....................... 4
Financial Review .......................................................... 5
Average Balances, Yields and Rates Paid ................................. 8
Asset Liability Management .............................................. 11
Analysis of the Allowance for Loan Losses ............................... 20
Allocated Allowance for Loan Losses ..................................... 21
Financial Statements
Consolidated Balance Sheet .............................................. 28
Consolidated Statement of Income ........................................ 29
Consolidated Statement of Changes in Shareholders' Equity and
Comprehensive Income .................................................. 30
Consolidated Statement of Cash Flows .................................... 31
Notes to Consolidated Financial Statements .............................. 32
Independent Auditors' Report ............................................ 63
Selected Statistical Information
Securities .............................................................. 64
Maturity Distribution of Loans .......................................... 64
Financial Ratios ........................................................ 64
Common Stock and Shareholder Data ....................................... 65
Quarterly Data .......................................................... 65
Analysis of Changes in Net Interest Margin .............................. 67
Description of Business ................................................... 68
Directory ................................................................. 73
Signatures ................................................................ 76
Form 10-K Cross Reference Index ........................................... 77
Exhibits Index ............................................................ 78
3
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
IMPERIAL BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income ..................................... $ 359,459 $ 282,972 $ 209,156 $ 174,779 $ 135,772
Interest expense .................................... 102,648 81,637 68,054 60,154 37,415
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Net interest income ............................... 256,811 201,335 141,102 114,625 98,357
Provision for loan losses ........................... 33,375 22,892 6,881 16,122 12,174
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Net interest income after provision for loan losses 223,436 178,443 134,221 98,503 86,183
Noninterest income .................................. 65,687 76,661 63,080 43,546 34,572
Gains - Imperial Credit Industries, Inc. stock ...... -- 4,977 36,411 -- --
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Total operating income .............................. 289,123 260,081 233,712 142,049 120,755
Personnel expense ................................... 114,599 85,065 64,876 47,702 47,087
Other noninterest expense ........................... 102,327 83,966 63,256 62,622 63,078
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Income before income taxes .......................... 72,197 91,050 105,580 31,725 10,590
Income tax provision .............................. 28,449 36,502 43,278 10,071 3,968
Income from continuing operations ................... 43,748 54,548 62,302 21,654 6,622
Income (loss) from discontinued operation, net of tax -- 629 (8,168) 1,523 21
Net income .......................................... $ 43,748 $ 55,177 $ 54,134 $ 23,177 $ 6,643
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Diluted earnings per share/(1)/
Earnings per share from continuing operations ..... $ 0.99 $ 1.24 $ 1.47 $ 0.53 $ 0.16
Earnings per share ................................ 0.99 1.25 1.28 0.56 0.17
Dilutive average common shares outstanding ........ 44,175,544 43,972,438 42,344,677 41,089,901 40,178,530
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At year end
Assets .............................................. $ 6,189,180 $ 4,726,279 $ 3,350,170 $ 2,788,374 $ 2,378,709
Net loans ........................................... 3,389,466 2,737,465 2,026,997 1,661,945 1,335,074
Deposits ............................................ 5,569,647 4,174,598 2,950,277 2,363,616 1,959,710
Other borrowings .................................... 62,996 59,172 49,352 165,542 199,072
Capital securities .................................. 73,372 73,314 -- -- --
Shareholders' equity ................................ 381,822 352,024 286,351 228,236 197,776
Financial ratios
Return on average equity ............................ 11.58% 17.53% 20.83% 11.03% 3.46%
Return on average assets ............................ 0.88 1.51 1.94 1.00 0.30
Average equity-to-average assets .................... 7.58 8.62 9.33 9.04 8.64
Capital ratios for Imperial Bancorp
Tier I leverage ratio ............................... 8.12% 10.28% 9.32% 9.13% 9.17%
Tier I capital ratio ................................ 9.59 11.14 9.96 9.96 10.70
Total capital ratio ................................. 10.89 12.48 11.24 11.30 12.10
Average balances
Total assets ........................................ $ 4,983,885 $ 3,653,267 $ 2,785,089 $ 2,326,308 $ 2,224,856
Earning assets ...................................... 4,487,719 3,247,448 2,449,148 2,031,551 1,887,389
Loans, net .......................................... 3,318,454 2,397,626 1,836,864 1,540,940 1,361,630
Total deposits ...................................... 4,351,225 3,136,189 2,412,150 2,006,737 1,903,203
Shareholders' equity ................................ 377,854 314,765 259,823 210,188 192,172
Common share and shareholder data/(1)/
Market price, end of year ........................... $ 15.40 $ 30.44 $ 13.47 $ 8.49 $ 4.17
Book value, end of year ............................. 9.12 8.31 6.96 5.65 5.10
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</TABLE>
(1) Adjusted for stock dividends declared and paid in 1994 through 1997,
3-for-2 stock splits effected in 1996 and first quarter 1998, and an 8%
stock dividend paid March 5, 1999, to shareholders of record on February
19, 1999. Earnings per share for the current year and all prior periods
presented reflect the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
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4
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The following discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which can be identified
by the use of forward-looking terminology including "may", "will", "intend",
"should", "expect", "anticipate", "estimate" or "continue" or the negatives
thereof or other comparable terminology. The Company's actual results could
differ materially from those anticipated in such forward-looking statements as a
result of various factors, including those set forth in documents filed with the
Securities and Exchange Commission.
FINANCIAL REVIEW
The following discussion provides information about the results of operations,
financial condition, liquidity and capital resources of Imperial Bancorp ("the
Company"). This information is intended to facilitate the understanding and
assessment of the financial condition of the Company and trends impacting future
operations. It should be read in conjunction with the audited Consolidated
Financial Statements of the Company and notes thereto.
PERFORMANCE SUMMARY
Net income for the year ended December 31, 1998, decreased to $43.7 million, or
$0.99 a diluted share, from $55.2 million, or $1.25 a diluted share for the year
ended December 31, 1997. Although the Company experienced strong earnings growth
in its core banking operations, overall financial results for 1998 were
significantly impacted by the loss derived from its investment in Imperial
Credit Industries, Inc. ("ICII") (NASDAQ: ICII). At December 31, 1998, the
Company held 8.9 million shares of ICII common stock or approximately 24.3% of
the total shares outstanding. The Company's share of ICII's net loss for the
twelve months ended December 31, 1998, on an after-tax basis was $10.6 million,
or $0.25 a share, compared with net income of $11.7 million, or $0.27 a diluted
share, for 1997. ICII's net loss for 1998 reflects charges related to a
discontinued business and write downs in the carrying value of its securities
and held for sale loan portfolios attributed to volatility in the financial
markets. The Company's net income for 1998 also includes an after-tax
restructuring charge of $2.8 million, or $0.06 a share, due to the canceled
spin-off of Imperial Financial Group ("IFG"). Net income for 1997 includes an
after-tax gain of approximately $2.1 million on the sale of a merchant card
transaction processing company.
Net income from continuing operations was $43.7 million, or $0.99 a diluted
share for the twelve months ended December 31, 1998, compared with $54.5
million, or $1.24 a diluted share for 1997. The $629,000 of net income reported
for discontinued operations in 1997 includes a $695,000 after-tax recovery, net
of additional expenses incurred, related to the Company's former Precious Metals
business which was discontinued in 1996.
Excluding equity in the net losses of ICII and the restructuring charges,
normalized net income from continuing operations increased 38% for the year
ended December 31, 1998, to $57.1 million, or $1.29 a diluted share, from $41.3
million, or $0.94 a diluted share, for the year earlier. The normalizing
adjustments increased 1998 net income by $13.4 million. For purposes of this
comparison, net income for 1997 excludes equity in the net income of ICII, gains
on the sale of ICII stock, appreciation on donated ICII stock, the gain on the
sale of a merchant card processing company, expense associated with the
settlement of a consulting agreement and charitable contribution expense
associated with the donation of ICII shares to a nonprofit institution. The
normalizing adjustments decreased 1997 net income from continuing operations by
$13.3 million. The increase in normalized net income from continuing operations
for the year ended December 31, 1998, compared with the prior year reflects
solid growth in the Company's core commercial banking business.
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FOR THE PERIOD ENDED
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
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Income from continuing operations ................... $ 43,748 $ 54,548
After-tax adjustments:/(1)/
Equity in net loss (income) of ICII ................ 10,550 (11,742)
Gain on sale of ICII common stock .................. -- (2,884)
Appreciation of donated ICII
common stock ...................................... -- (1,632)
Gain on sale of merchant card company .............. -- (2,054)
Restructuring charges .............................. 2,828 --
Consulting expense ................................. -- 2,922
Charitable contribution expense .................... -- 2,105
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NORMALIZED INCOME FROM
CONTINUING OPERATIONS .............................. $ 57,126 $ 41,263
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NORMALIZED DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS .............................. $ 1.29 $ 0.94
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/(1)/ Adjustment increases (decreases) reported income.
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Earnings per share calculations for all periods presented have been adjusted for
an 8% stock dividend paid on March 5, 1999, to shareholders of record as of
February 19, 1999.
The Company's return on average total assets was 0.88% for the year ended
December 31, 1998, compared with 1.51% for the year earlier. Based on normalized
net income from continuing operations, the Company's return on average total
assets
5
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increased to 1.16% for 1998 from 1.15% for 1997. Return on average shareholders'
equity was 11.58% for the year ended December 31, 1998, compared with 17.53% for
the year earlier. The return on average shareholders' equity based on normalized
net income increased to 15.12% for 1998 from 13.11% for 1997.
The increase in normalized earnings for the year ended December 31, 1998,
compared with 1997, was primarily due to growth in loans and continued growth in
fee-based services. Average loan balances for 1998 increased $920.8 million, or
approximately 38%, over 1997. Increases in net interest income and noninterest
income for the year were partially offset by increases in salaries and benefits
expense, occupancy and equipment expense, data processing expense and customer
services expense.
Net interest income increased 28% to $256.8 million for the year ended December
31, 1998, from $201.3 million for the year earlier. The increase in net interest
income is primarily due to growth in commercial loans. The Company's net
interest margin (net interest income expressed as a percentage of
average-earning assets) decreased to 5.72% for 1998 from 6.20% for 1997. The
decline in net interest margin compared with the prior year can be attributed to
a decrease in the yield on commercial loans and an increase in lower-yielding
Federal funds sold tied to the growth in demand deposits.
Noninterest income decreased 20% to $65.7 million for the year ended December
31, 1998, from $81.6 million for 1997. The decrease in noninterest income
compared with the prior year is primarily due to the reduction in earnings
derived from the Company's investment in ICII. Excluding equity in the net loss
of ICII, noninterest income increased 68% to $83.9 million for the year ended
December 31, 1998, from $50.0 million, excluding $20.3 million equity in the net
income of ICII, a $5.0 million gain on the sale of ICII stock, $2.8 million of
appreciation on donated ICII stock and a $3.5 million gain on the sale of a
merchant card processing company for 1997. In addition to growth in fee-based
services including international fees, merchant card processing fees and service
charges on deposits, gains on the exercise and sale of equity warrants made a
significant contribution to noninterest income in 1998. Gains on the exercise
and sale of warrants totaled $21.7 million for the year ended December 31, 1998,
which includes a $16.1 million gain on the exercise and sale of warrants held in
a single company, compared with $4.3 million for the prior year. The Company
expects to recognize gains on the exercise and sale of equity warrants in the
future, but not at the level reported for 1998.
Noninterest expense totaled $216.9 million for the year ended December 31, 1998,
compared with $169.0 million for 1997. The increase in noninterest expense for
1998 compared with 1997 occurred primarily in salaries and benefits, occupancy
and equipment expense, data processing expense and customer services expense.
Noninterest expense for 1998 also includes $4.9 million of restructuring charges
related to the canceled spin-off of IFG. The increase in salaries and benefits
expense and occupancy and equipment expense is the result of growth in the
Company's lending and deposit businesses, enhanced support operations and the
addition of new offices. The average number of full-time equivalent staff
increased 24% to 1,136 for 1998 from 917 for 1997. Benefits expense for the year
ended December 31, 1998, includes $4.0 million of commissions paid to employees,
related to the exercise and sale of equity warrants compared with $1.3 million
for the prior year. The increase in customer services expense is directly
related to growth in deposit balances generated by the Financial Services
Division that services the real estate industry. These deposits remain an
important source of funding for the Company.
Loan loss provisions totaled $33.4 million for the year ended December 31, 1998,
compared with $22.9 million for 1997. The increase in the loan loss provision
for 1998 compared with the prior year is due to loan growth and to an increase
in net charge-offs. Net charge-offs for 1998, totaling $21.9 million, include
$10.5 million on a single commercial loan to a healthcare company. Excluding
this loan, net charge-offs for 1998 were $11.4 million, or 0.34% of total
average loans, compared with net charge-offs of $7.8 million, or 0.33% of total
average loans, for 1997.
Total assets at December 31, 1998, were $6.2 billion, a 31% increase from $4.7
billion at December 31, 1997. Total loans increased 24% to $3.5 billion at
December 31, 1998, from $2.8 billion at December 31, 1997. Total deposits grew
33% to $5.6 billion at December 31, 1998, from $4.2 billion at December 31,
1997. Noninterest-bearing demand balances comprised 59% and 57% of total
deposits at December 31, 1998 and 1997, respectively. Shareholders' equity
increased 8% to $381.8 million at December 31, 1998, from $352.0 million at
December 31, 1997.
Nonaccrual loans increased to $30.6 million, or 0.89% of total loans, at
December 31, 1998, from $10.6 million, or 0.38% of total loans, at December 31,
1997. At December 31, 1998, the allowance for loan losses was $62.6 million, or
1.81% of total loans and 205% of nonaccrual loans, compared with $51.1 million,
or 1.83% of total loans and 483% of nonaccrual loans, at December 31, 1997.
Imperial Bancorp is classified as well capitalized with leverage, Tier I and
total capital ratios at December 31, 1998, of 8.12%, 9.59% and 10.89%,
respectively, compared with 10.28%, 11.14%, and 12.48%, respectively, at
December 31, 1997.
6
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STOCK REPURCHASE PROGRAM
On September 24, 1998, the Company announced that the Board of Directors had
authorized the Company to repurchase 1,080,000 shares of its common stock,
adjusted for an 8% stock dividend paid on March 5, 1999, in addition to the
existing repurchase plan announced in January 1997 under which 1,782,000 shares,
as adjusted for stock dividends and splits, were authorized to be repurchased.
As of December 31, 1998, the Company had repurchased 1,849,542 shares, adjusted
for the 8% stock dividend, of the total 2,862,000 shares authorized for
repurchase.
SPIN-OFF
In September 1998, the Company canceled plans to spin-off its wholly owned
subsidiary, IFG, as a separate publicly traded company. The decision to cancel
the spin-off was due to volatility in the financial markets which contributed to
a significant decline in the market value of ICII common stock. The proposed
transaction involved the spin-off, in a tax-free distribution to shareholders,
of a portion of the Company's specialty lending and finance businesses (The
Lewis Horwitz Organization, the Small Business Administration lending division
("SBA"), Imperial Trust Company and the Company's 24.3% ownership interest in
ICII) into IFG. The distribution had been set to occur on October 1, 1998.
Noninterest expense for 1998 includes a $4.9 million restructuring charge
recorded in the third quarter for the canceled spin-off. The restructuring
charge included $2.4 million to establish an allowance for estimated expenses
incurred during the restructuring process. At December 31, 1998, the balance of
the restructuring allowance was $1.3 million.
INVESTMENT IN ICII STOCK
In December 1998, the Company announced plans to sell its 8.9 million shares of
ICII common stock. The Company is actively pursuing opportunities to sell these
shares.
STOCK DIVIDEND
On February 3, 1999, the Company announced an 8% stock dividend paid on March 5,
1999, to shareholders of record as of February 19, 1999.
ORGANIZATION
In January 1998, the Company increased its ownership interest in U S Audiotex,
LLC, to 80%. U S Audiotex, located in San Ramon, California, provides payment
processing services to counties and cities throughout the country. It is
currently participating in a pilot program to provide credit card processing for
the Internal Revenue Service. In September 1998, the Company acquired Houston,
Texas-based Altair Corporation for approximately $4.4 million in cash and stock.
Altair is a leading provider of software systems to bankruptcy trustees and
practitioners. During the fourth quarter of 1998, the Company acquired bank
charters in Arizona for $800,000 and Colorado for $1.1 million. Following
acquisition of the charters, the Company merged its Imperial Bank Arizona
subsidiary with Imperial Bank to form an Arizona banking office of Imperial Bank
and opened a banking office in Denver, Colorado.
7
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EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID /(1)/
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1998
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INTEREST
AVERAGE INCOME/ AVERAGE
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE %
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Earning assets:
Loans /(2)/ ............................. $ 3,318,454 $294,623/(3)/ 8.88%
Trading instruments ..................... 32,717 1,813 5.54
Securities available for sale ........... 666,163 37,425 5.62
Securities held to maturity ............. 4,004 287 7.17
Federal funds sold and securities
purchased under resale agreements ...... 454,651 24,170 5.32
Loans held for sale ..................... 11,730 1,141 9.73
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TOTAL INTEREST-EARNING ASSETS $ 4,487,719 $359,459 8.01%
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Allowance for loan losses ................ (58,124)
Cash ..................................... 341,385
Other assets ............................. 212,905
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Total assets ............................ $ 4,983,885
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Interest-bearing liabilities:
Savings ................................. $ 27,247 $ 691 2.54%
Money market ............................ 949,634 31,618 3.33
Time - under $100,000 .................. 189,387 10,875 5.74
Time - $100,000 and over ................ 890,686 47,482 5.33
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TOTAL INTEREST-BEARING DEPOSITS $ 2,056,954 $ 90,666 4.41%
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Short-term borrowings ................... 97,350 5,299 5.44
Long-term borrowings:
Floating rate notes and fixed rate
debentures ........................... 3,141 232 7.39
Capital securities .................... 73,342 6,451 8.80
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TOTAL INTEREST-BEARING LIABILITIES $ 2,230,787 $102,648 4.60%
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Demand deposits ......................... 2,294,271
Other liabilities ....................... 80,973
Shareholders' equity .................... 377,854
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Total liabilities and shareholders'
equity ............................... $ 4,983,885
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Net interest income/net interest margin.. $256,811 5.72%
------------------------
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(1) The yields are not presented on a tax-equivalent basis as the effects are
not material.
(2) Average balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $23.9 million, $19.8
million, $9.7 million and $5.4 million for the years ended December 31,
1998, 1997, 1996 and 1995, respectively.
NET INTEREST INCOME: The Company's operating results depend primarily on net
interest income. Net interest income is the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average
interest-earning assets. For the year ended December 31, 1998, net interest
income increased to $256.8 million from $201.3 million for 1997. The increase in
net interest income was driven by growth in earning assets, primarily loans.
Total average earning assets increased to $4.5 billion for the year ended
December 31, 1998, from $3.2 billion for 1997. Average loan balances increased
$920.8 million to $3.3 billion for 1998 from $2.4 billion for the year earlier.
Increases in the average balance of securities available for sale and Federal
funds sold also contributed to the increase in net interest income for 1998
compared with 1997.
The Company's net interest margin decreased to 5.72% for the year ended December
31, 1998, from 6.20% for 1997. The decrease in the net interest margin is
largely due to a decrease in the yield on loans. The average yield on loans
decreased to 8.88% for 1998 from 9.72% for 1997. The Company's loans are
generally tied to an index rate, either the national prime rate or the London
Interbank Offered Rate ("LIBOR"), plus a spread.
8
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<TABLE>
<CAPTION>
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1997 1996 1995
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INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE % BALANCE EXPENSE RATE % BALANCE EXPENSE RATE%
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans /(2)/ ....................... $ 2,397,626 $233,124(3) 9.72% $1,836,864 $173,734(3) 9.46% $1,540,940 $143,627(3) 9.32%
Trading instruments ............... 37,604 2,473 6.58 59,767 2,971 4.97 52,759 3,516 6.66
Securities available for sale ..... 564,563 33,239 5.89 357,837 21,675 6.06 265,422 17,349 6.54
Securities held to maturity ....... 4,130 292 7.07 4,313 306 7.09 5,619 311 5.53
Federal funds sold and securities
purchased under resale agreements 237,186 13,145 5.54 185,659 9,970 5.37 164,359 9,707 5.91
Loans held for sale ............... 6,339 699 11.03 4,708 500 10.62 2,452 269 10.97
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TOTAL INTEREST-EARNING ASSETS $ 3,247,448 $282,972 8.71% $2,449,148 $209,156 8.54% $2,031,551 $174,779 8.60%
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Allowance for loan losses .......... (42,108) (39,429) (39,993)
Cash ............................... 269,772 249,341 210,500
Other assets ....................... 178,155 126,029 124,250
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Total assets ...................... $ 3,653,267 $2,785,089 $2,326,308
-------------- -------------- --------------
Interest-bearing liabilities:
Savings ........................... $ 20,923 $ 527 2.52% $ 18,277 $ 456 2.49% $ 24,554 $ 613 2.50%
Money market ...................... 769,225 25,259 3.28 485,295 14,802 3.05 442,702 12,614 2.85
Time - under $100,000.............. 148,676 8,473 5.70 218,064 12,467 5.72 233,726 14,682 6.28
Time - $100,000 and over .......... 706,684 38,527 5.45 671,357 36,826 5.49 462,818 27,582 5.96
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TOTAL INTEREST-BEARING DEPOSITS . $ 1,645,508 $ 72,786 4.42% $1,392,993 $ 64,551 4.63% $1,163,800 $ 55,491 4.77%
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Short-term borrowings ............. 76,303 4,072 5.34 61,361 3,160 5.15 72,077 4,135 5.74
Long-term borrowings:
Floating rate notes and
fixed rate debentures .......... 3,942 270 6.85 5,154 343 6.66 7,260 528 7.27
Capital securities .............. 50,803 4,509 8.88 -- -- -- -- -- --
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TOTAL INTEREST-BEARING
LIABILITIES .................. $ 1,776,556 $ 81,637 4.60% $1,459,508 $ 68,054 4.66% $1,243,137 $ 60,154 4.84%
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Demand deposits ................... 1,490,681 1,019,157 842,937
Other liabilities ................. 71,265 46,601 30,046
-------------- -------------- --------------
Shareholders' equity .............. 314,765 259,823 210,188
-------------- -------------- --------------
Total liabilities and
shareholders' equity ........... $ 3,653,267 $2,785,089 $2,326,308
-------------- -------------- --------------
Net interest income/net
interest margin................. $201,335 6.20% $141,102 5.76% $114,625 5.64%
-------------------- -------------------- ------------------
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</TABLE>
The prime rate averaged 8.36% for 1998 compared with 8.44% for 1997. Loans tied
to LIBOR tend to produce a lower yield. In recent years, the Company has
experienced a trend in the market that favors LIBOR-based loan products, which
has contributed to an increase in LIBOR-based loans in the portfolio. The yield
on commercial loans was also impacted by the increase in nonaccrual loans. To a
lesser extent, the increase in short-term Federal funds sold as a percentage of
total average earning assets also contributed to the decline in the net interest
margin for 1998 compared with 1997. The level of Federal funds sold tends to
correspond with demand deposit balances. Average demand deposits increased to
$2.3 billion, or 53% of total average deposits, for 1998 from $1.5 billion, or
48% of total average deposits, for 1997. The increase is largely due to balances
held by the Company's customers in the real estate services industry. The
Company's overall cost of funds remained stable at 4.60% for both 1998 and 1997.
The Analysis of Changes in Net Interest Margin located on page 67 illustrates
that the growth in net interest income and the net interest margin is
substantially due to growth in the loan portfolio.
The Company's use of derivative financial instruments resulted in a $1.5 million
increase in net interest income and a 3 basis point increase in net interest
margin for 1998. In 1997, the Company's use of derivative financial instruments
resulted in a $507,300 increase in net interest income and a 2 basis point
increase in the net interest margin.
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the
9
<PAGE>
Company's reported net interest income and noninterest expense would have been
reduced by $27.2 million and $18.7 million, respectively, for the years ended
December 31, 1998 and 1997. The net interest margin would have been 5.12% for
1998 and 5.63% for 1997.
NONINTEREST INCOME: Noninterest income totaled $65.7 million for the year ended
December 31, 1998, compared with $81.6 million for 1997. The table below
provides the major components of noninterest income for 1998 and 1997:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Service charges on deposit accounts .............. $ 6,705 $ 5,473
Trust fees ....................................... 8,608 7,840
Gain on origination and sale of loans ............ 4,764 3,944
Equity in net (loss) income of Imperial
Credit Industries, Inc. ......................... (18,205) 20,260
Other service charges and fees ................... 16,537 10,622
Merchant and credit card fees .................... 7,242 3,570
International fees ............................... 11,751 7,857
Gain on securities available for sale ............ 173 987
Gain on trading instruments ...................... 1,152 4,482
Gain on sale of investment in Imperial
Credit Industries, Inc. ......................... -- 4,977
Gain on exercise and sale of equity warrants ..... 21,672 4,317
Gain on sale of equity investment ................ -- 3,544
Appreciation of donated Imperial Credit
Industries, Inc. common stock ................... -- 2,816
Other income ..................................... 5,288 949
================================================================================
TOTAL ........................................... $ 65,687 $81,638
================================================================================
Excluding the $18.2 million equity in the net loss of ICII, noninterest income
for the year ended December 31, 1998, increased 68% to $83.9 million for 1998
from $50.0 million, excluding $20.3 million equity in the net income of ICII, a
$5.0 million gain on the sale of ICII stock, $2.8 million of appreciation on
donated ICII stock and a $3.5 million gain on the sale of a merchant card
transaction processing company for 1997. Noninterest income for 1998 includes
gains on the sale and exercise of equity warrants totaling $21.7 million, which
includes a $16.1 million gain on the exercise and sale of warrants held in a
single company. Significant components also include increases in other service
charges and fees ($5.9 million), international fees ($3.9 million) and merchant
card processing fees ($3.7 million). The increase in other service charges and
fees occurred in factoring fees ($1.9 million), commissions on the sale of
nonproprietary mutual funds ($1.9 million), commitment fees ($361,000), loan
servicing fees ($333,000) and loan documentation fees ($232,000). The remaining
increase in other service charges and fees is spread throughout several smaller
categories.
Other noninterest income categories that increased for the year ended December
31, 1998, compared with 1997 include other income, which increased $4.3 million
due in part to fee income generated by US Audiotex and Altair Corporation
totaling $1.7 million, service charges on deposits, which increased by $1.2
million largely due to increased volume, gains on the origination and sale of
loans by the Company's SBA lending business ($820,000) and trust fees
($768,000). The increases in noninterest income for 1998 compared with 1997 were
partially offset by a $3.3 million reduction in gains on the sale of trading
instruments.
NONINTEREST EXPENSE: Noninterest expense increased 28% to $216.9 million for the
year ended December 31, 1998, from $169.0 million for 1997. The table below
provides the major components of noninterest expense for the periods indicated:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) ........................ 1998 1997
- --------------------------------------------------------------------------------
Salary and employee benefits .................. $114,599 $ 85,065
Net occupancy expense ......................... 10,426 9,077
Furniture and equipment ....................... 9,792 6,702
Data processing ............................... 9,969 7,525
Customer services ............................. 27,212 18,663
Net real estate and other assets
owned expense ................................ (989) 615
Restructuring charges ......................... 4,880 --
Professional and legal fees ................... 10,777 11,892
Business development .......................... 5,855 5,154
Charitable donations .......................... 288 3,802
Other expense ................................. 24,117 20,536
================================================================================
TOTAL ........................................ $216,926 $169,031
================================================================================
The increase in noninterest expense for the year ended December 31, 1998,
compared with 1997 occurred primarily in salaries and employee benefits,
occupancy and equipment expense, data processing expense and customer services
expense. In addition, noninterest expense for 1998 includes restructuring
charges of $4.9 million associated with the canceled spin-off of IFG.
Noninterest expense growth for the coming year is expected to moderate from the
levels experienced in 1998 and 1997.
The increase in salaries and benefits expense and occupancy and equipment
expense is the result of growth in the Company's lending and deposit businesses,
enhanced support operations and, to a lesser extent, the addition of new
offices. The average number of full-time equivalent staff increased 24% to 1,136
for 1998 from 917 for 1997. At December 31, 1998, total full-time equivalent
staff was 1,229 compared with 1,012 at December 31, 1997. Operations support
staff increased by approximately 120 staff at December 31, 1998, compared with
year-end 1997. The staff increases were necessary to support the growth in
transaction volumes, maintain high levels of customer service and to support key
project initiatives such as the
10
<PAGE>
Year 2000 project. See- "Year 2000." During 1998, the Company added a loan
production office in Virginia, expanded operations at its San Fernando Valley
office to a full-service regional office, formed an equipment leasing division
and purchased Houston, Texas-based Altair Corporation. The Company also opened a
banking office in Denver, Colorado, in November 1998. Benefits expense for the
year ended December 31, 1998, includes $4.0 million of commissions paid to
employees, related to the exercise and sale of equity warrants compared with
$1.3 million for the prior year.
The $2.4 million increase in data processing expense for the year ended December
31, 1998, compared with 1997 can be attributed to the following: increased
bankcard processing expense due to higher volumes ($810,000), increased
software-related expense due to purchase of new software, upgrades of existing
software and maintenance ($637,000), increases in data processing equipment
expense to support the Company's growth and upgrades of equipment related to the
Year 2000 project ($541,000) and increased processing expense associated with
the Company's main data processing system ($467,000).
Customer services expense includes accounting, courier and other deposit-related
service costs that the Company pays on behalf of its depositors in the real
estate services industry. Customer services expense is a function of the volume
of these deposits and interest rates. Customer services expense increased to
$27.2 million for the year ended December 31, 1998, from $18.7 million for 1997.
The average balance of these demand deposits increased to $1.4 billion for the
year ended December 31, 1998, from $767.1 million for 1997.
Other noninterest expense increased $3.6 million for the year ended December 31,
1998, compared with 1997. Noninterest expense includes $1.1 million related to
the Company's investment in qualified low income housing tax credits. The
Company's gross investment in these tax credits increased to $8.5 million at
December 31, 1998, from $2.6 million at December 31, 1997. Other noninterest
expense for 1998 reflects increases in a number of categories related to the
Company's growth including: travel ($985,000), supplies ($893,000),
telecommunications ($822,000), personnel recruiting expense ($639,000), broker
fees ($633,000), postage and courier ($626,000) and dues ($351,000). The
remaining increases occurred in a number of smaller categories. The increases in
noninterest expense were partially offset by a reduction in lawsuit settlement
expense ($1.2 million) and expenses associated with the initial formation of IFG
that were incurred in 1997 ($1.2 million).
INCOME TAXES
The Company recorded income taxes of $28.4 million for the year ended December
31, 1998, representing an effective tax rate of approximately 39.4%. For 1997,
the Company's income taxes and effective tax rate were $36.5 million and 40.1%,
respectively. At December 31, 1998, the Company reported a net deferred tax
asset of $21.8 million, compared with a net deferred tax asset of $355,000 at
December 31, 1997. The increase in the net deferred tax asset in 1998 compared
with the year earlier is largely due to increases in the deferred tax benefits
associated with the loan loss provision and deferred compensation accounts
totaling $10.2 million and to an $8.3 million decrease in the deferred tax
liability associated with the Company's investment in ICII.
The Company's net deferred tax asset is supported by carryback and carryforward
provisions of the tax laws as well as the Company's projection of taxable income
for 1999.
ASSET LIABILITY MANAGEMENT
LIQUIDITY: Liquidity management involves the Company's ability to meet the cash
flow requirements of its lending and deposit businesses. For the Company, as
with most commercial banking institutions, this involves an ongoing process of
managing the cash inflows and outflows associated with a commercial deposit
base. The Company's ability to acquire new deposits at pricing levels consistent
with management's targets is largely based upon its financial condition and
capital base.
The Company's liquid assets consist of cash, Federal funds sold, securities
purchased under resale agreements and investment securities, excluding those
pledged as collateral. The majority of the Company's securities portfolio is
held as available for sale. Available for sale securities can be sold in
response to liquidity needs or used as collateral under reverse repurchase
agreements. It is the Company's policy to maintain a minimum liquidity ratio
(liquid assets to liabilities) of 20% and to limit gross loans to no more than
80% of deposits. The Company's liquidity ratio and loan-to-deposit ratio were
38% and 62%, respectively, at December 31, 1998.
The overall liquidity position of the Company has been enhanced by a sizable
base of demand deposits resulting from the Company's long-standing relationship
with the real estate services industry which has provided a relatively stable
and low cost funding base. Total demand deposits averaged $2.3 billion for the
year ended December 31, 1998, compared with $1.5 billion for 1997. The Company's
average demand deposits and average shareholders' equity funded 54% and 49% of
average total assets for the years ended December 31, 1998 and 1997,
respectively.
These funding sources are augmented by payments of principal and interest on
loans, the routine liquidation of securities from the trading and available for
sale portfolios and Federal funds
11
<PAGE>
sold and securities purchased under resale agreements. During 1998, the Company
experienced a net cash outflow from its investing activities of $1.4 billion.
The net outflow from investing activities can be attributed to a net $648.9
million increase in the Company's loan portfolio and a $681.0 million increase
in Federal funds sold. The net outflow from investing activities was offset by
$1.4 billion provided by the Company's financing activities due to an increase
in deposits.
Imperial Bancorp's ("the Parent Company") liquidity is managed through the
purchase and sale of securities available for sale. This activity is directly
correlated to the sale of commercial paper. The Parent Company's only source of
funds for its annual sinking fund obligations on the Floating Rate Notes and
Debentures, interest payments on its Junior Subordinated Debentures (see -
"Capital Securities") and other operating expenses is preferred and common stock
dividends received from Imperial Bank. The dividends provide the Parent Company
with adequate funds to meet its obligations. At December 31, 1998, the Bank had
$132.4 million available to distribute to the Parent Company in the form of
dividends.
INTEREST RATE SENSITIVITY MANAGEMENT: The primary objective of the asset
liability management process is to manage the Company's exposure to interest
rate fluctuations while maintaining adequate levels of liquidity and capital. In
order to manage its interest rate sensitivity, the Company has adopted policies
which attempt to limit the change in pretax net interest income assuming various
interest rate scenarios. This is accomplished by adjusting the repricing
characteristics of the Company's assets and liabilities as interest rates
change. The Company's Asset Liability Committee ("ALCO") chooses strategies that
conform with its policies to achieve an appropriate trade off between interest
rate sensitivity and the volatility of pretax net interest income and net
interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
net interest margin by simulating various interest rate scenarios over future
time periods. Through the use of these simulations, the Company can approximate
the impact these projected rate changes may have on its entire on- and
off-balance sheet position, on any particular segment of the balance sheet, and
overall profitability.
12
<PAGE>
The following table sets forth the maturity and rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1998. The cumulative interest sensitivity gap ("gap") as reflected
in the table represents the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing, whichever is earlier, at a
given point in time and is not necessarily indicative of the position on other
dates. The gap is considered to be positive when interest-earning assets exceed
interest-bearing liabilities and negative when interest-bearing liabilities
exceed interest-earning assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Greater Greater Greater Greater Non-
0-3 than 3-6 than 6-12 than 1-5 than 5 Interest-
At December 31, 1998 (Dollars in thousands) Months Months Months Years Years Bearing Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Trading instruments(1) ................... $ 52,971 $ -- $ -- $ -- $ -- $ -- $ 52,971
Securities available for sale ............ 675,927 584 252 18,051 -- 694,814
Securities held to maturity .............. -- 932 2,966 -- -- -- 3,898
Federal funds sold and securities
purchased under resale agreements ....... 1,446,000 -- -- -- -- -- 1,446,000
Loans held for sale(1) ................... 18,287 -- -- -- -- -- 18,287
Loans:(2)
Commercial loans ....................... 2,861,639 10,267 12,032 71,957 29,384 29,853 3,015,132
Real estate loans ...................... 328,871 -- 7,794 55,814 8,458 692 401,629
Consumer loans ......................... 34,893 6 18 367 -- 70 35,354
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans .............................. $ 3,225,403 $ 10,273 $ 19,844 $ 128,138 $ 37,842 $ 30,615 $3,452,115
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses ................ -- -- -- -- -- (62,649) (62,649)
Non-earning assets ....................... -- -- -- -- -- 583,744 583,744
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ............................. $ 5,418,588 $ 11,789 $ 20,096 $ 131,104 $ 55,893 $ 551,710 $6,189,180
- ------------------------------------------------------------------------------------------------------------------------------------
Sources of funds:
Deposits:
Demand ................................. -- -- -- -- -- 3,298,070 3,298,070
Savings ................................ 25,135 -- -- -- -- -- 25,135
Money market ........................... 1,086,959 -- -- -- -- -- 1,086,959
Time - under $100,000 .................. 111,295 37,049 20,035 2,845 -- -- 171,224
Time - $100,000 and over ............... 784,316 166,094 37,180 669 -- -- 988,259
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................... $ 2,007,705 $ 203,143 $ 57,215 $ 3,514 $ -- $ 3,298,070 $5,569,647
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings .................... 60,601 -- -- -- -- -- 60,601
Long-term borrowings:
Floating rate notes and fixed
rate debentures....................... 1,106 -- 999 -- -- -- 2,105
Other borrowed funds ................... -- -- -- -- 290 -- 290
Capital securities ..................... -- -- -- -- 73,372 -- 73,372
Noninterest-bearing liabilities .......... -- -- -- -- -- 101,343 101,343
Equity ................................... -- -- -- -- -- 381,822 381,822
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity ............. $ 2,069,412 $ 203,143 $ 58,214 $ 3,514 $ 73,662 $ 3,781,235 $6,189,180
- ------------------------------------------------------------------------------------------------------------------------------------
Gap before derivative instruments ........ 3,349,176 (191,354) (38,118) 127,590 (17,769) (3,229,525) --
Interest rate swaps - capital securities . 75,000 -- -- -- (75,000) -- --
Interest rate swaps - loans and deposits . 9,000 (5,000) -- -- (4,000) -- --
Gap adjusted for derivative instruments .. $ 3,433,176 $ (196,354) $ (38,118) $ 127,590 $ (96,769) $(3,229,525) $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap ...... $ 3,433,176 $3,236,822 $3,198,704 $3,326,294 $3,229,525 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Trading instruments and loans held for sale are sold within 90 days.
(2) The noninterest-bearing column consists of nonaccrual loans.
================================================================================
13
<PAGE>
At December 31, 1998, the Company maintained a positive one-year gap of
approximately $3.2 billion. This positive cumulative gap position indicates that
the Company is asset sensitive. A positive gap tends to result in increased net
interest income during a period of rising interest rates, but also exposes the
Company to decreased interest income during a period of falling interest rates.
The Company had a positive cumulative one-year gap of $2.2 billion at December
31, 1997. The increase in the positive cumulative one-year gap for 1998 compared
with 1997 is primarily due to the growth in variable-rate commercial loans. In
addition, growth in period-end demand deposits led to increased short-term
investments in Federal funds sold.
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the majority of the Company's interest-earning assets,
primarily its loans, are tied to the prime rate, an index which tends to react
more slowly to changes in market rates than other money market indices such as
LIBOR. The rates paid for the Company's interest-bearing liabilities, however,
do correlate with LIBOR. This mismatch creates a spread relationship risk
between the Company's prime-based assets and LIBOR-correlated liabilities.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate caps and floors with strike prices that
generally adjust quarterly and range from 100-250 basis points below or above
(depending on the instrument) current market rates at the time the caps and
floors were purchased.
INTEREST RATE CAPS AND FLOORS: In March 1998, the Company purchased an
over-the-counter interest rate cap with a notional value of $1.0 billion. The
cap provides protection in the event the three-month LIBOR rate increases above
the 8.33% strike price. The unrealized gain on the cap was approximately
$454,000 at December 31, 1998. The unamortized premium on the cap was $353,000
at year end. The cap expires in March 2001. In addition, at December 31, 1998,
the Company owned interest rate caps and collars with a notional value totaling
$25.6 million that hedge specific lending transactions. The unrealized loss on
these contracts approximated $31,000 at December 31, 1998. The strike prices on
the caps and collars are tied to prime or LIBOR consistent with the pricing on
the underlying lending transaction. These caps and collars expire as follows:
$9.0 million in the first quarter of 1999, $6.0 million in the second quarter of
1999, $4.0 million in the fourth quarter of 1999 and $6.6 million in the first
quarter of 2000.
At December 31, 1998, the Company owned exchange traded floors totaling $4.75
billion that expire at the rate of $1.25-$1.75 billion per quarter through the
third quarter of 1999. The floors provide the Company protection in the event
that the three-month LIBOR rate drops below their respective strike prices. The
floors have an average strike price of 4.0%. The unrealized gain on the floors
approximated $344,000 at December 31, 1998. The unamortized premium relating to
the floors was $1.8 million at year end.
Exchange traded floors owned at December 31, 1997, expired at the rate of $1.0
billion per quarter in the first, second and third quarters of 1998. In June
1998, the Company purchased exchange traded floors with a notional value of $1.5
billion. The floors had a strike price of 4.75% and expire in June 1999. In July
1998, the Company purchased exchange traded floors with a notional value of
$250.0 million. The floors had a strike price of 4.75% and expire in June 1999.
In August 1998, the Company purchased exchange traded floors with a notional
value of $500.0 million. The floors had a strike price of 4.75% and expire in
September 1999. In October 1998, following a decline in the LIBOR rate, the
Company sold the exchange traded floor contracts with a notional amount totaling
$4.5 billion in order to reset the strike price on the floors from 4.75% to
4.00%. The Company concurrently purchased exchange traded floor contracts with a
notional amount totaling $4.75 billion. The gain on the sale of the floors is
being amortized over the term of the original floors and will be fully amortized
by the end of the third quarter 1999. The balance of the deferred gain at
December 31, 1998, was $3.3 million.
INTEREST RATE SWAPS: In June 1998, the Company entered into two fixed-for-
floating interest rate swaps with a total notional value of $5.0 million. The
swaps require the Company to pay three-month LIBOR and receive a fixed rate of
5.95%. The swaps mature in June 1999. Concurrently, the Company entered into
interest rate swaps with its subsidiary, Crown American Bank. The notional
amount, maturity and payment due dates on the swaps coincide with the original
swaps, however, the payment terms require the Company to pay a fixed rate of
5.95% and receive three-month LIBOR. The purpose of the swaps is to convert to a
floating rate a similar amount of one-year fixed rate time certificates of
deposit acquired on behalf of Crown American Bank as part of a $35.0 million
time deposit acquisition program. The unrealized gain on the swaps approximated
$11,000 at December 31, 1998.
In July 1998, the Company entered into an interest rate swap with a notional
value of $4.0 million. The swap requires the Company to pay a fixed rate of
5.95% and receive three-month LIBOR. The swap matures in July 2004. The purpose
of the swap is to convert a fixed rate loan to a commercial borrower to a
floating rate. The unrealized loss on the swap approximated $151,000 at December
31, 1998.
14
<PAGE>
The following table summarizes the Company's derivative instruments at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 NOTIONAL WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps and collars
purchased
Over the counter................... $1,000,000 n/a Expires March 2001.
Over the counter................... $25,593 n/a Expires $9.0 million first quarter 1999, $6.0 million second
quarter 1999, $4.0 million fourth quarter 1999 and $6.6 million
first quarter 2000. Contracts hedge specific lending transactions.
Interest rate floors purchased
Exchange traded.................... $4,750,000 n/a $1.25 billion expires first quarter 1999, $1.75 billion expires
second and third quarter 1999.
Interest rate swaps
Loans:
Pay-fixed rate..................... $ 4,000 5.95% Matures third quarter 2004.
Receive-3 month LIBOR.............. $ 4,000 5.31%
Deposits:
Pay-3 month LIBOR plus 32 basis
points............................ $ 5,000 5.43% Matures second quarter 1999.
Receive-fixed rate................. $ 5,000 5.95%
Capital securities:
Pay-3 month LIBOR.................. $ 75,000 5.73% Matures second quarter 2007.
Receive-fixed rate................. $ 75,000 7.18%
- -----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997 NOTIONAL WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE TERMS AND MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate floors purchased
Exchange traded.................... $5,250,000 n/a $1.0 billion expiring per quarter in first, second, third and
fourth quarter 1998 $1.25 billion expiring first quarter 1999.
Interest rate swaps
Time deposits:
Pay-3 month LIBOR less 10 basis
points............................ $ 27,000 5.63% Matures first quarter 2007, callable by the Company first quarter
1998 and semi-annually thereafter.
Receive-fixed rate ................ $ 27,000 7.15%
Capital securities:
Pay-3 month LIBOR ................. $ 75,000 5.75% Matures second quarter 2007.
Receive-fixed rate ................ $ 75,000 7.18%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the first quarter of 1997, the Company sold $27.0 million of ten-year
certificates of deposit with a fixed rate of 7.15%. These long-term certificates
of deposit were callable by the Company after one year and semi-annually after
that. In order to minimize the interest rate risk of paying out a fixed rate for
ten years, the Company executed an interest rate swap transaction with a
notional value of $27.0 million in the first quarter of 1997. The swap was
callable at the option of the counterparty after one year and semi-annually
thereafter. The interest rate swap required the Company to pay a rate of
three-month LIBOR less 10 basis points, quarterly for ten years. Simultaneously,
the Company received quarterly interest payments at a fixed rate of 7.15% for
ten years. On July 28, 1998, the swap was called by the counterparty and the
Company paid off the certificates of deposit.
In April 1997, the Company issued $75.0 million of 9.98% capital securities (the
"Capital Securities") and entered into three fixed-for-floating interest rate
swaps with a total notional value of $75.0 million in order to convert the
Capital Securities to a floating rate. The swaps require the Company to pay
three-month LIBOR and receive a fixed rate of 7.18% on $25.0 million, 7.186% on
$25.0 million and 7.187% on the remaining $25.0 million. The maturity and fixed
payment due dates on the swaps coincide with the call date and payment dates of
the Capital Securities. The unrealized gain on the swaps approximated $9.1
million at December 31, 1998.
The impact of the Company's derivative financial instruments was a $1.5 million
and $507,300 increase in net interest income, and a 3 basis point and 2 basis
point increase in net interest margin for the years ended December 31, 1998 and
1997, respectively. For the year ended December 31, 1996, the Company's
derivative financial instruments resulted in a $700,000 increase in net interest
income and a 3 basis point increase in net interest margin.
15
<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, 1998. Market risk sensitive
instruments are generally defined as on- and off-balance sheet financial
instruments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATE AT DECEMBER 31, 1998/(1)/
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial assets:
Trading account assets ..................... $ 52,971 $ -- $ -- $ -- $ --
Average interest rate ..................... 5.54% -- -- -- --
Investment securities ...................... 144,332 -- -- 50 --
Average interest rate ..................... 5.22% -- -- 7.99% --
Federal funds sold ......................... 1,446,000 -- -- -- --
Average interest rate ..................... 5.32% -- -- -- --
Loans held for sale ........................ 18,287 -- -- -- --
Average interest rate ..................... 10.48% -- -- -- --
Loans
Commercial ................................ 1,525,831 301,380 221,031 343,357 357,582
Average interest rate ................... 8.15% 8.13% 8.34% 8.25% 7.84%
Real estate term .......................... 40,825 40,907 8,324 24,779 19,142
Average interest rate ................... 9.58% 8.80% 8.93% 9.48% 8.31%
Real estate construction .................. 208,669 50,094 -- -- --
Average interest rate ................... 9.03% 8.81% -- -- --
Consumer .................................. 12,533 11,300 11,336 105 80
Average interest rate ................... 7.87% 8.15% 8.14% 8.66% 7.86%
- -------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS $3,449,448 $ 403,681 $ 240,691 $ 368,291 $ 376,804
- -------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits:
Rate sensitive demand ..................... $ 457,510 $ 366,008 $ 292,806 $ 234,245 $ 187,396
Savings and money market .................. 166,814 155,694 144,572 133,451 122,330
Average interest rate ................... 3.31% 3.31% 3.31% 3.31% 3.31%
Time certificates of deposit -
under $100,000 .......................... 168,379 2,845 -- -- --
Average interest rate ................... 5.74% 5.16% -- -- --
Time certificates of deposit -
over $100,000 ........................... 987,590 669 -- -- --
Average interest rate ................... 5.33% 5.35% -- -- --
Short-term borrowings ..................... 60,601 -- -- -- --
Average interest rate ................... 5.48% -- -- -- --
Long-term borrowings ...................... 2,105 -- -- -- --
Average interest rate ................... 7.07% -- -- --
- -------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL LIABILITIES $1,842,999 $ 525,216 $ 437,378 $ 367,696 $ 309,726
- -------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments:
Interest rate swaps ........................ $ 5,000 $ -- $ -- $ -- $ --
Interest rate caps and collars purchased ... 18,993 6,600 1,000,000 -- --
Interest rate floors purchased ............. 4,750,000 -- -- -- --
Spot and forwards to purchase
foreign currency .......................... 71,259 -- -- -- --
Spot and forwards to sell
foreign currency .......................... 71,005 -- -- -- --
<CAPTION>
- -----------------------------------------------------------------------------------------
ESTIMATED
FAIR
(DOLLARS IN THOUSANDS) THEREAFTER TOTAL VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial assets:
Trading account assets ..................... $ -- $ 52,971 $ 52,971
Average interest rate ..................... --
Investment securities ...................... 554,330 698,712 698,712
Average interest rate ..................... 5.66%
Federal funds sold ......................... -- 1,446,000 1,446,000
Average interest rate ..................... --
Loans held for sale ........................ -- 18,287 19,416
Average interest rate ..................... --
Loans
Commercial ................................ 265,951 3,015,132 2,999,639
Average interest rate ................... 7.78%
Real estate term .......................... 8,889 142,866 142,458
Average interest rate ................... 8.05%
Real estate construction .................. -- 258,763 262,138
Average interest rate ................... --
Consumer .................................. -- 35,354 35,235
Average interest rate ................... --
- -----------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS $ 829,170 $ 5,668,085 $ 5,656,569
- -----------------------------------------------------------------------------------------
Financial liabilities:
Deposits:
Rate sensitive demand ..................... $ 749,585 $ 2,287,550 $ 2,287,550
Savings and money market .................. 389,233 1,112,094 1,112,094
Average interest rate ................... 3.31%
Time certificates of deposit -
under $100,000 ........................... -- 171,224 171,379
Average interest rate ................... --
Time certificates of deposit -
over $100,000 ........................... -- 988,259 988,059
Average interest rate ................... --
Short-term borrowings ..................... -- 60,601 60,601
Average interest rate ................... --
Long-term borrowings ...................... 73,662 75,767 79,688
Average interest rate ................... --
- -----------------------------------------------------------------------------------------
TOTAL FINANCIAL LIABILITIES $ 1,212,480 $ 4,695,495 $ 4,699,371
- -----------------------------------------------------------------------------------------
Off-balance sheet financial instruments:
Interest rate swaps ........................ $ 79,000 -- $ 8,916
Interest rate caps and collars purchased ... -- (353) 423
Interest rate floors purchased ............. -- (1,813) 344
Spot and forwards to purchase
foreign currency .......................... -- 1,661 1,661
Spot and forwards to sell
foreign currency .......................... -- (2,359) (2,359)
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Expected maturities are generally based upon contractual maturities
adjusted for anticipated prepayments of principal, and for commercial
loans, anticipated renewals. For deposit liabilities, in accordance with
standard industry practice, run-off factors ranging from 11%-20% per year
have been applied depending upon deposit type. The Company categorizes its
real estate services demand deposits as rate sensitive because the level of
real estate activity and the associated demand balances tend to fluctuate
inversely with the level of market interest rates. The actual maturities of
the Company's financial instruments could vary substantially depending on
future changes in interest rates and economic conditions in its market
areas. Total for off-balance sheet financial instruments represents
carrying amount. Expected maturity represents notional amount.
================================================================================
16
<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
which include required reserves. The Company maintains balances with
correspondent banks to cover daily inclearings and other activity. Deposits with
the Federal Reserve totaled $68.9 million at December 31, 1998. For 1998 and
1997, cash and due from banks comprised approximately 7% of the Company's
average total assets.
SECURITIES: Trading instruments increased to $53.0 million at December 31, 1998,
from $35.8 million at December 31, 1997. SBA loan certificates and mutual funds
held by the Company's broker/dealer comprise the majority of the Company's
trading instruments at December 31, 1998. The balance of SBA loan certificates
increased to $45.3 million at December 31, 1998, from $26.8 million at December
31, 1997.
In addition to trading instruments, the Company's investment securities
portfolio consists primarily of SBA securities, U.S. Treasury securities, U.S.
Government agency securities, and mutual funds invested in short-term government
securities. The Company currently classifies its entire investment portfolio as
available for sale, with the exception of a $3.9 million investment in
Industrial Revenue Bonds, in order to maintain flexibility in managing the
portfolio and in meeting its liquidity needs. Investment securities are reported
in the Company's Consolidated Balance Sheet at their estimated fair value. There
was a net unrealized loss on securities available for sale of $889,000 at
December 31, 1998, compared with a net unrealized gain of $2.9 million at
December 31, 1997.
The following table provides a summary of the Company's investment portfolio by
type of security for the periods indicated:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Securities held to maturity:
Industrial development bonds ............. $ 3,898 $ 4,026 $ 4,193
- --------------------------------------------------------------------------------
TOTAL .................................. $ 3,898 $ 4,026 $ 4,193
- --------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and federal agencies ....... $563,355 $615,207 $387,667
Mutual funds invested in short-term
government securities ................... 112,579 37,532 31,095
Other securities ......................... 18,880 16,527 7,574
- --------------------------------------------------------------------------------
TOTAL .................................. $694,814 $669,266 $426,336
================================================================================
The balance of available for sale investment securities increased to $694.8
million at December 31, 1998, from $669.3 million at December 31, 1997. The
average balance of investment securities increased by $101.6 million to $666.2
million at December 31, 1998, from $564.6 million for 1997. The Company also
utilizes Federal funds sold and securities purchased under resale agreements for
short-term investments of excess liquidity. The balance of Federal funds sold
and securities purchased under resale agreements increased to $1.4 billion at
December 31, 1998, from $765.0 million at December 31, 1997. The average balance
of these investments increased approximately $217.5 million for 1998 compared
with the prior year. The increases in the year-end and average balances of
investment securities and Federal funds sold is a function of the growth in
demand deposits during 1998.
LOANS HELD FOR SALE: Loans held for sale totaled $18.3 million and $3.8 million
at December 31, 1998 and 1997, respectively. SBA loans originated by the Company
comprise the balance of loans held for sale. The Company sells the guaranteed
portion of these loans in the secondary market while retaining the unguaranteed
portion for its own portfolio as well as the servicing rights.
LOANS: The Company offers a broad range of products designed to meet the credit
needs of its borrowers in targeted industries. The Company's primary lending
activities include: commercial loans, asset-based loans, loans to emerging
growth companies, accounts receivable factoring, SBA loans, and medium-term real
estate loans secured by commercial properties and loan participations and
syndications. The Company also offers construction financing to developers of
moderately priced housing.
17
<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:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Commercial loans .................... $3,015 $2,350 $1,595 $1,238 $ 920
Loans secured by real estate:
Real estate term loans ............. 143 233 362 389 337
Interim construction loans ......... 259 175 86 65 117
Consumer loans ...................... 35 31 20 7 1
- --------------------------------------------------------------------------------
TOTAL LOANS ...................... $3,452 $2,789 $2,063 $1,699 $1,375
================================================================================
The loan portfolio totaled $3.5 billion at December 31, 1998, an increase of
$663.0 million from year-end 1997. Commercial loan balances increased by $665.0
million, or 28%, for 1998 compared with 1997. The Company experienced strong
loan demand in its core California markets during 1998. In addition, loan
balances at out-of-state offices grew to $234.1 million at December 31, 1998,
from $131.8 million at December 31, 1997. Management anticipates overall loan
growth in the 15-20% range for 1999.
Commercial loans comprised 87% of the total loan portfolio at December 31, 1998,
up from 84% of the total portfolio at December 31, 1997. As illustrated in the
following table, the Company's commercial loan portfolio is broadly diversified
among many industries including entertainment, high technology, manufacturing,
healthcare, real estate services and retail trade with no significant
concentrations. The Company experienced loan growth across most industry sectors
with substantial growth in loans to manufacturing, entertainment, high
technology, healthcare, title and escrow and retail trade businesses.
The following table sets forth the distribution of average commercial loans by
industry type:
- --------------------------------------------------------------------------------
1998 1997
AVERAGE PERCENT OF AVERAGE PERCENT OF
(DOLLARS IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO
- --------------------------------------------------------------------------------
Industry type:
Manufacturing ................ $ 507,298 17.62% $ 293,410 15.23%
Entertainment ................ 359,804 12.50 234,479 12.17
Title/escrow ................. 357,799 12.43 122,072 6.34
High technology .............. 276,707 9.61 164,175 8.52
Healthcare ................... 203,834 7.08 136,283 7.07
Wholesale trade .............. 196,582 6.83 168,362 8.74
Retail trade ................. 161,415 5.61 101,927 5.29
Professional services ........ 149,541 5.19 102,361 5.31
Real estate services ......... 137,730 4.78 122,734 6.37
Consumers .................... 129,636 4.50 62,390 3.24
Gaming ....................... 87,489 3.04 77,355 4.02
Distribution ................. 73,984 2.57 60,167 3.12
Apparel and textile .......... 53,931 1.87 58,481 3.04
Other ........................ 182,852 6.37 222,345 11.54
- --------------------------------------------------------------------------------
TOTAL ...................... $2,878,602 100.00% $1,926,541 100.00%
================================================================================
Total real estate loans decreased slightly to $402.0 million at December 31,
1998, from $408.0 million at December 31, 1997. A $90.0 million decrease in the
Company's term real estate loans, due to payoffs, was largely offset by an $84.0
million increase in construction loans. Growth in the Company's construction
loan portfolio occurred primarily in the affordable housing segment of the
market. The Company is managing the existing term real estate portfolio but does
not anticipate significant new originations in this area. The Company's
real estate loans, both term and construction, are secured by first deeds of
trust and are distributed among a variety of project types including
multi-family residential and retail facilities. While
18
<PAGE>
real estate lending activities are collateralized by real property, these
transactions are subject to similar credit evaluation, underwriting and
monitoring standards as those applied to commercial loans. At December 31, 1998,
96% of the Company's real estate loans were geographically concentrated in
California and 4% were to borrowers outside of California.
A certain degree of risk is inherent in the extension of credit. The Company
assesses and manages credit risk on an ongoing basis through diversification,
lending limits, credit review, approval policies and internal monitoring. As a
part of the control process, an independent credit review function regularly
examines the Company's loan portfolio. In addition, the Company's lending
policies require extensive evaluation of new credit requests and continuing
internal review of existing credits in order to promptly identify and quantify
any evidence of deterioration of quality or potential loss. The Company seeks to
manage and control its risk through diversification of the loan portfolio by
type of loan, geographic and industry concentration and type of borrower.
Diversification helps to reduce risk by minimizing the adverse impact of any
single event or set of circumstances.
NONACCRUAL LOANS, RESTRUCTURED LOANS AND REAL ESTATE AND OTHER ASSETS OWNED:
The Company recognizes income principally on the accrual basis of accounting. In
determining income from loans, the Company generally adheres to a policy of not
accruing interest on loans on which a default of principal or interest has
existed for a period of 90 days or more. The Company's policy is to place a loan
on nonaccrual status if either (i) principal or interest payments are past due
in excess of 90 days; or (ii) the full collection of interest or principal
becomes uncertain, regardless of the length of past due status. When a loan
reaches nonaccrual status, any interest accrued on the loan is reversed and
charged against current income.
Nonaccrual loans increased $20.0 million to $30.6 million at December 31, 1998,
from $10.6 million at year-end 1997. The increase in nonaccrual loans from
year-end 1997 reflects additions totaling $69.9 million, offset in part by
charge-offs of nonaccrual loans totaling $13.0 million, payments collected on
nonaccrual loans totaling $12.5 million, a sale of $11.1 million of nonaccrual
entertainment loans, a transfer of $1.8 million of nonaccrual loans to OREO and
$11.5 million of nonaccrual loans that were returned to performing status. The
Company financed the sale of the nonaccrual entertainment loans to a new
borrower. No gain or loss was recognized on the sale. Interest forgone on
nonaccrual loans approximated $1.4 million for 1998 and $1.3 million for 1997.
At December 31, 1998, there were $364,000 of government-guaranteed SBA loans
that were past due 90 days or more and still accruing interest. The Company
expects to collect all amounts due on these loans.
Restructured loans, loans outstanding that have had their original terms
modified, totaled $9.8 million at December 31, 1998, a $14.2 million reduction
from $24.0 million at December 31, 1997. Additions to restructured loans as of
December 31, 1998, totaling $5.7 million were offset by decreases due to the
payoff of a $14.3 million loan on a shopping center, the removal of two loans
totaling $4.6 million from restructured status, and to the receipt of payments
on restructured loans totaling approximately $1.0 million.
Real estate and other assets owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the real estate or other collateral, less the
estimated costs of disposal, and the loan balance at the time of transfer to
OREO is reflected in the allowance for loan losses as a charge-off. Any
subsequent declines in the fair value of the OREO after the date of transfer are
recorded through a provision for writedowns on OREO. Routine holding costs, net
of any income and gains and losses on disposal, are reported as noninterest
expense. OREO equaled $2.3 million at December 31, 1998, and $3.3 million, net
of a $1.1 million valuation allowance, at December 31, 1997. Seven real estate
properties totaling $1.9 million were added to OREO during 1998. The Company
sold eight OREO properties during 1998. The book value of the OREO sold was $2.5
million. Payments totaling $395,000 were received on OREO property during 1998.
The Company is actively marketing the remaining properties.
19
<PAGE>
Detailed information regarding nonaccrual loans, restructured loans and real
estate and other assets owned is presented in the table below for the periods
indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial loans .......................... $ 29,853 $ 8,675 $ 9,382 $ 11,714 $ 10,884
Real estate loans ......................... 692 1,903 10,760 17,212 7,272
Consumer loans ............................ 70 -- 248 -- --
- ---------------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL LOANS .................. $ 30,615 $ 10,578 $ 20,390 $ 28,926 $ 18,156
- ---------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percent of total nonaccrual loans ........ 204.6% 483.5% 176.8% 129.3% 220.7%
Total nonaccrual loans as a percent
of total loans outstanding ............... 0.89 0.38 0.99 1.70 1.32
- ---------------------------------------------------------------------------------------------------------
Restructured loans ......................... $ 9,770 $ 23,970 $ 28,681 $ 33,608 $ 5,948
- ---------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
Real estate and other assets owned, gross . $ 2,309 $ 4,373 $ 2,895 $ 15,015 $ 35,446
Less valuation allowance .................. -- (1,089) (769) (4,686) (6,475)
- ---------------------------------------------------------------------------------------------------------
REAL ESTATE AND OTHER ASSETS OWNED, NET . $ 2,309 $ 3,284 $ 2,126 $ 10,329 $ 28,971
- ---------------------------------------------------------------------------------------------------------
TOTAL ................................... $ 42,694 $ 37,832 $ 51,197 $ 72,863 $ 53,075
=========================================================================================================
</TABLE>
The following tables provide information on impaired loans for the periods
indicated:
- --------------------------------------------------------------------------------
NET
CARRYING SPECIFIC NET
(DOLLARS IN THOUSANDS) VALUE ALLOWANCE BALANCE
- --------------------------------------------------------------------------------
December 31, 1998
Loans with specific
allowances ........................... $ 56,746 $(12,775) $ 43,971
Loans without specific
allowances ........................... 4,847 -- 4,847
- --------------------------------------------------------------------------------
TOTAL ................................. $ 61,593 $(12,775) $ 48,818
- --------------------------------------------------------------------------------
December 31, 1997
Loans with specific
allowances ........................... $ 85,612 $(11,881) $ 73,731
Loans without specific
allowances ........................... 7,374 -- 7,374
- --------------------------------------------------------------------------------
TOTAL ................................. $ 92,986 $(11,881) $ 81,105
================================================================================
Impaired loans were classified as follows:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Current ........................................ $27,414 $79,109
Past due ....................................... 3,564 3,299
Nonaccrual ..................................... 30,615 10,578
- --------------------------------------------------------------------------------
TOTAL ......................................... $61,593 $92,986
================================================================================
At December 31, 1998 and 1997, the Company had classified $61.6 million and
$93.0 million, respectively, of its loans as impaired with specific allowances
of $12.8 million and $11.9 million, respectively. At December 31, 1998, 15% of
the impaired loans were secured by real estate compared with 83% at December 31,
1997. Impaired loans secured by real estate decreased to $9.5 million at
December 31, 1998, from $78.4 million at December 31, 1997, primarily due to
payoffs received. The Company's average recorded investment in impaired loans
for the years ended December 31, 1998 and 1997, was $78.6 million and $101.3
million, respectively. During 1998 and 1997, total interest recognized on
impaired loans, on a cash basis, was $5.8 million and $8.5 million,
respectively.
ALLOWANCE AND PROVISION FOR LOAN LOSSES: A certain degree of risk is inherent
in the extension of credit. The allowance for loan losses is maintained at a
level considered by management to be adequate to absorb estimated known and
inherent risks in the existing portfolio. Management performs an ongoing
assessment of the risks inherent in the loan portfolio. The allowance for loan
losses is increased by the provision for loan losses which is charged against
current period operating results, and is decreased by the amount of net
charge-offs during the period. The Company's determination of the level of the
allowance for loan losses, and correspondingly, the provision for loan losses is
based upon various judgments and assumptions, including general economic
conditions (especially in California), loan portfolio composition and
concentrations, prior loan loss experience, collateral value, identification of
problem and potential problem loans and other relevant data to identify the
risks in the loan portfolio. Management believes that the allowance for loan
losses was adequate at December 31, 1998. Future additions to the allowance will
be subject to continuing evaluation of inherent risk in the loan portfolio.
20
<PAGE>
At December 31, 1998, the allowance for loan losses was $62.6 million, or 1.81%
of total loans, compared with $51.1 million, or 1.83% of total loans, at
December 31, 1997. The following table summarizes activity in the allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance, beginning of year ............... $ 51,143 $ 36,051 $ 37,402 $ 40,072 $ 42,800
Loans charged off:
Commercial ............................... (21,487) (8,938) (7,265) (13,432) (9,120)
Real estate .............................. (2,248) (1,423) (3,734) (7,470) (8,506)
Consumer ................................. (58) (4) (26) (60) (108)
- --------------------------------------------------------------------------------------------------------------------------
Total loans charged off ................ $ (23,793) $ (10,365) $ (11,025) $ (20,962) $ (17,734)
- --------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial ............................... 1,761 1,056 2,745 1,690 2,729
Real estate .............................. 154 1,493 12 445 47
Consumer ................................. 9 19 21 35 56
- --------------------------------------------------------------------------------------------------------------------------
Total loan recoveries .................. $ 1,924 $ 2,568 $ 2,778 $ 2,170 $ 2,832
- --------------------------------------------------------------------------------------------------------------------------
Net loans charged off .................... (21,869) (7,797) (8,247) (18,792) (14,902)
Provision for loan losses ................ 33,375 22,892 6,881 16,122 12,174
Provision for loan losses of
discontinued operation .................. -- (3) 15 -- --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR ...................... $ 62,649 $ 51,143 $ 36,051 $ 37,402 $ 40,072
- --------------------------------------------------------------------------------------------------------------------------
Loans outstanding at end of year .......... $ 3,452,115 $ 2,788,608 $ 2,063,048 $ 1,699,347 $ 1,375,146
- --------------------------------------------------------------------------------------------------------------------------
Average amount of loans outstanding ....... $ 3,318,454 $ 2,397,626 $ 1,836,864 $ 1,540,940 $ 1,361,630
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans ................................... 0.66% 0.33% 0.45% 1.22% 1.09%
Ratio of allowance for loan losses
to average loans ........................ 1.89 2.13 1.96 2.43 2.94
Ratio of allowance for loan losses
to loans outstanding at end of
year .................................... 1.81 1.83 1.75 2.20 2.91
Ratio of provision for loan losses
to net charge-offs ...................... 153 294 83 86 82
==========================================================================================================================
</TABLE>
The provision for loan losses totaled $33.4 million for the year ended December
31, 1998, an increase of $10.5 million over $22.9 million for 1997. The increase
in the loan loss provision from the prior year is due to growth in the loan
portfolio and to an increase in net charge-offs. Net charge-offs for 1998,
totaling $21.9 million, include $10.5 million on one commercial loan to a
company in the healthcare industry. Excluding this loan, net charge-offs for
1998 were $11.4 million, or 0.34% of total average loans, compared with net
charge-offs of $7.8 million, or 0.33% of total average loans, for 1997.
Although the Company evaluates the adequacy of its allowance on an overall basis
rather than by specific categories of loans, the following table reflects
management's allocation of the allowance for loans losses by loan category and
the ratio of each loan category to total loans as of the dates indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 % 1997 % 1996 % 1995 % 1994 %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ................ $50,465 87% $22,889 84% $17,545 77% $17,365 73% $24,628 66%
Real estate ............... 5,245 12 13,120 15 16,248 22 16,773 26 11,515 33
Consumer .................. 141 1 100 1 165 1 809 1 175 1
Unallocated ............... 6,798 -- 15,034 -- 2,093 -- 2,455 -- 3,754 --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL .................... $62,649 100% $51,143 100% $36,051 100% $37,402 100% $40,072 100%
=====================================================================================================================
</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.
In 1997, management increased the unallocated portion of the allowance for loan
losses to 29% of the total allowance in response to strong growth in the loan
portfolio. As projected,
21
<PAGE>
the seasoning of the portfolio resulted in the allocation of a greater
proportion of the allowance to the growing commercial portfolio in 1998, which
reduced the unallocated portion of the allowance from 29% to 11%. Similarly,
coverage of nonperforming loans was increased to 483% in 1997, due to strong
loan growth and indications of economic weakness in Asia. The resulting increase
in entertainment nonaccruals in 1998 reduced allowance coverage of nonaccruals
to 205%, an increase from 177% in 1996.
FUNDING SOURCES
DEPOSITS: Total deposits increased to $5.6 billion at December 31, 1998, from
$4.2 billion at December 31, 1997. Noninterest-bearing demand deposits comprised
59% and 57%, respectively, of total deposits at December 31, 1998 and 1997.
Average demand deposits increased to $2.3 billion for 1998 from $1.5 billion for
1997, a 54% increase. The growth in average demand deposit balances is primarily
due to a $650.0 million increase in the average balance of real estate services
deposits. Average interest-bearing deposits grew $411.4 million, or 25%, in 1998
compared with 1997. Average money market accounts increased by $180.4 million,
due in part to a $64.2 million increase in bankruptcy deposits, and time
certificates of deposit balances grew by $224.7 million. The remaining increase
in interest-bearing deposits occurred in savings. The mix of average money
market deposits and average time certificates of deposit as a percentage of
total average deposits was 22% and 25%, respectively, for 1998 and 25% and 27%,
respectively, for 1997.
OTHER BORROWINGS: The Company uses short-term borrowings as a means to manage
the interest rate sensitivity and liquidity position of the balance sheet.
Short-term borrowings generally consist of Federal funds purchased, obligations
under securities repurchase agreements, commercial paper and Treasury, tax and
loan notes. Average short-term borrowings totaled $97.4 million for 1998
compared with $76.3 million for 1997. The increase in short-term borrowings in
1998 compared with 1997 is primarily due to increases in commercial paper and
Federal funds purchased and repurchase agreements of $10.7 and $7.3 million,
respectively.
CAPITAL: Prior to 1997, the primary source of new capital for the Company had
been retained earnings from operations, with the exception of its long-term debt
offering in 1979, and on a smaller scale, the exercise of employee stock
options. On April 23, 1997, Imperial Capital Trust, a wholly owned subsidiary of
the Company, issued in a private placement transaction $75.0 million of 9.98%
capital securities. See - "Capital Securities." At December 31, 1998,
shareholders' equity totaled $381.8 million, a $29.8 million, or 8.5%, increase
over $352.0 million at December 31, 1997. The Company recorded an additional
$2.9 million in 1998 and $4.8 million in 1997 of shareholders' equity from the
exercise of employee stock options. The Company receives a tax deduction for the
difference between the option price and the market value of shares issued. The
tax benefit associated with shares exercised during 1998 and 1997, which is
recorded as a component of shareholders' equity, approximated $8.7 million in
1998 and $7.6 million in 1997.
Management is committed to maintaining capital at a level sufficient to assure
shareholders, customers and regulators that the Company and its bank
subsidiaries are financially sound. The Company and its bank subsidiaries are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. The risk-based capital guidelines assign risk weightings to
assets both on and off-balance sheet and place increased emphasis on common
equity. Federal law requires each federal banking agency to take prompt
corrective action to resolve problems of insured depository institutions
including, but not limited to, those that fall below one or more prescribed
capital ratios. According to the regulations, institutions whose Tier I and
total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be
"well capitalized." Tier I capital basically consists of common shareholders'
equity and noncumulative perpetual preferred stock and minority interest of
consolidated subsidiaries minus intangible assets. Based on the guidelines, the
Company's Tier I and total capital ratios at December 31, 1998, were 9.59% and
10.89%, respectively, compared with 11.14% and 12.48%, respectively, for 1997.
The capital securities discussed above qualify as Tier 1 capital.
The reduction in the Company's risk-based capital ratios at December 31, 1998,
compared with the prior year-end is primarily due to the growth in loans and
Federal funds sold.
22
<PAGE>
The following table compares the Company's actual capital ratios at December 31,
1998 and 1997, to those required by regulatory agencies for capital adequacy and
well capitalized classification purposes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998
Total capital (to
risk-weighted
assets):
Company ............ $507,556 10.89% Greater than or equal to $373,025 Greater than or equal to 8.0%
Bank ............... 480,571 10.45 Greater than or equal to 367,968 Greater than or equal to 8.0%
Tier I capital (to
risk-weighted
assets):
Company ............ $447,112 9.59% Greater than or equal to $186,512 Greater than or equal to 4.0%
Bank ............... 423,015 9.20 Greater than or equal to 183,984 Greater than or equal to 4.0%
Tier I capital (to
average assets):
Company ............ $447,112 8.12% Greater than or equal to $165,147 Greater than or equal to 3.0%
Bank ............... 423,015 7.76 Greater than or equal to 163,454 Greater than or equal to 3.0%
- -------------------------------------------------------------------------------------------------------------
At December 31, 1997
Total capital (to
risk-weighted
assets):
Company ............ $471,898 12.48% Greater than or equal to $302,542 Greater than or equal to 8.0%
Bank ............... 398,741 10.65 Greater than or equal to 299,519 Greater than or equal to 8.0%
Tier I capital (to
risk-weighted
assets):
Company ............ $421,321 11.14% Greater than or equal to $151,271 Greater than or equal to 4.0%
Bank ............... 351,890 9.40 Greater than or equal to 149,759 Greater than or equal to 4.0%
Tier I capital (to
average assets):
Company ............ $421,321 10.28% Greater than or equal to $122,973 Greater than or equal to 3.0%
Bank ............... 351,890 8.70 Greater than or equal to 121,405 Greater than or equal to 3.0%
<CAPTION>
- -----------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED UNDER
PROMPT CORRECTIVE ACTION
PROVISIONS
(DOLLARS IN THOUSANDS) AMOUNT RATIO
- -----------------------------------------------------------------------------------------
<S> <C> <C>
At December 31, 1998
Total capital (to
risk-weighted
assets):
Company ............ Greater than or equal to $466,281 Greater than or equal to 10.0%
Bank ............... Greater than or equal to 459,960 Greater than or equal to 10.0%
Tier I capital (to
risk-weighted
assets):
Company ............ Greater than or equal to $279,769 Greater than or equal to 6.0%
Bank ............... Greater than or equal to 275,976 Greater than or equal to 6.0%
Tier I capital (to
average assets):
Company ............ Greater than or equal to $275,246 Greater than or equal to 5.0%
Bank ............... Greater than or equal to 272,423 Greater than or equal to 5.0%
- ------------------------------------------------------------------------------------------
At December 31, 1997
Total capital (to
risk-weighted
assets):
Company ............ Greater than or equal to $378,178 Greater than or equal to 10.0%
Bank ............... Greater than or equal to 374,398 Greater than or equal to 10.0%
Tier I capital (to
risk-weighted
assets):
Company ............ Greater than or equal to $226,907 Greater than or equal to 6.0%
Bank ............... Greater than or equal to 224,639 Greater than or equal to 6.0%
Tier I capital (to
average assets):
Company ............ Greater than or equal to $204,954 Greater than or equal to 5.0%
Bank ............... Greater than or equal to 202,342 Greater than or equal to 5.0%
- ------------------------------------------------------------------------------------------
</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 8.12% and
10.28% at December 31, 1998 and 1997, respectively, well in excess of the
minimum regulatory requirement.
CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98% capital securities (the "Capital Securities")
which represent undivided preferred beneficial interests in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust (the "Common Securities"), together with the
Capital Securities, (the "Trust Securities"). The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
9.98% junior subordinated deferrable interest debentures (the "Junior
Subordinated Debentures") issued by the Company and engaging in certain other
limited activities. The Junior Subordinated Debentures held by the Trust will
mature on December 31, 2026.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions, accumulating from April 23, 1997, the date of original issuance,
and payable semi-annually in arrears on June 30 and December 31 of each year,
commencing June 30, 1997, at an annual rate of 9.98% of the liquidation amount
of $1,000 per Trust Security. The Company has the right under certain
circumstances to defer payments of interest on the Junior Subordinated
Debentures at any time and from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period, provided
that no deferral period may end on a day other than an interest payment date or
extend beyond the stated maturity date of the Junior Subordinated Debentures. If
and for so long as interest payments on the Junior Subordinated Debentures are
so
23
<PAGE>
deferred, cash distributions on the Trust Securities will also be deferred and
the Company will not be permitted, subject to certain exceptions, to declare or
pay any cash distributions with respect to the Company's capital stock (which
includes common and preferred stock) or to make any payment with respect to debt
securities of the Company that rank equal with or junior to the Junior
Subordinated Debentures.
Upon the repayment on December 31, 2026, the stated maturity date, or prepayment
prior to this date of the Junior Subordinated Debentures, the proceeds from such
repayment or prepayment shall be applied to redeem the Trust Securities upon not
less than 30 nor more than 60 days notice of a date of redemption at the
applicable redemption price. At maturity, the redemption price shall equal the
principal of and accrued and unpaid interest on the Junior Subordinated
Debentures. Subject to the Company having received prior approval of the Board
of Governors of the Federal Reserve System, if then required under applicable
capital guidelines or policies of the Federal Reserve, the Junior Subordinated
Debentures will be prepayable prior to the maturity date at the option of the
Company on or after June 30, 2007, in whole or in part, at a prepayment price
equal to 105.113% of the principal amount thereof on the prepayment date,
declining ratably on each June 30 thereafter to 100% on or after June 30, 2017,
plus accrued and unpaid interest thereon to the date of prepayment.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at December 31, 1998.
The Company used $67.2 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make additional investments in Imperial Bank. An
investment of $30.0 million was made in September 1997 and an investment of
$37.2 million was made in January 1998. The remainder of the proceeds has been
used to implement the Company's stock repurchase plan. The Capital Securities
qualify as Tier I capital under the capital guidelines of the Federal Reserve.
The net principal balance of the Capital Securities was $73.4 million at
December 31, 1998.
YEAR 2000: To fulfill the Company's business responsibility and ensure
compliance with regulatory requirements, the Company has established a Year
2000-readiness program ("Y2K") with the objective of having the Company Y2K
compliant by mid-1999. The Y2K issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computers that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than year 2000. The Company's Y2K readiness
program is managed by an enterprise-wide Program Office ("Office") under the
guidance of the Company's Management Committee. The Office is staffed with
representatives from each of the Company's primary business units. Within some
business units, the Office representative is supported by a business unit Y2K
project team.
The Company's Y2K program is modeled on the approach set forth by the Federal
Financial Institutions Examination Council ("FFIEC"). This approach is based on
five crucial phases: awareness, assessment, remediation, validation, and
implementation. The Company's approach considers the FFIEC guidelines to be a
minimum set of prudent business practices needed to become Y2K ready.
AWARENESS: As of the end of 1998, the Company has done extensive internal and
external communication related to the Y2K issue. The communication has been in
the form of customer statement stuffers, Web site disclosures, monthly and
quarterly reports to the Company's Management Committee, internal mailings and
periodic meetings.
ASSESSMENT: The Company has conducted a comprehensive review of its information
technology ("IT") and non-IT computer systems. All systems have been evaluated
and classified as critical, important or ordinary. Systems requiring upgrades or
replacement have been identified.
The Company utilizes the services of third-party service providers and software
vendors for substantially all of its data processing functions. As such, the
Company has focused on monitoring the Y2K compliance progress of its primary
vendors and providers. The Company has identified its significant customers as
funds providers, funds takers and counterparties. The initial evaluation and
assignment of risk for the Company's funds providers, funds takers, and
counterparties has been completed.
Contingency plans are being designed to mitigate the risks associated with (1)
the failure to successfully complete renovation, validation or implementation of
its Y2K readiness plan (Remediation Contingency Plan), and (2) the failure of
systems at critical dates (Business Resumption Contingency Plan) ("BRCP"). The
Company has completed the Remediation Contingency Plan and anticipates
completing the BRCP by June 30, 1999. Approximately 50% of the BRCPs being
developed by the business units have been submitted to the Office for review.
REMEDIATION, VALIDATION AND IMPLEMENTATION: The Company does not employ a
programming staff, nor does it customize application code that affects the books
of record or customer accounting. The Company's vendors and service providers
are committed to delivering Y2K ready capabilities.
24
<PAGE>
At December 31, 1998, system testing was approximately 60% complete for critical
systems, 65% complete for important systems and 55% complete for ordinary
systems. Testing is scheduled for completion by March 1999. Systems requiring
remediation are placed into production after testing has been completed and
authorization from the business unit has been obtained.
Non-IT systems, such as security systems, vault alarms and elevators, have been
identified and the Company is in the process of evaluating the Y2K readiness of
these systems. Most of the Company's facilities are leased; therefore, the
Company's effort to determine that status of Y2K compliance and contingency
plans for the non-IT systems has focused on monitoring the progress of the
property managers of the leased facilities. The evaluation of leased locations
was completed in March 1999. Through this process, seven key sites were
identified that will be certified for Y2K readiness through inspection and/or
testing of the non-IT systems. It is anticipated that these certifications will
be completed by June 30, 1999.
COSTS: Based upon its identification and analysis of necessary Y2K updates and
enhancements, the Company anticipates that it will incur operating expenses of
approximately $2.5 million and capital expenditures of approximately $1.9
million related to the Y2K project. The Company has incurred operating expenses
of $1.5 million and capital expenditures of $1.1 million as of December 31,
1998.
STATE OF READINESS: The Office presently believes that with updates and
upgrades to existing software and minimal conversions to new software, the
Company's computer systems will be Y2K compliant. However, the potential impact
of the Y2K issue on the financial services industry could be significant due to
the interdependent nature of banking transactions. Despite its efforts towards
achieving Y2K readiness, the Company could be adversely impacted if the entities
with which it transacts business do not address this issue successfully.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 - REPORTING COMPREHENSIVE INCOME: On January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") establishing standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities available for sale and is
presented in the Consolidated Statement of Changes in Shareholders' Equity and
Comprehensive Income.
Prior year financial statements have been reclassified to conform with the
requirements of SFAS No. 130.
SFAS NO. 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION: Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 supersedes SFAS Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. It amends SFAS Statement No. 94,
"Consolidation of All Majority-Owned Subsidiaries," to remove the special
disclosure requirements for previously unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis consistent with that used internally for evaluating segment performance
and deciding how to allocate resources to segments.
SFAS No. 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
25
<PAGE>
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. The Company adopted SFAS No. 131 for the year ended December 31,
1998. Prior year disclosures have been presented to conform with the
requirements of SFAS No. 131.
SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. It
specifies necessary conditions to be met to designate a derivative as a hedge.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. Early implementation is permitted under this statement. The
Company does not believe that the adoption of SFAS No. 133 will have a material
impact on its operations and financial position.
COMPARISON OF 1997 VERSUS 1996
Net income for the year ended December 31, 1997, was $55.2 million, or $1.25 a
diluted share, compared with $54.1 million, or $1.28 a diluted share, for 1996.
Results for 1997 and 1996 include net income of $629,000 and a net loss of $8.2
million, respectively, related to the Company's discontinued Precious Metals
operation. Net income from continuing operations was $54.5 million, or $1.24 a
diluted share, for the year ended December 31, 1997, compared with $62.3
million, or $1.47 a diluted share for 1996.
Normalized net income from continuing operations increased to $41.3 million, or
$0.94 a diluted share, for the year ended December 31, 1997, from $29.5 million,
or $0.70 a diluted share, for 1996. For purposes of this comparison, normalized
net income for 1997 excludes equity in the net income of ICII, gains on the sale
of ICII stock, appreciation on donated ICII stock, a gain on the sale of a
merchant card processing company, expense associated with the settlement of a
consulting agreement and charitable contribution expense associated with the
donation of ICII shares to a nonprofit institution. For 1996, normalized net
income excludes equity in the net income of ICII, gains on the sale of ICII
stock, appreciation on donated ICII stock and charitable contribution expense
associated with the donation of ICII shares to a nonprofit institution.
Detail of the normalizing adjustments for 1997 and 1996 are provided in the
following table:
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) 1997 1996
- --------------------------------------------------------------------------------
Income from continuing operations ............. $ 54,548 $ 62,302
After-tax adjustments:(1)
Equity in net loss (income) of ICII .......... (11,742) (12,428)
Gain on sale of ICII common stock ............ (2,884) (21,102)
Appreciation of donated ICII
common stock ................................ (1,632) (2,143)
Gain on sale of merchant card company ........ (2,054) --
Consulting expense ........................... 2,922 --
Charitable contribution expense .............. 2,105 2,912
- --------------------------------------------------------------------------------
NORMALIZED INCOME FROM
CONTINUING OPERATIONS ........................ $ 41,263 $ 29,541
- --------------------------------------------------------------------------------
NORMALIZED DILUTED EARNINGS PER SHARE
FROM CONTINUING OPERATIONS ................... $ 0.94 $ 0.70
- --------------------------------------------------------------------------------
(1) Adjustment increases (decreases) reported income.
- --------------------------------------------------------------------------------
Normalizing adjustments reduced net income by $13.3 million and $32.8 million
for 1997 and 1996, respectively.
Earnings per share calculations for all periods reported have been adjusted for
an 8% stock dividend paid on March 5, 1999, to shareholders of record on
February 19, 1999.
The Company's return on average total assets was 1.51% for the twelve months
ended December 31, 1997, compared with 1.94% for 1996. Based on normalized
earnings from continuing operations, the Company's return on average total
assets increased to 1.15% for 1997 from 1.08% for 1996. Return on average
shareholders' equity was 17.53% for the year ended December 31, 1997, compared
with 20.83% for 1996. The return on average shareholders' equity based on
normalized earnings from continuing operations increased to 13.11% for 1997 from
11.37% for 1996.
The increase in normalized earnings from continuing operations for the twelve
months ended December 31, 1997, compared with 1996, was primarily due to growth
in loans, an improved net interest margin and growth in fee-based service
revenue. Average loan balances increased approximately 31% to $2.4 billion for
1997 from $1.8 billion for 1996. The Company's net interest margin increased to
6.20% for 1997 from 5.76% for 1996 primarily due to higher loan yields and a
modest decrease in the overall cost of funds. The Company's use of derivative
financial instruments resulted in a $507,300 increase
26
<PAGE>
in net interest income and a 2 basis point increase in net interest margin for
1997. In 1996, use of derivatives resulted in a $700,000 increase in net
interest income and a 3 basis point increase in net interest margin.
Normalized noninterest income increased by $12.1 million, or 32%, to $50.0
million for the year ended December 31, 1997, from $37.9 million for 1996. The
increase in noninterest income for 1997 compared with 1996 was primarily due to
growth in fee-based services, particularly item processing fees and trade
finance fees, and to increased gains on the exercise and sale of equity
warrants.
Normalized noninterest expense increased by $37.3 million, or 30%, to $160.4
million for the year ended December 31, 1997, from $123.1 million for 1996. The
increase in noninterest expense for 1997 compared with the year earlier was
primarily due to growth in salaries and benefits expense, customer services
expense, and expenses associated with the formation and proposed spin-off of
Imperial Financial Group. The increase in salaries and benefits for the year
ended December 31, 1997, compared with 1996 reflects the full-year impact of new
offices opened during the latter part of 1996 and additional offices opened in
1997. Support operations were also expanded to support the Company's growth. The
average number of equivalent staff increased to approximately 917 for 1997 from
787 for 1996. Incentive compensation, which is tied to Company performance,
increased by $5.9 million for 1997 compared with 1996.
Customer services expense includes accounting, courier and other deposit-related
costs that the Company pays on behalf of its customers in the real estate
services industry. Customer services expense is a function of the volume of
these deposits and interest rates. Customer services expense increased to $18.7
million for 1997 from $11.2 million for 1996. The average balance of these
demand deposits increased to $767.1 million for 1997 from $460.9 million for
1996.
Total assets increased 41% to $4.7 billion at December 31, 1997, from $3.4
billion at December 31, 1996. Total loans increased 35% to $2.8 billion at
December 31, 1997, from $2.1 billion at December 31, 1996. Total deposits were
$4.2 billion at December 31, 1997, an increase of 42% over the $3.0 billion
reported at December 31, 1996. Noninterest-bearing demand balances comprised 57%
of total deposits at December 31, 1997, compared with 50% of total deposits at
December 31, 1996. Shareholders' equity was $352.0 million at December 31, 1997,
up from $286.4 million at December 31, 1996.
Nonaccrual loans decreased to $10.6 million, or 0.38% of total loans, at
December 31, 1997, from $20.4 million, or 0.99% of total loans, at December 31,
1996. Net loan charge-offs for the year ended December 31, 1997, were $7.8
million, or 0.33% of average loans, compared with $8.2 million, or 0.45% of
average loans for 1996. The loan loss provision increased to $22.9 million for
the year ended December 31, 1997, from $6.9 million for 1996. The increase in
the loan loss provision was primarily due to growth in the Company's loan
portfolio. Other factors that impacted the level of provision for 1997 included
the Company's expansion into selected commercial markets outside of California
and to economic developments in Asia and Latin American markets that could
potentially impact the Company's entertainment lending. At December 31, 1997,
the allowance for loan losses was $51.1 million, or 1.83% of total loans and
483% of nonaccrual loans, compared with $36.1 million, or 1.75% of total loans
and 177% of nonaccrual loans, at December 31, 1996.
The Company was classified as well capitalized at December 31, 1997 and 1996.
The Company's leverage, Tier I and total capital ratios were 10.28%, 11.14% and
12.48%, respectively, at December 31, 1997, and 9.32%, 9.96% and 11.24%,
respectively, at December 31, 1996.
27
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
AT DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................................ $ 355,317 $ 316,600
Trading instruments ............................................................................ 52,971 35,782
Securities available for sale .................................................................. 694,814 669,266
Securities held to maturity (market value of $3,898 and $4,026 for 1998 and 1997, respectively) 3,898 4,026
Federal funds sold and securities purchased under resale agreements ............................ 1,446,000 765,000
Loans held for sale (market value of $19,416 and $4,120 for 1998 and 1997, respectively) ....... 18,287 3,763
Loans:
Loans, net of unearned income and deferred loan fees .......................................... 3,452,115 2,788,608
Less allowance for loan losses .............................................................. (62,649) (51,143)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL NET LOANS $ 3,389,466 $ 2,737,465
- ------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net .................................................................... 30,938 23,091
Accrued interest receivable .................................................................... 25,505 22,212
Real estate and other assets owned, net ........................................................ 2,309 3,284
Current income taxes receivable ................................................................ -- 6,086
Deferred tax asset ............................................................................. 21,809 355
Investment in Imperial Credit Industries, Inc. ................................................. 56,796 75,001
Other assets ................................................................................... 91,070 64,348
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,189,180 $ 4,726,279
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand ........................................................................................ $ 3,298,070 $ 2,378,830
Savings ....................................................................................... 25,135 23,375
Money market .................................................................................. 1,086,959 939,086
Time - under $100,000 ........................................................................ 171,224 128,543
Time - $100,000 and over ...................................................................... 988,259 704,764
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 5,569,647 $ 4,174,598
- ------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable ....................................................................... 5,428 5,205
Income taxes payable ........................................................................... 1,504 --
Short-term borrowings .......................................................................... 60,601 55,915
Long-term borrowings:
Floating rate notes and fixed rate debentures ................................................. 2,105 3,257
Other borrowed funds .......................................................................... 290 --
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of subsidiary trust holding
solely junior subordinated deferrable interest debentures of the Company, net .............. 73,372 73,314
Other liabilities .............................................................................. 94,411 61,966
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 5,807,358 $ 4,374,255
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock--no par, 50,000,000 shares authorized; 41,863,935 shares at December 31, 1998,
and 42,374,917 shares at December 31, 1997, issued and outstanding ........................... 224,433 236,186
Accumulated other comprehensive (loss) income, net of tax ...................................... (515) 1,682
Retained earnings .............................................................................. 157,904 114,156
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 381,822 $ 352,024
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,189,180 $ 4,726,279
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
===============================================================================
28
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans ..................................................................... $ 294,623 $ 233,124 $ 173,734
Trading instruments ....................................................... 1,813 2,473 2,971
Securities available for sale ............................................. 37,425 33,239 21,675
Securities held to maturity ............................................... 287 292 306
Federal funds sold and securities purchased under resale agreements ....... 24,170 13,145 9,970
Loans held for sale ....................................................... 1,141 699 500
- -------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 359,459 $ 282,972 $ 209,156
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits .................................................................. 90,666 72,786 64,551
Short-term borrowings ..................................................... 5,335 4,072 3,160
Long-term borrowings ...................................................... 6,647 4,779 343
- -------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 102,648 $ 81,637 $ 68,054
- -------------------------------------------------------------------------------------------------------------------
Net interest income ........................................................ 256,811 201,335 141,102
Provision for loan losses .................................................. 33,375 22,892 6,881
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $ 223,436 $ 178,443 $ 134,221
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts ....................................... 6,705 5,473 4,892
Trust fees ................................................................ 8,608 7,840 8,592
Gain on origination and sale of loans ..................................... 4,764 3,944 3,222
Equity in net (loss) income of Imperial Credit Industries, Inc. ........... (18,205) 20,260 21,444
Other service charges and fees ............................................ 16,537 10,622 4,981
Merchant and credit card fees ............................................. 7,242 3,570 2,395
International fees ........................................................ 11,751 7,857 5,141
Gain on securities available for sale ..................................... 173 987 229
Gain on trading instruments ............................................... 1,152 4,482 3,197
Gain on sale of investment in Imperial Credit Industries, Inc. ............ -- 4,977 25,650
Gain resulting from sale of stock by Imperial Credit Industries, Inc. ..... -- -- 10,761
Gain on exercise and sale of equity warrants .............................. 21,672 4,317 1,529
Gain on sale of equity investment ......................................... -- 3,544 311
Appreciation of donated Imperial Credit Industries, Inc. common stock ..... -- 2,816 3,698
Other income .............................................................. 5,288 949 3,449
- -------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $ 65,687 $ 81,638 $ 99,491
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits .............................................. 114,599 85,065 64,876
Net occupancy expense ..................................................... 10,426 9,077 9,165
Furniture and equipment ................................................... 9,792 6,702 5,048
Data processing ........................................................... 9,969 7,525 6,419
Customer services ......................................................... 27,212 18,663 11,178
Net real estate and other assets owned (income) expense ................... (989) 615 1,876
Restructuring charges ..................................................... 4,880 -- --
Professional and legal fees ............................................... 10,777 11,892 5,967
Business development ...................................................... 5,855 5,154 3,659
Charitable donations ...................................................... 288 3,802 5,024
Other expense ............................................................. 24,117 20,536 14,920
- -------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $ 216,926 $ 169,031 $ 128,132
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes ...................... 72,197 91,050 105,580
Income tax provision ....................................................... 28,449 36,502 43,278
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $ 43,748 $ 54,548 $ 62,302
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operation, net of tax ...................... -- 629 (8,168)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 43,748 $ 55,177 $ 54,134
- -------------------------------------------------------------------------------------------------------------------
Basic income per share from continuing operations ......................... $ 1.03 $ 1.30 $ 1.54
Diluted income per share from continuing operations ....................... $ 0.99 $ 1.24 $ 1.47
Basic net income per share ................................................ $ 1.03 $ 1.32 $ 1.34
Diluted net income per share .............................................. $ 0.99 $ 1.25 $ 1.28
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
29
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES ACCUMULATED TOTAL
NUMBER OTHER SHARE
OF SHARES COMMON RETAINED COMPREHENSIVE HOLDERS'
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF SHARES DATA) OUTSTANDING STOCK EARNINGS INCOME EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ............................... 22,390,223 $ 130,780 $ 94,709 $ 2,747 $ 228,236
- ------------------------------------------------------------------------------------------------------------------------------------
Stock splits and dividends .............................. 14,254,261 27,417 (27,446) -- (29)
Common stock issued under employee stock option plans ... 868,339 4,140 -- -- 4,140
Retirement of common stock .............................. (123,684) (1,788) -- -- (1,788)
Tax benefit of employee stock options ................... -- 3,199 -- -- 3,199
Comprehensive income:
Net income .............................................. -- -- 54,134 -- 54,134
Other comprehensive income, net of tax:
Reclassification adjustments, net of tax effect ....... -- -- -- -- --
Unrealized loss on securities available for sale,
net of tax effect ($1,118) ........................... -- -- -- (1,541) (1,541)
-----------
Total comprehensive income .............................. -- -- -- -- 52,593
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) ................................. 14,998,916 32,968 26,688 (1,541) 58,115
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 ............................... 37,389,139 $ 163,748 $ 121,397 $ 1,206 $ 286,351
- ------------------------------------------------------------------------------------------------------------------------------------
Stock splits and dividends .............................. 3,761,407 62,400 (62,418) -- (18)
Common stock issued under employee stock option plans ... 1,379,828 4,787 -- -- 4,787
Retirement of common stock .............................. (125,001) (1,928) -- -- (1,928)
Common stock repurchased ................................ (30,456) (470) -- -- (470)
Tax benefit of employee stock options ................... -- 7,649 -- -- 7,649
Comprehensive income:
Net income .............................................. -- -- 55,177 -- 55,177
Other comprehensive income, net of tax:
Reclassification adjustments for gains included in net
income, net of tax effect ($206) ..................... -- -- -- (283) (283)
Unrealized gain on securities available for sale,
net of tax effect ($551) ............................. -- -- -- 759 759
-----------
Total comprehensive income .............................. -- -- -- -- 55,653
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) ................................. 4,985,778 72,438 (7,241) 476 65,673
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ............................... 42,374,917 $ 236,186 $ 114,156 $ 1,682 $ 352,024
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for acquisition ..................... 400,964 3,922 -- -- 3,922
Common stock issued under employee stock option plans ... 937,596 2,855 -- -- 2,855
Common stock repurchased ................................ (1,849,542) (27,243) -- -- (27,243)
Tax benefit of employee stock options ................... -- 8,713 -- -- 8,713
Comprehensive income:
Net income .............................................. -- -- 43,748 -- 43,748
Other comprehensive income, net of tax:
Reclassification adjustments for gains included in net
income, net of tax effect ($2) ....................... -- -- -- (3) (3)
Unrealized loss on securities available for sale,
net of tax effect ($1,592) ........................... -- -- -- (2,194) (2,194)
-----------
Total comprehensive income .............................. -- -- -- -- 41,551
- ------------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE ................................. (510,982) (11,753) 43,748 (2,197) 29,798
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 .............................. 41,863,935 $ 224,433 $ 157,904 $ (515) $ 381,822
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
30
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 43,748 $ 55,177 $ 54,134
Adjustments for non-cash charges (credits):
Depreciation and amortization .................................................... (19,983) (14,155) (3,387)
Accretion of purchase loan discount .............................................. -- (37) (227)
Provision for loan losses ........................................................ 33,375 22,892 6,881
Provision for operational losses in discontinued operation ....................... -- -- 15,485
Provision for real estate and other assets owned ................................. -- 556 476
Equity in net loss (income) of Imperial Credit Industries, Inc. .................. 18,205 (20,260) (21,444)
Gains - Imperial Credit Industries, Inc. stock ................................... -- (4,977) (36,411)
Gain on exercise and sale of equity warrants ..................................... (21,672) (4,317) (1,529)
Gain on sale of equity investment ................................................ -- 3,544 311
(Gain) loss on sale of real estate and other assets owned ........................ (1,164) (352) 151
Loss (gain) on sale of premises and equipment .................................... (9) 9 --
(Benefit) provision for deferred taxes ........................................... (21,454) (2,147) 6,621
Gain on securities available for sale ............................................ (173) (987) (229)
Net change in trading instruments ................................................ (17,189) 29,105 (24,837)
Net change in loans held for sale ................................................ (14,524) 1,768 (2,883)
Net change in accrued interest receivable ........................................ (3,293) (6,665) (263)
Net change in accrued interest payable ........................................... 223 (738) 367
Net change in income taxes ....................................................... 7,590 2,401 (4,506)
Net change in other liabilities .................................................. 32,445 3,719 17,358
Net change in other assets ....................................................... (18,466) (19,851) (11,552)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 17,659 $ 44,685 $ (5,484)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity .......................................... 128 167 183
Proceeds from sale of securities available for sale ................................ 4,293,282 2,901,745 2,785,935
Proceeds from maturities of securities available for sale .......................... 880,760 602,342 294,223
Purchase of securities available for sale .......................................... (5,197,928) (3,745,226) (3,208,635)
Proceeds from sale of Imperial Credit Industries, Inc. common stock ................ -- 7,156 35,079
Proceeds from exercise and sale of equity warrants ................................. 10,572 4,458 1,529
Net change in Federal funds sold and securities purchased under resale agreements .. (681,000) (408,000) 68,300
Net change in loans ................................................................ (648,940) (716,649) (358,612)
Capital expenditures ............................................................... (14,685) (10,146) (6,425)
Proceeds from sale of real estate and other assets owned ........................... 3,972 875 4,207
Proceeds from sale of premises and equipment ....................................... 35 353 --
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(1,353,804) $(1,362,925) $ (384,216)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings and money market accounts ................... 1,068,873 1,261,676 482,513
Net change in time deposits ........................................................ 326,176 (37,355) 104,148
Net change in short-term borrowings ................................................ 4,686 11,018 (114,739)
Proceeds from issuance of capital securities, net .................................. -- 73,314 --
Net change in long-term borrowings ................................................. (862) (1,198) (1,451)
Proceeds from exercise of employee stock options ................................... 2,855 2,859 2,352
Repurchase of common stock ......................................................... (27,243) (470) --
Other .............................................................................. 377 (18) (127)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,374,862 $ 1,309,826 $ 472,696
- ----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND DUE FROM BANKS $ 38,717 $ (8,414) $ 82,996
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, BEGINNING OF YEAR $ 316,600 $ 325,014 $ 242,018
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF YEAR $ 355,317 $ 316,600 $ 325,014
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to consolidated financial statements.
================================================================================
31
<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, majority and minority-owned subsidiaries are summarized below. Certain
amounts in the Consolidated Financial Statements for 1997 and 1996 have been
reclassified to conform with the current year presentation.
(a) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. The principal subsidiary is Imperial
Bank ("the Bank"), a state-chartered commercial bank located in California. All
material intercompany balances and transactions have been eliminated.
At December 31, 1998, the Company owned 8.9 million shares of Imperial Credit
Industries, Inc. ("ICII") stock at an equivalent book value of $6.35 per share,
representing approximately 24.3% of all outstanding ICII shares. The Company
does not exercise significant control over the operations of ICII, therefore,
the results of ICII operations are accounted for in the Company's Consolidated
Financial Statements as an equity investment. The results of operations of ICII
are reflected as "Equity in net (loss) income of Imperial Credit Industries,
Inc." in the Consolidated Statement of Income.
(b) Basis of Financial Statement Presentation
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles. In preparing the Consolidated
Financial Statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the balance sheets and the results of operations for the periods presented.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the allowances for loan losses and real estate and other
assets owned. While management believes that these allowances are currently
adequate, future additions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as a part of their
examination process, periodically review the allowances for loan losses and real
estate and other assets owned. Such agencies may require the Company to
recognize additions to these allowances based on their judgments about
information available to them at the time of their examination.
(c) Investments
Purchases and sales of investments are recorded on the trade date. Amortization
of premiums and accretion of discounts are recognized in interest income on
securities held to maturity and securities available for sale using the interest
method in the Consolidated Statement of Income.
Trading Instruments
Securities: Trading instruments, primarily Small Business Administration
("SBA") loan certificates, are carried at market value with unrealized
market value adjustments recorded in the Consolidated Statement of Income
as "Gain on trading instruments."
Foreign Exchange: Trading positions in foreign currencies, including spot,
forward and futures positions, are valued at prevailing market rates.
Realized and unrealized gains and losses are included in noninterest income
as "Gain on trading instruments."
Securities Available for Sale
The Company holds certain securities, primarily U.S. Treasury and federal agency
securities and mutual funds invested in short-term government securities, to
manage its overall liquidity. These securities are carried at fair value.
Unrealized gains and losses, net of tax, on securities available for sale are
reported as a separate component of other comprehensive income until realized,
unless the security is determined to be other than temporarily impaired.
Realized gains and losses on securities available for sale are computed using
the specific identification method. For other than temporarily impaired
securities, unrealized losses are recorded in the Consolidated Statement of
Income.
Securities Held to Maturity
Securities held to maturity are so designated when acquired based upon the
Company's intent and ability to hold them until maturity. These securities are
carried at amortized cost using the specific identification method. When a
decline in value has occurred that is deemed to be other than temporary, such
decline is charged to income.
(d) Equity Investments
The Company's equity investments are carried at cost adjusted for equity in an
investee's undistributed income when the Company owns 20% to 50% of an
investee's common stock. Management evaluates the Company's equity investments
for impairment on a regular basis by monitoring the trading price of the
investee's stock relative to the book value. Fluctuations deemed other than
temporary will result in a charge to income.
Sale of Investment in Equity Investee
The sale of shares of the Company's equity investment in ICII to the public was
recorded as "Gain on sale of investment in Imperial Credit Industries, Inc." in
the Consolidated Statement
32
<PAGE>
of Income. This gain represents actual proceeds from the sale of stock reduced
by the Company's recorded investment in those shares and expenses related to the
sale.
GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE
The impact on the Company's investment in ICII from the sale of previously
unissued stock by ICII to the public was recorded as "Gain resulting from sale
of stock by Imperial Credit Industries, Inc." in the Consolidated Statement of
Income. This gain resulted from ICII's sale of previously unissued stock in a
public offering in 1996 at a per share offering price that exceeded the
Company's per share carrying amount for its equity investment in the common
stock of ICII.
(E) LOANS HELD FOR SALE
Currently, the Company designates its SBA loans originated as held for sale.
These loans are carried at the lower of aggregate cost or market. Gains on the
origination and sale of SBA loans are reported in "Gain on origination and sale
of loans" in the Consolidated Statement of Income.
(F) LOANS
Loans are stated at the amount of principal outstanding. Nonrefundable loan fees
and related direct costs associated with the origination or purchase of loans
are deferred and netted against outstanding loan balances. The net deferred fees
and costs are recognized into income over the loan term using the interest
method.
Interest income on loans is accrued as earned. Interest accruals on commercial
and real estate loans are generally discontinued whenever the payment of
interest or principal is 90 days past due. When a loan is placed on nonaccrual
status, the accrued and unpaid interest is charged against current income and
recognition of net deferred fees and costs into income is discontinued. In order
to be returned to accrual status, all past due payments must be received and the
loan must be paying in accordance with its payment terms.
A loan is impaired when it is "probable" that the Company will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. Loans of $500,000 or more (excluding
nonaccrual loans) are evaluated for impairment on an individual basis. The
measurement of impairment may be based on (1) the present value of the expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired loan or
(3) the fair value of the collateral of a collateral-dependent loan. The amount
by which the recorded investment of the loan exceeds the measure of the impaired
loan is recognized by recording a valuation allowance with a corresponding
charge to provision for loan losses.
All loans on nonaccrual status are considered to be impaired, however, not all
impaired loans are on nonaccrual status. To remain on accrual status, payments
on an impaired loan must be current.
Loans deemed by management to be uncollectible are charged to the allowance for
loan losses. Recoveries on loans previously charged off are credited to the
allowance. Provisions for loan losses are charged to expense and added to the
allowance to maintain it at an appropriate level. In evaluating the adequacy of
the allowance, management considers numerous factors including economic
conditions, loan portfolio composition and risk, loan loss experience, ongoing
review of specific loans and reviews by the Company's regulators. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in the
aforementioned factors.
(G) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation on the Company's owned premises is calculated using the
straight-line method over its estimated useful life of 39 years. Depreciation on
equipment is calculated using the straight-line method over the estimated useful
lives of the assets (3 to 7 years). Leasehold improvements are amortized using
the straight-line method over the terms of the respective leases or the
estimated useful lives of the leasehold improvements, whichever is shorter.
(H) REAL ESTATE AND OTHER ASSETS OWNED
Real estate and other assets owned ("OREO") is transferred from the loan
portfolio at fair value as determined by an appraisal obtained at the time of
foreclosure. The excess carrying value, if any, of the loan over the estimated
fair value is charged to the allowance for loan losses. Estimated selling costs
and any subsequent impairments in value are recognized through a valuation
allowance. Subsequent increases in fair value are credited to income and reduce
the valuation allowance, but only to the extent that decreases in fair value
were recorded for the same property through the valuation allowance. Gains and
losses from sales of OREO and net operating expenses are recorded in "Net real
estate and other assets owned (income) expense" in the Consolidated Statement of
Income.
(I) INCOME TAXES
The Company accounts for income taxes using an asset and liability approach, the
objective of which is to recognize the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in a company's financial statements or
tax returns. The measurement of tax assets and liabilities is based on enacted
tax laws. Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based on available evidence.
33
<PAGE>
(J) FOREIGN EXCHANGE OPERATIONS
The Company engages in foreign exchange transactions on behalf of middle market
companies and financial institutions. Stated trading limits are maintained and
monitored to ensure efficient operations. The majority of transactions are
settled on a cash-and-carry basis to minimize settlement risk to the Company.
The Company requires cash collateral or an approved line of credit on all
forward transactions.
(K) INTEREST RATE DERIVATIVE CONTRACTS
Interest rate derivative contracts, such as swaps, futures, and options
including interest rate caps and floors are used in conjunction with asset
liability management strategies to synthetically alter the interest income or
expense flows of certain assets or liabilities. Gains and losses on financial
futures and options used in asset liability management are recorded as a
component of the interest income or expense reported on the related asset or
liability. Amounts payable and receivable relating to interest rate swaps are
accrued until settled, the effect of which is included in the interest income or
expense reported on the asset or liability whose payment streams have been
synthetically altered. Fees paid for financial contracts are amortized over
their contractual life as a component of the interest reported on the related
asset or liability.
(L) STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), the intrinsic value method, to account
for stock-based compensation. In accordance with Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
includes pro forma disclosures reflecting the impact of the fair value method on
net income and income per share as if SFAS No. 123 had been adopted for purposes
of preparing its basic financial statements for stock options granted in years
after 1994.
(M) EARNINGS PER SHARE
The Company computes and presents both basic and diluted earnings per share
("EPS") in the Consolidated Statement of Income. Basic EPS excludes dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
from issuance of common stock that then shared in earnings. A reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation is provided in the notes to the
Consolidated Financial Statements.
(N) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
The Company makes loans to small businesses ("SBA loans"), sells the guaranteed
portion of the loans, and retains the servicing rights and interest-only strips
relating to those loans. The portion of the contractually specified servicing
fee that exceeds the fee that a substitute servicer would demand to assume the
servicing on SBA loans sold after January 1, 1997, is recorded as a servicing
asset and amortized in proportion to the net servicing income. A substitute
servicing fee is deemed to be 40 basis points for loans sold at par or less and
100 basis points for loans sold in excess of par based on the 1993 National
Association for Government Guaranteed Loans survey. Any cash flow expected to be
received in excess of the contractually specified servicing fees is recorded as
an interest-only strip receivable at its allocated carrying amount and
subsequently measured at fair value as either a security available for sale or
trading instrument under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
(O) CAPITAL SECURITIES
In the second quarter of 1997, the Company established Imperial Capital Trust I
("the Trust"), a wholly owned subsidiary which issued in a private placement
transaction $75.0 million of 9.98% capital securities ("Capital Securities")
which represent undivided preferred beneficial interest in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust. The purpose of issuing the Capital
Securities was to provide the Company with a cost effective means of obtaining
Tier I Capital for regulatory purposes. The Capital Securities are reflected in
the Consolidated Balance Sheet as "Capital Securities of subsidiary trust." The
Capital Securities were issued at a discount which is accreted to interest
expense using a method which approximates the interest method.
(P) COMPREHENSIVE INCOME
On January, 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes standards for reporting comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities available
for sale and is presented in the Consolidated Statement of Changes in
Shareholders' Equity and Comprehensive Income. Prior year financial statements
have been reclassified to conform with the requirements of SFAS No. 130.
(Q) SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131"), for the year ended December 31, 1998. The statement establishes standards
for the way public companies are to report information about operating segments.
Operating segments are determined by how management has organized the business
for making operating decisions and assessing performance. Prior year disclosures
have been presented to conform with the requirements of SFAS No. 131.
34
<PAGE>
(R) YEAR 2000
Expenditures over $1,000 to acquire data processing or other equipment related
to the Company's Year 2000 Program ("Y2K") are capitalized and included in
"Premises and Equipment" in the Consolidated Balance Sheet. Operating expenses
related to the Y2K project are expensed as incurred and included in the
applicable expense category in the Consolidated Statement of Income.
NOTE (2) STATEMENT OF CASH FLOWS
Cash and due from banks consists of cash and amounts due from banks with an
initial term of less than three months. The following information supplements
the statement of cash flows:
- --------------------------------------------------------------------------------
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest paid ........................... $102,425 $82,375 $67,687
Taxes paid .............................. 31,903 34,807 30,902
Taxes refunded .......................... -- 431 244
Significant noncash transactions:
Loans transferred to real estate and
other assets owned ..................... 1,827 2,762 731
Loans made in conjunction with the
sale of real estate owned .............. -- 211 4,100
Net change in accumulated other
comprehensive income, net of tax ....... (2,197) 476 (1,541)
Acquisition of Altair Corp. for stock ... 3,922 -- --
- --------------------------------------------------------------------------------
NOTE (3) SECURITIES
The amortized cost and fair value of securities held to maturity and securities
available for sale at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------------
AMORTIZED AMORTIZED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less .................... $ -- $ -- $144,311 $144,332
Due after one year through five years ...... -- -- 50 50
Due after five years through ten years ..... -- -- 2,254 1,847
Due after ten years ........................ 3,898 3,898 549,088 548,585
- ----------------------------------------------------------------------------------------------------------
TOTAL ..................................... $3,898 $3,898 $695,703 $694,814
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of securities pledged to secure public deposits and for other
purposes as required or permitted by law totaled $475.0 million and $391.0
million as of December 31, 1998 and 1997, respectively.
(A) SECURITIES HELD TO MATURITY
A summary of securities held to maturity by type is provided below for the
periods indicated:
- -------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- -------------------------------------------------------------------------------
December 31, 1998
Industrial development bonds ... $3,898 $ -- $ -- $3,898
- -------------------------------------------------------------------------------
TOTAL .......................... $3,898 $ -- $ -- $3,898
- -------------------------------------------------------------------------------
December 31, 1997
Industrial development bonds ... $4,026 $ -- $ -- $4,026
- -------------------------------------------------------------------------------
TOTAL .......................... $4,026 $ -- $ -- $4,026
- -------------------------------------------------------------------------------
There were no gross realized gains or losses on securities held to maturity for
the years ended December 31, 1998, 1997 and 1996.
35
<PAGE>
(B) SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale by type for the
periods indicated:
- -------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
December 31, 1998
U.S. Treasury and federal
agencies.................... $560,332 $ 3,024 $ (1) $563,355
Mutual funds ................ 112,579 -- -- 112,579
Other securities ............ 22,792 -- (3,912) 18,880
- -------------------------------------------------------------------------------
TOTAL ....................... $695,703 $ 3,024 $ (3,913) $694,814
- -------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury and federal
agencies ................... $612,903 $ 2,378 $ (74) $615,207
Mutual funds ................ 37,532 -- -- 37,532
Other securities ............ 15,928 599 -- 16,527
- -------------------------------------------------------------------------------
TOTAL ....................... $666,363 $ 2,977 $ (74) $669,266
- -------------------------------------------------------------------------------
Mutual funds at December 31, 1998 and 1997, were comprised of government, muni,
treasury and cash funds. Other securities at December 31, 1998 and 1997, were
primarily interest-only strips associated with the guaranteed portion of Small
Business Administration loans.
The Bank's broker/dealer subsidiary, Imperial Securities Corp., receives fees
for performing certain distribution and service activities on behalf of Monarch
Funds (a family of mutual funds). These fees, totaling $3.6 million, $1.7
million and $832,900 for the years ended December 31, 1998, 1997 and 1996,
respectively, are included in "Other service charges and fees" in the
Consolidated Statement of Income. Of the five trustees of the Monarch Funds, one
is a member of the Company's management. As of December 31, 1998 and 1997, the
Company's investment in the Monarch Funds represented approximately 7.8% and
4.6%, respectively, of the net asset value of all Monarch Funds.
Gross realized gains and losses related to the available for sale portfolio were
$178,000 and $5,000, respectively, for the year ended December 31, 1998, $1.1
million and $71,000, respectively, for the year ended December 31, 1997, and
$274,000 and $45,000, respectively, for the year ended December 31, 1996. At
December 31, 1998 and 1997, the Company reported unrealized losses, net of tax,
of $515,000 and unrealized gains, net of tax, of $1.7 million, respectively, in
the Consolidated Balance Sheet.
The following table sets forth information with respect to Federal funds sold
and securities purchased under resale agreements:
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
Balance, end of year ....................... $1,446,000 $ 765,000
Weighted average interest rate,
end of year ............................... 4.92% 5.58%
Average amount outstanding during
the year .................................. $ 454,651 $ 237,186
Weighted average interest rate
for the year .............................. 5.32% 5.54%
Maximum amount outstanding at
any month end ............................. $1,515,000 $ 765,000
- -------------------------------------------------------------------------------
Depending on the nature of the securities obtained under the resale agreements,
the collateral is held by a third party custodian or by the Company's custodian
under written agreements that recognize the Company's interest in the
securities. Interest income associated with Federal funds sold and securities
purchased under resale agreements totaled $24.2 million, $13.1 million and $10.0
million, respectively, for 1998, 1997 and 1996.
NOTE (4) LOANS
The carrying amount of loans, net of unearned income and deferred loan fees,
consisted of the following:
- -------------------------------------------------------------------------------
1998 1997
CARRYING CARRYING
AT DECEMBER 31, (DOLLARS IN THOUSANDS) AMOUNT AMOUNT
- -------------------------------------------------------------------------------
Commercial loans ............................. $ 3,015,132 $ 2,350,438
Loans secured by real estate:
Real estate term loans ...................... 142,866 232,954
Interim construction loans .................. 258,763 174,767
Consumer loans ............................... 35,354 30,449
- -------------------------------------------------------------------------------
Total loans .................................. 3,452,115 2,788,608
Less allowance for loan losses ............... (62,649) (51,143)
- -------------------------------------------------------------------------------
NET LOANS ................................... $ 3,389,466 $ 2,737,465
- -------------------------------------------------------------------------------
36
<PAGE>
Net deferred loan fees included in total loans approximated $13.4 million and
$14.7 million at December 31, 1998 and 1997, respectively.
The following table contains information for loans deemed impaired:
- --------------------------------------------------------------------------------
NET
CARRYING SPECIFIC NET
(DOLLARS IN THOUSANDS) VALUE ALLOWANCE BALANCE
- --------------------------------------------------------------------------------
December 31, 1998
Loans with specific
allowances ............................... $ 56,746 $(12,775) $ 43,971
Loans without specific
allowances ............................... 4,847 -- 4,847
- --------------------------------------------------------------------------------
TOTAL ..................................... $ 61,593 $(12,775) $ 48,818
- --------------------------------------------------------------------------------
December 31, 1997
Loans with specific
allowances ............................... $ 85,612 $(11,881) $ 73,731
Loans without specific
allowances ............................... 7,374 -- 7,374
- --------------------------------------------------------------------------------
TOTAL ..................................... $ 92,986 $(11,881) $ 81,105
- --------------------------------------------------------------------------------
Impaired loans were classified as follows:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Current ............................................ $27,414 $79,109
Past due ........................................... 3,564 3,299
Nonaccrual ......................................... 30,615 10,578
- --------------------------------------------------------------------------------
TOTAL ............................................. $61,593 $92,986
- --------------------------------------------------------------------------------
Impaired loans totaled $61.6 million and $93.0 million at December 31, 1998 and
1997, respectively. At December 31, 1998 and 1997, 15% and 83%, respectively, of
impaired loans were secured by real estate. Impaired loans averaged $78.6
million in 1998, $101.3 million in 1997 and $131.0 million in 1996. During 1998,
1997, and 1996, total interest recognized on the impaired loan portfolio, on a
cash basis, was $5.8 million, $8.5 million and $10.3 million, respectively.
Nonaccrual loans included as impaired loans totaled $30.6 million, $10.6 million
and $20.4 million at December 31, 1998, 1997 and 1996, respectively. There were
no commitments to lend additional funds on nonaccrual loans at December 31,
1998. Interest income foregone on nonaccrual loans approximated $1.4 million in
1998, $1.3 million in 1997 and $2.2 million in 1996. Interest income recognized
on nonaccrual loans was approximately $1.5 million in 1998, $0.4 million in 1997
and $1.1 million in 1996.
At December 31, 1998, 1997 and 1996, restructured loans were $9.8 million, $24.0
million and $28.7 million, respectively. At December 31, 1998, restructured
loans were performing in accordance with their modified terms. At December 31,
1998, commitments to lend additional funds on restructured loans totaled
$19,000. Interest recorded in 1998, 1997 and 1996 on restructured loans totaled
$2.2 million, $2.3 million and $2.7 million, respectively. Interest that would
have been recorded in 1998, 1997 and 1996 had the loans performed in accordance
with their original terms was $2.3 million, $2.3 million and $2.6 million,
respectively. The average yield on restructured loans was 9.27% for 1998 and
8.35% for 1997.
An effort is made to diversify risk within the loan portfolio with the objective
of achieving high rates of return and minimizing losses for the benefit of
shareholders and protection of depositors. Diversification of the loan portfolio
by type of loan, geographic and industry concentration also reduces the overall
risk by minimizing the adverse impact of any single event or set of occurrences.
Commercial loans comprised 87% of the total loan portfolio at December 31, 1998,
up from 84% of the total portfolio at December 31, 1997. As illustrated in the
following table, the Company's commercial loan portfolio is broadly diversified
among many industries including entertainment, high technology, manufacturing,
healthcare, real estate services and retail trade with no significant
concentrations. The Company experienced loan growth across most industry
sectors, with substantial growth in loans to manufacturing, entertainment, high
technology, healthcare, title and escrow and retail trade businesses.
37
<PAGE>
The following table sets forth the distribution of average commercial loans by
industry type:
- --------------------------------------------------------------------------------
1998 1997
AVERAGE PERCENT OF AVERAGE PERCENT OF
(DOLLARS IN THOUSANDS) BALANCE PORTFOLIO BALANCE PORTFOLIO
- --------------------------------------------------------------------------------
Industry type:
Manufacturing ............... $ 507,298 17.62% $ 293,410 15.23%
Entertainment ............... 359,804 12.50 234,479 12.17
Title/escrow ................ 357,799 12.43 122,072 6.34
High technology ............. 276,707 9.61 164,175 8.52
Healthcare .................. 203,834 7.08 136,283 7.07
Wholesale trade ............. 196,582 6.83 168,362 8.74
Retail trade ................ 161,415 5.61 101,927 5.29
Professional services ....... 149,541 5.19 102,361 5.31
Real estate services ........ 137,730 4.78 122,734 6.37
Consumers ................... 129,636 4.50 62,390 3.24
Gaming ...................... 87,489 3.04 77,355 4.02
Distribution ................ 73,984 2.57 60,167 3.12
Apparel and textile ......... 53,931 1.87 58,481 3.04
Other ....................... 182,852 6.37 222,345 11.54
- --------------------------------------------------------------------------------
TOTAL ..................... $2,878,602 100.00% $1,926,541 100.00%
- --------------------------------------------------------------------------------
The Company's real estate loans, both term and construction, are secured by
first deeds of trust. Term loans are distributed among a variety of projects.
The majority of the Company's construction loans are to builders of moderately
priced residential tract homes.
At year-end 1998, real estate loans totaling $401.6 million do not include
commercial loans to real estate related customers totaling $230.1 million. At
December 31, 1998, these loans consisted of the following: $64.1 million to real
estate agents, operators and lessors, $43.6 million to subcontractors and
developers, $90.5 million to title and escrow companies and $31.9 million to
builders.
The principal amount of loans pledged to secure public deposits and a credit
line with the Federal Reserve approximated $231.0 million and $112.0 million at
December 31, 1998 and 1997, respectively.
NOTE (5) ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the periods indicated
is presented below:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year ........... $ 51,143 $ 36,051 $ 37,402
Provision for losses ................. 33,375 22,892 6,881
Provision for loan losses of
discontinued operation .............. -- (3) 15
Loans charged off .................... (23,793) (10,365) (11,025)
Recoveries on loans previously
charged off ......................... 1,924 2,568 2,778
- --------------------------------------------------------------------------------
NET CHARGE-OFFS ..................... $(21,869) $ (7,797) $ (8,247)
- --------------------------------------------------------------------------------
BALANCE, END OF YEAR ................ $ 62,649 $ 51,143 $ 36,051
- --------------------------------------------------------------------------------
38
<PAGE>
NOTE (6) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Land ........................................... $ 1,765 $ 1,765
Buildings & improvements ....................... 3,980 3,803
Leasehold improvements ......................... 9,041 7,358
Furniture, fixtures & equipment ................ 54,628 40,981
- --------------------------------------------------------------------------------
LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION (38,476) (30,816)
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET $ 30,938 $ 23,091
- --------------------------------------------------------------------------------
NOTE (7) REAL ESTATE AND OTHER ASSETS OWNED
The following table provides a summary of real estate and other assets owned
("OREO") by type of property for the periods indicated:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Real estate owned:
Commercial ....................................... $ 1,362 $ --
Acquisition and land development ................. 255 2,719
Single-family residential ........................ 164 988
- --------------------------------------------------------------------------------
TOTAL $ 1,781 $ 3,707
- --------------------------------------------------------------------------------
Other assets owned:
Film distribution rights ......................... $ 528 $ 666
- --------------------------------------------------------------------------------
REAL ESTATE AND OTHER ASSETS
OWNED, GROSS $ 2,309 $ 4,373
- --------------------------------------------------------------------------------
Less valuation allowance .......................... -- (1,089)
- --------------------------------------------------------------------------------
REAL ESTATE AND OTHER ASSETS
OWNED, NET $ 2,309 $ 3,284
- --------------------------------------------------------------------------------
The following comprises net real estate and other assets owned (income) expense
for the periods indicated:
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Net (gain) loss on sale of real
estate and other assets owned ........ $(1,164) $ (352) $ 151
Valuation adjustments charged
to operations ........................ -- 556 476
Direct holding costs .................. 175 411 1,249
- --------------------------------------------------------------------------------
Net real estate and other assets
owned (income) expense $ (989) $ 615 $ 1,876
- --------------------------------------------------------------------------------
The following table sets forth information regarding the Company's valuation
allowance for OREO:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year ........... $ 1,089 $ 769 $ 4,686
Provision for OREO ................... -- 556 476
OREO sold/charged off ................ (1,089) (236) (4,393)
- --------------------------------------------------------------------------------
BALANCE, END OF YEAR $ -- $ 1,089 $ 769
- --------------------------------------------------------------------------------
NOTE (8) EARNINGS PER COMMON SHARE/COMMON STOCK OUTSTANDING
The Company reports earnings per share ("EPS") in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then shared in
earnings. Reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation is
presented in the following table:
39
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER PER-SHARE PER-SHARE PER-SHARE
SHARE DATA) INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Income from continuing
operations .................... $ 43,748 42,587,418 $ 1.03 $ 54,548 41,900,852 $ 1.30 $ 62,302 40,570,578 $ 1.54
Income (loss) from discontinued
operation,
net of tax .................... -- -- 629 0.02 (8,168) (0.20)
-------- ------ -------- ------ -------- ------
Net income .................... $ 43,748 $ 1.03 $ 55,177 $ 1.32 $ 54,134 $ 1.34
EFFECT OF DILUTIVE SECURITIES
Incremental shares - from
outstanding common
stock options ................. 1,588,126 2,071,586 1,774,099
---------- ---------- ----------
DILUTED EPS
Income available to shareholders:
Income from continuing
operations .................... $ 43,748 44,175,544 $ 0.99 $ 54,548 43,972,438 $ 1.24 $ 62,302 42,344,677 $ 1.47
Income (loss) from discontinued
operations, net of tax ........ -- -- 629 0.01 (8,168) (0.19)
-------- ------ -------- ------ -------- ------
Net income $ 43,748 $ 0.99 $ 55,177 $ 1.25 $ 54,134 $ 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of shares used to compute basic and diluted income per common share
has been retroactively adjusted to reflect stock splits and dividends as
appropriate. On March 5, 1999, the Company paid an 8% stock dividend. The number
of common shares outstanding for all periods presented has been adjusted to
reflect this stock dividend. The Company split its common stock at the ratio of
one share for every two shares outstanding on February 6, 1998. In the first
quarter of 1997, the Company declared and paid a 10% stock dividend. In the
fourth quarter of 1996, the Company split its common stock at the ratio of one
new share for every two shares outstanding. In the first quarter of 1996, the
Company declared and paid an 8% stock dividend.
Securities that could potentially dilute basic earnings per share in the future
that were not included in the calculation of diluted earnings per share for 1998
because their effect was antidilutive totaled approximately 515,000 shares.
In September 1998, the Company announced that the Board of Directors had
authorized the Company to repurchase 1,080,000 shares of its common stock,
adjusted for the 8% stock dividend paid in March 1999, in addition to the
existing repurchase plan announced in January 1997, under which 1,782,000
shares, as adjusted for stock dividends and splits, were authorized to be
purchased. As of December 31, 1998, the Company had repurchased 1,849,542
shares, adjusted for the 8% stock dividend, of the total 2,862,000 shares
authorized for repurchase. The stock repurchase program will reduce the shares
outstanding, and shares repurchased may later be issued to the Company's
employee stock ownership plan or issued under the employee stock option plan.
The repurchased shares will reduce the dilution from issuances in connection
with those plans as well as from any future stock dividends.
NOTE (9) DEPOSITS
Interest expense on time certificates of deposit with balances of $100,000 or
more totaled $47.5 million in 1998, $38.5 million in 1997 and $36.8 million in
1996.
Included in the Company's noninterest-bearing demand deposits are deposits of
customers in the real estate services industry. While these deposits are
noninterest bearing, the Company incurs customer services expense in the form of
payments to third parties who provide accounting, courier and other
deposit-related services for these customers. The costs associated with these
deposits are included in "Customer services" in the accompanying Consolidated
Statement of Income. During 1998 and 1997, the average balances of such deposit
accounts were $1.4 billion and $767.1 million, respectively.
40
<PAGE>
The following table shows the time remaining to maturity of time certificates of
deposit at December 31, 1998 and 1997:
- --------------------------------------------------------------------------------
$100,000 AND OVER UNDER $100,000
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
3 months or less ............... $784,316 $486,747 $111,295 $ 59,409
Over 3 through 6 months ........ 166,094 140,831 37,049 28,403
Over 6 through 12 months ....... 37,180 71,143 20,035 37,069
1 year through 5 years ......... 669 6,043 2,845 3,662
- --------------------------------------------------------------------------------
TOTAL ......................... $988,259 $704,764 $171,224 $128,543
- --------------------------------------------------------------------------------
NOTE (10) SHORT-TERM BORROWINGS
The following table sets forth information with respect to Federal funds
purchased and securities sold under agreements to repurchase:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, end of year ................. $ 25,141 $ 39,000 $ 12,450
Weighted average interest rate,
end of year ......................... 4.70% 5.39% 4.93%
Average amount outstanding ...........
during the year ..................... $ 34,659 $ 27,353 $ 16,489
Weighted average interest rate
for the year ........................ 5.35% 5.32% 5.04%
Maximum amount outstanding at
any month end ....................... $140,850 $ 80,300 $ 37,700
================================================================================
Securities subject to repurchase agreements are retained by the Company's
custodian under written agreements that recognize the customers' interests in
the securities. Interest expense associated with Federal funds purchased and
securities sold under repurchase agreements totaled $1.9 million, $1.5 million
and $0.8 million for 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had unused borrowing capacity under Federal
funds lines of $205.0 million. The Company also had approximately $87.0 million
available on a credit line with the Federal Reserve at December 31, 1998. The
Company incurred no commitment fees relating to short-term credit lines during
1998. Federal funds purchased and securities sold under agreements to repurchase
outstanding at December 31, 1998, matured on the next business day.
The Company issues commercial paper. The following table sets forth information
regarding the Company's outstanding commercial paper for the periods indicated:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, end of year ................. $30,447 $15,898 $ 8,011
Weighted average interest rate,
end of year ......................... 5.01% 5.26% 5.11%
Average amount outstanding
during the year ..................... $24,677 $13,960 $18,613
Weighted average interest rate
for the year ........................ 5.33% 5.30% 5.45%
Maximum amount outstanding at
any month end ....................... $30,812 $19,931 $25,707
================================================================================
Commercial paper outstanding at December 31, 1998, matured within 30 days,
except one issue of $100,000 that matured within 60 days.
The Bank is a designated depository for federal tax collections. These tax
collections, as set forth in the following table, bear interest at 25 points
below the Federal funds rate:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, end of year ............... $ 5,013 $ 1,017 $ 24,436
Weighted average interest rate,
end of year ....................... 4.54% 5.59% 6.01%
Average amount outstanding
during the year ................... $ 38,014 $ 34,990 $ 26,259
Weighted average interest rate
for the year ...................... 5.32% 5.35% 5.00%
Maximum amount outstanding at
any month end ..................... $107,910 $ 97,155 $ 89,579
================================================================================
41
<PAGE>
NOTE (11) LONG-TERM BORROWINGS
(A) FLOATING RATE NOTES AND FIXED RATE DEBENTURES
In 1979, the Company issued $16,500,000 of Floating Rate Notes ("the Notes")
which mature on August 1, 1999. The Notes were convertible at the option of the
holder at any time prior to August 1, 1986, into an equivalent principal amount
of Debentures. At December 31, 1998, $1,106,000 in Notes and $999,000 in
Debentures were outstanding and the current interest rates on the Notes and
Debentures were 6.00% and 9.00%, respectively. At December 31, 1997, the
outstanding Notes and Debentures totaled $2,219,000 and $1,038,000,
respectively.
The Notes and Debentures may be redeemed after August 1, 1989, at the option of
the Company until maturity at a declining premium, plus accrued interest.
The Company was required under the indenture to make equal annual mandatory
sinking fund payments of $1,650,000 in each of the years 1992 through 1998 which
will be sufficient to retire at par approximately 90% of the aggregate principal
amount of Notes and Debentures prior to maturity. The 1998 sinking fund payment
was made in the third quarter. The Notes and Debentures will be paid off on
their maturity date of August 1, 1999.
The Trust Indentures for the Notes and Debentures include provisions which
restrict the sale or issuance of capital stock of the Bank, the payment of
dividends and the disposition of assets. The Company was in compliance with the
provisions of the respective Trust Indentures at December 31, 1998.
(B) OTHER BORROWED FUNDS
Other borrowed funds include a total of $290,000 due on an equity line of
credit, 5-year term loan and leases held by the Company's U S Audiotex
subsidiary. The average balance of other borrowed funds for the year was
$370,000 and the average rate paid was 9.75%. Interest expense on borrowed funds
also includes $106,000 to maintain a line of credit for Imperial Financial
Group. The line was never used.
(C) CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98% capital securities (the "Capital Securities")
which represent undivided preferred beneficial interests in the assets of the
Trust. The Company is the owner of all the beneficial interests represented by
the common securities of the Trust (the "Common Securities") together with the
Capital Securities (the "Trust Securities"). The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
9.98% junior subordinated deferrable interest debentures (the "Junior
Subordinated Debentures") issued by the Company and engaging in certain other
limited activities. The excess of the stated redemption price at maturity of the
Junior Subordinated Debentures over their original issue price resulted in an
original issue discount of $1.8 million. The Junior Subordinated Debentures held
by the Trust will mature on December 31, 2026, at which time the Company is
mandatorily obligated to redeem the Capital Securities.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions, accumulating from April 23, 1997, the date of original issuance,
and payable semi-annually in arrears on June 30 and December 31 of each year,
commencing June 30, 1997, at an annual rate of 9.98% of the liquidation amount
of $1,000 per Trust Security. The Company has the right under certain
circumstances to defer payments of interest on the Junior Subordinated
Debentures at any time and from time to time for a period not exceeding 10
consecutive semi-annual periods with respect to each deferral period, provided
that no deferral period may end on a day other than an interest payment date or
extend beyond the stated maturity date of the Junior Subordinated Debentures. If
and for so long as interest payments on the Junior Subordinated Debentures are
so deferred, cash distributions on the Trust Securities will also be deferred
and the Company will not be permitted, subject to certain exceptions, to declare
or pay any cash distributions with respect to the Company's capital stock (which
includes common and preferred stock) or to make any payment with respect to debt
securities of the Company that rank equal with or junior to the Junior
Subordinated Debentures.
Upon the repayment on December 31, 2026, the stated maturity date, or prepayment
prior to this date of the Junior Subordinated Debentures, the proceeds from such
repayment or prepayment shall be applied to redeem the Trust Securities upon not
less than 30 nor more than 60 days notice of a date of redemption at the
applicable redemption price. At maturity, the redemption price shall equal the
principal of and accrued and unpaid interest on the Junior Subordinated
Debentures. Subject to the Company having received prior approval of the Board
of Governors of the Federal Reserve System, if then required under applicable
capital guidelines or policies of the Federal Reserve, the Junior Subordinated
Debentures will be prepayable prior to the maturity date at the option of the
Company on or after June 30, 2007, in whole or in part, at a prepayment price
equal to 105.113% of the principal amount thereof on the prepayment date,
declining ratably on each June 30 thereafter to 100% on or after June 30, 2017,
plus accrued and unpaid interest thereon to the date of prepayment.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at December 31, 1998.
42
<PAGE>
The unamortized discount on the Capital Securities was $1.6 million at December
31, 1998.
The Company used $67.2 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make additional investments in the Bank. An
investment of $30.0 million was made in September 1997 and an investment of
$37.2 million was made in January 1998. The remainder of the proceeds has been
used to implement the Company's stock repurchase plan. The Capital Securities
qualify as Tier I capital under the capital guidelines of the Federal Reserve.
The net principal balance of the Capital Securities was $73.4 million at
December 31, 1998.
NOTE (12) INCOME TAXES
Income tax expense (benefit) is included in the accompanying Consolidated
Statement of Income as follows:
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Income tax expense (benefit) from:
Continuing operations ............... $ 28,449 $ 36,502 $ 43,278
Discontinued operations ............. -- 456 (6,000)
- --------------------------------------------------------------------------------
TOTAL ............................. $ 28,449 $ 36,958 $ 37,278
================================================================================
The income tax provision for both continuing and discontinued operations in the
Consolidated Statement of Income is comprised of the following current and
deferred amounts:
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal ............................. $ 29,234 $ 24,704 $ 19,897
State ............................... 10,362 7,162 6,609
- --------------------------------------------------------------------------------
TOTAL ............................. $ 39,596 $ 31,866 $ 26,506
================================================================================
Deferred:
Federal ............................. (16,274) (2,701) 4,485
State ............................... (5,180) 554 2,136
- --------------------------------------------------------------------------------
TOTAL ............................. $(21,454) $ (2,147) $ 6,621
================================================================================
Total:
Federal ............................. 12,960 22,003 24,382
State ............................... 5,182 7,716 8,745
- --------------------------------------------------------------------------------
Taxes credited to
shareholders' equity ............... 10,307 7,239 4,506
- --------------------------------------------------------------------------------
Reversal of overaccrued taxes
from prior years ................... -- -- (355)
- --------------------------------------------------------------------------------
TOTAL ............................. $ 28,449 $ 36,958 $ 37,278
================================================================================
During 1997, the Company recorded a $0.4 million reduction of income tax expense
to reflect the finalization of prior years income tax issues.
The Company had a current income tax payable of $1.5 million at December 31,
1998, and a current income tax receivable of $6.1 million at December 31, 1997.
Of the $10.3 million tax benefit recorded directly to shareholders' equity in
1998, $8.7 million represents current taxes receivable associated with employee
stock options and $1.6 million represents the increase in deferred taxes
associated with the unrealized loss on securities available for sale.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following table
shows the primary components of the Company's net deferred tax asset:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Components of the deferred tax asset:
Bad debt deduction .................................. $ 22,699 $ 17,972
Deferred compensation ............................... 15,682 10,251
State franchise taxes ............................... 2,927 3,571
Accrued expenses .................................... 1,715 --
Deferred gain ....................................... 1,495 --
Goodwill amortization ............................... 1,194 1,143
Unrealized loss on securities available for sale .... 407 --
Other ............................................... 811 1,056
- --------------------------------------------------------------------------------
TOTAL ............................................. $ 46,930 $ 33,993
- --------------------------------------------------------------------------------
Valuation allowance ................................. -- --
- --------------------------------------------------------------------------------
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE ...... $ 46,930 $ 33,993
- --------------------------------------------------------------------------------
Components of the deferred tax liability:
Prepaid expense ..................................... (722) (454)
Installment sale of real estate owned ............... -- (5)
Depreciation ........................................ -- (207)
Deferred loan fees .................................. (1,326) (1,114)
Investment in Imperial Credit Industries, Inc. ...... (21,960) (30,306)
Low income housing .................................. (411) (1,330)
Other ............................................... (702) (222)
- --------------------------------------------------------------------------------
TOTAL ............................................. $(25,121) $(33,638)
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSET ............................ $ 21,809 $ 355
================================================================================
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Management believes that
it is more likely than not the Company will realize the benefits of these
deductible differences. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
43
<PAGE>
The income tax provision related to income from continuing operations differs
from the amount computed by applying the statutory Federal income tax rate for
the following reasons:
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
(DOLLARS IN THOUSANDS) AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- -------------------------------------------------------------------------------
Income tax provision at
statutory rate .......... $25,269 35.0% $31,867 35.0% $36,953 35.0%
(Reduction) increase in
taxes resulting from:
Tax exempt interest ...... (102) (0.1) (102) (0.1) (167) (0.2)
Cash surrender value of
officers life insurance . (318) (0.4) (428) (0.4) (90) (0.1)
Appreciation of donated
Imperial Credit
Industries, Inc. common
stock ................... -- -- (986) (1.1) (1,294) (1.2)
State franchise taxes, net
of Federal income tax
benefit ................. 5,096 7.1 6,222 6.8 7,510 7.1
Reversal of overaccrued
taxes from prior year ... -- -- (410) (0.4) (355) (0.4)
Low income housing tax
credit .................. (1,854) (2.6) -- -- -- --
Other .................... 358 0.4 339 0.3 721 0.8
- --------------------------------------------------------------------------------
TOTAL .................... $28,449 39.4% $36,502 40.1% $43,278 41.0%
================================================================================
NOTE (13) EMPLOYEE BENEFIT PLANS
The Company has established the following employee benefit plans. All share
amounts have been adjusted for the 8% stock dividend paid on March 5, 1999.
IMPERIAL BANCORP PROFIT-SHARING/EMPLOYEE STOCK OWNERSHIP PLAN: The Company has
a noncontributory profit-sharing/employee stock ownership plan ("combined plan")
in which employees of the Company, Bank and certain subsidiaries are eligible to
participate at year-end if they have been employed for at least 1,000 hours
during the year. Investments and distribution of vested benefits to terminated
participants are made in accordance with the contribution allocation form signed
by the employee. Distributions are made at the option of the Company in either
cash or common stock of the Company or a combination thereof.
Prior to 1997, the Company had both an employee stock ownership plan ("ESOP")
and a profit sharing plan. Effective December 31, 1996, the ESOP was merged with
the profit-sharing plan and all assets of the ESOP transferred to the
profit-sharing plan. The account of each participant or former participant in
the ESOP as of December 31, 1996, was transferred to the profit-sharing plan and
will continue to be held and administered under the terms of the profit-sharing
plan as a separate account in the name of the participant.
A contribution of $2.8 million was made to the plan in the first quarter of 1999
for 1998 performance. A total of $3.5 million was contributed for 1997 during
the first quarter of 1998. During 1996, the Company contributed $2.5 million to
the ESOP while no contribution was made to the profit sharing plan. The trusts
created by the combined plan held 1,571,775 shares at December 31, 1998, and
1,898,332 shares at December 31, 1997. The shares held by the combined plan
represented approximately 3.8% of the Company's total shares outstanding at
December 31, 1998.
IMPERIAL BANCORP 401(K) PLAN: The Company has a 401(k) Plan in which all
employees of the Company, Bank and certain subsidiaries may elect to enroll each
January 1 or July 1 of every year provided that they have been employed for at
least six months prior to the semi-annual enrollment date. Employees may
contribute up to 14% of their salaries with the Company matching 50% of any
contribution, up to the first 8% of earnings contributed by the employee.
Only active 401(k) Plan members at December 31 of any year are eligible to
receive Company matching contributions for that year. The Company's matching
contributions under the 401(k) Plan approximated $1.7 million in 1998, $1.2
million in 1997 and $950,000 in 1996. Distributions of employee and matching
contributions to terminated participants are made in accordance with the
contribution allocation form signed by the employee in either common stock of
the Company or cash or a combination thereof. The trust created by the plan held
809,755 shares at December 31, 1998, and 767,595 shares at December 31, 1997.
SUPPLEMENTAL COMPENSATION PLANS:
DEFERRED COMPENSATION PLAN: In 1992, the Company adopted a Deferred Compensation
Plan ("the 1992 Plan") in order to provide specified benefits to certain key
employees and directors. Participants are allowed to defer portions of their
compensation each plan year, subject to a minimum and a maximum dollar amount of
deferral. In any plan year, the Company will make a matching contribution of not
less than 10% nor more than 50% of the participants' deferral for that year. The
exact
44
<PAGE>
ratio will be determined by a formula based on return on shareholders' equity.
The matching contribution ratio as calculated was 10% for 1998 and 50% for 1997.
Effective January 1, 1996, the Company adopted a second Deferred Compensation
Plan ("the 1996 Plan"), with features similar to the 1992 Plan. The 1996 Plan
allows participants to alter their initial deferral percentage in subsequent
plan years which is not allowable under the 1992 Plan. In addition, participants
in the 1992 Plan were permitted to transfer certain compensation deferred under
the 1992 Plan to the 1996 Plan when the 1992 Plan expired on December 31, 1998.
Balances not transferred to the 1996 Plan will be paid out to the participants
in accordance with the payout election made at the time they entered the Plan.
Each participant's "account balance" earns interest at a rate established
annually. Prior to September 1, 1997, the rate of interest for both the 1992 and
1996 Plan was based upon the Moody's Seasoned Corporate Bond Rate. The Company
amended both the 1992 and 1996 Plans effective September 1, 1997, to compute
interest based on the 10-Year Treasury Bond Yield plus 250 basis points. The
rate for 1998 was 8.37%. The rates for 1997 were 7.41% for the period January 1,
1997, to August 29, 1997, and 8.84% for the period September 1, 1997, to
December 31, 1997. The rate for 1996 was 7.30%.
The expense of funding the deferred compensation plans totaled $2.3 million,
$2.9 million and $2.3 million for the years ended December 31, 1998, 1997 and
1996, respectively.
To offset the deferred compensation plan liability, the Company purchased life
insurance policies during 1996 for which it is the beneficiary. The policies
have a cash surrender value which substantially offsets the premiums paid for
the policies. The net (income) expense derived from the policies included in the
accompanying Consolidated Statement of Income approximated ($33,000), ($466,000)
and $50,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
DEATH BENEFIT ONLY PLAN: The Death Benefit Only Plan ("DBO Plan") was
established in 1986 to provide certain death benefits to the Company's then
Chairman and Vice Chairman, so long as they remained employed by the Company.
The DBO Plan provides for lump sum payments to the estate of each individual in
amounts ranging from $2.5 million in year one to $5.1 million in year fifteen,
depending on the time of death. The DBO Plan was funded by the Company through
the purchase of life insurance for which it is the beneficiary. The benefits
specified by the DBO Plan are accrued over fifteen years (expected mortality).
The DBO Plan was designed such that, if the assumptions made with respect to
mortality experience, policy dividends and other factors are realized, the
Company will recover all costs including life insurance premiums and benefits
paid by it, plus a factor for the use of its money.
The Company's income related to the funding of the DBO Plan amounted to
$222,000, $254,000 and $276,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
SPLIT DOLLAR LIFE INSURANCE PLAN: In 1996, the Company established a Split
Dollar Life Insurance Plan to provide certain death benefits to the estate of
the Company's Chairman and his spouse. The insurance policy purchased under the
plan provides for a lump sum payment to the estate of the Company's Chairman in
amounts ranging from $10.5 million in year one to $5.2 million in year 26,
depending on the time of death. The Company is obligated to make annual premium
payments of $830,000 with respect to the policy for a twelve-year period. At the
end of the thirteenth year, the Company will receive back an amount equal to the
aggregate premiums paid without interest or earnings. The cash surrender value
generated by the policy offsets the amount of premiums paid over the life of the
policy. The net (income) expense derived from the policy in the Consolidated
Statement of Income for the years ended December 31, 1998, 1997 and 1996
approximated ($215,000), ($99,000) and $350,000, respectively.
STOCK OPTION PLAN: The Company has a stock option plan for directors and
certain employees. Options are granted at the market price of the Company's
common stock at the date of grant, and become exercisable immediately for all
directors. Options which have been granted to employees are exercisable at
either 25% or 16.7% per year beginning one year after the date of grant.
A summary of changes in outstanding options is as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Options outstanding,
beginning of year .......... 4,157,779 5,160,228 4,221,827
Options granted ............. 2,569,189 413,098 2,283,234
Options exercised ........... (992,836) (1,410,752) (1,245,051)
Options cancelled ........... (1,737,541) (4,795) (99,782)
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING,
END OF YEAR ................ 3,996,591 4,157,779 5,160,228
================================================================================
There were 1.5 million option shares available for future grants at December 31,
1998.
45
<PAGE>
Information regarding stock option activity and prices of the shares is as
follows:
- --------------------------------------------------------------------------------
AVERAGE
OPTION
NUMBER OPTION PRICE
OF PRICE RANGE PER
SHARES* PER SHARE* SHARE*
- --------------------------------------------------------------------------------
Shares under option at:
December 31, 1998 ............. 3,996,591 $2.24-$29.63 $10.06
December 31, 1997 ............. 4,157,779 $2.25-$29.94 $ 7.72
December 31, 1996 ............. 5,160,228 $2.25-$12.34 $ 5.78
Options exercisable at:
December 31, 1998 ............. 2,464,747 $2.24-$29.63 $ 8.56
December 31, 1997 ............. 2,558,248 $2.24-$28.63 $ 6.31
December 31, 1996 ............. 3,309,500 $2.24-$10.24 $ 4.83
Options exercised during the year:
December 31, 1998 ............. 992,836 $2.76-$11.47 $ 5.47
December 31, 1997 ............. 1,410,752 $2.53-$10.24 $ 3.44
December 31, 1996 ............. 1,245,051 $2.53-$ 7.70 $ 2.88
================================================================================
*Adjusted for stock dividends declared and paid first quarter 1999 and 1997 and
3-for-2 stock splits effected in 1996 and first quarter 1998.
The Company recorded additional shareholders' equity of $2.9 million in 1998 and
$4.8 million in 1997 related to the exercise of employee stock options. The
Company receives a tax deduction from the exercise of non-qualified stock
options for the difference between the option price and the market value of the
shares issued. The tax benefit associated with shares exercised, which was
recorded as a component of shareholders' equity, approximated $8.7 million in
1998 and $7.6 million in 1997. During 1998 and 1997, $42,000 and $1.9 million of
common stock was exchanged and retired in conjunction with the exercise of stock
options.
Due to adverse market conditions that led to a drop in the Company's stock
price, options granted between October 1, 1997 and December 2, 1998, were
repriced at $16.00 a share. The number of options granted was also adjusted.
Recipients of option grants for 1,000-3,000 shares received repriced options for
70% of the original number of shares; recipients of option grants for over 3,000
shares received repriced options for 60% of the original number of shares; and
executive officers and directors received repriced options for 50% of the
original number of shares. The repriced options have a grant date of December 2,
1998, and the option vesting schedule was revised accordingly. Option holders
were given the opportunity to accept the offer of repriced options or retain
their original options. Options surrendered for repricing were canceled and new
options issued. A total of 1.4 million options, with an average price of $26.82,
were canceled and 829,625 new options issued under the program.
The Company applies APB 25 in accounting for the stock option plan and,
accordingly, no compensation cost has been recognized in the Consolidated
Financial Statements for the fair value of stock options granted. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated in the table below:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------
Income from continuing operations:
As reported ......................... $ 43,748 $ 54,548 $ 62,302
Pro forma ........................... 41,234 52,317 60,735
Net income:
As reported ......................... $ 43,748 $ 55,177 $ 54,134
Pro forma ........................... 41,234 52,946 52,567
Basic income per share from
continuing operations:
As reported ......................... $ 1.03 $ 1.30 $ 1.54
Pro forma ........................... 0.97 1.25 1.50
Basic net income per share:
As reported ......................... $ 1.03 $ 1.32 $ 1.34
Pro forma ........................... 0.97 1.26 1.30
Diluted income per share from
continuing operations:
As reported ......................... $ 1.00 $ 1.24 $ 1.47
Pro forma ........................... 0.93 1.19 1.43
Diluted net income per share:
As reported ......................... $ 1.00 $ 1.25 $ 1.28
Pro forma ........................... 0.93 1.20 1.24
- --------------------------------------------------------------------------------
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
years presented:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Dividend yield .......................... -- -- --
Expected life of option (years):
Officers ............................... 6.1 6.8 6.5
Directors .............................. 4.6 2.8 3.5
Stock price volatility:
Officers ............................... 44% 42% 44%
Directors .............................. 39 39 45
================================================================================
The risk-free interest rates used in the Black-Scholes option-pricing model were
equal to comparable U.S. Treasury rates at each respective grant date. A 10-year
rate was used for valuing officers' options and a 5-year rate was used for
valuing directors' options based upon the respective terms of the options.
46
<PAGE>
The weighted average fair value at the date of grant for options granted during
1998, 1997 and 1996 was $14.13 per option, $10.13 per option and $5.20 per
option, respectively.
The full impact of calculating compensation cost for stock options is not
reflected in the pro forma income amounts presented above because compensation
cost is reflected over the options' vesting period and compensation cost for
options granted prior to January 1, 1995, is not considered.
NOTE (14) LOANS TO OFFICERS
Pursuant to an Employee Loan Program and under by-laws approved by shareholders
in 1984, the Company had $3.4 million and $3.5 million in loans to certain
officers and directors, outstanding at December 31, 1998 and 1997, respectively.
With respect to loans made to the Company's Chairman, one loan matures at the
earlier of his termination of employment or January 1, 2002, and is secured by
his interest in the DBO Plan (Note 13). A second loan to the Company's Chairman
is unsecured and matures at the earlier of his termination of employment or
August 15, 2000. During 1998, additional loans made to officers totaled $423,000
and payments received totaled $520,000. Loans to other officers are unsecured,
are due in seven equal annual principal payments or on demand, and mature at the
earlier of each individual's termination of employment or August 15, 2000. These
loans accrue interest at a rate which is equal to 60% of the average of the
one-year and three-year Treasury securities rates as published in the Wall
Street Journal at the end of each calendar year, to be fixed at that rate for
the coming year. The rate was 3.4% for 1998 and will be 2.8% for 1999.
NOTE (15) COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees, interest rate cap and floor contracts, interest rate swaps, options,
and forward and financial futures contracts. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the Consolidated Balance Sheet. The contract or notional
amounts of these instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
Commitments to extend credit, standby letters of credit and financial guarantees
only represent exposure to off-balance sheet risk in the event the contract is
drawn upon and the other party to the contract defaults. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. The Company does not
anticipate any material losses as a result of these transactions.
For interest rate cap, collar, floor and swap transactions, forward and
financial futures contracts, and options, the contract or notional amounts do
not represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities' values and interest rates. It is currently estimated that the
related credit risk of these investments is an immaterial percentage of the
notional amounts. The Company controls the credit risk of its interest rate cap,
collar, floor and swap agreements and forward and financial futures contracts
through credit approvals, limits and monitoring procedures.
A summary of the contract or notional amounts of significant commitments and
contingent liabilities is as follows:
- --------------------------------------------------------------------------------
AT DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Commitments to extend credit ...................... $2,764,908 $2,072,020
Standby letters of credit ......................... 159,811 170,513
Commercial letters of credit ...................... 81,874 75,088
When-issued securities ............................ 18,341 2,730
Asset/liability management:
Interest rate swaps ............................... 84,000 102,000
Interest rate caps and collars purchased .......... 1,025,593 --
Interest rate floors purchased .................... 4,750,000 5,250,000
Trading contracts:
Spot and forwards to purchase foreign currency .... 71,259 76,055
Spot and forwards to sell foreign currency ........ 71,005 75,731
- --------------------------------------------------------------------------------
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the Company's interest-earning assets, primarily its loans,
are generally tied to the prime rate, an index which tends to react more slowly
to changes in market rates than other money market indices such as LIBOR (London
Interbank Offered Rate). The rates paid for the Company's interest-bearing
liabilities, however, do correlate with LIBOR. This mismatch creates a spread
relationship risk between the Company's prime-based assets and LIBOR-correlated
liabilities.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate caps and floors with strike prices that
generally adjust quarterly and range from 100-250 basis points below or above
(depending on the instrument) current market rates at the time the caps and
floors were purchased.
47
<PAGE>
INTEREST RATE CAPS AND FLOORS: In March 1998, the Company purchased an
over-the-counter interest rate cap with a notional value of $1.0 billion. The
cap provides protection in the event the three-month LIBOR rate increases above
the 8.33% strike price. The unrealized gain on the cap was approximately
$454,000 at December 31, 1998. The unamortized premium on the cap was $353,000
at year end. The cap expires in March 2001. In addition, at December 31, 1998,
the Company owned interest rate caps and collars with a notional value totaling
$25.6 million that hedge specific lending transactions. The unrealized loss on
these contracts approximated $31,000 at December 31, 1998. The strike prices on
the caps and collars are tied to prime or LIBOR consistent with the pricing on
the underlying lending transaction. These caps and collars expire as follows:
$9.0 million in the first quarter of 1999, $6.0 million in the second quarter of
1999, $4.0 million in the fourth quarter of 1999 and $6.6 million in the first
quarter of 2000.
At December 31, 1998, the Company owned exchange traded floors totaling $4.75
billion that expire at the rate of $1.25-$1.75 billion per quarter through the
third quarter of 1999. The floors provide the Company protection in the event
that the three-month LIBOR rate drops below their respective strike prices. The
floors have an average strike price of 4.0%. The unrealized gain on the floors
approximated $344,000 at December 31, 1998. The unamortized premium relating to
the floors was $1.8 million at year end.
Exchange traded floors owned at December 31, 1997, expired at the rate of $1.0
billion per quarter in the first, second and third quarters of 1998. In June
1998, the Company purchased exchange traded floors with a notional value of $1.5
billion. The floors had a strike price of 4.75% and expired in June 1999. In
July 1998, the Company purchased exchange traded floors with a notional value of
$250.0 million. The floors had a strike price of 4.75% and expired in June 1999.
In August 1998, the Company purchased exchange traded floors with a notional
value of $500.0 million. The floors had a strike price of 4.75% and expired in
September 1999. In October 1998, following a decline in the LIBOR rate, the
Company sold exchange traded floor contracts with a notional amount totaling
$4.5 billion in order to reset the strike price on the floors from 4.75% to
4.00%. The Company concurrently purchased exchange traded floor contracts with a
notional amount totaling $4.75 billion. The gain on the sale of the floors, net
of the remaining unamortized premium, is being amortized over the term of the
original floors. The balance of the deferred gain at December 31, 1998, was $3.3
million.
INTEREST RATE SWAPS: In June 1998, the Company entered into two fixed-for-
floating interest rate swaps with a total notional value of $5.0 million. The
swaps require the Company to pay three-month LIBOR and receive a fixed rate of
5.95%. The swaps mature in June 1999. Concurrently, the Company entered into
interest rate swaps with its subsidiary, Crown American Bank. The notional
amount, maturity and payment due dates on the swaps coincide with the original
swaps, however, the payment terms require the Company to pay a fixed rate of
5.95% and receive three-month LIBOR. The purpose of the swaps is to convert to a
floating rate a similar amount of one-year fixed rate time certificates of
deposit acquired on behalf of Crown American Bank as part of a $35.0 million
time deposit acquisition program. The unrealized gain on the swaps approximated
$11,000 at December 31, 1998.
In July 1998, the Company entered into an interest rate swap with a notional
value of $4.0 million. The swap requires the Company to pay a fixed rate of
5.95% and receive three-month LIBOR. The swap matures in July 2004. The purpose
of the swap is to convert a fixed rate loan to a commercial borrower to a
floating rate. The unrealized loss on the swap approximated $151,000 at December
31, 1998.
48
<PAGE>
The following table summarizes the Company's derivative instruments for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 (Dollars in NotionaL Weighted
thousands) Amount Average Rate Terms and Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps and collars purchased
Over the counter. . . . . . . . . . . . $1,000,000 n/a Expires March 2001.
Over the counter. . . . . . . . . . . . $ 25,593 n/a Expires $9.0 million first quarter 1999, $6.0 million second
quarter 1999, $4.0 million fourth quarter 1999 and $6.6 million
first quarter 2000. Contracts hedge specific lending
transactions.
Interest rate floors purchased
Exchange traded . . . . . . . . . . . . $4,750,000 n/a $1.25 billion expires first quarter 1999, $1.75 billion expires
second and third quarters 1999.
Interest rate swaps
Loans:
Pay-fixed rate. . . . . . . . . . . . . $ 4,000 5.95% Matures third quarter 2004.
Receive-3 month LIBOR . . . . . . . . . $ 4,000 5.31%
Deposits:
Pay-3 month LIBOR plus 32 basis points. $ 5,000 5.43% Matures second quarter 1999.
Receive-fixed rate. . . . . . . . . . . $ 5,000 5.95%
Capital securities:
Pay-3 month LIBOR . . . . . . . . . . . $ 75,000 5.73% Matures second quarter 2007.
Receive-fixed rate. . . . . . . . . . . $ 75,000 7.18%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 (Dollars in Notional Weighted
THOUSANDS) Amount Average Rate Terms and Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate floors purchased
Exchange traded . . . . . . . . . . . . $5,250,000 n/a $1.0 billion expiring per quarter in first, second, third and
fourth quarter 1998. $1.25 billion expiring first quarter 1999.
Interest rate swaps
Time deposits:
Pay-3 month LIBOR less 10 basis points. $ 27,000 5.63% Matures first quarter 2007, callable by the Company first
quarter 1998 and semi-annually thereafter.
Receive-fixed rate. . . . . . . . . . . $ 27,000 7.15%
Capital securities:
Pay-3 month LIBOR . . . . . . . . . . . $ 75,000 5.75% Matures second quarter 2007.
Receive-fixed rate. . . . . . . . . . . $ 75,000 7.18%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the first quarter of 1997, the Company sold $27.0 million of ten-year
certificates of deposit with a fixed rate of 7.15%. These long-term certificates
of deposit were callable by the Company after one year and semi-annually after
that. In order to minimize the interest rate risk of paying out a fixed rate for
ten years, the Company executed an interest rate swap transaction with a
notional value of $27.0 million in the first quarter of 1997. The swap was
callable at the option of the counter-party after one year and semi-annually
thereafter. The interest rate swap required the Company to pay a rate of
three-month LIBOR less 10 basis points, quarterly for ten years. Simultaneously,
the Company received quarterly interest payments at a fixed rate of 7.15% for
ten years. On July 28, 1998, the swap was called by the counterparty and the
Company paid off the certificates of deposit.
In April 1997, the Company issued $75.0 million of 9.98% capital securities (the
"Capital Securities") and entered into three fixed-for-floating interest rate
swaps with a total notional value of $75.0 million in order to convert the
Capital Securities to a floating rate. The swaps require the Company to pay
three-month LIBOR and receive a fixed rate of 7.18% on $25.0 million, 7.186% on
$25.0 million and 7.187% on the remaining $25.0 million. The maturity and fixed
payment due dates on
49
<PAGE>
the swaps coincide with the call date and payment dates of the Capital
Securities. The unrealized gain on the swaps approximated $9.1 million at
December 31, 1998.
The impact of the Company's use of derivative financial instruments was a $1.5
million and $507,300 increase in net interest income, and a 3 basis point and 2
basis point increase in net interest margin for the years ended December 31,
1998 and 1997, respectively. For the year ended December 31, 1996, the Company's
use of derivative financial instruments resulted in a $700,000 increase in net
interest income and a 3 basis point increase in net interest margin.
OTHER COMMITMENTS: As of December 31, 1998 and 1997, SBA loans serviced for
others approximated $103.4 million and $81.1 million, respectively. In the
ordinary course of business, the Company is exposed to liability under
representations and warranties made to purchasers of loans. Under certain
circumstances, loans must be repurchased if there has been a breach of
representations or warranties.
The Company's wholly owned subsidiary, Imperial Trust Company, a California
licensed trust company, had total assets under management of approximately $9.6
billion and $8.7 billion at December 31, 1998 and 1997, respectively.
LEASE COMMITMENTS: The Company leases the land and buildings for certain of its
premises under noncancelable operating leases which expire in various years to
2012. Lease payments, net of sublease income, charged to net occupancy expense
in the Consolidated Statement of Income for the years ended December 31, 1998,
1997 and 1996, amounted to approximately $7.9 million, $6.8 million and $6.3
million, respectively.
Aggregate minimum rental commitments under these leases net of $532,000 of
income to be received from noncancelable subleases are as follows:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT
- --------------------------------------------------------------------------------
1999 .............................................. $ 7,972
2000 .............................................. 6,387
2001 .............................................. 6,138
2002 .............................................. 5,441
2003 .............................................. 4,534
Thereafter ......................................... 13,270
- --------------------------------------------------------------------------------
TOTAL .............................................. $43,742
- --------------------------------------------------------------------------------
Certain of the aforementioned leases contain provisions such that the Company
may at its option renew the leases at a specified rental for a specified period.
Certain of the leases also contain provisions such that the Company must pay all
property taxes on the premises or any increase in property taxes after specified
years.
In addition, the Company has entered into long-term agreements for certain data
processing and computer software products and services. These agreements expire
in various years to 2002 and contain provisions that allow renewal at a
specified amount for a specified period. Total expense from these agreements
equaled $3.7 million in 1998, $3.3 million in 1997 and $2.9 million in 1996 and
are included in data processing in the Consolidated Statement of Income.
Aggregate minimum contractual payments under these agreements are as follows:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNTS
- --------------------------------------------------------------------------------
1999 ....................................................... $2,514
2000 ....................................................... 2,519
2001 ....................................................... 2,518
2002 ....................................................... 1,469
- --------------------------------------------------------------------------------
TOTAL ...................................................... $9,020
- --------------------------------------------------------------------------------
DIRECTOR CLAIMS: A dispute has arisen between the Bank and Second Southern Corp,
a corporation owned by one of its directors, G. Louis Graziadio, III as to the
existence and content of an alleged modification to the Consulting Agreement
dated as of November 1, 1991, which agreement arose out of the formation of
Imperial Credit Industries, Inc. Mr. Graziadio claims that the Consulting
Agreement was modified during 1997 to pay Second Southern a fixed amount based
on the market value at modification of 2.5% of the Bank's stake in ICII less the
basis established in the agreement. The Bank has maintained that the Agreement
has not been modified. Mr. Graziadio also has made claims against the Bank in
connection with Imperial Financial Group, Inc. for expenses and compensation
from its formation, which the Bank disputes. The claims in total are not
material to the financial condition of the Company. Negotiations have taken
place and a special committee of the Company's board consisting of the outside
directors recommended a settlement, but no agreement has yet been reached to
resolve the claims. No proceeding has been brought by either party to resolve
the claims.
LEGAL ACTION: The Company and its subsidiaries are defendants in various
lawsuits arising from the normal course of business. Management believes, based
upon the opinion of legal counsel, that the ultimate resolution of the pending
litigation will not have a material effect upon the Company.
NOTE (16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("SFAS No. 107") requires disclosures of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate. Such instruments include
securities, loans receivable, time deposits, borrowings and various off-balance
sheet items. Because no market exists for a significant portion of the Company's
loan portfolio, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration of these instruments and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
The fair value estimates presented do not include the value of anticipated
future business and the value of assets and liabilities that are not considered
to be financial instruments. For example, the value of the Company's fiduciary
contracts for trust services and the value of the Company's investment in
subsidiaries are not considered to be financial instruments; therefore, their
values are not incorporated into the fair value estimates. Additionally, there
is a value in the Company's core deposit base
50
<PAGE>
which is unrelated to the interest rate assumptions used to compute the fair
value estimates. Such demand deposits are a significant source of low cost funds
to the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER
RESALE AGREEMENTS: The carrying values reported in the balance sheet
approximate fair values due to the short-term nature of the assets.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE AND TRADING
INSTRUMENTS: Fair values are based on bid prices and quotations published and/
or received from securities dealers.
LOANS HELD FOR SALE: Fair value is based on quoted market prices and/or
forward delivery contracts.
LOANS : The fair value of the loan portfolio is generally estimated by
discounting expected future cash flows at an estimated market rate of interest.
A market rate of interest is estimated based on the AAA Corporate Bond Rate,
adjusted for credit risk and the Company's cost to administer such instruments.
Expected future cash flows are estimated using maturity dates for performing
loans, with cash flows on nonaccrual loans estimated on an individual basis. For
nonaccrual and potential problem loans secured by real property, estimated fair
value has been determined on an individual basis, considering the value of the
collateral as determined by a current third party appraisal and estimated
foreclosure, holding and selling costs. For consumer loans, market rates of
interest are based on current market rates charged for these loans.
DEPOSITS: The fair values for demand, savings and money market accounts are
estimated at the amount payable on demand. Fair values for certificates of
deposit are estimated by discounting the expected cash flows at current market
rates over expected maturities.
SHORT-TERM BORROWINGS: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, federal tax collection accounts and
commercial paper approximate their fair values due to the short-term nature of
the borrowings.
LONG-TERM BORROWINGS: Fair value is estimated using market prices or by
discounting the expected future cash flows at market rates for similar
instruments trading currently.
OFF-BALANCE SHEET INSTRUMENTS: Fair values of the Company's interest rate
swaps, caps, floors, futures, spot and forward contracts are based on quoted
market prices. Fair values of letters of credit and commitments to extend credit
are based on fees currently charged to enter into similar agreements.
51
<PAGE>
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
At December 31, (Dollars in Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ........................................... $ 355,317 $ 355,317 $ 316,600 $ 316,600
Trading instruments ............................................... 52,971 52,971 35,782 35,782
Securities available for sale ..................................... 694,814 694,814 669,266 669,266
Securities held to maturity ....................................... 3,898 3,898 4,026 4,026
Federal funds sold and securities purchased
under resale agreements ......................................... 1,446,000 1,446,000 765,000 765,000
Loans held for sale ............................................... 18,287 19,416 3,763 4,120
Loans:
Commercial loans ................................................. 3,015,132 2,999,639 2,350,438 2,377,887
Real estate loans ................................................ 401,629 404,596 407,721 398,032
Consumer loans ................................................... 35,354 35,235 30,449 30,347
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans ...................................................... $ 3,452,115 $ 3,439,470 $ 2,788,608 $ 2,806,266
- -----------------------------------------------------------------------------------------------------------------------------------
Less allowance for loan losses ................................... $ (62,649) $ -- $ (51,143) $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans ........................................................ $ 3,389,466 $ 3,439,470 $ 2,737,465 $ 2,806,266
- -----------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits:
Demand ........................................................... $ 3,298,070 $ 3,298,070 $ 2,378,830 $ 2,378,830
Savings .......................................................... 25,135 25,135 23,375 23,375
Money market ..................................................... 1,086,959 1,086,959 939,086 939,086
Time deposits - under $100,000 .................................. 171,224 171,379 128,543 128,545
Time deposits - over $100,000 .................................... 988,259 988,059 704,764 704,366
Short-term borrowings ............................................. 60,601 60,601 55,915 55,915
Long-term borrowings:
Floating rate notes and fixed rate debentures .................... 2,105 2,126 3,257 3,295
Other borrowed funds ............................................. 290 290 -- --
Capital securities ............................................... 73,372 77,272 73,314 83,214
- -----------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments:
asset/liability management:
Interest rate swaps/(1)/ .......................................... $ -- $ 8,916 $ -- $ 5,893
Interest rate caps and collars purchased/(1)/ ..................... (353) 423 -- --
Interest rate floors purchased/(1)/ ............................... (1,813) 344 (388) 384
Trading contracts:
Spot and forwards to purchase foreign currency .................... 1,661 1,661 (3,239) (3,239)
Spot and forwards to sell foreign currency ........................ (2,359) (2,359) 3,573 3,573
Credit instruments:
Commitment to extend credit ....................................... -- (41,474) -- (31,080)
Standby letters of credit ......................................... -- (2,397) -- (2,558)
Commercial letters of credit ...................................... -- (1,228) -- (1,126)
When issued securities ............................................ -- (275) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated fair value represents net unrealized gains (losses).
- -----------------------------------------------------------------------------------------------------------------------------------
</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 1998 and 1997, the Bank maintained average balances with the Federal
Reserve of approximately $71.1 million and $59.9 million, respectively.
NOTE (18) IMPERIAL CREDIT INDUSTRIES, INC.
At December 31, 1998, the Company owned 8,941,106 shares, or approximately
24.3%, of the common stock of Imperial Credit Industries, Inc. (NASDAQ-NMS-ICII)
("ICII").
52
<PAGE>
The following table summarizes changes in the Company's investment in
ICII during 1998 and 1997:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Shares owned, beginning of year ............. 8,941,106 9,396,106
Sale of shares .............................. -- (320,000)
Charitable donation of shares ............... -- (135,000)
- --------------------------------------------------------------------------------
Shares owned, end of year ................... 8,941,106 8,941,106
- --------------------------------------------------------------------------------
In 1992, the Bank entered into two consulting agreements, one between the Bank
and a senior executive of the Bank, and the second between the Bank and a
director of the Company, that obligate it to pay commissions upon the sale of
ICII shares. According to the terms of the agreements, each individual is
entitled to receive an incentive fee of 2.5% of the pretax gains realized by the
Bank, from the disposition of ICII shares it holds. If such a sale by the Bank
has not occurred, the agreements require that the Bank be considered to have
sold an amount equal to 20% of the ICII shares held as of January 1 of each year
from 1997 through 2001, at a price equal to the arithmetic average of the daily
average stock price of ICII common stock as reported by NASD during the
preceding year.
The Company settled the consulting agreement with the senior executive of the
Bank in 1997. In connection with this settlement, the Company sold 2.5%, or
231,528 shares, of its investment in ICII at various times during 1997. An
additional 88,472 shares were also sold to reduce the financial impact of the
transaction to the Company. As a result of the sales, the Company recorded gains
of $5.0 million in "Gain on sale of investment in Imperial Credit Industries,
Inc." in the Consolidated Statement of Income. Offsetting the gain on sale was a
$5.0 million consulting charge recorded in "Professional and legal fees" which
represented full satisfaction of the Company's obligation under one of the
consulting agreements. The agreement with the director remains an obligation of
the Company at December 31, 1998.
Based on the daily average market price for 1998 of $17.15 per share, less the
director's basis of $0.88 per share as of December 31, 1998, as adjusted for
stock splits and dividends, the liability relating to the remaining agreement
approximated $3.8 million at December 31, 1998. This liability is being accrued
over the vesting period and will be remeasured quarterly for changes in the
average market price.
The Company does not exercise significant control over the operations of ICII.
The results of ICII operations are accounted for in the Company's financial
statements as an equity investment. The equity investment in ICII is carried at
cost adjusted for equity in undistributed (losses) income and evaluated for
impairment on a regular basis. Transactions between ICII and the Company occur
during the normal course of business. All transactions are carried out at
substantially the same terms as those prevailing at the same time for comparable
transactions with others.
The following represents summarized financial information with respect to the
operations of ICII. Certain amounts reported for 1997 relating to operations
that were discontinued in 1998 have been reclassified for consistency.
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Loans held for sale ............. $ 323,699 $ 153,469 $ 940,096
Loans held for investment ....... 1,320,095 1,252,487 1,068,599
Total assets .................... 2,397,922 2,094,389 2,470,639
Deposits ........................ 1,711,328 1,156,022 1,069,184
Total liabilities ............... 2,164,401 1,770,456 2,231,131
Retained earnings ............... 101,265 174,898 88,977
Total equity .................... 233,521 323,933 239,508
- --------------------------------------------------------------------------------
Total revenues .................. 16,183 314,904 256,933
Total expenses .................. 120,836 114,861 99,049
(Loss) income before taxes,
minority interest &
extraordinary item ............. (104,653) 200,043 157,884
Minority interest ............... (1,464) 10,513 12,026
Discontinued operations ......... (14,509) (25,347) --
Extraordinary item .............. -- (3,995) --
Net (loss) income ............... (73,634) 85,921 75,984
- --------------------------------------------------------------------------------
ICII's net loss of $73.6 million for 1998 reflects a number of one-time charges
including: the write-off of its investment in a finance company specializing in
sub-prime mortgages, reductions in the carrying value of its securities and held
for sale loan portfolios attributed to volatility in the financial markets, and
charges related to the discontinued operations of a sub-prime auto lending
subsidiary. The Company's share of ICII's losses was approximately $10.6 million
after tax.
In the fourth quarter of 1998, the Company canceled the previously announced
spin-off of certain specialty lending and finance businesses to shareholders due
to volatility in the financial markets. The Company's shares of ICII common
stock were among the assets that were to have been included in the spin-off. The
Company has received notification from the Federal Reserve Board that it is in
violation of Section 4(c)(8) of the Bank Holding Company Act and Section
225.22(d)(2)(II) of Regulation Y with regards to its ownership of ICII common
stock. On December 19, 1998, the Company announced, in a Schedule 13D filing
with the Securities and Exchange Commission, its intention to sell the 8.9
million shares of ICII common stock it owns. The Company is actively pursuing
opportunities to sell these shares. The violations of banking regulations will
be corrected once a sale of the ICII stock has been completed.
53
<PAGE>
NOTE (19) CAPITAL MATTERS
Imperial Bank and the Company are subject to various regulatory requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum dollar amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
The Bank, as a California corporation, is limited in making distributions to its
sole shareholder, the Company, to the lesser of the retained earnings of the
Bank or the net income of the Bank for its last three fiscal years, less the
amount of any distributions during such period. The Indentures of the Notes,
Debentures and Capital Securities also have restrictions on distributions. At
December 31, 1998, the Bank could distribute up to $132.4 million to the Parent
Company in the form of dividends.
As of December 31, 1998 and 1997, the then most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
Prompt Corrective Action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institution's
category under the risk-based capital guidelines.
The following table compares the Company's actual capital ratios at December 31,
1998 and 1997, to those required by regulatory agencies for capital adequacy and
well capitalized classification purposes:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
For Capital Adequacy
Actual Purposes
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998
Total capital (to risk
weighted assets):
Company ............. $507,556 10.89% Greater than or equal to $373,025 Greater than or equal to 8.0%
Bank ................ 480,571 10.45 Greater than or equal to 367,968 Greater than or equal to 8.0
Tier I capital (to
risk weighted
assets):
Company ............. $447,112 9.59% Greater than or equal to $186,512 Greater than or equal to 4.0%
Bank ................ 423,015 9.20 Greater than or equal to 183,984 Greater than or equal to 4.0
Tier I capital (to
average assets):
Company ............. $447,112 8.12% Greater than or equal to $165,147 Greater than or equal to 3.0%
Bank ................ 423,015 7.76 Greater than or equal to 163,454 Greater than or equal to 3.0
- ---------------------------------------------------------------------------------------------------------------
At December 31, 1997
Total capital (to risk
weighted assets):
Company ............. $471,898 12.48% Greater than or equal to $302,542 Greater than or equal to 8.0%
Bank ................ 398,741 10.65 Greater than or equal to 299,519 Greater than or equal to 8.0
Tier I capital (to
risk weighted
assets):
Company ............. $421,321 11.14% Greater than or equal to $151,271 Greater than or equal to 4.0%
Bank ................ 351,890 9.40 Greater than or equal to 149,759 Greater than or equal to 4.0
Tier I capital (to
average assets):
Company ............. $421,321 10.28% Greater than or equal to $122,973 Greater than or equal to 3.0%
Bank ................ 351,890 8.70 Greater than or equal to 121,405 Greater than or equal to 3.0
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------
To Be Well Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio
- --------------------------------------------------------------------------------------------
<S> <C> <C>
At December 31, 1998
Total capital (to risk
weighted assets):
Company ............. Greater than or equal to $466,281 Greater than or equal to 10.0%
Bank ................ Greater than or equal to 459,960 Greater than or equal to 10.0
Tier I capital (to
risk weighted
assets):
Company ............. Greater than or equal to $279,769 Greater than or equal to 6.0%
Bank ................ Greater than or equal to 275,976 Greater than or equal to 6.0
Tier I capital (to
average assets):
Company ............. Greater than or equal to $275,246 Greater than or equal to 5.0%
Bank ................ Greater than or equal to 272,423 Greater than or equal to 5.0
- --------------------------------------------------------------------------------------------
At December 31, 1997
Total capital (to risk
weighted assets):
Company ............. Greater than or equal to $378,178 Greater than or equal to 10.0%
Bank ................ Greater than or equal to 374,398 Greater than or equal to 10.0
Tier I capital (to
risk weighted
assets):
Company ............. Greater than or equal to $226,907 Greater than or equal to 6.0%
Bank ................ Greater than or equal to 224,639 Greater than or equal to 6.0
Tier I capital (to
average assets):
Company ............. Greater than or equal to $204,954 Greater than or equal to 5.0%
Bank ................ Greater than or equal to 202,342 Greater than or equal to 5.0
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE (20) DISCONTINUED OPERATION
In the second quarter of 1996, management of the Company decided to discontinue
the precious metals business which had been engaged in trading and leasing of
precious metals in addition to making loans secured by precious metals since
1993. The decision to exit this line of business was made in the wake of several
operational losses for which the Company provided approximately $9.8 million,
net of tax, in 1996. The provision, in addition to all of the results of
operations from this division, is reflected in the Consolidated Statement of
Income as "Income (loss) of discontinued operation, net of tax." In accordance
with the Company's termination plan, customers of the precious metals division
were notified of the Company's decision to exit the business and given an
appropriate amount of
54
<PAGE>
time to liquidate their outstanding positions. Substantially all of the
activities of the precious metals division were terminated as of December 31,
1996. During 1997, the Company recovered approximately $1.6 million pretax
related to the precious metals business.
- -----------------------------------------------------------------
For the years ended
December 31,
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------
Income (loss) from discontinued
operation, net of income taxes
of $456 and ($6,000)................ $ -- $ 629 $(8,168)
- -----------------------------------------------------------------
Total $ -- $ 629 $(8,168)
=================================================================
Summary financial information pertaining to the precious metals division is
provided below:
- ----------------------------------------------------
At December 31
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------
Loans...................... $ -- $ 306 $ 3,797
Total assets............... -- 329 19,931
Total liabilities.......... -- 183 14,769
====================================================
NOTE (21) NEW ACCOUNTING
PRONOUNCEMENTS
SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It specifies necessary conditions to be met to designate a
derivative as a hedge. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Early implementation is permitted
under this statement. The Company does not believe that the adoption of SFAS NO.
133 will have a material impact on its operations and financial position.
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY)
- -------------------------------------------------------------------------------
Condensed Balance Sheet
At December 31, (Dollars in thousands, except share data) 1998 1997
- -------------------------------------------------------------------------------
ASSETS
Cash..................................................... $ 433 $ 2,365
Interest bearing time deposit at Imperial Bank........... -- 37,242
Securities available for sale............................ 5,346 14,412
Securities purchased under resale agreements from
Imperial Bank........................................... 4,900 7,925
Loans to officers........................................ 3,422 3,519
Investments in subsidiaries:
Imperial Bank.................................... 492,151 355,869
Other subsidiaries............................... 23,755 13,842
Other assets............................................. 28,137 19,059
- -------------------------------------------------------------------------------
Total assets $495,154 $454,233
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper........................................ $ 30,477 $ 15,898
Floating rate notes and fixed rate debentures........... 2,105 3,257
Junior subordinated debentures.......................... 75,641 75,582
Other liabilities....................................... 5,138 7,472
- -------------------------------------------------------------------------------
Total liabilities $113,332 $102,209
- -------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par 50,000,000 shares
authorized: 41,863,935 shares at December 31,
1998, and 42,374,917 shares at December 31,
1997, issued and outstanding................... 244,433 236,186
Accumulated other comprehensive income,
net of tax..................................... (515) 1,682
Retained earnings.............................. 157,904 114,156
- -------------------------------------------------------------------------------
Total shareholders' equity $381,822 $362,204
- -------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $495,154 $454,233
===============================================================================
55
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN
THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Dividends - Imperial Bank ....................... $ 11,120 $ 1,120 $ 4,120
Interest income:
Securities available for sale ................. 971 1,327 1,195
Securities purchased under resale agreements
from Imperial Bank ........................... 366 166 141
Interest-bearing time deposit at Imperial Bank. 171 2,101 --
Loans to officers ............................. 123 131 119
Other income .................................... 9 8 15
- ----------------------------------------------------------------------------------------
TOTAL REVENUE $ 12,760 $ 4,853 $ 5,590
- ----------------------------------------------------------------------------------------
Expense:
Salary .......................................... 211 171 137
Other employee benefits(1) ...................... (260) (168) 206
Interest expense:
Commercial paper .............................. 1,315 740 1,015
Floating rate notes and subordinated debentures 197 270 343
Junior subordinated debentures, net ........... 6,684 4,669 --
Other expense ................................... 1,039 915 890
- ----------------------------------------------------------------------------------------
TOTAL EXPENSE $ 9,186 $ 6,597 $ 2,591
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes ................ 3,574 (1,744) 2,999
Applicable income tax benefit .................... (3,535) (1,522) (603)
- ----------------------------------------------------------------------------------------
Income before equity in undistributed income of
subsidiaries .................................... 7,109 (222) 3,602
- ----------------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries ... 36,639 55,399 50,532
- ----------------------------------------------------------------------------------------
NET INCOME $ 43,748 $ 55,177 $ 54,134
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Includes the accrual for benefit costs associated with the deferred
compensation plan and DBO Plan less the increase in cash surrender value
associated with the life insurance policies funding the plans (see - Note
13 Employee Benefit Plans).
- --------------------------------------------------------------------------------
56
<PAGE>
NOTE (22) IMPERIAL BANCORP (PARENT COMPANY ONLY - CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN
THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 43,748 $ 55,177 $ 54,134
Adjustments for non-cash charges (credits):
Undistributed income of subsidiaries ........... (36,639) (55,399) (50,532)
Net change in other liabilities/(1)/ ............. (5,840) 3,164 1,198
Net change in other assets ....................... (1,670) (3,758) (1,034)
- ----------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES .................................... $ (401) $ (816) $ 3,766
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for
sale ............................................ 492,760 231,794 416,117
Purchase of securities available for sale ........ (483,694) (232,409) (413,471)
Maturity (investment) in time deposit at Imperial
Bank ............................................ 37,242 (37,242) --
Investments in subsidiaries ...................... (40,067) (39,179) (1,750)
Net change in securities purchased under resale
agreements ...................................... 3,025 (4,725) (3,200)
Net change in loans made to officers ............. 204 114 605
- ----------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES .................................... $ 9,470 $ (81,647) $ (1,699)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in commercial paper ................... 14,549 7,887 (3,551)
Retirement of floating rate notes and subordinated
debentures ...................................... (1,152) (1,198) (1,451)
Issuance of junior subordinated debentures ....... -- 75,540 --
Net proceeds from exercise of employee stock
options ......................................... 2,855 2,407 2,352
Repurchase of common stock ....................... (27,243) -- --
Other ............................................ -- 4 (29)
- ----------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES .................................... $ (10,991) $ 84,640 $ (2,679)
- ----------------------------------------------------------------------------------------------
NET CHANGE IN CASH ............................. $ (1,922) $ 2,177 $ (612)
- ----------------------------------------------------------------------------------------------
CASH, BEGINNING OF YEAR ........................ $ 2,365 $ 188 $ 800
- ----------------------------------------------------------------------------------------------
CASH, END OF YEAR .............................. $ 443 $ 2,365 $ 188
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) The Parent Company recorded a tax benefit in shareholders' equity for its
employee stock options of $3,947,000 in 1998, $2,025,000 in 1997 and
$1,863,000 in 1996.
- --------------------------------------------------------------------------------
In 1998, 1997 and 1996, the Parent Company paid $8.2 million, $5.7 million and
$1.4 million in interest, respectively.
Dividends received from the Bank are subject to certain limitations. See - Note
19 Capital Matters.
57
<PAGE>
NOTE (23) OPERATING SEGMENT RESULTS
The Company has identified seven principal operating segments for purposes of
management reporting. Information related to the Company's remaining businesses
and centralized functions has been aggregated and is included in either "Other
Segments" or "Unallocated" as appropriate. The Company's management reporting is
structured to support management's strategic focus on mid-sized companies,
high-growth and niche markets, and new enterprises that exhibit solid growth
potential.
The table presents the operating results and other key financial measures for
the individual operating segments for 1998, 1997 and 1996. Operating segment
results are based on the Company's internal management reporting process, which
reflects allocations of the items noted below. Any future changes in the
Company's management structure or reporting methodologies may result in changes
in the measurement of business line results. In that case, results for prior
periods would be restated for comparability.
. Most balance sheet, revenue and expense items are derived from the internal
management reporting system, where they are specifically attributable to
individual businesses. There are no significant intersegment revenues.
. Each operating segment within the management reporting structure receives an
allocation of capital based on 10% of risk-weighted assets and an allocation
of internal funding as required to fund the business. The difference between
the aggregate capital allocated under this methodology and total consolidated
capital is reported in "Unallocated." The difference between the aggregate
internal funding allocated and the aggregate cost of funds is reported in
"Unallocated."
. Various techniques are used to allocate certain costs associated with
centralized operations and administrative functions, including the use of unit
costs and service volumes.
. The provision for loan losses is allocated to operating segments based on a
combination of actual loss experience, loan growth and the risk profile of a
segment's loan portfolio.
. The tax rate applied to each operating segment is based on the Company's
consolidated statutory tax rate.
A discussion of the Company's principal operating segments follows:
THE COMMERCIAL BANKING DIVISION offers a wide range of credit products and
financial services to mid-sized companies across a broad array of industries
including manufacturing and distribution, healthcare, technology and apparel and
textile. The companies served generally have sales in the $10 million to $150
million range, with the majority having sales of $10 million to $75 million.
Products offered include commercial loans and lines of credit, trade finance,
cash management services and a full range of deposit products. The Commercial
Banking Division delivers these products and services through eleven regional
offices located in the major metropolitan areas of California, and branches in
Phoenix, Arizona, and Denver, Colorado.
THE SPECIAL MARKETS DIVISION offers credit and deposit products and services to
technology, multimedia, biotechnology and other growth companies, most of which
are backed by venture capital, throughout the United States. The Division has
three offices in California located in Menlo Park, San Diego and San Jose; and
offices in key technology centers outside of California: Boston, Massachusetts;
Austin, Texas; Reston, Virginia; and Bellevue, Washington. The Boston office
also offers financing for management buy-outs, leveraged buy-outs and
recapitalizations.
THE REAL ESTATE DIVISION serves the construction financing needs of developers
of moderately priced residential housing tracts. Loans range in size from $1.0
million to $10.0 million with an average of $5.0 million. The Division also
services an existing portfolio of commercial real estate loans. Offices are
located throughout California and in Phoenix, Arizona.
ENTERTAINMENT AND INDEPENDENT FILM PRODUCTION offers commercial banking products
and services to independent film, cable and television producers, and to
companies serving the entertainment industry (e.g., multimedia software, post
production and sound). The entertainment business finances films, with budgets
ranging from $2 million to $35 million, both domestically and internationally.
Loans to independent producers are generally backed by presold distribution
rights. The Entertainment Division has offices in Beverly Hills and Los Angeles,
California.
THE SYNDICATED FINANCE DIVISION buys and sells syndicated commercial loans in
the primary and secondary markets. The Division provides the capability for
generating commercial loans outside of the Company's network of regional offices
and provides a mechanism for managing risk and liquidity within the commercial
loan portfolio. Loans are typically purchased from money center banks; the total
credit facility is usually in the $200 million-$1.0 billion range and ten or
more banks may be participating. The Company's maximum participation in any one
facility is generally $10 million. The Division provides advisory services to
other lending units within the Company to ensure that loans are properly
structured for sale or syndication to other financial institutions when a
customer's credit requirements exceed the Company's limits or when there is a
desire to diversify exposure to a particular customer or industry. The Division
also develops and manages relationships with syndicate member banks and provides
administrative support services for those relationships in which the Bank is the
agent bank. The Syndicated Finance Division is based at the Company's
headquarters.
THE FINANCIAL SERVICES DIVISION provides specialized deposit products and
services to title and escrow companies, bankruptcy trustees, homeowners
associations and labor unions. Through
58
<PAGE>
strategic alliances with software companies, the Company has participated in the
development of accounting software packages that are offered to property
management companies, bankruptcy trustees and title and escrow companies. Other
products offered include commercial loans, cash management and lockbox services.
The Division has four offices in California: Beverly Hills, Orange County, San
Francisco and San Diego. The Division also services customers in Arizona and
Colorado through the Company's regional offices located in Phoenix and Denver.
IMPERIAL CREDIT INDUSTRIES (NASDAQ-NMS-ICII) ("ICII") is a diversified financial
services company offering a variety of commercial, real estate and consumer loan
products, investment banking and asset management services. The Company holds
8.9 million shares, or approximately 24.3%, of the outstanding shares of ICII as
an equity investment. ICII offers its products through its subsidiaries and
affiliates and is headquartered in Torrance, California.
OTHER SEGMENTS includes the Company's investment portfolio; the impact of asset
liability management strategies the Company has implemented to manage interest
rate sensitivity; an accounts receivable factoring business;
government-guaranteed loans to small businesses generated by the Small Business
Administration lending division; loans to small businesses serviced by the
Company's Business Banking Division; the Company's registered broker dealer and
custodial trust businesses; the processing division, a nationwide supplier of
financial processing products to hospitals, medical offices, airports, casinos,
restaurants, hotels and municipalities; and the Company's equity investments
excluding ICII.
UNALLOCATED includes the net impact of transfer pricing loan and deposit
balances, the cost of external debt, the elimination of intercompany balances,
unallocated administrative expenses and asymmetrical allocations. Asymmetrical
allocations occur when a balance is booked to one cost center and the associated
income or expense is allocated to another cost center. Fixed assets and deferred
fee balances are booked to a central cost center in the Company's general
ledger. For purposes of management reporting, depreciation expense is charged to
the cost center using the asset, and deferred fee income is credited to the
lending unit responsible for the loan.
59
<PAGE>
OPERATING SEGMENT RESULTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
COMMERCIAL SPECIAL
FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) BANKING MARKETS REAL ESTATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income .................................... $ 89,710 $ 37,057 $ 28,610
Provision for loan losses .............................. 15,354 7,149 2,463
Noninterest income ..................................... 14,695 6,467 916
Noninterest expense .................................... 59,265 23,859 6,233
- -----------------------------------------------------------------------------------------------------------
Income before taxes .................................... 29,786 12,516 20,830
Income taxes ........................................... 12,524 5,263 8,758
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations ...................... $ 17,262 $ 7,253 $ 12,072
- -----------------------------------------------------------------------------------------------------------
Average net loans ...................................... $1,231,975 $ 486,221 $ 426,761
Average assets ......................................... 1,261,980 489,652 435,068
Average deposits ....................................... 1,235,995 480,368 13,587
- -----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
Net interest income .................................... $ 75,428 $ 28,128 $ 27,081
Provision for loan losses .............................. 5,218 2,245 (2,473)
Noninterest income ..................................... 11,970 5,443 730
Noninterest expense .................................... 50,785 17,351 6,187
- -----------------------------------------------------------------------------------------------------------
Income before taxes .................................... 31,395 13,975 24,097
Income taxes ........................................... 13,200 5,876 10,132
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations ...................... $ 18,195 $ 8,099 $ 13,965
- -----------------------------------------------------------------------------------------------------------
Average net loans ...................................... $ 947,422 $ 303,352 $ 452,164
Average assets ......................................... 953,987 304,676 460,616
Average deposits ....................................... 1,045,941 406,839 6,932
- -----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------
Net interest income .................................... $ 54,241 $ 49,252 $ 22,655
Provision for loan losses .............................. 2,439 1,640 2,339
Noninterest income ..................................... 8,462 4,517 1,061
Noninterest expense .................................... 37,457 36,206 8,169
- -----------------------------------------------------------------------------------------------------------
Income before taxes .................................... 22,807 15,923 13,208
Income taxes ........................................... 9,684 6,761 5,608
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations ...................... $ 13,123 $ 9,162 $ 7,600
- -----------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT AND
FOR THE YEAR ENDED DECEMBER INDEPENDENT FILM SYNDICATED FINANCIAL OTHER
31, 1998 (DOLLARS IN THOUSANDS) PRODUCTION FINANCE SERVICES ICII SEGMENTS UNALLOCATED CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income ................ $ 29,944 $ 14,788 $ 62,257 $ -- $ 8,580 $ (14,135) $ 256,811
Provision for loan losses .......... 2,550 944 614 -- 937 3,364 33,375
Noninterest income ................. 2,479 1,910 435 (18,205) 50,919 6,071 65,687
Noninterest expense ................ 10,581 1,975 45,384 -- 44,811 24,818 216,926
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes ................ 19,292 13,779 16,694 (18,205) 13,751 (36,246) 72,197
Income taxes ....................... 8,111 5,793 7,019 (7,655) 5,782 (17,146) 28,449
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations .. $ 11,181 $ 7,986 $ 9,675 $ (10,550) $ 7,969 $ (19,100) $ 43,748
- ----------------------------------------------------------------------------------------------------------------------------------
Average net loans .................. $ 391,275 $ 414,182 $ 297,909 $ -- $ 73,341 $ (61,334) $ 3,260,330
Average assets ..................... 394,171 416,874 298,268 72,260 1,212,459 403,153 4,983,885
Average deposits ................... 81,396 -- 1,807,964 -- 700,209 31,706 4,351,225
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................ $ 22,821 $ 11,007 $ 39,284 $ -- $ 8,563 $ (10,977) $ 201,335
Provision for loan losses .......... 3,212 635 616 -- 1,422 12,017 22,892
Noninterest income ................. 3,209 954 272 28,053 27,576 3,431 81,638
Noninterest expense ................ 7,552 2,233 28,027 8,676 31,616 16,604 169,031
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes ................ 15,266 9,093 10,913 19,377 3,101 (36,167) 91,050
Income taxes ....................... 6,419 3,823 4,589 8,147 1,304 (16,988) 36,502
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations .. $ 8,847 $ 5,270 $ 6,324 $ 11,230 $ 1,797 $ (19,179) $ 54,548
- ----------------------------------------------------------------------------------------------------------------------------------
Average net loans .................. $ 218,430 $ 285,735 $ 97,024 $ -- $ 61,556 $ (10,165) $ 2,355,518
Average assets ..................... 219,462 287,390 96,706 60,203 879,520 390,707 3,653,267
Average deposits ................... 86,044 -- 993,939 -- 596,288 206 3,136,189
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................ $ 13,719 $ 5,512 $ 5,013 $ -- $ 8,997 $ (18,287) $ 141,102
Provision for loan losses .......... (176) 1,095 250 -- 518 (1,224) 6,881
Noninterest income ................. 1,701 631 114 61,553 22,584 (1,132) 99,491
Noninterest expense ................ 5,916 1,537 6,351 5,024 20,923 6,549 128,132
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes ................ 9,680 3,511 (1,474) 56,529 10,140 (24,744) 105,580
Income taxes ....................... 6,159 1,491 (626) 23,768 4,264 (13,831) 43,278
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations .. $ 3,521 $ 2,020 $ (848) $ 32,761 $ 5,876 $ (10,913) $ 62,302
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Detail of amounts included in unallocated is provided below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income:
Internal funding ................................ $(10,711) $ (9,590) $(15,433)
Deferred loan fees .............................. (5,295) (4,161) (2,854)
Other ........................................... 1,871 2,774 --
- --------------------------------------------------------------------------------------
TOTAL $(14,135) $(10,977) $(18,287)
- --------------------------------------------------------------------------------------
Provision for loan losses:
Unallocated allowance ........................... $ 2,989 $ 11,224 $ (1,618)
Mortgage loans .................................. 251 755 247
Other ........................................... 124 38 147
- --------------------------------------------------------------------------------------
TOTAL $ 3,364 $ 12,017 $ (1,224)
- --------------------------------------------------------------------------------------
Noninterest income:
Item processing revenue ......................... $ 3,974 $ 3,915 $ 526
Other ........................................... 2,097 (484) (1,658)
- --------------------------------------------------------------------------------------
TOTAL $ 6,071 $ 3,431 $ (1,132)
- --------------------------------------------------------------------------------------
Noninterest expense:
Unallocated administration and operations ....... $ 18,750 $ 18,690 $ 13,179
Spin off and restructuring costs ................ 9,421 2,341 --
Formation of leasing division ................... 942 -- --
Deferred loan costs ............................. (5,131) (4,633) (2,807)
Operating loss recovery ......................... (1,320) -- --
Other ........................................... 2,156 206 (3,823)
- --------------------------------------------------------------------------------------
TOTAL $ 24,818 $ 16,604 $ 6,549
- --------------------------------------------------------------------------------------
</TABLE>
Balance Sheet:
Unallocated average assets include the Company's cash and due from accounts
with correspondent banks and the Federal Reserve, the unallocated portion of
the allowance for loan losses and the balance of deferred fees. Unallocated
deposit balances include official checks and Treasury, Tax and Loan accounts.
- --------------------------------------------------------------------------------
62
<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, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity and comprehensive income
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Bancorp and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
January 25, 1999
63
<PAGE>
SELECTED STATISTICAL INFORMATION
SECURITIES
The following table shows the maturities of securities held to maturity and
securities available for sale at December 31, 1998, and their weighted average
yields:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) MATURING
- ----------------------------------------------------------------------------------------------------------------------------------
Less than Greater than Greater than Greater than
1 YEAR 1 - 5 YEARS 5 - 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Industrial development bonds ..... $ -- -- $ -- -- $ -- -- $ 3,898 7.53% $ 3,898 7.53%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL .......................... $ -- -- $ -- -- $ -- -- $ 3,898 7.53% $ 3,898 7.53%
==================================================================================================================================
Securities available for sale:
U.S. Treasury and federal agencies $ 30,974 5.05% $ -- --% $ -- --% $532,381 5.64% $563,355 5.61%
Mutual funds ..................... 112,579 5.27 -- -- -- -- -- -- 112,579 5.28
Other securities ................. 779 3.63 50 7.99 1,847 10.43 16,204 5.16 18,880 5.62
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL .......................... $144,332 5.22% $ 50 7.99% $ 1,847 10.43% $548,585 5.63% $694,814 5.56%
==================================================================================================================================
</TABLE>
MATURITY DISTRIBUTION OF LOANS
The following table shows the maturity schedule of the Company's loan portfolio
at December 31, 1998, net of unearned income and deferred loan fees and costs:
- -------------------------------------------------------------------------------
Less than Greater than Greater than
(DOLLARS IN THOUSANDS) 1 YEAR 1 TO 5 YEARS 5 YEARS TOTAL
- -------------------------------------------------------------------------------
Commercial loans:
Floating rate ............ $ 1,401,192 $ 1,154,310 $ 236,474 $ 2,791,976
Fixed rate ............... 124,639 69,040 29,477 223,156
Real estate loans:
Floating rate ............ 212,846 87,432 341 300,619
Fixed rate ............... 36,648 55,814 8,548 101,010
Consumer loans:
Floating rate ............ 12,510 22,537 -- 35,047
Fixed rate ............... 23 284 -- 307
- -------------------------------------------------------------------------------
TOTAL LOANS ............ $ 1,787,858 $ 1,389,417 $ 274,840 $ 3,452,115
- -------------------------------------------------------------------------------
Allowance for loan losses (62,649)
- -------------------------------------------------------------------------------
NET LOANS .............. $ 3,389,466
===============================================================================
FINANCIAL RATIOS
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Net income as a percentage of:
Average shareholders' equity ..... 11.58% 17.53% 20.83% 11.03% 3.46%
Average total assets ............. 0.88 1.51 1.94 1.00 0.30
Average earning assets ........... 0.97 1.70 2.10 1.14 0.35
Shareholders' equity at year-end
as a percentage of:
Total assets at year-end ......... 6.17% 7.45% 8.55% 8.19% 8.31%
Total gross loans at year-end .... 11.06 12.62 13.88 13.43 14.38
Total deposits at year-end ....... 6.86 8.43 9.71 9.66 10.09
Average shareholders' equity
as a percentage of:
Average total assets ............. 7.58% 8.62% 9.33% 9.04% 8.64%
Average gross loans .............. 11.39 13.13 14.14 13.64 14.11
Average total deposits ........... 8.68 10.04 10.77 10.47 10.10
- -------------------------------------------------------------------------------
----
64
<PAGE>
COMMON STOCK AND SHAREHOLDER DATA
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Market price:
High for year ..................... $ 30.56 $ 30.63 $ 13.75 $ 8.49 $ 6.34
Low for year ...................... 9.89 12.98 7.70 3.95 4.00
At year end ....................... 15.40 30.44 13.47 8.49 4.17
Book value at year end ............. 9.12 8.31 6.96 5.65 5.10
Market price/book value at year end 168.8% 366.6% 193.5% 150.3% 81.8%
================================================================================
On February 3, 1999, the Company announced an 8% stock dividend to be paid on
March 5, 1999, to shareholders of record on February 19, 1999. On January 21,
1998, the Company announced a three-for-two stock split which was effected on
February 6, 1998, to shareholders of record on February 2, 1998.
On January 24, 1997, the Company declared a 10% stock dividend, payable on
February 24, 1997, to shareholders of record on February 17, 1997. In the fourth
quarter of 1996, the Company split its common stock at the ratio of one new
share for every two shares outstanding. The Company declared an 8% stock
dividend on January 25, 1996, payable on February 23, 1996, to shareholders of
record on February 15, 1996. In addition, 5% stock dividends were declared on
January 24, 1995, payable February 24, 1995, to shareholders of record on
February 15, 1995, and on January 20, 1994, payable February 28, 1994, to
shareholders of record on February 10, 1994. The ratios and amounts in the above
table have been adjusted for the effect of these dividends for all periods
presented.
The Company's common stock trades on the New York Stock Exchange ("NYSE") under
the stock symbol "IMP." During the first eleven months of 1996, the common stock
of the Company was traded in the over-the-counter market on the National Market
System and quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the ticker symbol "IBAN." As of March 1, 1999,
shareholders of record approximated 1,577 exclusive of shares held in street
name at brokerage firms.
QUARTERLY DATA
The following table sets forth the range of the high and low prices for the
calendar periods indicated as adjusted for the 8% stock dividend paid in March
1999:
- -----------------------------------------------------------------------------
1998 1997
---------------------------------------------
STOCK MARKET QUOTATIONS HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------
First Quarter .................. $30.56 $25.92 $17.67 $12.98
Second Quarter ................. 30.16 24.31 17.82 13.27
Third Quarter .................. 28.81 11.17 23.07 17.56
Fourth Quarter ................. 25.39 9.89 30.63 21.77
=============================================================================
- ----
65
<PAGE>
Quarterly financial information for the Company and its subsidiaries for the
years ended December 31, 1998 and 1997, is summarized below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 DECEMBER 31 SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $93,615 $91,627
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 66,645 64,460
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 7,799 5,610
Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 22,149 (10,066)
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 51,994 55,775
Income from continuing operations before taxes. 29,001 (6,991)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $16,905 $(3,099)
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE $ 0.40 $ (0.07)
DILUTED NET INCOME (LOSS) PER SHARE $ 0.40 $ (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 DECEMBER 31 SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $81,372 $74,372
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 59,491 53,844
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 8,107 7,068
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . 30,504 19,046
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 46,638 41,886
Income from continuing operations before taxes . . . . . . . . . . . . 35,250 23,936
Income (loss) from operations of discontinued operation, net of tax. . 150 690
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $21,392 $14,873
- ---------------------------------------------------------------------------------------------------------------------------------
Basic income per share from continuing operations. . . . . . . . . . . 0.50 0.34
Basic income per share of discontinued operation . . . . . . . . . . . 0.01 0.02
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME PER SHARE $ 0.51 $ 0.36
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted income per share from continuing operations. . . . . . . . . . 0.48 0.32
Diluted income per share of discontinued operation . . . . . . . . . . -- 0.02
DILUTED NET INCOME PER SHARE $ 0.48 $ 0.34
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data has been adjusted for stock dividends declared and paid in 1999
and 1997, and 3-for-2 stock splits effected in 1996 and first quarter 1998.
Earnings per share for the current year and all prior periods presented reflects
the adoption of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------
1998 JUNE 30 MARCH 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $90,146 $84,071
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 65,069 60,637
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 14,127 5,839
Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 35,501 18,103
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 59,074 50,083
Income from continuing operations before taxes. . . . . . . . . . . . 27,369 22,818
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $16,567 $13,375
- --------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE $0.39 $0.31
DILUTED NET INCOME (LOSS) PER SHARE $0.39 $0.31
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1997 JUNE 30 MARCH 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . $68,495 $58,733
Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 47,839 40,161
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 4,427 3,290
Noninterest income. . . . . . . . . . . . . . . . . . . . . . . . . . 15,959 16,129
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . . 40,793 39,714
Income from continuing operations before taxes.. . . . . . . . . . . . 18,578 13,286
Income (loss) from operations of discontinued operation, net of tax . (132) (79)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $10,959 $ 7,953
- --------------------------------------------------------------------------------------------------------------------------
Basic income per share from continuing operations . . . . . . . . . . 0.26 0.19
Basic income per share of discontinued operation . . . . . . . . . . . -- --
- --------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME PER SHARE $ 0.26 $ 0.19
- --------------------------------------------------------------------------------------------------------------------------
Diluted income per share from continuing operations. . . . . . . . . . 0.25 0.18
Diluted income per share of discontinued operation . . . . . . . . . . -- --
DILUTED NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.18
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data has been adjusted for stock dividends declared and paid in 1999
and 1997, and 3-for-2 stock splits effected in 1996 and first quarter 1998.
Earnings per share for the current year and all prior periods presented reflects
the adoption of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share."
- --------------------------------------------------------------------------------
---
66
<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. Nonaccrual loans are included in average
loans used to compute this table. The table is not presented on a tax equivalent
basis as the effects are not material.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 OVER 1997 1997 OVER 1996
RATE/ RATE/
(DOLLARS IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease)
in:
Loans /(1)/ . . . . . $66,966 $(20,255) $14,788 $61,499 $53,038 $4,866 $1,486 $59,390
Trading instruments. (240) (390) (30) (660) (1,102) 960 (356) (498)
Securities available
for sale. . . . . . 4,474 (1,522) 1,234 4,186 12,522 (607) (351) 11,564
Securities held to
maturity. . . . . . (9) 4 -- (5) (13) (1) -- (14)
Federal funds sold
and securities
purchased under
resale agreements. 9,014 (536) 2,547 11,025 2,767 319 89 3,175
Loans held for sale. 445 (82) 79 442 173 19 7 199
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest
income $80,650 $(22,781) $18,618 $76,487 $67,385 $5,556 $ 875 $73,816
- -----------------------------------------------------------------------------------------------------------------------------------
Savings. . . . . . . 119 4 41 164 66 4 1 71
Money market. . . . 4,431 352 1,576 6,359 8,660 1,134 663 10,457
Time - under $100,000 1,736 64 602 2,402 (3,967) (40) 13 (3,994)
Time - $100,000 and 7,503 (854) 2,306 8,955 1,938 (225) (12) 1,701
over/(2)/ . . . . .
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $13,789 $ (434) $ 4,525 $17,880 $ 6,697 $ 873 $665 $8,235
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 840 81 306 1,227 769 115 28 912
Long-term borrowings:
Floating rate notes
and subordinated
debentures. . . . (55) 21 (4) (38) (81) 10 (2) (73)
Capital 2,000 (40) (18) 1,942 4,509 -- -- 4,509
securities/(3)/ .
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST
EXPENSE $16,574 $ (372) $ 4,809 $21,011 $11,894 $ 998 $ 691 $13,583
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES IN NET
INTEREST INCOME $64,076 $(22,409) $13,809 $55,476 $55,491 $4,558 $ 184 $60,233
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The rate change for interest income on loans includes a $163,000 positive
and a $519,000 negative impact of derivative instruments for the years ended
December 31, 1998 and 1997, respectively. Loans are net of unearned income
and deferred loan fees.
(2) The rate change for interest expense on time deposits under $100,000
includes a $245,000 and $360,000 positive impact of derivative instruments
for the years ended December 31, 1998 and 1997, respectively.
(3) The rate change for interest expense on capital securities includes a $1.1
million and $666,000 positive impact of derivative instruments for the years
ended December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
- ---
67
<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") and its non-bank subsidiaries.
The Company establishes the general policies and oversees the activities of the
operating subsidiaries.
IMPERIAL BANK: The Bank is engaged in general commercial banking at 12 banking
offices located throughout California, banking offices located in Phoenix,
Arizona and Denver, Colorado and loan production offices located in Menlo Park
and San Diego, California; Austin, Texas; Bellevue, Washington; Boston,
Massachusetts and Reston, Virginia. The Bank was incorporated in 1963 under the
laws of the State of California and became a subsidiary of the Company in 1969.
The Bank offers a wide variety of financial products and services to its
business customers including: checking accounts; savings accounts; money market
deposit accounts; certificates of deposit; business and real estate loans;
credit cards; ESOP financing; venture capital financing; SBA loans; accounts
receivable financing; accounts receivable factoring; equipment leasing; letters
of credit, foreign currency exchange and trade financing; asset management
services; federal income, excise and withholding tax depository services;
collection services; Mastercard and Visa depository services; payment processing
services; business account reconciliation services; cash management services;
automated payroll systems; and escrow and bankruptcy accounting systems. The
Bank has historically directed its business development efforts toward mid-sized
businesses with annual sales of between $5 million and $100 million.
Additionally, the Bank has established specialized divisions to more directly
serve certain market segments such as the Special Markets Division, Imperial
Entertainment Division, International Banking Division, Financial Services
Division, Corporate Cash Management, The Lewis Horwitz Organization, Small
Business Lending and the Imperial Processing Division. The Bank's loans and
deposits are widely diversified across a number of industries.
For individual customers, the Bank provides: personal checking, interest
checking and savings accounts; individual retirement accounts and Keogh Plans;
money market deposit accounts; certificates of deposit; auto, home improvement,
home equity and other types of consumer loans; credit cards; travelers checks;
money transfer services; and automatic overdraft protection. While the Bank
offers these retail type services, it does so primarily as an accommodation to
its business customers within the geographic areas it serves.
The Bank does not have trust powers. However, Imperial Trust Company, a
subsidiary of the Bank, is licensed to operate a trust business under the laws
of the State of California and operates from offices in Los Angeles, Costa Mesa
and San Francisco. The Bank is licensed as an insurance agent and can engage in
insurance activities as permitted under applicable law.
As of December 31, 1998, the Bank and its subsidiaries had total assets of $6.1
billion and total deposits of $5.6 billion. Net income for 1998 was $39.0
million.
COMPETITION - The banking and financial services business in the Bank's market
areas is highly competitive. The competitive environment is a result of changes
in regulation, technology and product delivery systems and the ongoing
consolidation among financial services providers. The Bank competes for loans,
deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets, and
offer a broader array of financial services than the Bank. In order to compete
with the other financial services providers, the Bank principally relies upon
local promotional activities, personal relationships established by officers,
directors and employees with customers, and specialized services tailored to
meet customers' needs. In those instances where a customer desires a service
that the Bank does not offer directly, the Bank may arrange for those services
to be provided by its correspondents.
MONETARY POLICY - Banking, as a business, is affected by general economic
conditions, both domestic and international, as well as the monetary and fiscal
policies of the United States and its agencies. In particular, the Board of
Governors of the Federal Reserve System ("the Board") exerts substantial
influence on interest rates and credit conditions, primarily through open market
operations in U.S. government securities, varying the discount rate on member
bank borrowings and setting reserve require-ments against deposits. The Board's
monetary policies have had a significant impact on the operating results of
financial institutions in the past and are expected to continue to do so in the
future.
IMPERIAL BANK SUBSIDIARIES: Crown American Bank ("CAB"), a state-chartered
industrial bank, was formed in mid-1998 to provide secured small business loans,
the majority of which are guaranteed in part by the Small Business
Administration. CAB had assets of $58.0 million and total deposits of $21.5
million at December 31, 1998. CAB had net income of
68
<PAGE>
$489,000 for 1998. The small business lending activities are being returned to a
division of the Bank and the CAB charter is expected to be sold.
Imperial Trust Company, a California licensed trust company, had total assets
under management of approximately $9.6 billion at December 31, 1998. The Trust
Company reported net income of $1.2 million for 1998.
Imperial Ventures, Inc. ("IVI") was organized in 1977 and is licensed as a small
business investment company. IVI reported net income of $31,600 for 1998. At
December 31, 1998, IVI had total assets of $1.4 million.
Imperial Securities Corporation ("ISC"), a registered broker dealer, engages in
the purchase and resale of financial instruments to corporations, financial
institutions and high net worth individuals. ISC, organized as a broker dealer
in 1993, reported net income of $1.2 million for 1998. At December 31, 1998, ISC
had total assets of $6.8 million.
Pacific Bancard Association, Inc. ("PBA") was formed in 1976 to facilitate
merchant bankcard processing activities. In the fourth quarter of 1997, PBA sold
its 50% investment in American Heritage Pacific Bancard Association which was
formed in 1994. PBA recognized a $3.5 million pretax gain on the sale. PBA's
assets at December 31, 1998, consisted of deposits totaling $3.1 million at
Imperial Bank. PBA reported net income of $123,900 for 1998.
U S Audiotex, LLC, is an 80% owned subsidiary of the Bank that provides payment
processing services to government agencies and municipalities. U S Audiotex had
a net loss of $104,000 for 1998.
Imperial Trade Services, Ltd., ("ITS") was formed in 1997. Located in Hong Kong,
ITS has established a strategic alliance with an international financial
institution to issue, advise and pay letters of credit in the Asian market. ITS
reported net income of $77,000 for 1998.
NONBANK SUBSIDIARIES: In addition to the Bank and its subsidiaries, the Company
has four wholly owned direct subsidiaries.
Imperial Bank Realty Company, Inc. ("Realty") holds leases on certain real
property occupied by the Company and the Bank. Realty is responsible for
purchasing, leasing and maintaining all Bank and Company operating real
properties. At December 31, 1998, Realty's total assets consisted of deposits
with Imperial Bank totaling $636,900. Net income for 1998 was $16,400.
Imperial Capital Trust I ("the Trust") is a statutory business trust formed in
April 1997. The Trust was formed for the sole purpose of issuing 9.98% Capital
Securities, which was completed in April 1997, and investing the proceeds
thereof in 9.98% Junior Subordinated Debentures issued by the Company. At
December 31, 1998, the Trust had assets of $76.0 million, of which $75.6 million
reflects its investment in the Junior Subordinated Debentures issued by the
Company. The Trust had net income of $138,800 for 1998.
Imperial Creditcorp ("ICC") seeks to generate capital appreciation through
medium-term equity investments made in financial sector businesses. At December
31, 1998, ICC's total assets were $20.4 million. Net income for 1998 of $8.4
million was derived primarily from the exercise of an equity option and sale of
the acquired common stock.
Altair Corporation, acquired in September 1998, provides software systems to
bankruptcy trustees and practitioners. Altair had total assets of $6.8 million
at December 31, 1998, and reported a net loss of $10,600 for the year.
INVESTMENT IN IMPERIAL CREDIT INDUSTRIES, INC.: Imperial Credit Industries,
Inc. ("ICII"), capitalized in late 1991, is a diversified finance company. In
1992, ICII sold 2.3 million shares of stock in an initial public offering.
During the second quarter of 1993, the Bank sold 2.8 million shares of ICII
common stock reducing its ownership from 72.4% at December 31, 1992, to 40.3% at
December 31, 1993 and 1994. During 1995, ICII common stock was split at the
ratio of three new shares for every two shares outstanding. In addition, ICII
declared and paid a 10% stock dividend in February 1996 and effected a two-for-
one stock split in late 1996.
In the second quarter of 1996, the Company sold 1.5 million shares of its
investment in ICII. At the same time, ICII completed a secondary public offering
in which 2.8 million new shares were sold to the public. During 1997, the
Company sold and donated 455,000 shares of ICII stock. At December 31, 1998, the
Company owned approximately 24.3% of the total ICII shares outstanding. The
Company accounts for its investment in ICII using the equity method of
accounting.
On December 19, 1998, the Company announced in a Schedule 13D filing with the
Securities and Exchange Commission, its intention to sell the 8.9 million shares
of ICII common stock it owns. The Company is actively pursuing opportunitis to
sell these shares.
SUPERVISION AND REGULATION: Bank holding companies, banks and their nonbank
subsidiaries are extensively regulated under both federal and state law. The
following is not intended to be a complete description of the statutes and
regulations applicable to the Company's or the Bank's business. The description
of statutory and regulatory provisions is qualified in its entirety by reference
to the particular statutory or regulatory provisions. A
69
<PAGE>
number of changes to laws and regulations affecting the Bank and the Company and
additional legislative and regulatory changes have occurred in the past several
years and can be expected to occur in the future. The nature, timing and impact
of new and amended laws and regulations cannot be accurately predicted.
BANK HOLDING COMPANY - The Company is regulated under the BHC Act and as such is
required to file annual reports of its operations with the Board and is subject
to examination by it. The BHC Act requires, among other things, the Board's
prior approval whenever a bank holding company proposes to (i) acquire all or
substantially all the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% voting shares of a bank, or (iii) merge or
consolidate with another bank holding company.
As contemplated by the BHC Act, numerous states have enacted laws, and nearly
every state in the nation has contemplated laws, which would permit the
acquisition of banks located within the state by out-of-state bank holding
companies. In September 1994, full interstate banking legislation was adopted by
Congress in the Riegle-Neal Interstate Banking and Branch Efficiency Act ("the
Riegle-Neal Act"). Under the Riegle-Neal Act, interstate banking is allowed in
three different ways: (i) effective September 1995, a bank owned by a holding
company may acquire a subsidiary bank anywhere in the U.S., (ii) effective
September 1995, a bank owned by a holding company may act as an agent in
accepting deposits or servicing loans, and (iii) effective June 1, 1997, a bank
may establish a branch or merge with a bank in another state, but only if the
bank's home state permits interstate mergers and branches, and the other state
has not passed a law to prohibit interstate mergers or branches. The Riegle-Neal
Act is subject to certain phase in and opt out provisions.
The State of California has passed interstate banking legislation. Any
out-of-state bank holding company is permitted to acquire a California bank
provided that reciprocal rights are granted to California bank holding
companies.
The BHC Act prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of 5% or more of the voting
shares of any company engaged in non-banking activities. The Board is authorized
to approve, among other things, a bank holding company's acquisition of control
of any company engaged in activities which the Board has determined to be
closely related to banking or managing or controlling banks. In making such
determination, the Board is required to weigh the expected benefits of the
acquisition to the public, such as greater convenience and increased competition
or gains in efficiency, against the risks of possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts of
interest and unsound banking practices. The Company has received notification
from the Board that it is in violation of Section 4(c)(8) of the BHC Act and
Section 225.22(d)(2)(II) of Regulation Y with regards to its ownership of ICII
common stock. In a December 1998 filing with the Securities Exchange Commission,
the Company stated its intention to sell its investment in ICII. The violations
of banking regulations will be corrected once a sale of the ICII stock has been
finalized.
The Company and its nonbank subsidiaries are affiliates of the Bank within the
meaning of the Federal Reserve Act. Under the Federal Reserve Act there are
certain restrictions on loans by the Bank to the Company and to its nonbank
affiliates and all such affiliates in the aggregate, on investments by the Bank
in any affiliate's securities and on the Bank taking any affiliate's securities
as collateral for loans to any borrower. The Bank is subject to certain
restrictions with respect to engaging in the issue, flotation, underwriting,
public sale or distribution of certain types of securities and the Company and
all other affiliates may be subject to such restrictions. Under the BHC Act and
the Board's regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or lease or sale of any property or the furnishing of
services.
STATE BANKS - The Bank is supervised by California's Department of Financial
Institutions ("DFI"), and is a member of the Federal Deposit Insurance
Corporation ("FDIC"). It is subject to the provisions of the Federal Deposit
Insurance Act and to regular examinations by the DFI and the FDIC. The Bank is
not a member of the Federal Reserve System ("Fed"), although it is subject to
reserve requirements of the Fed. There are various requirements and restrictions
under the laws of the State of California and of the United States affecting the
Bank in its operations, and these laws and extensive administrative regulations
cover many aspects of the Bank's business such as investments, branching,
municipal securities and other activities, including restrictions on the nature
and amount of loans which may be made. Although the Bank is governed by
regulation of the DFI and the FDIC, the policies of the Board so permeate the
banking industry as a whole, that the Bank, while not a member of the Fed, is to
a large degree subject to the same policies that affect member banks.
The Bank, as a California corporation, is limited in making distributions to its
shareholder, the Company, to the lesser of the retained earnings of the Bank or
the net income of the Bank for its last three fiscal years, less the amount of
any distributions during such period. The Indentures of the Notes, Debentures
and Capital Securities also have restrictions on distributions. At December 31,
1998, the Bank could distribute up to $132.4 million to the Parent Company in
the form of dividends.
The Bank is insured by the FDIC and therefore subject to its regulations. Among
other things the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provided authority for special assessments and required the FDIC to
develop a general risk-based assessment system. Under this regulation, the
amount of FDIC assessments paid by insured
70
<PAGE>
depository institutions is based on their relative risk as measured by
regulatory capital ratios and certain other factors. Under this system, in
establishing the insurance premium assessment for each bank, the FDIC takes into
consideration the probability that the Bank Insurance Fund ("BIF") will incur a
loss with respect to the bank, and charges a bank with perceived higher inherent
risks a higher insurance premium. The FDIC will also consider the different
categories and concentrations of assets and liabilities of the institution, the
likely amount of any such loss, the revenue needs of the BIF, and any other
factors the FDIC deems relevant.
In September 1996, Congress passed the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("the Budget Act") which provided that, among other
things, Savings Association Insurance Fund ("SAIF") members and BIF members
would have the same risk-based deposit insurance assessment schedule with
respect to FDIC deposit insurance premiums, effective January 1, 1997, whereas
previously, FDIC insurance premiums were based on the level of reserves in the
BIF and the SAIF. The assessment schedule proposed by the FDIC ranges from 0% to
0.27% of deposits and is based upon the capital position and a supervisory
evaluation of each institution. As of January 1, 1997, assessments were set at
the following percentages of deposits:
- --------------------------------------------------------------------------------
GROUP A GROUP B GROUP C
- --------------------------------------------------------------------------------
Well Capitalized............................ 0.00% 0.03% 0.17%
Adequately Capitalized...................... 0.03% 0.10% 0.24%
Undercapitalized............................ 0.10% 0.24% 0.27%
- --------------------------------------------------------------------------------
The Bank has been assigned the assessment risk classification of Group A and is
well capitalized. As a result, its FDIC insurance premium for the semi-annual
period of January to June 1999 is zero.
Prior to the enactment of the Budget Act, FDIC assessments for interest payments
on bond obligations issued by the Financing Corporation ("FICO") were solely
paid by SAIF member institutions. Under the Budget Act, both BIF and SAIF
members now share in the cost of the FICO bond interest payments. Beginning
January 1, 1997 and continuing through December 31, 1999, partial sharing is
occurring. During this initial period, SAIF member institutions pay 0.0630% of
domestic deposits while BIF member institutions, such as the Bank, pay 0.0126%
of domestic deposits. Full pro rata sharing of the FICO bond interest payments
will take effect on January 1, 2000.
FDICIA also requires each insured depository institution to prepare annual
financial statements in accordance with generally accepted accounting principles
which must be audited by an independent public accountant. Each institution must
also prepare a management report stating management's responsibility for
preparing the institution's annual financial statements, for complying with
designated safety and soundness laws and regulations and for other related
matters. In addition, the report must contain an assessment by management of the
effectiveness of internal controls and procedures over financial and regulatory
reporting and of the institution's compliance with designated laws and
regulations. The institution's independent public accountant must examine,
attest to, and report separately on, assertions of management concerning
internal controls and procedures. The Bank is complying with these requirements.
FDICIA required the establishment of minimum acceptable operational and
managerial standards, and standards for asset quality, earnings, and valuation
of publicly traded shares for depository institutions and their holding
companies. The operational standards must cover internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation. The asset quality and earnings standards must specify a
maximum ratio of market value to book value for publicly traded shares. An
institution which fails to meet such standards must submit a corrective action
plan within 30 days.
The federal bank regulatory agencies have adopted final regulations which
require institutions to adopt written real estate lending policies that, among
other things, must be consistent with guidelines adopted by the agencies. Among
the guidelines adopted are maximum loan-to-value ratios for land loans (65%),
development loans (75%), construction loans (80- 85%), loans on owner occupied
1-4 family property, including home equity loans (no limit, but loans at or
above 90% require private mortgage insurance), and loans on other improved
property (85%). The guidelines permit institutions to make loans in excess of
the supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's risk-based capital, and the aggregate of nonconforming loans
secured by real estate other than 1-4 family property should not exceed 30% of
risk-based capital.
In a follow up to a policy statement originally issued in December 1993, on
November 24, 1998, the FDIC and other regulatory agencies issued a Joint
Interagency Statement ("the Statement") addressing the importance of depository
institutions having prudent, conservative, but not excessive loan loss
allowances. The Statement was issued to better ensure the consistent application
of loan loss accounting policy and to address regulatory concerns that loan loss
allowances be based on the underlying economics of the loan portfolio and not be
used as an earnings management tool. The Statement requires that federally
insured depository institutions maintain an allowance for loan losses adequate
to cover probable losses that exist as of the balance sheet date. While
recognizing that management's process for determining allowance adequacy
involves judgment and results in a range of estimated losses, the Statement
requires that the determination of the allowance be based on a comprehensive,
adequately documented and consistently applied analysis of the loan portfolio.
Each depository institution must ensure that its allowance is supportable in
light of disclosures made to investors in SEC filings and footnotes to financial
statements.
71
<PAGE>
In 1995, the federal bank regulatory agencies determined that the allowance for
loan losses established pursuant to Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS No. 114")
should be characterized as a general allowance (created against unidentified
losses) rather than a specific allowance (created against identified losses). As
a general allowance, the SFAS No. 114 allowance is includable in Tier 2 capital,
subject to existing regulatory capital limitations.
The Bank is subject to the Community Reinvestment Act of 1977 as amended
("CRA"). CRA requires the Bank to ascertain and meet the credit needs of the
communities it serves, including low and moderate income neighborhoods. The
Bank's compliance with CRA is monitored by the FDIC, which assigns the Bank a
publicly available CRA rating. An assessment of CRA compliance is required by
both the FDIC and the Board in connection with applications for approval of
certain activities, such as mergers with or acquisitions of other banks or bank
holding companies. In April 1995, the federal regulatory agencies issued a
comprehensive revision to the rules governing CRA compliance. In assigning a CRA
rating to a bank, the new regulations place greater emphasis on measurements of
performance in the areas of lending (specifically, the bank's home mortgage,
small business, small farm and community development loans), investment (the
bank's community development investments) and service (the bank's community
development services and the availability of its retail banking services),
although examiners are still given a degree of flexibility in taking into
account unique characteristics and needs of the bank's community and its
capacity and constraints in meeting such needs. The new regulations also require
increased collection and reporting of data regarding certain kinds of loans.
Although the new regulations became generally effective on July 1, 1995, various
provisions have different effective dates, and the new CRA evaluation criteria
went into effect for examinations beginning on July 1, 1997. Although management
cannot project the impact of the substantial changes in the new rules on the
Bank's CRA rating, it continues to take steps to comply with the requirements in
all respects.
CAPITAL ADEQUACY GUIDELINES - Risk-adjusted capital guidelines, issued by bank
regulatory authorities, assign risk weighting to assets and off-balance sheet
items and place increased emphasis on common equity. The guidelines currently
require a minimum Tier I capital ratio of 4% and a total risk weighted capital
ratio of 8% in order for an institution to be classified as adequately
capitalized. Institutions which maintain a Tier I ratio of 6% and total capital
ratio of 10% are defined as well capitalized. Tier I capital basically consists
of common shareholders' equity and non-cumulative perpetual preferred stock and
minority interest in consolidated subsidiaries minus intangible assets. The
Bank's Tier I and total risk-weighted ratios at December 31, 1998, were 9.20%
and 10.45%, respectively.
In addition to the risk-weighted ratios, the highest rated banks are required to
maintain a minimum leverage ratio of 3%. All other banks are expected to
maintain higher leverage ratios, to be determined on an individual basis. This
ratio is defined as Tier I capital to average total assets for the most recent
quarter. The Bank's leverage ratio at December 31, 1998, was 7.76%.
The banking agencies have issued a final rule which requires them to revise
their risk-based capital guidelines to ensure that their standards take adequate
account of interest rate risk.
PROPERTIES
The principal executive offices of the Company and the Bank are located in
leased premises in the Imperial Bank Building at 9920 South La Cienega
Boulevard, Inglewood, California. The leases are either long-term or contain
sufficient options for extension to assure availability of the space for 10
years.
The Company leases office space for branch and subsidiary locations with
expiration dates ranging from 1999 to 2012, exclusive of renewal options. Annual
rentals, net of sublease income, for all leased premises were $7.9 million for
1998.
The Bank houses its Corporate Service Center at 2015 Manhattan Beach Boulevard,
Redondo Beach, California. The property is owned by the Bank.
72
<PAGE>
<TABLE>
<CAPTION>
DIRECTORY
IMPERIAL BANCORP, SUBSIDIARIES AND ENTERPRISES
<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. ALTAIR CORP.
Century Boulevard at the San Diego Freeway 5757 Memorial Drive, Suite 200
P. O. Box 92991 Houston, Texas 77007
Los Angeles, California 90009 (800) 868-5755
(310) 417-5600
- ------------------------------------------------------------- --------------------------------------------------------------
<CAPTION>
DIRECTORS
<S> <C>
GEORGE L. GRAZIADIO, JR. WILLIAM L. MACDONALD
Chairman of the Board, President and Chief Executive Officer, President and Chief Executive Officer, Compensation
Imperial Bancorp Resource Group
Chairman of the Board and Co-Founder, Imperial Bank Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
NORMAN P. CREIGHTON DANIEL R. MATHIS
Vice Chairman and Chief Executive Officer, Imperial Bank President and Chief Operating Officer, Imperial Bank
Director, Imperial Bancorp and Imperial Bank Director, Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
JOHN A. ANDREINI LEE E. MIKLES
Andreini & Company Chairman, Mikles/Miller Management
Director, Imperial Bank Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
RICHARD K. EAMER PAUL A. NOVELLY
Venture Capitalist President, Apex Oil Co.
Director, Imperial Bancorp and Imperial Bank Director, Imperial Bancorp and Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
G. LOUIS GRAZIADIO, III CHARLES T. OWEN
President, Ginarra Holdings, Inc. President and Publisher, San Diego Business Journal
Director, Imperial Bancorp Director, Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
ROBERT L. HARRIS GREGG E. TRYHUS
President, Entertainment Properties Trust President and Owner, Grayhawk
Director, Imperial Bank Development Company Director, Imperial Bank
- ------------------------------------------------------------- --------------------------------------------------------------
<CAPTION>
IMPERIAL BANK MANAGEMENT COMMITTEE
<S> <C>
NORMAN P. CREIGHTON JAMES R. DALEY
Vice Chairman and Chief Executive Officer Executive Vice President
- ------------------------------------------------------------- --------------------------------------------------------------
DANIEL R. MATHIS CHRISTINE M. MCCARTHY
President and Chief Operating Officer Executive Vice President and Chief Financial Officer
- ------------------------------------------------------------- --------------------------------------------------------------
J. RICHARD BARKLEY MAHLON L. VIGESAA
Executive Vice President and Director, Human Resources Executive Vice President
- ------------------------------------------------------------- --------------------------------------------------------------
RICHARD J. CASEY STEPHEN P. YOST
Executive Vice President Executive Vice President and Chief Credit Officer
- ------------------------------------------------------------- --------------------------------------------------------------
H.W. DUKE CHENOWETH
Executive Vice President
- -------------------------------------------------------------
</TABLE>
73
<PAGE>
DIRECTORY OF BANK OFFICES
ARIZONA
. Phoenix
(602) 417-1100
SOUTHERN CALIFORNIA
. Beverly Hills
(310) 281-2400
. Downtown Los Angeles
(213) 484-3700
. Los Angeles International Airport
(310) 417-5600
. Orange County - Costa Mesa
(714) 641-2200
. San Diego
(619) 338-1500
. San Fernando Valley - Sherman Oaks
(818) 379-2901
. San Gabriel Valley - City of Industry
(626) 810-1186
NORTHERN CALIFORNIA
. Central Valley - Fresno
(559) 244-3900
. East Bay - Walnut Creek
(925) 941-1900
. Sacramento
(916) 491-1300
. San Francisco
(415) 954-5000
. Santa Clara Valley - San Jose
(408) 451-8508
COLORADO
. Denver
(303) 294-3340
LOAN PRODUCTION OFFICES
. Austin, Texas
(512) 349-2333
. Bellevue, Washington
(425) 454-6604
. Boston, Massachusetts
(617) 521-9400
. Menlo Park, California
(650) 233-3000
. Reston, Virginia
(703) 689-3768
. San Diego, California
(619) 509-2360
SPECIALTY OFFICES
. Apparel and Textile Industries Division
. Commercial Real Estate Mortgage Banking
. Imperial Entertainment Group
. International Division and Foreign Exchange
. Wine Industry Division
IMPERIAL BANK -- SUBSIDIARIES & DIVISIONS
. Commercial Banking Division
. Corporate Cash Management
. Equipment Leasing Division
. Financial Institutions Division
. Financial Services Division:
Association Bank Services
Bankruptcy Deposit Division
Labor Management Division
Title/Escrow Division
. Imperial Processing Division:
Gaming Industry Division
Imperial Technology Solutions
Merchant Card Services Division
Pacific Bancard Association
US Audiotex, LLC
. Imperial Securities Corporation
. Imperial Trust Company
. Imperial Ventures, Inc.
. Lewis Horwitz Organization
. Mortgage Warehouse Division
. Real Estate Division:
Residential Construction Lending
. Small Business Lending Division
. Special Markets Division:
Emerging Growth Division
Factoring and Commercial Finance
Merchant Banking Division
. Syndicated Finance Division
74
<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:
www.imperialbank.com
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Co.
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
INDEPENDENT AUDITORS
KPMG LLP
STOCK LISTING
Imperial Bancorp - NYSE - IMP
75
<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 31, 1999, on its behalf by the undersigned, thereunto duly authorized.
Date
/s/ George L. Graziadio, Jr. March 31, 1999
----------------------------------
George L. Graziadio, Jr.
Chief Executive Officer
/s/ Christine M. McCarthy March 31, 1999
-----------------------------------
Christine M. McCarthy
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below on March 31, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
Date
/s/ George L. Graziadio, Jr. March 31, 1999
-----------------------------------
George L. Graziadio, Jr.
Chairman of the Board, President and
Chief Executive Officer
/s/ William L. MacDonald March 31, 1999
-----------------------------------
William L. MacDonald
Director
/s/ Norman P. Creighton March 31, 1999
-----------------------------------
Norman P. Creighton
Director
/s/ G. Louis Graziadio, III March 31, 1999
-----------------------------------
G. Louis Graziadio, III
Director
/s/ Richard K. Eamer March 31, 1999
-----------------------------------
Richard K. Eamer
Director
/s/ Lee E. Mikles March 31, 1999
-----------------------------------
Lee E. Mikles
Director
/s/ Paul A. Novelly March 31, 1999
-----------------------------------
Paul A. Novelly
Director
76
<PAGE>
FORM 10-K CROSS-REFERENCE INDEX
- --------------------------------------------------------------------------------
Part I PAGE
- --------------------------------------------------------------------------------
ITEM 1. Business
Financial Review.........................5
Selected Statistical Information.........4, 8-9, 13, 18, 20-21, 64-67
Market Risk..............................16
Description of Business..................68-72
ITEM 2. Properties...............................72
ITEM 3. Legal Proceedings........................50
ITEM 4. Submission of Matters to a vote of
security holders.......................*
Executive Officers of the Registrant.....73
- --------------------------------------------------------------------------------
PART II. PAGE
- --------------------------------------------------------------------------------
ITEM 5. Market for Registrant's Common
Equity and Related Shareholder
Matters................................4, 65
ITEM 6. Selected Financial Data..................4
ITEM 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations..............5-27
ITEM 8. Financial Statements and
Supplementary Data
Imperial Bancorp and Subsidiaries -
Consolidated Financial Statements......28-31
Notes to Consolidated
Financial Statements...................32-62
Independent Auditors' Report.............63
Selected Statistical Information.........4, 8-9, 13, 18, 20-21, 64-67
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure...................*
- --------------------------------------------------------------------------------
PART III PAGE
- --------------------------------------------------------------------------------
ITEM 10. Directors and Executive Officers
of the Registrant......................**
ITEM 11. Executive Compensation...................**
ITEM 12. Security Ownership of Certain
Beneficial Owners and
Management.............................**
ITEM 13. Certain Relationships and
Related Transactions...................**
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for a listing of all
financial statements).
(2) Financial Statement Schedules
All schedules normally required by Form 10-K are omitted
since they either are not applicable or the required
information is shown in the financial statements or notes
thereto.
(3) Exhibits.
Exhibit 10. Split Dollar Insurance Agreement and Assignment
Agreement
Exhibit 21. Subsidiaries of Registrant.
Exhibit 23. Independent Auditors' Consent
Exhibit 27. Financial Data Schedule.
(b) Form 8-K filed on March 30, 1999, to record fourth quarter 1998
earnings as a matter of public record is incorporated by
reference
- --------------------------------------------------------------------------------
* This item is omitted because it is either inapplicable or the answer thereto
is in the negative.
** Incorporated by reference from the Company's proxy statement which will be
filed within 120 days of fiscal year ended December 31, 1998.
77
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Number Description
- -------------- -----------------------------------------------------------
10 Split Dollar Insurance Agreement and Assignment Agreement
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
- --------------------------------------------------------------------------------
78
<PAGE>
EXHIBIT 10
SPLIT DOLLAR INSURANCE AGREEMENT
AND
TRANSFER OWNERSHIP AND ASSIGNMENT OF LIFE
INSURANCE POLICY AS COLLATERAL
This Agreement is entered into as of the 9th day of Dec, 1998 at
--- ---
LOS ANGELES, California, by and among (i) IMPERIAL BANCORP, a California
- -----------
corporation ("Employer"), (ii) G. LOUIS GRANZIADIO, III, MARY LOU GRANZIADIO
AREA, AND ALIDA GRAZIADIO CALVILLO, Trustees under the GRAZIADIO DYNASTY TRUST
II dated DECEMBER 9, 1998 ("Trust"), (iii) GEORGE L. GRAZIADIO, JR ("Employee"),
----------------
and (iv) REVA M. GRAZIADIO ("Reva"). Employer, Trust, Employee and Reva shall
referred to individually as a "Party" or collectively as the "Parties".
W I T N E S S E T H:
A. WHEREAS, the Employer is the owner of a life insurance policy,
John Hancock Mutual Life Insurance Company ("Insurer") Policy No. 80140387
(together with any supplementary contracts issued by the Insurer in conjunction
therewith, "the Policy") on the life of Employee in the original face amount at
the time of issue of $10,5000,00;
B. WHEREAS, Employer is a bank holding company, and Employee is a
valuable employee of Employer, and is its duly elected Chairman of the Board,
President and CEO;
C. WHEREAS, the Policy was previously subject to a Split Dollar
Life Insurance Agreement entered into October 17, 1996 by Employer and a
different trust, under which that other trust undertook to pay a portion of the
policy premiums, but which was
<PAGE>
terminated by mutual agreement with and resulted in Employer becoming sole owner
of the Policy;
D. WHEREAS, Employer is willing to continue to pay a portion of the
premium payments on the Policy, wishes to provide benefits to Employee in
consideration of the performance of services by Employee for Employer, and
desires to enter into this Agreement as an investment;
E. WHEREAS, Employer, in order to induce Trust to pay the remaining
premium payments previously being paid by the other trust under the now
terminated agreement referred to in Recital C above, is willing to assign the
Policy to Trust if its interest in the policy is secured by a reassignment and
pledge of the Policy to Employer by the Trust as collateral;
F. WHEREAS, Trust is willing to pay that portion of the premium
payments which are not paid by the Employer if the Policy is assigned to it
subject to a collateral reassignment of the Policy to the Employer to secure the
Employer's interest in the policy; and
G. WHEREAS, the Parties desire to enter into this Agreement in order
to secure payment, out of the proceeds of the Policy, of the portions of the
Policy proceeds due to Trust and to the Employer under the terms of this
Agreement;
NOW, THEREFORE, for value received, the receipt and sufficiency of
which are hereby acknowledged, the Parties mutually agree as follows:
1. OTHER DEFINITIONS. In this Agreement:
-----------------
a. Advances. Advances refer to:
--------
(i) the cumulative total (without interest) of all premiums
paid by the Employer including $2,490,000 of premiums paid prior to
the date of this Agreement;
(ii) reduced by any amounts received by Employer as
reimbursement of premiums paid; and
2
<PAGE>
(iii) reduced further by any indebtedness with respect to the Policy
from Employer to Insurer.
b. Change in Control. "Change in Control" refers to the first to occur
-----------------
of any of the following events:
(i) Any "person" (as that term is used in Section 13 and 14(d)(2) of
the Securities Exchange Act of 1934 ("Exchange Act") becomes the beneficial
owner (as that term is used in Section 13(d) of the Exchange Act), directly
or indirectly, of 50% or more of the Employer's capital stock entitled to
vote in the election of directors;
(ii) During any period of not more than two consecutive years, not
including any period prior to the adoption of this Agreement, individuals
who at the beginning of such period constitute the board of directors of
the Employer, and any new director (other than a director designated by a
person who has entered into an agreement with the Employer to effect a
transaction described in clauses (i), (ii), (iii) or (iv) of this Paragraph
1.b) whose election by the board of directors, or nomination for election
by the Employer's stockholders was approved by a vote of at least three-
fourths (3/4th) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination
for election was previously so approved cease for any reason to constitute
at least a majority thereof.
(iii) The shareholders of the Employer approve any consolidation or
merger of the Employer, other than a consolidation or merger of the
Employer in which the holders of the common stock of the Employer
immediately prior to the consolidation or merger hold more than 50% of the
common stock of the surviving corporation immediately after the
consolidation or merger;
(iv) The shareholders of the Employer approve any plan or proposal
for the liquidation or dissolution of the Employer; or
(v) The shareholders of the Employer approve the sale or transfer of
substantially all of the assets of the Employer to parties that are not
within a "controlled group of corporations" (as defined in Code (S) 1563)
in which the Company is a member.
c. "Code" shall refer to the Internal Revenue Code of 1986, as amended.
----
d. "Assignment Agreement" shall refer to the document attached as Schedule
--------------------
A assigning the Policy to the Trust and collaterally reassigning the Policy to
secure the Employer's Interest as determined pursuant to Paragraph 5.b herein.
e. "Death Benefit" shall refer to the amount payable by Insurer to
-------------
Beneficiary on the death of the Survivor.
3
<PAGE>
f. "Disability" shall refer to the total and permanent incapacity,
----------
as determined by the Employer based upon competent medical advice, of the
Employee to render substantial services to the Employer by reason of mental
or physical disability.
g. "Imputed Income Amount" shall refer to the amount equal to the
---------------------
Trust's Share of Death Benefit divided by 1,000 and then multiplied by the
applicable Imputed Income Rate, regardless of whether or not the Trust
Premium Payment is paid by the Trust.
h. "Imputed Income Rate" shall refer to the rate published by the
-------------------
Internal Revenue Service in the P.S. 58 Table or U.S. Life Table 38, as
applicable as amended from time to time, or if lower, Insurer's standard
one-year term rates for original issue insurance on a single life, as
allowed by Revenue Rulings 66-110 and 67-154. The currently published
Imputed Income Rate is set forth on Schedule B attached hereto and
incorporated herein by reference.
i. "Insureds" shall collectively refer to the Employee and Reva or
--------
to the Survivor.
j. "Survivor" shall refer to the second to die of Employee and Reva.
--------
k. "Trust Premium Payment" shall refer to the amount of Policy
---------------------
premium allowed to be paid by the Trust (at the Trustee's sole option)
directly to the Insurer, pursuant to Paragraph 3.c herein.
l. "Trust's Share of Death Benefit" shall refer to the amount of the
------------------------------
Death Benefit, less the Employer's interest in the Policy proceeds at death
of the Survivor, determined pursuant to Paragraph 5.b herein.
m. "Trust's Interest" shall mean all to the rights and interests in
----------------
the Policy not specifically retained by the Employer, including but not
necessarily limited to the Trust's Share of Death Benefit and the Trust's
interest in the balance of the Proceeds as defined in Paragraph 5.c.
herein.
2. DESCRIPTION OF POLICY/POLICY OWNERSHIP. In furtherance of the purposes
--------------------------------------
of this Agreement the Trust shall own the Policy. The Trust's ownership of the
Policy shall be subject to the terms and conditions contained in this Agreement.
3. POLICY PREMIUM PAYMENTS.
-----------------------
a. Payment of Premium by Employer. Except as otherwise provided in
------------------------------
Paragraph 3.b herein, the Employer may pay 10 equal annual payments of $830,000.
The premium shall not be reduced by the premiums paid by the Trust, if any. The
Employer may pay the premium paid pursuant to this Paragraph 3.a directly to the
Insurer and may continue paying said amounts until the 10 annual payments have
been paid.
4
<PAGE>
b. Change in Control, Death or Disability. In the event of a Change in
--------------------------------------
Control, or the death or Disability of the Employee, the Employer shall pay the
equal annual payments of $830,000 remaining under the terms of the Agreement in
accordance with Paragraph 3.a herein.
c. Trust Premium Payment. The Trust may, at the Trustee's sole option,
---------------------
pay all or part of the premium on the Policy. The Trust Premium Payment shall be
first allocated to satisfy the imputed Income Amount.
4. COLLATERAL ASSIGNMENT AND POSSESSION OF POLICY.
----------------------------------------------
a. Assignment Agreement Form. To secure repayment of the Advances to the
-------------------------
Employer and secure the Trust's Interest, Employer and the Trust shall execute
the Assignment Agreement attached hereto as Schedule A. Employer shall
nevertheless retain possession of the policy until all of the Advances have been
repaid.
b. Exercise of Rights. The Employer shall have possession of the Policy
------------------
from the Effective Date of this Agreement until the return of its Advances paid
pursuant to Paragraph 11.a herein. The Employer shall make the Policy available
to the Insurer in order to make any change desired by the Trust as to the
designation of beneficiary or the selection of a settlement option, subject,
however, to the terms of the Assignment Agreement. The Trust shall have no power
or authority to borrow against the Policy, except on behalf of the Employer as
provided in Paragraph 4.1 (a) of the Assignment Agreement.
5. BENEFICIARY DESIGNATION AND PAYMENT OF POLICY PROCEEDS.
------------------------------------------------------
a. Beneficiary. The Trust shall have the right to name the Policy
-----------
beneficiary, subject to the Employer's interest in the Policy as determined
pursuant to Subparagraph b of this Paragraph.
b. Employer's Interest in Policy.
-----------------------------
(i) Payment of Death Benefit. If the Survivor dies during the term of
------------------------
this Agreement, the Employer shall have an interest in the Policy proceeds
equal to the amount of the Advances as of the date of death of the
Survivor, plus an amount equal to $120,000.
(ii) Surrender of Policy. If the Policy is surrendered during the term
-------------------
of this Agreement prior to the death of the Survivor, the Employer shall
have an interest in the Policy equal to the greater of: (i) the amount of
the Advances as of the date of surrender, or (ii) the cash surrender value
of the Policy as of the date of surrender, less reimbursed Advances.
5
<PAGE>
c. Balance of Proceeds. The balance, if any, of the proceeds of the
-------------------
Policy, including proceeds attributable to insurance purchased with annual
dividends-and Trust Premium Payments shall be paid to the Trust.
6. PROCEDURE AT SURVIVOR'S DEATH. Upon the death of the Survivor while
-----------------------------
the Policy and this Agreement are in force, the Employer shall promptly take all
necessary steps, including rendering of such assistance as may reasonably be
required by the Trust, to obtain payment from the Insurer of the amounts payable
under the Policy to the respective Parties, as provided under Paragraph 5
hereof.
7. CHOICE OF DIVIDEND OPTION(S). To the extent that the Insurer declares
----------------------------
dividends on the Policy, such dividends shall be reinvested in the Policy, as
specified by the Trustee.
8. TERMINATION OF AGREEMENT. This Agreement will terminate when the first
------------------------
of any of the following events occurs:
a. Performance Upon Survivor's Death. Performance of the Agreement's
---------------------------------
terms, following the death of the Survivor;
b. Mutual Agreement: The Employer and the Trustee mutually agree to
----------------
terminate the Agreement.
c. Exercise of Trustee's Option to Reimburse Employer Advances. The
-----------------------------------------------------------
Trustee exercises its option, pursuant to Paragraph 10.b, to reimburse the
Employer for the Advances at the time when the amount of the Advances
equals or exceeds the cash surrender value of the Policy.
9. DISPOSITION OF POLICY UPON TERMINATION OF AGREEMENT.
---------------------------------------------------
a. Purchase of Insurance. Upon the termination of this Agreement by
---------------------
mutual agreement as provided in Paragraph 8.b., the Trust shall have a 30
day option to reimburse the Employer for an amount equal to greater of the
Advances, or the cash surrender value of the Policy as of the date of
termination of the Agreement, and thereby obtain ownership of the Policy
free of any encumbrances.
b. Encumbrance. If the Policy shall then be encumbered by an
-----------
assignment, policy loan, or other means, the Employer shall either remove
such encumbrance, or reduce the amount necessary to reimburse the Employer
pursuant to Paragraph 10.a hereof by the total amount of indebtedness
outstanding against the Policy, from which Trust has previously made any
reimbursement of Employer Advances. If the Trust does not exercise its
right to reimburse the Employer, the Trust shall execute all documents
required by the Insurer to transfer ownership of the Policy to the Trust.
Such transfer shall constitute satisfaction of any obligation the Trust has
to the Employer with respect to this Agreement. If the Trust exercises its
right, Employer shall, execute all documents
6
<PAGE>
required by the Insurer to remove and satisfy the Collateral Assignment
outstanding on the Policy under the Assignment Agreement.
10. RETURN OF PREMIUMS PAID TO EMPLOYER.
-----------------------------------
a. Return of Premiums Paid After Ten Years. If the Agreement has not
---------------------------------------
terminated pursuant to Paragraph 8, upon the earlier of: (i) the thirteenth
(13th) anniversary of the Policy issue date, or (ii) if there has been no Change
in Control, the failure of both the Employer and the Trustee to make Premium
Payments On the Policy within 30 days of the premium due date, the Employer
shall, in order to satisfy the Trust's obligation to repay the Advances to the
Employer, borrow against the Policy, pursuant Paragraph 4.b of the Assignment
Agreement, an amount equal to the Advances; provided, however, that the Trustee
may satisfy its obligation by tendering to the Employer an amount equal to the
Advances. The Collateral Assignment thereunder shall secure the Trust's
performance under this provision.
b. Trust's Option.
--------------
(i) Right to Reimburse Employer. At any time prior to the termination
---------------------------
of the Agreement, the Trust shall have the option to reimburse the Employer
for the Advances. The Trust shall exercise said option by tendering to the
Employer an amount equal to the Advances. If the Policy shall then be
encumbered by an assignment, policy loan, or other means, the Employer
shall either remove such encumbrance, or reduce the amount necessary to
reimburse the Employer pursuant to this Paragraph 10.b.(i).
(ii) Effect on Agreement.
-------------------
(a) If, at the time the Trust exercises its option pursuant to
Paragraph 10.b.(i), the amount of the Advances equals or exceeds the
cash surrender value of the Policy, this Agreement shall terminate upon
the Trustee's exercise of said option and the Employer shall execute all
documents required by the Insurer to remove and satisfy the Collateral
Assignment outstanding on the Policy under the Assignment Agreement.
(b) If, at the time the Trustee exercises its option pursuant to
Paragraph 10.b.(i), the amount of the Advances is less than the cash
surrender value of the Policy, this Agreement shall continue until
terminated pursuant to Paragraph 8; however, the Employer's obligation
to pay the Policy premiums pursuant to Paragraph 3.a shall cease
(c) No Right of Reimbursement. Except as provided in Paragraphs
-------------------------
9.b and 10.b, the Trust shall have no right of reimbursement from the
Employer for any amounts borrowed by the Employer pursuant to the
Assignment Agreement.
7
<PAGE>
11. TAXABLE INCOME. The Employer will comply with all federal, state and
--------------
local reporting and withholding requirements applicable to this Agreement
throughout the term of this Agreement. If withholding is required, the Employer
may satisfy its withholding obligations from any and all compensation to be paid
to the Employeee and if necessary, Employee shall provide cash to Employer to
enable the Employer to satisfy its withholding obligation.
12. TRUST'S RIGHT TO ASSIGN ITS INTEREST. The Trust shall have the right
------------------------------------
to transfer its entire interest in the Policy (subject to the Employer's
Interest hereunder). If the Trust makes such transfer, all its rights shall be
vested in the transferee, and the Trust shall have no further interest in the
Policy and no further rights or obligations under this Agreement.
13. CLAIMS PROCEDURE. The following claims procedure shall apply to the
----------------
Agreement:
a. Filing of a Claim for Benefits. The Employer or the beneficiary of
------------------------------
the Policy shall make a claim for the benefits provided under the Policy in
the manner provided in the policy. The Employer is hereby appointed the
attorney-in-fact of either the Trust or the beneficiary to make such claim
if not made within ten days of notice from the Employer.
b. No Limitation of Rights. Nothing contained herein shall be
-----------------------
construed to limit the rights or remedies of the Employer, or the Trust
against the Insurer.
14. AMENDMENTS. Amendments may be added to this Agreement by a written
----------
agreement signed by each of the Parties and attached hereto.
15. GOVERNING LAW/VENUE. This Agreement shall be subject to, and construed
-------------------
according to, the laws of the State of California.
16. INSURANCE COMPANY NOT A PARTY TO AGREEMENT. The Insurer shall not be
------------------------------------------
deemed a party to this Agreement, but will respect the rights of the Parties as
herein developed upon receiving an executed copy of this Agreement.
17. A BINDING AGREEMENT. This Agreement shall bind the Employer and the
-------------------
Employer's successors, the Employee and assigns, the Trust and its successors
and assigns, and any Policy beneficiary.
18. COUNTERPARTS. This Agreement may be executed in One or more
------------
counterparts, each of which when executed and delivered shall be an original,
and all of which when executed shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day
and year first above written.
"EMPLOYER"
IMPERIAL BANCORP, a California corporation
By: /s/ Richard Baker
----------------------------------
RICHARD BAKER
Its: Senior Vice President/General
Counsel/Secretary
By: /s/ Christine M. McCarthy
----------------------------------
CHRISTINE M. McCARTHY
Its: Executive Vice President/ Chief
Financial Officer
"TRUST"
GRAZIADIO DYNASTY TRUST II, dated
DECEMBER 9, 1998
----------
By: /s/ G. Louis Graziadio III
----------------------------------
G. LOUIS GRAZIADIO III
Its: Trustee
By: /s/ Marylou Graziadio Area
----------------------------------
MARYLOU GRANZIADIO AREA
Its: Trustee
By: /s/ Alida Graziadio Calvillo
----------------------------------
ALIDA GRAZIADIO CALVILLO
Its: Trustee
"EMPLOYEE"
/s/ George L. Graziadio, Jr.
-------------------------------------
GEORGE L. GRAZIADIO, JR.
9
<PAGE>
"REVA"
/s/ Reva M. Graziadio
-----------------------------
REVA M. GRAZIADIO
ACKNOWLEDGED:
John Hancock Mutual Life Insurance Co.
<TABLE>
<S> <C>
By:
------------------------------ The John Hancock Mutual Life Insurance Company
JAMES C. MAGNER without assuming any responsibilities for the validity or the
sufficiency of this instrument, has on this date, filed a
Its: Executive Director duplicate thereof at it's Home Office.
Estate and Business Planning Group Date: 1/22/99
-----------
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
The John Hancock Variable Life Insurance Company
without assuming any responsibility for the validity
or the sufficiency of this instrument, has on this
date, filed a duplicate thereof at it's Home Office.
Date: 1/22/99
-----------
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
By: /s/ [ILLEGIBLE SIGNATURE] Secretary
</TABLE>
10
<PAGE>
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT is entered into and effective this
9th day of December 1998, by and between (i) IMPERIAL BANCORP, a California
- ---
corporation ("Employer"), as owner and as a beneficiary of date certain life
Insurance Policy No. 80140397 issued by John Hancock Mutual Life Insurance Co.,
located in the City of Boston, State of Massachusetts, ("Insurer"), and any
supplementary contracts issued in connection therewith ("Policy"), upon the
lives of GEORGE L. GRAZIADIO, JR. and REVA M. GRAZIADIO (collectively
"Insureds"), and (ii) G. LOUIS GRAZIADIO, M, MARY LOU GRAZIADIO AREA, and
ALIDA GRAZIADIO CALVILLO, Trustees, of the GRAZIADIO DYNASTY TRUST II,
dated December 9, 1998 ("Trust"),.
----------
WHEREAS George L. Graziadio, Jr. ("Employee") is a valued employee
of Employer; and
WHEREAS the Employer desires to provide the Employee with a
split-dollar life insurance arrangement by assigning the Policy to the Trust and
paying certain parts of some of the annual premiums due on the Policy
("Advances"), as more specifically provided for in that certain Split-Dollar
Life Insurance Agreement("Agreement"), dated as of December 9, 1998,
----------
entered into by and among the Trust, the Employee, Reva, and the Assignor; and
WHEREAS, in consideration of the Employer's making of the Advances and
of Employer's assignment of the policy to the Trust, the Trust has agreed to
grant Employer a security interest in the Policy as collateral security for the
repayment of the Advances.
NOW, THEREFORE, for value received, the undersigned Employer hereby
assigns, transfers and sets over to the Trust, all of its right title and
interest in the policy, while the Trust assigns back to the Employer, its
successors and assigns the following specific rights in the Policy, subject to
the following terms and conditions:
1. OTHER DEFINITIONS. Capitalized terms shall have the meanings set
-----------------
forth herein or as provided in the Agreement. The assignment by the Trust to
the Employer is referred to herein as the Collateral Assignment.
2. ASSIGNMENT. This Collateral Assignment is made, and the Policy is to
----------
be held, as collateral security to secure performance of all the obligations of
the Trust to the Employer, either now existing or that may hereafter arise,
pursuant to the terms of the Agreement.
3. LIMITATIONS. The Employer's interest in the policy shall be as
-----------
follows:
<PAGE>
a. Surrender or Cancellation. If the Policy is surrendered during
-------------------------
the term of the Agreement, the right to receive an amount equal to the
greater of (i) the Advances as of the date of surrender, or (ii) the cash
surrender value of the Policy as of the date of surrender, less reimbursed
Advances.
(i) The Employer retains the power and authority to borrow
from the Insurer, in the name of the Trust, the amount payable under
the Agreement (including amounts due under Paragraph 10 of the
Agreement), and to pledge or otherwise encumber the Policy to ensure
repayment of the loan. The Employer shall have the right to receive
the loan proceeds and shall have no obligation to make any payments on
the loan.
(ii) To Employer shall not have the authority to cancel or
surrender the policy.
b. DEATH BENEFIT. If the Agreement is in effect upon the death of
-------------
the Survivor, the right to receive an amount equal to:
(i) The Advances as of the date of the Survivor's death,
plus
(ii) $120,000.
c. INCIDENTS OF OWNERSHIP. Except as specifically retained by the
----------------------
Employer herein or in the Agreement, the Trust shall have all incidents
of ownership in the Policy, including but not limited to:
(i) To name the Policy beneficiary, subject to Employer's
interest in the Policy as determined pursuant to Paragraph 5.b of the
Agreement.
(ii) The right further to assign its interest in the Policy;
(iii) The right to change the beneficiary of that portion of
the proceeds to which it is entitled under Paragraph 5 of the
Agreement; and
(iv) The right to exercise all settlement options permitted
by the terms of the Policy, provided, however, that all rights
assigned to the Trust shall be subject to the terms and conditions of
the Agreement.
4. ENDORSEMENT. The Employer shall, upon request, forward the Policy to
-----------
the Insurer without unreasonable delay, for any designation or change of
beneficiary, for any election of optional mode of settlement, or for the
exercise of any other right granted to the Trust hereunder.
5. EMPLOYER'S RIGHT. The Insurer is hereby authorized to recognize the
----------------
Employer's claims to rights hereunder without investigating the reason for any
action taken by the Employer, the validity or amount of any of the liabilities
of the Trust to the Employer under
2
<PAGE>
the Agreement, the existence of any default therein, the giving of any notice
required herein, or the application to be made by the Employer of any amounts to
be paid to the Employer. The signature of the Employer shall be sufficient for
the exercise of any rights under the Policy assigned hereby to the Employer and
the receipt of the Employer for any sum received by it shaft be a discharge and
release therefore to the Insurer.
6. REASSIGNMENT. Upon receiving full payment for its interest in the
------------
Policy pursuant to the Agreement, the Employer shall reassign to the Trust the
Policy any all specific rights retained by it under this Collateral Assignment.
7. CONFLICT. In the event of any conflict between the provisions of this
--------
Assignment Agreement and the Agreement, or any other evidence of any liability
with respect to the Policy or the rights of collateral security herein, the
provisions of this Assignment Agreement shall prevail, as to the Insurer, and
the Agreement shall prevail between the Parties thereto.
8. ASSIGNMENT FOR SECURITY. It is the intent of the undersigned that the
-----------------------
assignment to the Trust makes the Trust the owner of the policy and the holder
of all incidents of ownership, as defined in Treasury Regulation (S)(S)
20.2042-1(c)(2)-(6), in the Policy, and that the Collateral Assignment assign an
interest in proceeds becoming payable under the Policy as security for the
Employer's Interest without granting to Employer any such incidents, and it is
agreed that this Assignment Agreement shall be construed so as to accomplish
this intent.
IN WITNESS WHEREOF the Parties have executed this Assignment Agreement
as of the day and year first above written.
TRUST:
GRAZIADIO DYNASTY TRUST, II dated December 9, 1998
By: /s/ G. Louis Graziadio, III
------------------------------------
G. LOUIS GRAZIADIO, III
Its: Trustee
By: /s/ Marylou Graziadio Area
------------------------------------
MARYLOU GRAZIADIO AREA
Its: Trustee
By: /s/ Alida Graziadio Calvillo
------------------------------------
ALIDA GRAZIADIO CALVILLO
Its: Trustee
3
<PAGE>
BENEFICIARY:
By: /s/ G. Louis Graziadio, III
----------------------------------
G. LOUIS GRAZIADIO, III
Its: Trustee
By: /s/ Marylou Graziadio Area
----------------------------------
MARYLOU GRAZIADIO AREA
Its: Trustee
By: /s/ Alida Graziadio Calvillo
----------------------------------
ALIDA GRAZIADIO CALVILLO
Its: Trustee
EMPLOYER:
IMPERIAL BANCORP, a California corporation
By: /s/ Richard M. Baker
----------------------------------
RICHARD M. BAKER
Its: Senior Vice President/General Counsel/Secretary
By: /s/ Christine M. McCarthy
----------------------------------
CHRISTINE M. McCARTHY
Its: Executive Vice President/Chief Financial Officer
INSUREDS:
/s/ George L. Graziadio, Jr.
- -------------------------------------
GEORGE L. GRAZIADIO, JR.
/s/ Reva M. Graziadio
- -------------------------------------
REVA M. GRAZIADIO
4
<PAGE>
SCHEDULE B
TO SPLIT DOLLAR LIFE INSURANCE AGREEMENT AND
COLLATERAL ASSIGNMENT
IMPUTED INCOME RATES (Per $1,000 of Trust's Share of Death Benefit)
<TABLE>
<CAPTION>
====================================================================================================================================
Standard One-Year Rates
for Original Issue Insurance
U.S. Life Table 38 (Per John Hancock Life) P.S. 58 Table Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Graziadio Mrs. Graziadio Insured's Insured's
AGE AGE RATE AGE RATE AGE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
76 74 $ 5.50 74 $ 9.69 74 $ 67.33
- ------------------------------------------------------------------------------------------------------------------------------------
77 75 6.50 75 10.93 75 73.23
- ------------------------------------------------------------------------------------------------------------------------------------
78 76 7.68 76 12.53 76 79.63
- ------------------------------------------------------------------------------------------------------------------------------------
79 77 9.08 77 14.38 77 86.57
- ------------------------------------------------------------------------------------------------------------------------------------
80 78 10.71 78 16.43 78 94.09
- ------------------------------------------------------------------------------------------------------------------------------------
81 79 12.64 79 18.77 79 102.23
- ------------------------------------------------------------------------------------------------------------------------------------
82 80 14.90 80 21.38 80 111.04
- ------------------------------------------------------------------------------------------------------------------------------------
83 81 17.56 81 23.90 81 120.57
- ------------------------------------------------------------------------------------------------------------------------------------
84 82 20.65 82 26.57 82 130.86
- ------------------------------------------------------------------------------------------------------------------------------------
85 83 24.27 83 29.39 83 141.95
- ------------------------------------------------------------------------------------------------------------------------------------
86 84 29.83 84 32.44 84 153.91
- ------------------------------------------------------------------------------------------------------------------------------------
87 85 33.68 85 35.67 85 166.77
- ------------------------------------------------------------------------------------------------------------------------------------
86 39.06 86 180.60
- ------------------------------------------------------------------------------------------------------------------------------------
87 40.54 87 195.43
- ------------------------------------------------------------------------------------------------------------------------------------
88 44.36 88 211.33
- ------------------------------------------------------------------------------------------------------------------------------------
89 48.40 89 228.31
- ------------------------------------------------------------------------------------------------------------------------------------
90 52.64 90 246.45
- ------------------------------------------------------------------------------------------------------------------------------------
91 54.61 91 265.76
- ------------------------------------------------------------------------------------------------------------------------------------
92 62.93 92 286.25
- ------------------------------------------------------------------------------------------------------------------------------------
93 71.96 93 307.98
====================================================================================================================================
</TABLE>
<PAGE>
ACKNOWLEDGED:
John Hancock Mutual Life Insurance Co.
By:
-------------------------------------
JAMES C. MAGNER
Its: Executive Director,
Estate and Business Planning Group
The John Hancock Variable Life Insurance Company
without assuming any responsibility for the validity
or the sufficiency of this instrument, has on this
date, filed a duplicate thereof at it's Home Office.
Date 1/22/99
-----------------
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
BY: [/s/ SIGNATURE ILLEGIBLE] Secretary
5
<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 and Imperial Trade Services, Ltd., which is incorporated in Hong
Kong. Each subsidiary is included in the Company's consolidated financial
statements.
PERCENTAGE OF VOTING
SECURITIES OWNED BY
NAME IMMEDIATE PARENT IMMEDIATE PARENT
- -------------------------------------------------------------------------------
Altair Corporation Imperial Bancorp 100%
Imperial Bank Imperial Bancorp 100%
Imperial Bank Realty Company, Inc. Imperial Bancorp 100%
Imperial Capital Trust I Imperial Bancorp 100%
Imperial Creditcorp Imperial Bancorp 100%
Crown American Bank Imperial Bank 100%
Imperial Asset Advisors, Inc. Imperial Bank 100%
Imperial International Bank Imperial Bank 100%
Imperial Securities Corporation Imperial Bank 100%
Imperial Trade Services, Ltd. Imperial Bank 100%
Imperial Trust Company Imperial Bank 100%
Imperial Ventures, Inc. Imperial Bank 100%
Pacific Bancard Association, Inc. Imperial Bank 100%
U S Audiotex, LLC Imperial Bank 80%
Imperial Capital Markets Group, Inc. (1) Imperial Bank 100%
Imperial Financial Group (1) Imperial Bank 100%
Imperial Global Trading Company, Inc. (1)Imperial Bank 100%
Imperial Management, Inc. (1) Imperial Bank 100%
Imperial Municipal Services Group, Inc.
(1) (2) Imperial Bank 100%
Imperial Plan, Inc. (1) Imperial Bank 100%
TNT Mortgage Services, Inc. (1) Imperial Bank 100%
- -------------------------------------------------------------------------------
(1) Not currently active
(2) Previously known as Imperial Municipal Services Corporation
<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 25, 1999, relating to the
consolidated balance sheet of Imperial Bancorp and subsidiaries as of December
31, 1998 and 1997 and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of Imperial Bancorp.
KPMG LLP
Los Angeles, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 355,317
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,446,000
<TRADING-ASSETS> 52,971
<INVESTMENTS-HELD-FOR-SALE> 694,814
<INVESTMENTS-CARRYING> 3,898
<INVESTMENTS-MARKET> 3,898
<LOANS> 3,452,115
<ALLOWANCE> (62,649)
<TOTAL-ASSETS> 6,189,180
<DEPOSITS> 5,569,647
<SHORT-TERM> 60,601
<LIABILITIES-OTHER> 101,343
<LONG-TERM> 75,767
0
0
<COMMON> 224,433
<OTHER-SE> 157,389
<TOTAL-LIABILITIES-AND-EQUITY> 6,189,180
<INTEREST-LOAN> 294,623
<INTEREST-INVEST> 39,525
<INTEREST-OTHER> 25,311
<INTEREST-TOTAL> 359,459
<INTEREST-DEPOSIT> 90,666
<INTEREST-EXPENSE> 102,648
<INTEREST-INCOME-NET> 256,811
<LOAN-LOSSES> 33,375
<SECURITIES-GAINS> 173
<EXPENSE-OTHER> 216,926
<INCOME-PRETAX> 72,197
<INCOME-PRE-EXTRAORDINARY> 43,748
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,748
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 5.72
<LOANS-NON> 30,615
<LOANS-PAST> 0
<LOANS-TROUBLED> 9,770
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 51,143
<CHARGE-OFFS> 23,793
<RECOVERIES> 1,924
<ALLOWANCE-CLOSE> 62,649
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
