UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(Mark
One)
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[X]
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended December 31, 2007
OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Transition Period From __________________ To __________________
Commission
File Number 1-33199
IMPERIAL
CAPITAL BANCORP, INC.
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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95-4596322
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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888
Prospect Street, Suite 110, La Jolla, California
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92037
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (858) 551-0511
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common
Stock, $.01 Par Value
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark 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 reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ].
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
[ ]
Accelerated Filer [X]
Non-Accelerated
Filer [ ] (Do not check if a smaller reporting company) Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X].
As of
March 3, 2008, there were issued and outstanding 5,426,760 shares of the
Registrant’s Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant as of June 30, 2007, computed by reference
to the closing price of such stock as of June 30, 2007, was $285.2 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Registrant that such person is an
affiliate of the Registrant.)
IMPERIAL CAPITAL BANCORP, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE
OF CONTENTS
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Page
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PART
I
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3
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13
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17
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18
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18
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18
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PART
II
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19
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21
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23
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40
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42
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68
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68
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68
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PART
III
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69
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71
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89
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91
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91
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PART
IV
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92
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93
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Forward-Looking
Statements
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-K contains forward-looking statements that are subject to risks and
uncertainties, including, but not limited to, changes in economic conditions in
our market areas, changes in policies by regulatory agencies, the impact of
competitive loan products, loan demand risks, the quality or composition of our
loan or investment portfolios, increased costs from pursuing the national
expansion of our lending platform and operational challenges inherent in
implementing this expansion strategy, fluctuations in interest rates, and
changes in the relative differences between short- and long-term interest rates,
levels of non-performing assets and other loans of concern, and operating
results, the economic impact of any terrorist actions and other risks detailed
from time to time in our filings with the Securities and Exchange Commission. We
caution readers not to place undue reliance on any forward-looking statements.
We do not undertake and specifically disclaim any obligation to revise any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements. These
risks could cause our actual results for 2008 and beyond to differ materially
from those expressed in any forward-looking statements by, or on behalf of, us,
and could negatively affect the Company’s operating and stock price
performance.
As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Imperial Capital Bancorp, Inc. and its consolidated subsidiaries.
PART
I
Item 1. Business
General
Imperial
Capital Bancorp, Inc. (formerly ITLA Capital Corporation) (“ICB”) is a
diversified bank holding company headquartered in San Diego County, California
with consolidated assets of $3.6 billion, consolidated net loans of $3.1
billion, consolidated deposits of $2.2 billion and consolidated shareholders’
equity of $227.6 million as of December 31, 2007. We conduct and manage our
business principally through our wholly-owned subsidiary, Imperial Capital Bank
(the “Bank”), an institution with $3.5 billion in assets and six retail branches
located in California (Beverly Hills, Costa Mesa, Encino, Glendale, San Diego,
and San Francisco), one retail branch located in Carson City, Nevada, and one
retail branch located in Baltimore, Maryland. During 2008, we expect
to open an additional retail branch office to be located in Las Vegas,
Nevada. Our branch offices are primarily used for our deposit
services and lending business. Additionally, the Bank has 25 loan origination
offices serving the Western United States, the Southeast region, the
Mid-Atlantic region, the Ohio Valley, the Metro New York area and New England.
The Bank has been in business for 33 years. In 2005, we opened our
east coast headquarters in Times Square in New York City. This office manages
and supports our east coast real estate lending efforts.
We are
primarily engaged in:
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Originating
and purchasing real estate loans secured by income producing properties
for retention in our loan
portfolio;
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Originating
entertainment finance loans; and
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Accepting
customer deposits through the following products: certificates of
deposits, money market, passbook and demand deposit accounts. Our deposit
accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to the legal limits.
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We
continuously evaluate business expansion opportunities, including acquisitions
or joint ventures with companies that originate or purchase commercial and
multi-family real estate loans, as well as other types of secured commercial
loans. In connection with this activity, we periodically have discussions with
and receive financial information about other companies that may or may not lead
to the acquisition of the company, a segment or division of that company, or a
joint venture opportunity.
Our
executive offices are located at 888 Prospect Street, Suite 110, La Jolla,
California 92037 and our telephone number at that address is (858)
551-0511.
Lending
Activities
General. During 2007, our
core lending activities were as follows:
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Originating
and, to a lesser extent, purchasing real estate loans secured by income
producing properties, or properties under construction;
and
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Originating
entertainment finance loans.
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Income Producing Property Loans.
We originate and purchase real estate loans secured by first trust deeds
or first mortgages on commercial and multi-family real estate. Our collateral
consists primarily of the following types of properties:
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•Apartments
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•Mini-storage
facilities
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•Retail
centers
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•Mobile
home parks
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•Small
office and light industrial buildings
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•Multi-family
real estate
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•Hotels
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•Other
mixed use or special purpose commercial
properties
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At
December 31, 2007, we had $2.6 billion of income producing property loans
outstanding, representing 85.6% of our total real estate loans, and 83.1% of our
gross loan portfolio. Most of our real estate borrowers are business owners,
individual investors, investment partnerships or limited liability entities. The
income producing property lending that we engage in typically involves loans to
a single borrower and is generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential lending, because repayment of
the loan generally is dependent, in large part, on the successful operation of
the property securing the loan or the business conducted on the property
securing the loan.
Income
producing property values are also generally subject to greater volatility than
residential property values. The liquidation values of income producing
properties may be adversely affected by risks generally incident to interests in
real property, such as:
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•Changes
or continued weakness in general or local economic
conditions;
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•Availability
of financing for investors/owners of income producing
properties;
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•Changes
or continued weakness in specific industry segments;
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•Other
factors beyond the control of the borrower or the
lender;
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•Increases
in other operating expenses (including energy costs);
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•Increases
in interest rates, real estate and personal property tax rates;
and
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•Declines
in rental, room or occupancy rates in hotels, apartment complexes or
commercial properties;
•Declines
in real estate values;
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•Changes
in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental
legislation and taxation.
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We
originate real estate loans through our retail branches and loan origination
offices. These offices are staffed by a total of 42 loan officers. Loan officers
solicit mortgage loan brokers for loan applications that meet our underwriting
criteria, and also accept applications directly from borrowers. A majority of
the real estate loans funded by us are originated through mortgage loan brokers.
Mortgage loan brokers act as intermediaries between us and the property owner in
arranging real estate loans and earn a fee based upon the principal amount of
each loan funded.
Income
producing property loans are generally made in amounts up to 75% of the
appraised value of the property; however, multi-family loan originations may be
made at a loan to value ratio of up to 80%. Loans are generally made for terms
of between ten and 30 years, with amortization periods up to 30 years. Depending
on market conditions at the time the loan was originated, certain loan
agreements may include prepayment penalties.
The
average yield on our real estate loan portfolio was 7.39% in 2007 compared to
7.74% in 2006. A significant portion of our loan portfolio is
comprised of adjustable rate loans indexed to either six month LIBOR or the
Prime Rate, most with interest rate floors and caps below and above which the
loan’s contractual interest rate may not adjust. Approximately 49.3%
of our loan portfolio was adjustable at December 31, 2007, and approximately
46.5% of the loan portfolio as of that date was comprised of hybrid loans, which
after an initial fixed rate period of three or five years, will convert to an
adjustable interest rate for the remaining term of the loan. As of
December 31, 2007, our hybrid loans had a weighted average of 2.3 years
remaining until conversion to an adjustable rate loan. Our adjustable
rate loans generally reprice on a quarterly or semi-annual basis with increases
generally limited to maximum adjustments of 2% per year up to 5% for the life of
the loan. At December 31, 2007, approximately $2.7 billion, or 85.0%,
of our adjustable and hybrid loan portfolio contained interest rate floors,
below which the loans’ contractual interest rate may not adjust. The
inability of our loans to adjust downward can contribute to increased income in
periods of declining interest rates, and also assists us in our efforts to limit
the risks to earnings resulting from changes in interest rates, subject to the
risk that borrowers may refinance these loans during periods of declining
interest rates. At December 31, 2007, the weighted average floor
interest rate of these loans was 7.31%. At that date, approximately
$251.9 million, or 7.9%, of these loans were at the floor interest
rate. At December 31, 2007, 42.0% of the adjustable rate loans
outstanding had a lifetime interest rate cap. The weighted-average lifetime
interest rate cap on our adjustable rate loan portfolio was 11.80% at that
date. At December 31, 2007, none of the loans in our adjustable rate
loan portfolio were at their cap rate.
Total
loan production, including the unfunded portion of loans, was $1.2 billion for
the year ended December 31, 2007, as compared to $1.6 billion, for each of the
years ended December 31, 2006 and 2005. Loan production in 2007 consisted of the
origination of $721.5 million of commercial real estate loans, $331.9 million of
small balance multi-family real estate loans and $114.4 million of entertainment
finance loans, and the acquisition of $47.3 million of commercial and
multi-family real estate loans by our wholesale loan operations. In
our real estate loan purchases, we generally apply the same underwriting
criteria as loans internally originated and reserve the right to reject
particular loans from a loan pool being purchased that do not meet our
underwriting criteria. The decline in loan production in 2007 was
primarily due to a $450.4 million decrease in wholesale loan acquisitions during
the year, primarily related to a reduction in loan pools being offered in the
secondary market that met our pricing and credit requirements.
Real Estate Construction and Land
Loans. We originate construction and land loans for the primary purpose
of developing or rehabilitating single-family residences, condominiums, and
commercial real estate. At December 31, 2007, our construction and
land loans amounted to $421.1 million, or 13.4%, of our gross loan
portfolio. Approximately $210.3 million, or 49.9%, of our
construction and land loan portfolio consisted of new condominium or condominium
conversion loans, $106.9 million, or 25.4%, consisted of commercial and
multifamily real estate loans, $61.1 million, or 14.5%, consisted of land loans,
and $42.8 million, or 10.2%, consisted of single-family residential construction
loans. At December 31, 2007, $226.2 million, or 53.7%, of our
construction projects were located in California, $65.5 million, or 15.6%, were
for projects located in New York, $39.7 million, or 9.4%, were for projects
located in Arizona, $21.3 million, or 5.1%, were for projects located in Texas
and $19.1 million, or 4.5%, were for projects located in Florida.
Loan
commitment amounts for residential and condominium construction loans typically
range from $3.0 to $20.0 million with an average loan commitment at December 31,
2007 of $15.6 million and $7.7 million, respectively. At December 31,
2007, the unadvanced portion of residential and condominium construction loans
were $39.2 million and $105.4 million, respectively. Commercial
construction loans typically consist of mixed-use retail and other commercial
related projects. At December 31, 2007, the average loan commitment
for our commercial construction loans was $5.8 million and the unadvanced
portion of these commitments was $59.5 million. Our land loans
generally finance the acquisition and/or development of improved lots or
unimproved raw land that will be utilized in the development of single-family
tract housing. At December 31, 2007, the average loan commitment for
our land loans was $4.4 million and the unadvanced portion of these commitments
was $7.4 million.
Loans to
finance our construction projects are generally offered to experienced builders
and developers. We regularly monitor our real estate construction
loans and the economic conditions and markets where our projects are located,
including the number of unsold properties in our residential and condominium
construction loan portfolio. Maturity dates for construction loans
are largely a function of the estimated construction period of the project, and
generally do not exceed 12 to 24 months. Substantially all of our
construction loans have adjustable rates of interest based on the Prime
Rate.
Entertainment Finance Loans.
We conduct our entertainment finance operations through ICB Entertainment
Finance (“ICBEF”), a division of the Bank. Typically, ICBEF lends to independent
producers of film and television on a senior secured basis. Collateral documents
include a mortgage of copyright, security agreements and assigned sales
contracts. Credit decisions are based in part on the creditworthiness and
reputation of the producer, the sales agent and distributors who have contracted
to distribute the films. ICBEF provides loans (with a typical term of 12 to 18
months) and letters of credit for the production of motion pictures and
television shows or series that have a predictable market worldwide, and
therefore, a predictable level of revenue arising from licensing of the
worldwide distribution rights.
ICBEF
lends to independent producers of film and television, many of which are located
in California. To a lesser extent, ICBEF also has borrowing clients outside of
the United States; however, loans are typically denominated in United States
dollars. Independent producers tend to be those producers that do not have major
studio distribution outlets for their product. Large film and television studios
generally maintain their own distribution outlets and finance their projects
with internally generated financing. In addition to funding production loans
against a number of distribution contracts, ICBEF may permit an advance,
generally not to exceed 20% of the budget amount, against its valuation of
unsold rights. ICBEF uses industry standards in the valuation of unsold rights.
ICBEF’s lending officers review the quality of the distributors and their
contracts, the budget, the producer’s track record, the script, the genre,
talent elements, the schedule of advances, and valuation of all distribution
rights when considering a new lending opportunity. Generally, ICBEF loans
require the borrower to provide a completion bond that guarantees the completion
of the film or the payoff of the outstanding balance of the loan in the event
the film is not completed. After closing, each requested advance is approved by
the bonding company on a regular basis to ensure that ICBEF is not advancing
ahead of an agreed-upon cash flow schedule. The loan documentation grants ICBEF
the right to impose certain penalties on the borrower and exercise certain other
rights, including replacing the sales agent, if sales are not consummated within
the appropriate time. Loans are repaid principally from revenue received from
distribution contracts. In many instances, the distribution contracts provide
for multiple payments payable at certain milestones (such as execution of
contract, commencement of principal photography or completion of principal
photography). The maturity date of the loan is generally six to nine months
after completion of the production. Delivery of the completed production is
typically made to the various distributors upon or after their minimum
guarantees have been paid in full. To the extent a distributor fails to make
payment upon completion of the film, or the predicted level of revenue is less
than expected, we may incur a loss if rights cannot be resold for the same
amount or other loan collateral cannot cover required loan
payments.
ICBEF
typically charges its customers an interest rate of three month LIBOR plus a
margin (exclusive of loan fees) on the outstanding balance of the loan. Loan
fees range from 0.75% to 1.50% with an additional fee up to 7.00% depending on
the unsecured amount of the production budget being financed.
At
December 31, 2007 and 2006, our entertainment finance portfolio totaled $76.3
million and $74.2 million, respectively, representing 2.4% and 2.5% of our gross
loan portfolio as of these dates. Of these amounts, approximately
$14.1 million and $10.3 million, respectively, were issued to producers
domiciled outside of the United States. The foreign loans outstanding
at December 31, 2007 were primarily issued to producers located in Australia.
Approximately $8.6 million, $5.6 million and $7.7 million of interest income was
earned during 2007, 2006 and 2005, respectively, in connection with our
entertainment finance portfolio.
Franchise
Loans. During 2005, we closed our franchise lending operations
and sold approximately $110.0 million, or 89.0%, of the remaining loans within
this portfolio. We do not currently anticipate originating or purchasing
franchise loans in the future. Franchise loans are loans to owners of
businesses, both franchisors and franchisees, such as fast food restaurants or
gasoline retailers that are affiliated with nationally or regionally recognized
chains and brand names. Various combinations of land, building, business
equipment and fixtures may secure these loans, or they may be a general
obligation of the borrower based on an evaluation of the borrower’s business and
debt service ability. As of December 31, 2007 and 2006, our franchise loan
portfolio was $2.7 million and $9.3 million, respectively, which represented
less than one percent of our gross loan portfolio as of those
dates.
Loan Underwriting. Initial
loan review for potential applications is performed by the Regional Directors
and Area Manager of our loan origination offices, in consultation with the Chief
Lending Officer, the Chief Operating Officer, Chief Underwriter, and the Chief
Credit Officer. Our loan underwriters are responsible for detailed reviews of
borrowers, collateral, and loan terms, and prepare a written presentation for
every loan application submitted to the real estate loan committee, which is
comprised of the following Bank officers:
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•Chairman,
President, and Chief Executive Officer
•Vice
Chairman of the Board
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•Deputy
Managing Director/Director of Portfolio Management
•Deputy
Managing Director/Eastern Area Manager
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•Executive
Managing Director/Chief Credit Officer
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•Deputy
Managing Director/Western Area Manager
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•Executive
Managing Director/Chief Operating Officer
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•Deputy
Managing Director/Chief Underwriter
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•Senior
Managing Director/Chief Lending Officer
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•First
Vice President/East Coast Credit Executive
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•Managing
Director/Business Lending Credit
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The
underwriting standards for loans secured by income producing real estate
consider the borrower’s financial resources and ability to repay and the amount
and stability of cash flow, if any, from the underlying collateral, to be
comparable in importance to the loan-to-value ratio as a repayment
source.
All real
estate secured loans over $3.0 million must be submitted to the loan committee
for approval. At least one loan committee member or designee must personally
conduct on-site inspections of any property involved in connection with a real
estate loan recommendation of $2.0 million or more for unstabilized properties
and $3.0 million for stabilized properties. Loans up to $750,000 may
be approved by any loan committee member. Loans of $750,000 to $2.0 million
require approval by any two members of the Bank’s loan committee, while loans in
excess of $2.0 million require approval of three loan committee members, one of
whom must be the Chief Lending Officer, and only one of whom may be from the
Loan Production Unit. Additionally, loans over $3.0 million require the approval
of the Chief Credit Officer; and individual loans over $7.5 million, loans
resulting in an aggregate borrowing relationship to one borrower in excess of
$10.0 million, and all purchased loan pools must be approved by the Executive
Committee of the Bank’s Board of Directors.
All
entertainment finance loans over $1.0 million are submitted to the business
lending loan committee for approval. All loans must be approved by
the Managing Director/Credit Risk Director and loans over $3.0 million must be
approved by the Executive Managing Director/Chief Credit
Officer. Individual loans over $7.5 million, loans resulting in an
aggregate borrowing relationship to one borrower in excess of $10.0 million, and
all purchased loan pools must be approved by the executive committee of the
Bank’s Board of Directors.
Our loans
are originated on both a non-recourse and full recourse basis and we generally
seek to obtain personal guarantees from the principals of borrowers which are
single asset or limited liability entities (such as partnerships, corporations
or trusts).
The
maximum size of a single loan made by the Bank is limited by California law to
25% of the Bank’s equity capital. At December 31, 2007, that limit was
approximately $70.0 million. Our largest combined credit extension to related
borrowers was $40.3 million at December 31, 2007. We had three other
relationships in excess of $20.0 million at December 31, 2007, with a combined
aggregate balance of $72.0 million at that date. At December 31,
2007, we had a total of 207 extensions of credit, with a combined outstanding
principal balance of $818.8 million that were over $5.0 million to a single
borrower or related borrowers. All combined extensions of credit over $5.0
million were performing in accordance with their repayment terms, with the
exception of two credit relationships aggregating $16.3 million that were on
nonaccrual status at December 31, 2007. At December 31, 2007, we had
3,334 real estate loans outstanding, with an average balance per loan of
approximately $942,000.
Servicing and Collections.
Our loan portfolio is predominantly serviced by our loan servicing
department, which is designed to provide prompt customer service, accurate and
timely information for account follow-up, financial reporting and management
review. We monitor our loans to ensure that projects are performing
as underwritten. This monitoring allows us to take a proactive approach to
addressing projects that do not perform as planned. When payments are not
received by their contractual due date, collection efforts begin on the
fifteenth day of delinquency with a telephone contact, and proceed to written
notices that progress from reminders of the borrower’s payment obligation to an
advice that a notice of default may be forthcoming. Accounts delinquent for more
than 30 days are reviewed more closely by our asset management department which
is responsible for implementing a collection or restructuring plan, or a
disposition strategy, and evaluates any potential loss exposure on the asset.
Our servicing department has received a primary servicer rating of “SBPS3” by
Fitch Ratings. Fitch rates small balance commercial mortgage primary and special
servicers on a scale of 1 to 5, with 1 being the highest rating. According to
Fitch Ratings the rating reflects the Bank’s experienced servicing management
and staff, including asset managers and its longtime experience as a small
balance commercial mortgage loan servicer. The special servicer rating was based
on our ability to work out, resolve and dispose of small balance commercial
mortgage loans and real estate owned (REO) properties.
Competition. We face
substantial competition in all phases of our operations, including deposit
accounts and loan originations, from a variety of competitors. Our competition for
existing and potential customers is principally from community banks, savings
and loan associations, industrial banks, real estate financing conduits,
specialty finance companies, small insurance companies, and larger banks. Many
of these entities enjoy competitive advantages over us relative to a potential
borrower in terms of a prior business relationship, wider geographic presence or
more accessible branch office locations, the ability to offer additional
services or more favorable pricing alternatives, or a lower cost of funds
structure. We attempt to offset the potential effect of these factors by
providing borrowers with higher interest rates for deposits and greater
individual attention and a more flexible and time-sensitive underwriting,
approval and funding process than they might obtain elsewhere.
Imperial
Capital Real Estate Investment Trust
During
2000, we acquired all of the equity and certain collateralized mortgage
obligations (“CMOs”) of the ICCMAC Multi-family and Commercial Trust 1999-1
(“ICCMAC Trust”) through our real estate investment trust subsidiary, Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”). During 2004, the
CMOs were retired and the ICCMAC Trust was dissolved. The remaining outstanding
loans were contributed to Imperial Capital REIT. At December 31, 2007, Imperial
Capital REIT held net real estate loans of $1.8 million. The cash flow from
Imperial Capital REIT loan pool provides cash flow on a monthly basis to
ICB. ICB recognized $171,000 of interest income from the loans held
in Imperial Capital REIT during the year ended December 31, 2007.
Non-performing
Assets and Other Loans of Concern
At
December 31, 2007, non-performing assets totaled $57.4 million or 1.62% of total
assets. Non-performing assets consisted of $38.0 million of non-accrual loans
and $19.4 million of other real estate and other assets owned consisting of 19
properties. For additional information regarding non-performing
assets see “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Credit Risk Elements”.
As of
December 31, 2007, we had loans with an aggregate outstanding balance of $27.4
million with respect to which known information concerning possible credit
problems with the borrowers or the cash flows of the properties securing the
respective loans has caused management to be concerned about the ability of the
borrowers to comply with present loan repayment terms. This known information
may result in the future inclusion of such loans in the non-accrual loan
category. All of these loans are classified as substandard pursuant to the
regulatory guidelines discussed below.
Classified
Assets
Management
uses a loan classification system consistent with the classification system used
by bank regulatory agencies to help it evaluate the risks inherent in its loan
portfolio. Loans are identified as “pass”, “substandard”, “doubtful” or “loss”
based upon consideration of all sources of repayment, underlying collateral
values, current and anticipated economic conditions, trends and uncertainties,
and historical experience. Pass loans are further divided into four additional
sub-categories, based on the type and nature of underlying collateral, as well
as the borrower’s financial strength and ability to service the debt. Underlying
collateral values for real estate dependent loans are supported by property
appraisals or evaluations. We review our loan classifications on at least a
quarterly basis. At December 31, 2007, we classified $65.4 million of loans as
“substandard”, none as “doubtful” and none as “loss” of which, $38.0 million of
these classified loans were included in the non-performing assets table in “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Credit Risk Elements”.
Funding
Sources
The
primary source of funding for our lending operations and investments are
deposits. Our deposits are federally insured by the FDIC to the
maximum extent permitted by law. At December 31, 2007 deposits
totaled $2.2 million of which approximately 86.5% were term deposits that pay
fixed rates of interest for periods ranging from 90 days to five years, 11.5%
were adjustable rate passbook accounts and adjustable rate money market accounts
with limited checking features, and 2.0% were customer demand deposit
accounts.
Our
retail checking account balance was $43.3 million at December 31, 2007. We
generally accumulate deposits by relying on renewals of term accounts by
existing depositors, participating in deposit rate surveys which promote the
rates offered by us on our deposit products, and periodically advertising in
various local market newspapers and other media. Management believes that our
deposits are a reliable funding source and that the cost of funds resulting from
our deposit gathering strategy is comparable to those of other banks pursuing a
similar strategy. However, because we compete for deposits primarily on the
basis of rates, we could experience difficulties in attracting deposits if we
could not continue to offer deposit rates at levels above those of other
financial institutions. Management also believes that any efforts to
significantly increase the size of our deposit base may require greater
marketing efforts and/or increases in deposit rates. At December 31, 2007,
$379.4 million, or 17.4% of total deposits, were brokered deposits.
For
information concerning overall deposits outstanding during the periods indicated
and the rates paid thereon, see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Net Interest
Income”.
The Bank
also uses advances from the Federal Home Loan Bank or FHLB of San Francisco and
borrowings from other unaffiliated financial institutions as funding sources.
FHLB advances are collateralized by pledges of qualifying cash equivalents,
investment securities, mortgage-backed securities and loans. At December 31,
2007, FHLB advances outstanding totaled $1.0 billion, and the remaining
available borrowing capacity, based on the loans and securities pledged as
collateral, totaled $415.6 million, net of the $13.2 million of additional FHLB
Stock that we would be required to purchase to support the additional
borrowings. Additionally, the Bank has a $30.0 million repurchase agreement
borrowing from an unaffiliated financial institution that is secured by
mortgage-backed securities. As of December 31, 2007, we had an available
borrowing capacity under the Federal Reserve Bank of San Francisco credit
facility of $178.5 million. We also had available $131.0 million of
uncommitted, unsecured lines of credit with four unaffiliated financial
institutions, and a $37.5 million revolving credit facility with an unaffiliated
financial institution. See “Item 8. Financial Statements and
Supplementary Data — Notes to Consolidated Financial Statements — Notes 7, 8,
and 9”.
Regulation
As a bank
holding company, ICB is regulated by the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board” or “FRB”). As a California-chartered
commercial bank, the Bank is regulated by the California Department of Financial
Institutions (the “DFI”) and the Federal Deposit Insurance Corporation (the
“FDIC”).
Holding
Company Regulation
Bank
holding companies are subject to comprehensive regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, and the regulations of the
Federal Reserve Board. As a bank holding company, ICB is required to file
reports with the Federal Reserve Board and provide such additional information
as the Federal Reserve Board may require. ICB and its non-bank subsidiaries are
also subject to examination by the Federal Reserve Board. The Federal Reserve
Board has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a bank holding
company divest subsidiaries, including its bank subsidiaries. In general,
enforcement actions may be initiated for violations of law and regulation as
well as unsafe or unsound practices.
Under
Federal Reserve Board policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy, the Federal Reserve Board
may require, and has required in the past, bank holding companies to contribute
additional capital to undercapitalized subsidiary banks.
Under the
Bank Holding Company Act of 1956, a bank holding company must obtain Federal
Reserve Board approval before, among other matters:
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acquiring,
directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after the acquisition, it would
own or control more than 5% of these shares (unless it already owns or
controls a majority of these
shares);
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acquiring
all or substantially all of the assets of another bank or bank holding
company; or
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merging
or consolidating with another bank holding
company.
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This
statute also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which have been identified as activities closely related to the business of
banking or managing or controlling banks. Companies that qualify as financial
holding companies may also engage in securities, insurance and merchant banking
activities.
Dividends. The Federal
Reserve Board has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the Federal Reserve Board’s view that a
bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the bank holding company’s
capital needs, asset quality and overall financial condition. Furthermore, under
its source of strength doctrine, the Federal Reserve Board expects a bank
holding company to serve as a source of financial strength for its bank
subsidiaries, which could limit the ability of a holding company to pay
dividends if a bank subsidiary did not have sufficient capital.
Repurchase or Redemption of Equity
Securities. A bank holding company is required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of its
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for bank holding companies, has a safety and
soundness examination rating of at least a “2” and is not subject to any
unresolved supervisory issues.
Regulatory Capital
Requirements. The
Federal Reserve has established risk-based measures and a leverage measure of
capital adequacy for bank holding companies.
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The
minimum ratio of total capital to risk-weighted assets is 8.0%. Total capital
consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital
generally consists of common shareholders’ equity, including retained earnings,
noncumulative perpetual preferred stock, certain trust preferred securities and
minority interest in equity accounts of fully consolidated subsidiaries, less
goodwill and other specified intangible assets. Tier 1 capital must equal at
least 4.0% of risk-weighted assets. Tier 2 capital generally consists of
subordinated debt and other hybrid capital instruments, other preferred stock, a
limited amount of loan loss reserves and a limited amount of unrealized holding
gains on equity securities. The total amount of Tier 2 capital is limited to
100% of Tier 1 capital. At December 31, 2007, our ratio of total capital to
risk-weighted assets was 11.3% and our ratio of Tier 1 capital to risk-weighted
assets was 9.7%.
In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum ratio of Tier
1 capital to average assets, less goodwill and other specified intangible
assets, of 3.0% for certain bank holding companies that meet specified criteria,
including having the highest regulatory rating and implementing the Federal
Reserve’s risk-based capital measure for market risk. All other bank holding
companies generally are required to maintain a leverage ratio of at least
4.0%. At December 31, 2007, ICB’s required leverage ratio
was 4.0% and its actual leverage ratio was 8.4%.
ICB
currently is deemed “well capitalized” under the Federal Reserve Board capital
requirements. To be well capitalized, a bank holding company must have a ratio
of total capital to risk weighted assets of at least 10% and a ratio of Tier 1
capital to risk weighted assets of at least 6.0%.
Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. As described below,
significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.
Bank
Regulation — California Law
The
regulations of the DFI govern most aspects of the Bank’s businesses and
operations, including, but not limited to, the scope of its business,
investments, the nature and amount of any collateral for loans, the issuance of
securities, the payment of dividends, bank expansion and bank activities. The
DFI’s supervision of the Bank includes comprehensive reviews of all aspects of
the Bank’s business and condition, and the DFI possesses broad remedial
enforcement authority to influence the Bank’s operations, both formally and
informally.
Bank
Regulation — Federal Law
The FDIC,
in addition to the DFI, broadly regulates the Bank. As an insurer of deposits,
the FDIC issues regulations, conducts examinations, requires the filing of
reports, and generally supervises the operations of institutions to which it
provides deposit insurance. The FDIC is also the federal agency charged with
regulating state-chartered banks that are not members of the Federal Reserve
System, such as the Bank. Insured depository institutions, and their
institution-affiliated parties, may be subject to potential enforcement actions
by the FDIC and the DFI for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Management is not aware of any pending or threatened enforcement actions against
the Bank.
Regulatory Capital Requirements.
Federally-insured, state-chartered banks such as the Bank are required to
maintain minimum levels of regulatory capital as specified in the FDIC’s capital
maintenance regulations. The FDIC also is authorized to impose capital
requirements in excess of these standards on individual banks on a case-by-case
basis.
The Bank
is required to comply with three separate minimum capital requirements: a “tier
1 capital ratio” and two “risk-based” capital requirements. “Tier 1 capital”
generally includes common shareholders’ equity, including retained earnings,
qualifying noncumulative perpetual preferred stock and any related surplus, and
minority interests in the equity accounts of fully consolidated subsidiaries,
less intangible assets, other than properly valued purchased mortgage servicing
rights up to certain specified limits and less net deferred tax assets in excess
of certain specified limits.
Tier 1 Capital Ratio. FDIC
regulations establish a minimum 3.0% ratio of tier 1 capital to total average
assets for the most highly-rated state-chartered, FDIC-supervised banks. All
other FDIC supervised banks must maintain at least a 4.0% tier 1 capital ratio.
At December 31, 2007, the Bank’s required minimum tier 1 capital ratio was 4.0%
and its actual tier 1 capital ratio was 8.3%.
Risk-Based Capital Requirements.
The risk-based capital requirements generally require the Bank to
maintain a minimum ratio of tier 1 capital to risk-weighted assets of at least
4.0% and a minimum ratio of total risk-based capital to risk-weighted assets of
at least 8.0%. To calculate the amount of capital required, assets are placed in
one of four categories and given a percentage weight (0%, 20%, 50% or 100%)
based on the relative risk of the category. For example, United States Treasury
Bills and Ginnie Mae securities are placed in the 0% risk category. Fannie Mae
and Freddie Mac securities are placed in the 20% risk category, loans secured by
one-to four-family residential properties and certain privately-issued
mortgage-backed securities are generally placed in the 50% risk category, and
commercial and consumer loans and other assets are generally placed in the 100%
risk category. In addition, certain off-balance-sheet items are converted to
balance sheet credit equivalent amounts and each amount is then assigned to one
of the four categories.
For
purposes of the risk-based capital requirements, “total capital” means tier 1
capital plus supplementary or tier 2 capital, so long as the amount of
supplementary or tier 2 capital that is used to satisfy the requirement does not
exceed the amount of tier 1 capital. Tier 2 capital includes cumulative and
certain other perpetual preferred stock, mandatory convertible subordinated debt
and perpetual subordinated debt, mandatory redeemable preferred stock,
intermediate-term preferred stock, mandatory convertible subordinated debt and
subordinated debt, the allowance for loan losses up to a maximum of 1.25% of
risk-weighted assets and a limited amount of unrealized holding gains on
securities. At December 31, 2007 the Bank’s required minimum tier 1 risk-based
and total capital ratios were 4.0% and 8.0% respectively and its actual was 9.6%
and 10.9%, respectively.
The
federal banking agencies have adopted regulations specifying that the agencies
will include, in their evaluation of a bank’s capital adequacy, an assessment of
the exposure to declines in the economic value of the bank’s capital due to
changes in interest rates. The FDIC and the other federal banking agencies have
also promulgated final amendments to their respective risk-based capital
requirements which identify concentration of credit risk and certain risks
arising from nontraditional activities, and the management of such risk, as
important factors to consider in assessing an institution’s overall capital
adequacy. The FDIC may require higher minimum capital ratios based on certain
circumstances, including where the institution has significant risks from
concentration of credit or certain risks arising from nontraditional
activities.
Prompt Corrective Action
Requirements. The FDIC has implemented a system requiring regulatory
sanctions against state-chartered banks that are not adequately capitalized,
with the sanctions growing more severe the lower the institution’s capital. The
FDIC has established specific capital ratios for five separate capital
categories: “well capitalized”, “adequately capitalized”, “undercapitalized”,
“significantly undercapitalized”, and “critically
undercapitalized”.
An
institution is treated as “well capitalized” if its total risk based capital
ratio is 10.0% or more, its tier 1 risk-based ratio is 6.0% or more, its tier 1
capital ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. The Bank exceeded these
requirements at December 31, 2007.
The FDIC
is authorized and, under certain circumstances, required to take certain actions
against institutions that are not at least adequately capitalized. Any such
institution must submit a capital restoration plan and, until such plan is
approved by the FDIC, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The capital restoration plan must include a
limited guaranty by the institution’s holding company. In addition,
the FDIC must appoint a receiver or conservator for an institution, with certain
limited exceptions, within 90 days after it becomes “critically
undercapitalized”.
The FDIC
is also generally authorized to reclassify an institution into a lower capital
category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
Deposit
Insurance. The Bank’s deposits are insured up to applicable
limits by the Deposit Insurance Fund, or DIF, which is administered by the FDIC.
The FDIC insures deposits up to the applicable limits and this insurance is
backed by the full faith and credit of the United States government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by institutions insured by the FDIC. It
also may prohibit any institution insured by the FDIC from engaging in any
activity determined by regulation or order to pose a serious risk to the
institution. The FDIC also has the authority to initiate enforcement actions
against insured institutions and may terminate the deposit insurance if it
determines that an institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
Under
regulations effective January 1, 2007, the FDIC adopted a new risk-based premium
system that provides for quarterly assessments based on an insured institution's
ranking in one of four risk categories based upon supervisory and capital
evaluations. Well-capitalized institutions (generally those with capital
adequacy, asset quality, management, earnings and liquidity, or "CAMELS"
composite ratings of 1 or 2) are grouped in Risk Category I and assessed for
deposit insurance at an annual rate of between five and seven basis points. The
assessment rate for an individual institution is determined according to a
formula based on a weighted average of the institution's individual CAMEL
component ratings plus either five financial ratios or, in the case of an
institution with assets of $10.0 billion or more, the average ratings of its
long-term debt. Institutions in Risk Categories II, III and IV are assessed at
annual rates of 10, 28 and 43 basis points, respectively. This assessment for
the year ended December 31, 2007 was approximately $1.0 million and was offset
by a one-time credit assessment allocated to member institutions under the
Federal Deposit Insurance Reform Act of 2005. As of December 31, 2007, the
remaining assessment credit available to offset our future deposit insurance
assessment was $34,000.
The FDIC
also collects assessments against the assessable deposits of insured
institutions to service the debt on bonds issued during the 1980s to resolve the
thrift bailout. Our expense related to this assessment for the year
ended December 31, 2007 was $250,000.
Community Reinvestment Act and Fair
Lending Requirements. Federal banking agencies are required to evaluate
the record of financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In its most recent
examination, the FDIC rated the Bank “satisfactory” in complying with its
Community Reinvestment Act obligations. The Bank is also subject to
certain fair lending (nondiscrimination) requirements. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies take
compliance with such laws into account when regulating and supervising other
activities such as mergers and acquisitions.
Fiscal and Monetary Policies.
Our business and earnings are affected significantly by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. Among the
instruments of monetary policy available to the Federal Reserve Board are (a)
conducting open market operations in United States government securities; (b)
changing the discount rates of borrowings of depository institutions, (c)
imposing or changing reserve requirements against depository institutions’
deposits, and (d) imposing or changing reserve requirements against certain
borrowings by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits.
The policies of the Federal Reserve Board may have a material effect on our
business, results of operations and financial condition.
Federal
Reserve Board regulations require the Bank to maintain non-interest earning
reserves against the Bank’s transaction deposit accounts. Currently,
the first $8.5 million of otherwise reservable balances are exempt from the
reserve requirement, a 3% reserve requirement applies to balances over $9.3
million up to $43.9 million and a 10% reserve requirement applies to balances
over $43.9 million. The Bank was in compliance with these
requirements as of December 31, 2007.
Privacy
Provisions. Banking regulators, as required under the
Gramm-Leach-Bliley Act (“GLB Act”), have adopted rules limiting the ability of
banks and other financial institutions to disclose nonpublic information about
consumers to nonaffiliated third parties. The rules generally require disclosure
of privacy policies to consumers and, in some circumstances, allow consumers to
prevent disclosure of certain personal information to nonaffiliated third
parties. The privacy provisions of the GLB Act affect how consumer information
is transmitted through diversified financial services companies and conveyed to
outside vendors.
The State
of California has adopted The California Financial Information Privacy Act
(“CFPA”), which took effect in 2004. The CFPA requires a financial
institution to provide specific information to a consumer related to the sharing
of that consumer’s nonpublic personal information. A consumer may direct the
financial institution not to share his or her nonpublic personal information
with affiliated or nonaffiliated companies with which a financial institution
has contracted to provide financial products and services, and requires that
permission from the consumer be obtained by a financial institution prior to
sharing such information. These provisions are more restrictive than the privacy
provisions of the GLB Act.
In
December 2003, the U.S. Congress adopted, and President Bush signed, the Fair
and Accurate Transactions Act (the “FACT Act”). In 2005, federal courts
determined that the provisions of the CFPA limiting shared information with
affiliates are preempted by provisions of the GLB Act, the FACT Act and the Fair
Credit Reporting Act.
International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001. President
Bush signed the USA Patriot Act of 2001 into law in October 2001. This act
contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadened
existing anti-money laundering legislation and the extraterritorial jurisdiction
of the United States, imposes new compliance and due diligence obligations,
creates new crimes and penalties, compels the production of documents located
both inside and outside the United States, and clarifies the safe harbor from
civil liability to customers. The U.S. Treasury Department has issued a number
of regulations implementing the USA Patriot Act that apply certain of its
requirements to financial institutions such as the Bank. The regulations impose
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing. The increased obligations of financial institutions,
including us, to identify their customers, watch for and report suspicious
transactions, respond to requests for information by regulatory authorities and
law enforcement agencies, and share information with other financial
institutions, requires the implementation and maintenance of internal
procedures, practices and controls which have increased, and may continue to
increase, our costs and may subject us to liability.
Enforcement
and compliance-related activity by government agencies has increased. Money
laundering and anti-terrorism compliance are among the areas receiving a high
level of focus in the present environment.
Future Legislation. Various
legislation, including proposals to change substantially the financial
institution regulatory system, is from time to time introduced in Congress. This
legislation may change banking statutes and our operating environment in
substantial and unpredictable ways. If enacted, this legislation could increase
or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit
unions, and other financial institutions. We cannot predict whether any of this
potential legislation will be enacted and, if enacted, the effect that it, or
any implementing regulations, would have on our business, results of operations
or financial condition.
Employees
As of
December 31, 2007, we had 268 employees. Management believes that its relations
with employees are satisfactory. We are not subject to any collective bargaining
agreements.
Segment
Reporting
Financial
and other information regarding our operating segments is contained in Note 17
to our audited consolidated financial statements included in Item 8 of this
report.
Internet
Website
We
maintain a website with the address www.imperialcapitalbancorp.com. The
information contained on our website is not included as a part of, or
incorporated by reference into, this Annual Report on Form 10-K. Other than an
investor’s own Internet access charges, we make available free of charge through
our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we have electronically filed such material with, or
furnished such material to, the Securities and Exchange Commission.
Item 1A. Risk Factors
An investment in
our common stock is subject to risks inherent in our business. Before
making an investment decision, you should carefully consider the risks and
uncertainties described below together with all of the other information
included in this report. In addition to the risks and uncertainties
described below, other risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial
condition and results of operations. The value or
market price of our common stock could decline due to any of these identified or
other risks, and you could lose all or part of your
investment.
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate
risk. Our primary source of income is net interest income, which is
the difference between interest earned on loans and investments and the interest
paid on deposits and borrowings. We expect that we will periodically
experience imbalances in the interest rate sensitivities of our assets and
liabilities and the relationships of various interest rates to each
other. Over any defined period of time, our interest-earning assets
may be more sensitive to changes in market interest rates than our
interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products may
not change to the same degree over a given time period. In any event,
if market interest rates should move contrary to our position, our earnings may
be negatively affected. In addition, loan volume and quality and
deposit volume and mix can be affected by market interest
rates. Changes in levels of market interest rates could materially
adversely affect our net interest spread, asset quality, origination volume and
overall profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate
environment, we may not be able to manage this risk effectively. If
we are unable to manage interest rate risk effectively, our business, financial
condition and results of operations could be materially harmed.
Changes
in the level of interest rates also may negatively affect our ability to
originate loans, the value of our assets and our ability to realize gains from
the sale of our assets, all of which ultimately affect our
earnings.
An
increase in loan prepayments may adversely affect our
profitability.
Prepayment
rates are affected by customer behavior, conditions in the real estate and other
financial markets, general economic conditions and the relative interest rates
on our fixed-rate and adjustable-rate mortgage loans and mortgage-backed
securities. Changes in prepayment rates are therefore difficult for us to
predict.
We
recognize our deferred loan origination costs and premiums paid in originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net deferred loan
origination costs and premiums are expensed accelerates. The effect of the
acceleration of deferred costs and premium amortization may be mitigated by
prepayment penalties paid by the borrower when the loan is paid in full within a
certain period of time which varies between loans. If prepayment occurs after
the period of time when the loan is subject to a prepayment penalty, the effect
of the acceleration of premium and deferred cost amortization is no longer
mitigated.
We may
not be able to reinvest prepayments on loans or mortgage-backed securities at
rates comparable to the prepaid instrument particularly in periods of declining
interest rates.
An
inadequate allowance for loan losses would reduce our earnings.
We are
exposed to the risk that our borrowers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to assure full repayment. Credit losses are
inherent in the lending business and could have a material adverse effect on our
operating results. Volatility and deterioration in the economy may also increase
our risk for credit losses. We evaluate the collectibility of our loan portfolio
and provide an allowance for loan losses that we believe is adequate based upon
such factors as:
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the
risk characteristics of various classifications of
loans;
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general
portfolio trends relative to asset and portfolio
size;
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potential
credit and geographic
concentrations;
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delinquency
trends and nonaccrual levels;
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historical
loss and recovery experience and risks associated with changes in
economic, social and business
conditions;
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the
amount and quality of the
collateral;
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the
views of our regulators; and
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the
underwriting standards in effect when the loan is
made.
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If our
evaluation is incorrect and borrower defaults cause losses exceeding our
allowance for loan losses, our earnings could be materially and adversely
affected. We cannot assure you that our allowance will be adequate to cover loan
losses inherent in our portfolio. We may experience losses in our loan portfolio
or perceive adverse trends that require us to significantly increase our
allowance for loan losses in the future, which would also reduce our earnings.
In addition, the Bank’s regulators, as an integral part of their examination
process, may require us to make additional provisions for loan
losses.
Our
income producing property loans involve higher principal amounts and expose us
to a greater risk of loss than one-to-four family residential
loans.
At
December 31, 2007, we had $2.6 billion of loans secured by commercial and
multi-family real estate, representing 85.6% of our total real estate loans and
83.1% of our gross loan portfolio. The income generated from the
operation of the property securing the loan is generally considered by us to be
the principal source of repayment on this type of loan. A significant
portion of the income producing property lending in which we engage typically
involves larger loans to a single borrower and is generally viewed as exposing
the lender to a greater risk of loss than one-to-four family residential lending
because these loans generally are not fully amortizing over the loan period, but
have a balloon payment due at maturity. A borrower’s ability to make
a balloon payment typically will depend on being able to either refinance the
loan or timely sell the underlying property. Income producing
property values are also generally subject to greater volatility than
residential property values. The liquidation values of income producing
properties may be adversely affected by risks generally incident to interests in
real property, such as:
|
•
|
changes
or continued weakness in general or local economic
conditions;
|
|
•
|
changes
or continued weakness in specific industry
segments;
|
|
•
|
declines
in real estate values;
|
|
•
|
declines
in rental, room or occupancy rates in hotels, apartment complexes or
commercial properties;
|
|
•
|
increases
in other operating expenses (including energy
costs);
|
|
•
|
the
availability of refinancing at lower interest rates or better loan
terms;
|
|
•
|
changes
in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental legislation and
taxation;
|
|
•
|
increases
in interest rates, real estate and personal property tax rates,
and
|
|
•
|
other
factors beyond the control of the borrower or the
lender.
|
We
generally originate and acquire income producing property loans primarily to be
held in our portfolio to maturity. Because the resale market for this
type of loan is less liquid than the well-established secondary market for
residential loans, should we decide to sell our income producing property loans,
we may incur losses on any sale.
The
unseasoned nature of many of the loans we originated as part of our small
balance multi-family real estate loan platform, along with our limited
experience in originating loans nationwide, may lead to additional provisions
for loan losses or charge-offs, which would hurt our profits.
The
national expansion of our real estate loan platform and, in particular, our
small balance multi-family real estate loans has led to an increase in the
number of these types of loans in our portfolio. Many of these loans are
unseasoned and have not been subjected to unfavorable economic
conditions. We have limited experience in originating loans outside
the State of California and as a result do not have a significant payment
history pattern with which to judge future collectibility. At December 31, 2007,
$1.7 billion, or 56.2%, of our real estate secured loans were secured by
properties located outside the state of California. As a result, it is difficult
to predict the future performance of this portion of our real estate loan
portfolio. These loans may have delinquency or charge-off levels
above our historical experience, which could adversely affect our
profitability.
Our
construction loans are based upon estimates of costs and value associated with
the complete project. These estimates may be inaccurate.
We
originate construction loans for income producing properties, as well as for
single family home construction. At December 31, 2007, construction
and land loans totaled $421.1 million, or 13.4% of gross loans
receivable. Residential, including condominium, construction loans
consisted of $253.1 million, or 8.0% of our total loan portfolio at December 31,
2007. Construction lending involves additional risks because funds
are advanced upon the security of the project, which is of uncertain value prior
to its completion. There are also risks associated with the timely
completion of the construction activities for their allotted costs, as a number
of factors can result in delays and cost overruns, and the time needed to
stabilize income producing properties or to sell residential tract
developments. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult
to evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio. This type of lending also typically
involves higher loan principal amounts and is often concentrated with a small
number of builders. As a result, construction loans often involve the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or lease
the property or refinance the indebtedness, rather than the ability of the
borrower or guarantor to repay principal and interest. If our
appraisal of the value of the completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss.
A
slowdown in the commercial and residential real estate markets may have a
negative impact on earnings and liquidity position.
The overall credit quality of our
construction loan portfolio is impacted by trends in commercial and residential
real estate prices. We continually monitor changes in key regional and national
economic factors because changes in these factors can impact our construction
loan portfolio and the ability of our borrowers to repay their
loans. Across the United States over the past year, commercial and
residential real estate markets have experienced significant adverse
trends, including accelerated price depreciation. These conditions
led to significant increases in loan delinquencies and credit losses, as well as
increases in loan loss provisions, which in turn have had a negative affect
on earnings for many banks across the country. Likewise, we have also
experienced loan delinquencies in our construction loan
portfolio. The current slowdown in commercial and residential real
estate markets may continue to negatively impact real estate values and the
ability of our borrowers to liquidate properties. Despite reduced
sales prices, the lack of liquidity in the commercial and residential real
estate markets and tightening of credit standards within the banking industry
may continue to diminish all sales, further reducing our borrowers’ cash flows
and weakening their ability to repay their debt obligations to us. As
a result, we may experience a further negative material impact on our earnings
and liquidity positions.
Our
real estate lending also exposes us to the risk of environmental
liabilities.
In the
course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties.
We may be held liable to a governmental entity or to third persons for property
damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to
investigate or clean up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, as the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
the property. If we ever become subject to significant environmental
liabilities, our business, financial condition and results of operations could
be materially and adversely affected.
Repayment
of our entertainment finance loans is primarily dependent on revenues from
distribution contracts.
Through
ICBEF, we originate entertainment finance loans to independent producers of film
and television on a senior secured basis. Although these loans are
typically collateralized by a mortgage of copyright, security agreements and
assigned sales contracts, the primary source of repayment is the revenue
received by the borrower from the licensing of distribution
rights. For this reason, our credit decisions are based in part on
the creditworthiness and reputation of the producer, sales agent and
distributors who have contracted to distribute the films. In many
instances, the distribution contracts provide for multiple payments payable at
certain milestones (such as execution of contract, commencement of principal
photography or completion of principal photography). The maturity date of the
loan is generally six to nine months after completion of the
production. To the extent a distributor fails to make payment upon
completion of the film, or the predicted level of revenue is less than expected,
we may incur a loss if rights cannot be resold for the same amount or other loan
collateral cannot cover required loan payments.
Negative
events in certain geographic areas, particularly California, could adversely
affect us.
Although
we have significantly increased the geographic diversification of our loan
portfolio since commencing our national expansion, our real estate loans remain
heavily concentrated in the State of California, with approximately 43.8% of our
real estate loans as of December 31, 2007 secured by collateral and made to
borrowers in that state. In addition, as of that date, approximately
5.6%, 4.3%, 3.4%, 4.4% and 11.1% of our real estate loans were secured by
collateral and made to borrowers in the States of Arizona, Florida, Georgia, New
York and Texas, respectively. We have no other state geographic concentration of
loans in excess of three percent of our total gross loan portfolio. A worsening
of economic conditions in California or in any other state in which we have a
significant concentration of borrowers could have a material adverse effect on
our business, by reducing demand for new financings, limiting the ability of
customers to repay existing loans, and impairing the value of our real estate
collateral and real estate owned properties. Real estate values are affected by
various other factors, including changes in general or regional economic
conditions, governmental rules or policies and natural disasters such as
earthquakes, tornados and hurricanes.
Our
wholesale funding sources may prove insufficient to replace deposits and support
our future growth.
We must
maintain sufficient funds to respond to the needs of depositors and
borrowers. As a part of our liquidity management, we use a number of
funding sources in addition to core deposit growth and repayments and maturities
of loans and investments. These sources include brokered certificates of
deposit, repurchase agreements, federal funds purchased and Federal Home Loan
Bank advances. Adverse operating results or changes in industry
conditions could lead to an inability to replace these additional funding
sources at maturity. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest
rates. Finally, if we are required to rely more heavily on more
expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs. In this case, our
profitability would be adversely affected.
Competition
with other financial institutions could adversely affect our
profitability.
The
banking and financial services industry is very competitive. Legal and
regulatory developments have made it easier for new and sometimes unregulated
competitors to compete with us. Consolidation among financial service providers
has resulted in fewer very large national and regional banking and financial
institutions holding a large accumulation of assets. These institutions
generally have significantly greater resources, a wider geographic presence or
greater accessibility. Our competitors sometimes are also able to offer more
services, more favorable pricing or greater customer convenience than we do. In
addition, our competition has grown from new banks and other financial services
providers that target our existing or potential customers. As consolidation
continues among large banks, we expect additional institutions to try to exploit
our market.
Technological
developments have allowed competitors including some non-depository
institutions, to compete more effectively in local markets and have expanded the
range of financial products, services and capital available to our target
customers. If we are unable to implement, maintain and use such technologies
effectively, we may not be able to offer products or achieve cost-efficiencies
necessary to compete in our industry. In addition, some of these competitors
have fewer regulatory constraints and lower cost structures.
We
rely heavily on the proper functioning of our technology.
We rely
on our computer systems, and outside sources providing technology, for much of
our business, including recording our assets and liabilities. If our computer
systems or outside technology sources fail, are not reliable or there is a
breach of security, our ability to maintain accurate financial records may be
impaired, which could materially affect our operations and financial
condition.
We
are dependent upon the services of our management team.
We are
dependent upon the ability and experience of a number of our key management
personnel who have substantial experience with our operations, the financial
services industry and the markets in which we offer our services. It is possible
that the loss of the services of one or more of our senior executives or key
managers would have an adverse effect on our operations. Our success also
depends on our ability to continue to attract, manage and retain other qualified
personnel as we grow. We cannot assure you that we will continue to attract or
retain such personnel.
Terrorist
activities could cause reductions in investor confidence and substantial
volatility in real estate and securities markets.
It is
impossible to predict the extent to which terrorist activities may occur in the
United States or other regions, or their effect on a particular security issue.
It is also uncertain what affects any past or future terrorist activities and/or
any consequent actions on the part of the United States government and others
will have on the United States and world financial markets, local, regional and
national economics, and real estate markets across the United States. Among
other things, reduced investor confidence could result in substantial volatility
in securities markets, a decline in general economic conditions and real estate
related investments and an increase in loan defaults. Such unexpected losses and
events could materially affect our results of operations.
We
are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our
business.
Bank
holding companies and California-charted commercial banks operate in a highly
regulated environment and are subject to supervision and examination by federal
and state regulatory agencies. We are subject to the Bank Holding Company Act of
1956, as amended, and to regulation and supervision by the FRB. Imperial Capital
Bank is subject to regulation and supervision by the FDIC, and DFI. The cost of
compliance with regulatory requirements may adversely affect our results of
operations or financial condition. Federal and state laws and regulations govern
numerous matters including: changes in the ownership or control of banks and
bank holding companies; maintenance of adequate capital and the financial
condition of a financial institution; permissible types, amounts and terms of
extensions of credit and investments; permissible non-banking activities; the
level of reserves against deposits; and restrictions on dividend
payments.
The FDIC
and DFI possess cease and desist powers to prevent or remedy unsafe or unsound
practices or violations of law by banks subject to their regulation, and the FRB
possesses similar powers with respect to bank holding companies. These and other
restrictions limit the manner in which we may conduct our business and obtain
financing.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The
following sets forth our material facilities as of December 31,
2007.
|
Locations
|
Office
Uses
|
Square
Footage
|
Year
Current Lease Term
Expires
|
|||
|
La
Jolla, CA
|
Corporate
Headquarters
|
21,903 |
2008
|
|||
|
Glendale,
CA
|
Loan
Operations Division/Loan Administration/Asset Management/Operations
Support
|
28,467 |
2012
|
|||
|
New
York, NY
|
East
Coast Corporate Headquarters
|
3,810 |
2009
|
|||
|
Century
City, CA
|
ICB
Entertainment Finance
|
7,003 |
2008
|
|||
|
Glendale,
CA
|
Bank
Branch
|
4,791 |
2012
|
|||
|
Encino,
CA
|
Bank
Branch
|
5,145 |
2009
|
|||
|
San
Francisco, CA
|
Bank
Branch
|
5,005 |
2014
|
|||
|
Costa
Mesa, CA
|
Bank
Branch
|
3,850 |
2011
|
|||
|
San
Diego, CA
|
Bank
Branch
|
3,046 |
2011
|
|||
|
Beverly
Hills, CA
|
Bank
Branch
|
2,218 |
2010
|
|||
|
Carson
City, NV
|
Bank
Branch
|
3,000 |
2008
|
|||
|
Baltimore,
MD
|
Bank
Branch
|
3,467 |
2013
|
|||
|
Las
Vegas, NV (1)
|
Bank
Branch
|
5,400 |
2014
|
|||
|
Walnut
Creek, CA
|
Loan
Origination Office
|
2,220 |
2009
|
|||
|
Boston,
MA
|
Loan
Origination Office
|
3,309 |
2009
|
|||
|
Atlanta,
GA
|
Loan
Origination Office
|
3,148 |
2008
|
|||
|
Red
Bank, NJ
|
Loan
Origination Office
|
1,800 |
2009
|
|||
|
Houston,
TX
|
Loan
Origination Office
|
3,420 |
2011
|
|||
_______________
(1) The
Las Vegas bank branch is scheduled to open in 2008.
For
additional information regarding our premises, see “Item 8. Financial Statements
and Supplementary Data — Notes to Consolidated Financial Statements - Note
5”.
In
February 2008, we relocated our ICB Entertainment Finance office to Glendale, CA
and increased the Glendale space currently occupied by our loan operations and
loan administration departments. The combined additional space occupied by these
divisions is 12,516 square feet with a lease expiration of 2012.
Management
believes that our present facilities are adequate for its current needs, and
that alternative or additional space, if necessary, will be available on
reasonable terms.
Item 3. Legal Proceedings
We are
party to certain legal proceedings incidental to our business. Management
believes that the outcome of such proceedings, in the aggregate, will not have a
material effect on our business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security
Holders
No matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the quarter ended December 31, 2007.
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
In
December 2006, we filed an application and received approval to list our common
stock on the New York Stock Exchange (“NYSE”). Our common stock began trading on
the NYSE on December 29, 2006 under the symbol “IMP”. Prior to trading on the
NYSE, our common stock traded on the NASDAQ Global Select Market under the
symbol “ITLA”. As of March 3, 2008, there were 108
holders of record of ICB’s common stock representing an
estimated 1,119
beneficial shareholders with a total of 5,426,760 shares
outstanding.
The
following table sets forth, for the periods indicated, the range of high and low
trade prices for ICB’s common stock and the cash dividends declared per share.
Stock price data reflects inter-dealer prices, without retail mark-up, mark-down
or commission.
|
Market
Price
|
Average
Daily
|
|||||||||||||||
|
High
|
Low
|
Close
|
Closing
Price
|
|||||||||||||
|
2007
4th
Quarter
|
$ | 28.29 | $ | 17.43 | $ | 18.30 | $ | 21.94 | ||||||||
|
3rd
Quarter
|
54.11 | 27.51 | 28.25 | 39.14 | ||||||||||||
|
2nd
Quarter
|
55.59 | 48.00 | 52.12 | 51.62 | ||||||||||||
|
1st
Quarter
|
61.95 | 47.50 | 52.02 | 54.94 | ||||||||||||
|
2006
4th
Quarter
|
$ | 58.96 | $ | 50.75 | $ | 57.91 | $ | 54.91 | ||||||||
|
3rd
Quarter
|
55.15 | 49.10 | 53.76 | 51.76 | ||||||||||||
|
2nd
Quarter
|
52.93 | 46.14 | 52.58 | 49.55 | ||||||||||||
|
1st
Quarter
|
50.20 | 44.65 | 48.22 | 47.28 | ||||||||||||
|
Cash
dividends declared per share
|
2007
|
2006
|
||||||
|
1st
Quarter
|
$ | 0.16 | $ | 0.15 | ||||
|
2nd
Quarter
|
0.16 | 0.15 | ||||||
|
3rd
Quarter
|
0.16 | 0.15 | ||||||
|
4th
Quarter
|
0.16 | 0.15 | ||||||
|
Total
|
$ | 0.64 | $ | 0.60 | ||||
As a bank
holding company, ICB’s ability to pay dividends may be affected by regulations,
including those governing the payment of dividends by the Bank to ICB, which
could be a source of funds for any dividends paid by ICB, as well as by the
policies of the Federal Reserve Board. Under federal regulations, the dollar
amount of dividends the Bank may pay depends upon its capital position and
recent net income. Generally, if the Bank satisfies its regulatory capital
requirements, it may make dividend payments up to the limits prescribed under
state law and FDIC regulations.
Payments
of the distributions on our trust preferred securities from the special purpose
subsidiary trusts we sponsored are fully and unconditionally guaranteed by us.
The junior subordinated debentures that we have issued to our subsidiary trusts
are senior to our shares of common stock. As a result, we must make required
payments on the junior subordinated debentures before any dividends can be paid
on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the interest and principal obligations under the junior
subordinated debentures must be satisfied before any distributions can be made
on our common stock. We may defer the payment of interest on each of the junior
subordinated debentures for a period not to exceed 20 consecutive quarters,
provided that the deferral period does not extend beyond the stated maturity.
During such deferral period, distributions on the corresponding trust preferred
securities will also be deferred and we may not pay cash dividends to the
holders of shares of our common stock.
We expect
to pay a cash dividend of $0.16 per share for each quarter in 2008; however,
there can be no assurance as to future dividends because they are dependent on
our future earnings, capital requirements and financial condition. See “Item 1.
Business—Regulation” and Note 15 to our consolidated financial statements
included in Item 8 of this report.
Stock
Repurchases
The
following table sets forth the repurchases of our common stock for the fiscal
quarter ended December 31, 2007.
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or Programs
(1)
|
||||||||||||
|
October
1, 2007 to October
31, 2007
|
— | $ | — | — | 110,486 | |||||||||||
|
November
1, 2007 to November
30, 2007
|
— | — | — | 110,486 | ||||||||||||
|
December
1, 2007 to December
31, 2007
|
— | — | — | 110,486 | ||||||||||||
|
Total
|
— | $ | — | — | 110,486 | |||||||||||
_______________
|
(1)
|
There
were no repurchases under the twelfth extension of our stock repurchase
program during the three months ended December 31, 2007. The
twelfth extension was announced on March 14, 2006, and authorized the
repurchase of an additional 5% of the outstanding shares as of the
authorization date. At December 31, 2007, a total of 110,486
shares remained available for repurchase under this
extension.
|
Performance
Graph
The
following graph compares the performance of our Common Stock with that of the
New York Stock Exchange Composite Index, the NASDAQ Composite Index (U.S.
Companies) and the SNL Bank Index over a five year period through December 31,
2007. The comparison assumes $100 was invested on December 31, 2002 in our
Common Stock and in each of the foregoing indices and assumes the reinvestment
of all dividends. Historical stock price performance is not necessarily
indicative of future stock price performance.
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
|||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
100.00 | 150.77 | 176.92 | 147.01 | 176.28 | 56.86 | ||||||||||||||||||
|
NYSE
Composite
|
100.00 | 127.92 | 146.23 | 156.39 | 184.33 | 197.74 | ||||||||||||||||||
|
NASDAQ
Composite (1)
|
100.00 | 150.01 | 162.89 | 165.13 | 180.85 | 198.60 | ||||||||||||||||||
|
SNL
Bank Index
|
100.00 | 134.90 | 151.17 | 153.23 | 179.24 | 139.28 | ||||||||||||||||||
_______________
(1)
The NASDAQ Composite Index was used in our last performance graph, and is used
again in this performance graph, because our Common Stock traded on the New York
Stock Exchange for only one day in 2006.
Item 6. Selected Financial Data
The
following condensed consolidated statements of operations and financial
condition and selected performance ratios as of December 31, 2007, 2006, 2005,
2004, and 2003 and for the years then ended have been derived from our audited
consolidated financial statements. The information below is qualified in its
entirety by the detailed information included elsewhere herein and should be
read along with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statements and
Supplementary Data.”
|
For
the years ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
| Condensed Consolidated Statements of Operations | ||||||||||||||||||||
|
Total
interest income
|
$ | 251,271 | $ | 226,501 | $ | 178,158 | $ | 124,954 | $ | 115,977 | ||||||||||
|
Total
interest expense
|
164,583 | 132,075 | 86,486 | 41,418 | 30,867 | |||||||||||||||
|
Net
interest income before provision for loan losses
|
86,688 | 94,426 | 91,672 | 83,536 | 85,110 | |||||||||||||||
|
Provision
for loan losses
|
11,077 | 5,000 | 10,250 | 4,725 | 7,760 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
75,611 | 89,426 | 81,422 | 78,811 | 77,350 | |||||||||||||||
|
Non-interest
income (1)
|
3,133 | 2,772 | 6,574 | 14,508 | 15,240 | |||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||||||
|
Compensation
and benefits
|
23,899 | 21,265 | 21,737 | 21,444 | 18,870 | |||||||||||||||
|
Occupancy
and equipment
|
7,832 | 7,439 | 7,177 | 5,924 | 4,839 | |||||||||||||||
|
Other
general and administrative expenses
|
19,633 | 17,743 | 17,344 | 14,666 | 13,006 | |||||||||||||||
|
Other
real estate and other assets owned expense, net
|
1,125 | 369 | 193 | 712 | 1,212 | |||||||||||||||
|
Total
non-interest expense
|
52,489 | 46,816 | 46,451 | 42,746 | 37,927 | |||||||||||||||
|
Income
before provision for income taxes and minority interest in income of
subsidiary
|
26,255 | 45,382 | 41,545 | 50,573 | 54,663 | |||||||||||||||
|
Minority
interest in income of subsidiary (2)(3)
|
— | — | — | — | 6,083 | |||||||||||||||
|
Income
before provision for income taxes
|
26,255 | 45,382 | 41,545 | 50,573 | 48,580 | |||||||||||||||
|
Provision
for income taxes
|
10,635 | 18,493 | 17,482 | 19,948 | 18,946 | |||||||||||||||
|
NET
INCOME
|
$ | 15,620 | $ | 26,889 | $ | 24,063 | $ | 30,625 | $ | 29,634 | ||||||||||
|
BASIC
EARNINGS PER SHARE
|
$ | 2.85 | $ | 4.83 | $ | 4.19 | $ | 5.04 | $ | 4.91 | ||||||||||
|
DILUTED
EARNINGS PER SHARE
|
$ | 2.81 | $ | 4.71 | $ | 4.04 | $ | 4.75 | $ | 4.55 | ||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Condensed
Consolidated Statements of Financial Condition
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 8,944 | $ | 30,448 | $ | 93,747 | $ | 87,580 | $ | 178,318 | ||||||||||
|
Investment
securities available-for-sale, at fair value
|
117,924 | 99,527 | 92,563 | 66,845 | 53,093 | |||||||||||||||
|
Investment
securities held-to-maturity, at amortized cost
|
159,023 | 193,512 | 233,880 | 296,028 | — | |||||||||||||||
|
Stock
in Federal Home Loan Bank
|
53,497 | 48,984 | 43,802 | 23,200 | 17,966 | |||||||||||||||
|
Loans,
net
|
3,125,072 | 2,973,368 | 2,523,480 | 1,793,815 | 1,505,424 | |||||||||||||||
|
Interest
receivable
|
20,841 | 20,753 | 16,287 | 10,695 | 8,958 | |||||||||||||||
|
Other
real estate and other assets owned, net
|
19,396 | 6,729 | 3,960 | — | 7,048 | |||||||||||||||
|
Premises
and equipment, net
|
8,550 | 7,851 | 6,718 | 6,645 | 5,766 | |||||||||||||||
|
Deferred
income taxes
|
12,148 | 11,513 | 12,717 | 10,468 | 11,609 | |||||||||||||||
|
Goodwill
|
3,118 | 3,118 | 3,118 | 3,118 | 3,118 | |||||||||||||||
|
Other
assets
|
22,706 | 19,707 | 20,924 | 19,677 | 26,915 | |||||||||||||||
|
Total
Assets
|
$ | 3,551,219 | $ | 3,415,510 | $ | 3,051,196 | $ | 2,318,071 | $ | 1,818,215 | ||||||||||
|
Deposit
accounts
|
$ | 2,181,858 | $ | 2,059,405 | $ | 1,735,428 | $ | 1,432,032 | $ | 1,147,017 | ||||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,021,235 | 1,010,000 | 992,557 | 584,224 | 378,003 | |||||||||||||||
|
Account
payable and other liabilities
|
33,959 | 38,168 | 32,130 | 20,491 | 19,696 | |||||||||||||||
|
Junior
subordinated debentures (3)
|
86,600 | 86,600 | 86,600 | 86,600 | 86,600 | |||||||||||||||
|
Shareholders’
equity
|
227,567 | 221,337 | 204,481 | 194,724 | 186,899 | |||||||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 3,551,219 | $ | 3,415,510 | $ | 3,051,196 | $ | 2,318,071 | $ | 1,818,215 | ||||||||||
|
Book
value per share
|
$ | 44.22 | $ | 42.07 | $ | 37.85 | $ | 35.09 | $ | 31.30 | ||||||||||
____________
|
(1)
|
For
2004 and 2003, includes fee income earned in connection with the tax
refund lending program pursuant to our strategic alliance with various
subsidiaries of Household International, Inc. (“Household”), a wholly
owned subsidiary of HSBC Holdings plc (NYSE-HBC). This program
was terminated by Household in 2004 subsequent to the tax filing
season.
|
|
(2)
|
Represents
distributions on our trust preferred
securities.
|
|
(3)
|
As
a result of our adoption of FASB Interpretation No. 46 (revised) issued by
the Financial Accounting Standards Board effective December 31, 2003, we
de-consolidated the trusts which issued our trust preferred
securities. The effect of this was to recognize investments in
the trusts in other assets, to report the amount of junior subordinated
debentures we issued to these trusts as a liability in our consolidated
balance sheets and, beginning on the date of adoption, to recognize the
interest expense on the junior subordinated debentures in our consolidated
statements of income. Prior to the de-consolidation, we
reported our trust preferred securities in the mezzanine section of our
balance sheet as “guaranteed preferred beneficial interests in the
Company’s junior subordinated deferrable interest debentures” and
recognized distributions paid to the holders of the trust preferred
securities as “minority interest in income of subsidiary” in our
consolidated statements of income.
|
|
As
of and for the years ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
| Selected Performance Ratios | ||||||||||||||||||||
|
Return
on average assets
|
0.45 | % | 0.86 | % | 0.90 | % | 1.47 | % | 1.71 | % | ||||||||||
|
Return
on average shareholders’ equity
|
6.88 | % | 12.75 | % | 12.12 | % | 15.44 | % | 16.88 | % | ||||||||||
|
Net
interest margin (1)
|
2.51 | % | 3.06 | % | 3.43 | % | 4.12 | % | 5.03 | % | ||||||||||
|
Average
interest earning assets to average interest bearing
liabilities
|
107.74 | % | 108.21 | % | 109.32 | % | 127.50 | % | 135.03 | % | ||||||||||
|
Efficiency
ratio (2)
|
57.18 | % | 47.79 | % | 47.08 | % | 42.87 | % | 36.59 | % | ||||||||||
|
Total
general and administrative expense to average assets
|
1.47 | % | 1.49 | % | 1.73 | % | 2.02 | % | 2.29 | % | ||||||||||
|
Average
shareholders’ equity to average assets
|
6.52 | % | 6.78 | % | 7.39 | % | 9.51 | % | 11.16 | % | ||||||||||
|
Dividend
payout ratio (3)
|
22.78 | % | 12.74 | % | — | — | — | |||||||||||||
|
Nonperforming
assets to total assets
|
1.62 | % | 0.97 | % | 0.92 | % | 0.63 | % | 0.86 | % | ||||||||||
|
Allowance
for loan losses to loans held for investment, net (4)
|
1.51 | % | 1.53 | % | 1.71 | % | 1.94 | % | 2.14 | % | ||||||||||
|
Allowance
for loan loss to nonaccrual loans
|
125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | 392.26 | % | ||||||||||
|
Net
charge-offs to average loans held for investment, net
|
0.30 | % | 0.10 | % | 0.09 | % | 0.16 | % | 0.52 | % | ||||||||||
____________
|
(1)
|
Net
interest margin represents net interest income divided by total average
interest earning assets.
|
|
(2)
|
Efficiency
ratio represents general and administrative expenses divided by
non-interest income and net interest income before provision for loan
losses.
|
|
(3)
|
Dividends
declared per common share as a percentage of net income per diluted
share.
|
|
(4)
|
Loans
held for investment, net, represent loans before allowance for loan
losses.
|
The
following table includes supplementary quarterly operating results and per share
information for the past two years. The data presented should be read along with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and with “Item 8. Financial Statements and Supplementary Data”
included elsewhere in this report.
Quarterly
Operations (Unaudited)
|
For
the Quarters Ended
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
Interest
income
|
$ | 63,332 | $ | 62,983 | $ | 62,699 | $ | 62,257 | ||||||||
|
Interest
expense
|
39,343 | 41,166 | 42,021 | 42,053 | ||||||||||||
|
Net
interest income before provision for loan losses
|
23,989 | 21,817 | 20,678 | 20,204 | ||||||||||||
|
Provision
for loan losses
|
750 | 500 | 5,266 | 4,561 | ||||||||||||
|
Non-interest
income
|
716 | 843 | 949 | 625 | ||||||||||||
|
General
and administrative expense
|
12,421 | 11,903 | 13,255 | 13,785 | ||||||||||||
|
Total
real estate and other assets owned expense, net
|
163 | 195 | 199 | 568 | ||||||||||||
|
Provision
for income taxes
|
4,634 | 4,024 | 1,193 | 784 | ||||||||||||
|
Net
income
|
6,737 | 6,038 | 1,714 | 1,131 | ||||||||||||
|
Basic
earnings per share
|
$ | 1.22 | $ | 1.10 | $ | 0.31 | $ | 0.21 | ||||||||
|
Diluted
earnings per share
|
$ | 1.19 | $ | 1.08 | $ | 0.31 | $ | 0.21 | ||||||||
|
2006
|
||||||||||||||||
|
Interest
income
|
$ | 51,428 | $ | 55,760 | $ | 59,130 | $ | 60,183 | ||||||||
|
Interest
expense
|
28,518 | 31,776 | 34,840 | 36,941 | ||||||||||||
|
Net
interest income before provision for loan losses
|
22,910 | 23,984 | 24,290 | 23,242 | ||||||||||||
|
Provision
for loan losses
|
750 | 1,500 | 1,500 | 1,250 | ||||||||||||
|
Non-interest
income
|
717 | 607 | 578 | 870 | ||||||||||||
|
General
and administrative expense
|
12,037 | 11,833 | 11,474 | 11,103 | ||||||||||||
|
Total
real estate owned expense, net
|
106 | (177 | ) | 287 | 153 | |||||||||||
|
Provision
for income taxes
|
4,402 | 4,689 | 4,759 | 4,643 | ||||||||||||
|
Net
income
|
6,332 | 6,746 | 6,848 | 6,963 | ||||||||||||
|
Basic
earnings per share
|
$ | 1.13 | $ | 1.22 | $ | 1.24 | $ | 1.26 | ||||||||
|
Diluted
earnings per share
|
$ | 1.10 | $ | 1.18 | $ | 1.20 | $ | 1.22 | ||||||||
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of
Operations
The
following discussion and analysis reviews the financial condition and results of
our consolidated operations, including our significant consolidated
subsidiaries: Imperial Capital Bank and Imperial Capital Real Estate Investment
Trust.
Application of Critical Accounting
Policies and Accounting Estimates
The
accounting and reporting policies followed by us conform, in all material
respects, to accounting principles generally accepted in the United States and
to general practices within the financial services industry. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. While we base our estimates on historical experience,
current information and other factors deemed to be relevant, actual results
could differ from those estimates.
We
consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that
management reasonably could have used for the accounting estimate in the current
period, or changes in the accounting estimate that are reasonably likely to
occur from period to period, could have a material impact on our financial
statements. Accounting polices related to the allowance for loan losses are
considered to be critical, as these policies involve considerable subjective
judgment and estimation by management. We also consider our accounting polices
related to other real estate and other assets owned to be critical due to the
potential significance of these activities and the estimates involved. Critical
accounting policies, and our procedures related to these policies, are described
in detail below. Also see Note 1 — Organization and Summary of Significant
Accounting Policies in the accompanying notes to the consolidated financial
statements included elsewhere in this report.
Allowance for Loan Losses
(“ALL”). Our management assesses the adequacy of the ALL prior
to the end of each calendar quarter. This assessment includes
procedures to estimate the allowance and test the adequacy and appropriateness
of the resulting balance.
We
establish the ALL amount separately for two different risk groups (1) individual
loans (loans with specifically identifiable risks); and (2) homogeneous
loans (groups of loan with similar characteristics). We base the allocation for
individual loans primarily on risk rating grades assigned to each of these loans
as a result of our loan management and review processes. We then assign each
risk-rating grade a loss ratio, which is determined based on the experience of
management and our independent loan review process. We estimate losses on
impaired loans based on estimated cash flows discounted at the loan’s original
effective interest rate or based on the underlying collateral value. Based on
historical loss experience, as well as management’s experience with similar
loans, we also assign loss ratios to groups of loans. These loss
ratios are assigned to the various homogenous categories of the
portfolio.
The level
of the allowance also reflects management’s continuing evaluation of geographic
and credit concentrations, specific credit risks, loan loss experience, current
loan portfolio quality, present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. While
management utilizes its best judgment and information available, the ultimate
adequacy of the allowance is dependent upon a variety of factors beyond our
control, including the performance of our loan portfolio, the economy, changes
in interest rates and the view of the regulatory authorities toward loan
classifications.
We test
the ALL balance by comparing the balance in the ALL to historical trends and
peer information. Our management team then evaluates the result of the
procedures performed, including the result of our testing, and concludes on the
appropriateness of the balance of the ALL in its entirety. See the
section captioned “Allowance for Loan Losses and Nonperforming Assets” elsewhere
in this discussion for further details of the risk factors considered by
management in estimating the necessary level of the allowance for loan
losses.
Other Real Estate and Other Assets
Owned. Properties and other assets acquired through
foreclosure, or in lieu of foreclosure, are transferred to the other real estate
and other owned portfolio and initially recorded at estimated fair value less
the estimated costs to sell the property. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower
of cost or estimated fair value less the estimated costs of disposition. The
fair value of other real estate and other owned is generally determined from
appraisals obtained from independent appraisers.
Adoption
and Pending Adoption of Recent Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for
Certain Hybrid Financial Instruments” — an amendment of SFAS Nos. 133 and
140. SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement was effective for us on January 1, 2007.
The adoption of SFAS No. 155 did not have a material impact on our financial
condition or results of operations.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities”, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires companies to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract. The statement permits a company to
choose either the amortized cost method or fair value measurement method for
each class of separately recognized servicing assets. This statement was
effective for us on January 1, 2007. The adoption of SFAS No. 156 did not have a
material impact on our financial condition or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for us on January 1,
2008. The adoption of SFAS No. 157 did not have a material impact on
our financial condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 provides companies
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for us on
January 1, 2008. The adoption of SFAS No. 159 did not have a material
impact on our financial condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB Statement No. 51.”
SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS No. 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for the Company on January 1, 2009 and is not expected to have a
significant impact on our financial condition or results of
operations.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
establishes a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition requirements. FIN 48 was effective for us on
January 1, 2007. The adoption of FIN 48 did not have a material
impact on our financial condition or results of operations.
Executive
Summary
The
following discussion and analysis is intended to identify the major factors that
influenced our financial condition as of December 31, 2007 and 2006 and our
results of operations for the years ended December 31, 2007, 2006 and 2005. Our
primary business involves the acceptance of customer deposits and the
origination and purchase of loans secured by income producing real estate and,
to a lesser extent, the origination of entertainment finance loans.
Consolidated
net income in 2007 was $15.6 million, or $2.81 per diluted share, compared to
$26.9 million, or $4.71 per diluted share in 2006 and $24.1 million, or $4.04
per diluted share in 2005. The decrease in net income in 2007 was
primarily due to a decrease in net interest income before provision for loan
losses, which decreased 8.2% to $86.7 million during the year ended December 31,
2007, compared to $94.4 million for the prior year. This decrease was
primarily due to the decline in the yield earned on our loan portfolio, as
higher yielding loans have paid-off and were replaced by loan production that
was originated at lower spreads over our cost of funds due to competitive
pricing pressures. Net interest income was further negatively impacted by the
increase in our cost of funds as deposits and all other interest bearing
liabilities repriced to higher market interest rates, partially offset by the
growth in the average balance of our loan portfolio. Net income was
further impacted by a $6.1 million increase in the provision for loan losses
recorded during 2007 compared to the prior year. The provision
recorded during 2007 reflected an $11.7 million net increase in our
non-performing loans during the year. As a percentage of our total
loan portfolio, the amount of non-performing loans was 1.20% and 0.88% at
December 31, 2007 and 2006, respectively. With the housing and secondary
mortgage markets continuing to deteriorate and showing no signs of stabilizing
in the near future, we continue to aggressively monitor our real estate loan
portfolio, including our commercial and residential construction loan portfolio.
Our construction and land loan portfolio at December 31, 2007 totaled $421.1
million, of which $253.1 million were residential and condominium construction
loans, representing 8.0% of our total loan portfolio. At December 31, 2007, we
had $8.8 million of non-performing lending relationships within our construction
loan portfolio, consisting of two condominium construction projects located in
Corona, California and Portland, Oregon. Net income was also impacted by a $5.7
million increase in non-interest expense incurred during the year as compared to
the prior year. The increase related to the additional costs incurred in
connection with operating the national expansion of our small balance
multi-family lending platform, as well as increased marketing
costs.
Total
loan production, including the unfunded portion of loans, was $1.2 billion for
the year ended December 31, 2007, as compared to $1.6 billion, for each of the
years ended December 31, 2006 and 2005. Loan production in 2007 consisted of the
origination of $721.5 million of commercial real estate loans, $331.9 million of
small balance multi-family real estate loans and $114.4 million of entertainment
finance loans, and the acquisition of $47.3 million of commercial and
multi-family real estate loans by our wholesale loan operations. Total loan
production declined in 2007 due to a reduction in wholesale loan acquisitions
primarily related to a lack of loan pools being offered to us that met our
pricing and credit requirements.
Our
average total assets increased approximately 11.9% during 2007 to $3.5 billion.
Average cash and investment securities totaled $356.6 million in 2007 compared
to $419.8 million in 2006, a decrease of $63.2 million, or 15.0%. Average loans
receivable totaled $3.1 billion in 2007 compared to $2.7 billion in 2006, an
increase of $432.4 million, or 16.2%. Average interest bearing deposit accounts
totaled $2.1 billion in 2007 compared to $1.8 billion in 2006, an increase of
$270.6 million, or 14.7%. FHLB advances and other borrowings averaged $1.0
billion in 2007, compared to $926.9 million in 2006, an increase of $84.5
million, or 9.1%.
The
allowance for loan losses as a percentage of our total loans was 1.5% at
December 31, 2007 and 2006. During the year ended December 31, 2007,
we had net charge-offs of $9.3 million, compared to $2.8 million during the
prior year.
At
December 31, 2007, shareholders' equity totaled $227.6 million, or 6.4% of total
assets. During 2007, we increased our regular quarterly cash dividend
from $0.15 to $0.16 per share. During the year, we declared total dividends of
$0.64 per share, or approximately $3.5
million in total. For the year ended December 31, 2007, we
repurchased 187,475 shares at an average price of $47.42 per
share. Since beginning share repurchases in April 1997, a total of
3.7 million shares have been repurchased, returning approximately $110.0 million
of capital to our shareholders at an average price of $29.59 per
share. Through our stock repurchase program, all of our contributed
capital has been returned to shareholders. ICB’s book value per share
of common stock was $44.22 as of December 31, 2007, an increase of 5.1% from
$42.07 per share as of December 31, 2006.
Results
of Operations
The
following table presents, for the periods indicated, our condensed average
balance sheet information, together with interest income and yields earned on
average interest earning assets and interest expense and rates paid on average
interest bearing liabilities. Average balances are computed using daily average
balances. Nonaccrual loans are included in loans receivable.
|
Years
Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||
|
Cash
and investment
securities
|
$ | 356,608 | $ | 17,522 | 4.91 | % | $ | 419,762 | $ | 19,181 | 4.57 | % | $ | 432,774 | $ | 18,438 | 4.26 | % | ||||||||||||||||||
|
Real
estate loans (1)
|
3,011,179 | 222,607 | 7.39 | % | 2,588,452 | 200,322 | 7.74 | % | 2,016,691 | 141,061 | 6.99 | % | ||||||||||||||||||||||||
|
Franchise
loans (1)
|
4,476 | 1,503 | 33.58 | % | 11,578 | 475 | 4.10 | % | 121,768 | 9,972 | 8.19 | % | ||||||||||||||||||||||||
|
Entertainment
finance loans (1)
|
73,947 | 8,587 | 11.61 | % | 59,262 | 5,620 | 9.48 | % | 89,420 | 7,724 | 8.64 | % | ||||||||||||||||||||||||
|
Commercial
and other loans (1)
|
11,053 | 1,052 | 9.52 | % | 8,962 | 903 | 10.08 | % | 11,382 | 963 | 8.46 | % | ||||||||||||||||||||||||
|
Total
loans receivable
|
3,100,655 | 233,749 | 7.54 | % | 2,668,254 | 207,320 | 7.77 | % | 2,239,261 | 159,720 | 7.13 | % | ||||||||||||||||||||||||
|
Total
interest earning assets
|
3,457,263 | $ | 251,271 | 7.27 | % | 3,088,016 | $ | 226,501 | 7.33 | % | 2,672,035 | $ | 178,158 | 6.67 | % | |||||||||||||||||||||
|
Non-interest
earning assets
|
70,491 | 70,936 | 51,549 | |||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(45,265 | ) | (46,366 | ) | (37,978 | ) | ||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 3,482,489 | $ | 3,112,586 | $ | 2,685,606 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing demand accounts
|
$ | 25,381 | $ | 922 | 3.63 | % | $ | 29,047 | $ | 836 | 2.88 | % | $ | 51,684 | $ | 1,236 | 2.39 | % | ||||||||||||||||||
|
Money
market and passbook accounts
|
238,231 | 11,779 | 4.94 | % | 207,962 | 9,379 | 4.51 | % | 177,213 | 5,308 | 3.00 | % | ||||||||||||||||||||||||
|
Time
certificates
|
1,847,220 | 97,410 | 5.27 | % | 1,603,210 | 74,941 | 4.67 | % | 1,421,415 | 47,263 | 3.33 | % | ||||||||||||||||||||||||
|
Total
interest bearing deposit accounts
|
2,110,832 | 110,111 | 5.22 | % | 1,840,219 | 85,156 | 4.63 | % | 1,650,312 | 53,807 | 3.26 | % | ||||||||||||||||||||||||
|
FHLB
advances and other borrowings
|
1,011,461 | 46,134 | 4.56 | % | 926,916 | 38,722 | 4.18 | % | 707,391 | 25,508 | 3.61 | % | ||||||||||||||||||||||||
|
Junior
subordinated debentures
|
86,600 | 8,338 | 9.63 | % | 86,600 | 8,197 | 9.47 | % | 86,600 | 7,171 | 8.28 | % | ||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
3,208,893 | $ | 164,583 | 5.13 | % | 2,853,735 | $ | 132,075 | 4.63 | % | 2,444,303 | $ | 86,486 | 3.54 | % | |||||||||||||||||||||
|
Non-interest
bearing demand accounts
|
10,657 | 12,738 | 27,671 | |||||||||||||||||||||||||||||||||
|
Other
non-interest bearing liabilities
|
35,988 | 35,173 | 15,086 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
226,951 | 210,940 | 198,546 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 3,482,489 | $ | 3,112,586 | $ | 2,685,606 | ||||||||||||||||||||||||||||||
|
Net
interest spread (2)
|
2.14 | % | 2.70 | % | 3.13 | % | ||||||||||||||||||||||||||||||
|
Net
interest income before provisions for loan losses
|
$ | 86,688 | $ | 94,426 | $ | 91,672 | ||||||||||||||||||||||||||||||
|
Net
interest margin (3)
|
2.51 | % | 3.06 | % | 3.43 | % | ||||||||||||||||||||||||||||||
_______________
|
(1)
|
Before
allowance for loan losses and net of deferred loan fees and costs. Net
loan fee accretion of $2.4 million, $2.8 million and $2.9 million was
included in net interest income for 2007, 2006 and 2005,
respectively.
|
|
(2)
|
Average
yield on interest earning assets minus average rate paid on interest
bearing liabilities.
|
|
(3)
|
Net
interest income divided by total average interest earning
assets.
|
Our
primary source of revenue is net interest income. Our net interest income is
affected by (a) the difference between the yields earned on interest earning
assets, including loans and investments, and the interest rates paid on interest
bearing liabilities, including deposits and borrowings, which is referred to as
“net interest spread”, and (b) the relative amounts of interest earning assets
and interest bearing liabilities. As of December 31, 2007, 2006 and 2005, our
ratio of average interest earning assets to average interest bearing liabilities
was 107.7%, 108.2% and 109.3%, respectively.
The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest rates. The
change in interest due to both volume and rate has been allocated to change due
to volume and rate in proportion to the relationship of the absolute dollar
amounts of each.
|
2007
vs. 2006
|
2006
vs. 2005
|
|||||||||||||||||||||||
|
Increase
(Decrease) Due to:
|
Increase
(Decrease) Due to:
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Interest
and fees earned on:
|
||||||||||||||||||||||||
|
Loans,
net
|
$ | 32,725 | $ | (6,296 | ) | $ | 26,429 | $ | 32,413 | $ | 15,187 | $ | 47,600 | |||||||||||
|
Cash and investment
securities
|
(3,020 | ) | 1,361 | (1,659 | ) | (567 | ) | 1,310 | 743 | |||||||||||||||
|
Total increase (decrease) in
interest income
|
29,705 | (4,935 | ) | 24,770 | 31,846 | 16,497 | 48,343 | |||||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||
|
Deposit
accounts
|
13,370 | 11,585 | 24,955 | 6,739 | 24,610 | 31,349 | ||||||||||||||||||
|
FHLB advances and other
borrowings
|
3,712 | 3,700 | 7,412 | 8,758 | 4,456 | 13,214 | ||||||||||||||||||
|
Junior subordinated
debentures
|
— | 141 | 141 | — | 1,026 | 1,026 | ||||||||||||||||||
|
Total increase in interest
expense
|
17,082 | 15,426 | 32,508 | 15,497 | 30,092 | 45,589 | ||||||||||||||||||
|
Increase (decrease) in net
interest income
|
$ | 12,623 | $ | (20,361 | ) | $ | (7,738 | ) | $ | 16,349 | $ | (13,595 | ) | $ | 2,754 | |||||||||
2007 Compared to
2006
Net
Interest Income
Net interest income before provision
for loan losses decreased to $86.7 million for the year ended December 31, 2007,
compared to $94.4 million for the prior year, a decrease of 8.2%. This decrease
was primarily due to the growth in the average balance of our interest bearing
deposits and the increase in our cost of funds as deposits and all other
interest bearing liabilities repriced to higher market interest rates. Net
interest income was further negatively impacted by the decline in the yield
earned on our real estate loan portfolio, as higher yielding loans have paid-off
and were replaced by loan production that was originated at lower spreads over
our cost of funds due to competitive pricing pressures partially offset by the
growth in the average balance of our loan portfolio.
The
average yield on our total loan portfolio was 7.54% in 2007 compared to 7.77% in
2006. The average yield on our real estate loan portfolio was 7.39%
in 2007 compared to 7.74% in 2006. A significant portion of our loan
portfolio is comprised of adjustable rate loans indexed to either six month
LIBOR or the Prime Rate, most with interest rate floors and caps below and above
which the loan’s contractual interest rate may not
adjust. Approximately 49.3% of our loan portfolio was comprised of
adjustable rate loans at December 31, 2007, and approximately 46.5% of the loan
portfolio was comprised of hybrid loans, which after an initial fixed rate
period of three or five years, will convert to an adjustable interest rate for
the remaining term of the loan. As of December 31, 2007, our hybrid
loans had a weighted average of 2.3 years remaining until conversion to an
adjustable rate loan. Our adjustable rate loans generally reprice on
a quarterly or semi-annual basis with increases generally limited to maximum
adjustments of 2% per year up to 5% for the life of the loan. At
December 31, 2007, approximately $2.7 billion, or 85.0%, of our adjustable and
hybrid loan portfolio contained interest rate floors, below which the loans’
contractual interest rate may not adjust. The inability of our loans
to adjust downward can contribute to increased income in periods of declining
interest rates, and also assists us in our efforts to limit the risks to
earnings resulting from changes in interest rates, subject to the risk that
borrowers may refinance these loans during periods of declining interest
rates. At December 31, 2007, the weighted average floor interest rate
of these loans was 7.31%. At that date, approximately $251.9 million,
or 7.9%, of these loans were at the floor interest rate. At December
31, 2007, 42.0% of the adjustable rate loans outstanding had a lifetime interest
rate cap. The weighted-average lifetime interest rate cap on our adjustable rate
loan portfolio was 11.80% at that date. At December 31, 2007, none of
the loans in our adjustable rate loan portfolio were at their cap
rate.
Interest
expense on interest bearing liabilities increased $32.5 million, or 24.6%, to
$164.6 million in 2007 compared to $132.1 million in 2006. The increase was
primarily due to an increase in interest expense on deposits and FHLB advances
and other borrowings. Interest expense from deposit accounts
increased $24.9 million, or 29.3%, to $110.1 million in 2007 compared to $85.2
million in 2006 due to the growth in interest bearing deposits during 2007 and
the increase in the average rate paid on deposits as a result of higher market
interest rates as compared to the prior year. The average rate paid
on deposits was 5.22% in 2007 compared to 4.63% in 2006.
Interest
expense on FHLB advances and other borrowings increased $7.4 million, or 19.1%,
to $46.1 million in 2007 compared to $38.7 million in 2006. This increase was
caused by additional borrowings utilized to finance lending activities during
the year, as well as an increase in the average rate paid as matured borrowings
were replaced with new borrowings at higher market interest rates. The average
balance of FHLB advances and other borrowings increased $84.5 million, or 9.1%,
to $1.0 billion in 2007 compared to $926.9 million in 2006. The rate paid on
FHLB advances and other borrowings was 4.56% in 2007 as compared to 4.18% in
2006.
Provision
for Loan Losses
The
provision for loan losses was $11.1 million for the year ended December 31,
2007, compared to $5.0 million for the prior year. These provisions for loan
losses were recorded to provide reserves adequate to support known and inherent
losses in our loan portfolio and for specific reserves as of December 31, 2007
and 2006, respectively. The increase in provision for loan losses
during the year was primarily due to the net increase in our non-performing
loans. Non-performing loans as of December 31, 2007 were $38.0 million, compared
to $26.3 million at December 31, 2006. The increase in non-performing loans
during the year ended December 31, 2007 consisted of the addition of $85.3
million of non-performing loans, partially offset by paydowns received of $27.0
million, charge-offs of $10.9 million and loan upgrades of $17.8 million from
non-performing to performing status. Non-performing loans were also impacted by
the foreclosure and transfer of $17.9 million of non-performing loans to other
real estate and other assets owned during the year. As of December
31, 2007 as compared to December 31, 2006, the net increase in non-performing
loans primarily consisted of $8.8 million of construction real estate loans
consisting of two condominium construction projects located in Corona,
California and Portland, Oregon and $15.0 million of commercial and multi-family
loans, partially offset by decreases of $4.5 million of franchise loans and $7.6
million of entertainment finance loans. As a percentage of our total loan
portfolio, the amount of non-performing loans was 1.20% and 0.88% at December
31, 2007 and 2006, respectively. See also “Credit Risk Elements –
Allowance for Loan Losses and Nonperforming Assets”.
Non-interest
Income
Non-interest
income was $3.1 million for the year ended December 31, 2007, compared to $2.8
million for the prior year. Non-interest income primarily consisted of late fees
and other related fee income earned on customer accounts.
Non-interest
Expense
General
and Administrative Expense
General
and administrative expenses increased to $51.4 million for the year ended
December 31, 2007, compared to $46.4 million for the prior year. Our
efficiency ratio (defined as general and administrative expenses as percentage
of net revenue) was 57.2% for the year ended December 31, 2007, compared to
47.8% for the same period last year. Full time equivalent associates
averaged 271 in 2007 compared to 259 in 2006. The increase related to
the additional costs incurred in connection with operating the national
expansion of our small balance multi-family lending platform, as well as
increased marketing.
Income
Taxes
Provision
for income taxes decreased to $10.6 million in 2007 compared to $18.5 million in
2006. The decrease in provision for income taxes was primarily due to
the decrease in taxable income earned in 2007. The effective tax rate
was 40.51% and 40.75%, respectively, for 2007 and 2006.
At
December 31, 2007, we had a net deferred tax asset of $12.1
million. The deferred tax asset related primarily to loan loss
provisions recognized on our financial statements that have not yet been
recognized on our income tax returns. During 2007 and 2006, we had no
deferred tax assets relating to net operating loss carryforward deductions. The
deferred tax assets were considered fully realizable. Accordingly, no valuation
allowance on the deferred tax assets was established in 2007 and
2006.
2006 Compared to
2005
Net
Interest Income
Net interest income before provision
for loan losses increased to $94.4 million for the year ended December 31, 2006,
compared to $91.7 million for 2005, an increase of 3.0%. The increase was
primarily caused by an increase in interest income, attributable to the
significant growth in the average balance of our loan portfolio and adjustable
rate loans repricing to higher market interest rates. The increase in interest
income was partially offset by additional interest expense incurred due to the
likewise significant growth in the average balance of our interest bearing
liabilities as compared to 2005, deposits and other interest bearing liabilities
repricing to higher market interest rates, and the addition of new
borrowings.
The
average yield on our total loan portfolio was 7.77% in 2006 compared to 7.13% in
2005. The average yield on our real estate loan portfolio was 7.74%
in 2006 compared to 6.99% in 2005. Our adjustable rate mortgages are
primarily indexed to either six month LIBOR or the Prime Rate with interest rate
floors, below which the loan’s contractual interest rate may not
adjust. Approximately 51.3% of our loan portfolio was comprised of
adjustable rate loans at December 31, 2006, and approximately 45.5% of the loan
portfolio was comprised of hybrid loans, which, after an initial fixed rate
period of three or five years, will convert to an adjustable interest rate for
the remaining term of the loan. Our adjustable rate loans generally re-price on
a quarterly or semi-annual basis with increases generally limited to maximum
adjustments of 2% per year up to 5% for the life of the loan. As of
December 31, 2006, approximately $2.7 billion, or 90.5% of our adjustable rate
loan portfolio contained interest rate floors, below which the loans’
contractual interest rate may not adjust. The inability of our loans
to adjust downward can contribute to increased income in periods of declining
interest rates, and also assists us in our efforts to limit the risks to
earnings resulting from changes in interest rates, subject to the risk that
borrowers may refinance these loans during periods of declining interest
rates. At December 31, 2006, the weighted average floor interest rate
of our adjustable rate loan portfolio was 6.03%. At that date,
approximately $95.0 million or 3.2% of our adjustable rate loan portfolio was at
the floor interest rate. At December 31, 2006, 52.0% of the
adjustable rate loans outstanding had a lifetime interest rate cap. The
weighted-average lifetime interest rate cap on our adjustable rate loan
portfolio was 11.60%. At December 31, 2006, none of the loans in our adjustable
rate loan portfolio were at the cap rate.
Interest
expense on interest bearing liabilities increased $45.6 million, or 52.7%, to
$132.1 million in 2006 compared to $86.5 million in 2005. The increase was
primarily due to an increase in interest expense on deposits and FHLB advances
and other borrowings. Interest expense from deposit accounts
increased $31.3 million, or 58.3%, to $85.2 million in 2006 compared to $53.8
million in 2005 due to the growth in interest bearing deposits during 2006 and
the increase in the average rate paid on deposits as a result of higher market
interest rates as compared to the prior year. The average rate paid
on deposits was 4.63% in 2006 compared to 3.26% in 2005.
Interest
expense on FHLB advances and other borrowings increased $13.2 million, or 51.8%,
to $38.7 million in 2006 compared to $25.5 million in 2005. This increase was
primarily caused by additional borrowings utilized to finance lending activities
during the year. The average balance of FHLB advances and other borrowings
increased $219.5 million, or 31.0%, to $926.9 million in 2006 compared to $707.4
million in 2005. The increase was further caused by an increase in the rate paid
on FHLB advances and other borrowings, which was 4.18% in 2006 as compared to
3.61% in 2005.
Provision
for Loan Losses
The
provision for loan losses was $5.0 million for the year ended December 31, 2006,
compared to $10.3 million for 2005. These provisions for loan losses were
recorded to provide reserves adequate to support known and inherent losses in
our loan portfolio and for specific reserves as of December 31, 2006 and 2005,
respectively. The provision recorded during 2005 reflected the impact
of a $29.3 million increase in our other loans of concern, a $9.6 million
increase in non-performing loans during the year and a 40.3% increase in our
loan portfolio. Despite the significant continued growth in the size
of our overall loan portfolio during 2006, the level of other loans of concern
and non-performing loans remained relatively flat in 2006 compared to the prior
year. Other loans of concern were $67.0 million and $66.4 million,
respectively, at December 31, 2006 and 2005. Non-performing loans
totaled $26.3 million and $24.3 million, respectively, at December 31, 2006 and
2005. As a percentage of our total loan portfolio, the amount of
other loans of concern and non-performing loans decreased to 2.22% and 0.88%,
respectively, at December 31, 2006, compared to 2.32% and 0.95%, respectively,
at December 31, 2005.
Non-interest
Income
Non-interest
income was $2.8 million for the year ended December 31, 2006, compared to $6.6
million for 2005. In 2005, we recorded a $4.9 million gain in connection with
the sale of substantially all of our franchise loan portfolio. There were no
comparable loan sales in 2006.
Non-interest
Expense
General
and Administrative Expense
General
and administrative expenses increased to $46.4 million for the year ended
December 31, 2006, compared to $46.3 million for 2005. Our efficiency
ratio (defined as general and administrative expenses as percentage of net
revenue) was 47.8% for the year ended December 31, 2006, compared to 47.1% for
2005. Full time equivalent associates averaged 259 in 2006 compared
to 244 in 2005.
Income
Taxes
Provision
for income taxes increased to $18.5 million in 2006 compared to $17.5 million in
2005. The increase in provision for income taxes was due to the
increase in taxable income earned in 2006, partially offset by a decline in our
effective tax rate. The effective tax rate was 40.75% and 42.08%,
respectively, for 2006 and 2005.
At
December 31, 2006, we had a net deferred tax asset of $11.5
million. The deferred tax asset related primarily to loan loss
provisions recognized on our financial statements that have not yet been
recognized on our income tax returns. During 2006 and 2005, we had no
deferred tax assets relating to net operating loss carryforward deductions. The
deferred tax assets were considered fully realizable. Accordingly, no valuation
allowance on the deferred tax assets was established in 2006 and
2005.
Financial
Condition
At
December 31, 2007 Compared with December 31, 2006
Total
assets increased by $135.7 million, or 4.0%, to $3.6 billion at December 31,
2007 compared to $3.4 billion at December 31, 2006. The increase in
total assets was primarily due to a $153.4 million increase in our loan
portfolio, an $18.4 million increase in investment securities available-for-sale
and a $12.7 million increase in other real estate and other assets owned,
partially offset by a $34.5 million decline in investment securities
held-to-maturity and a $21.5 million decrease in cash and cash
equivalents. The increase in the loan portfolio was primarily due to
our loan production, partially offset by loan repayments, as well as loan
prepayments, received during the year. In addition, our other real
estate and other assets owned increased by $12.7 million during the current year
to $19.4 million. At December 31, 2007, we owned 19 properties,
consisting of $2.8 million of commercial real estate, $9.5 million of
multi-family real estate, $2.0 million of condominium conversion construction
and $5.1 million of entertainment finance assets. The growth in
assets was primarily funded by the increase in deposits of $122.5 million and an
increase in FHLB advances and other borrowings of $11.2 million. The
increase in shareholders’ equity was primarily due to the retention of net
income and a $2.9 million increase in contributed capital, which was primarily
related to the exercise of stock options, partially offset by treasury stock
purchases of $9.1 million and cash dividends of $3.5 million.
At
December 31, 2006 Compared with December 31, 2005
Total
assets increased by $364.3 million, or 11.9%, to $3.4 billion at December 31,
2006 compared to $3.1 billion at December 31, 2005. The increase in
total assets was primarily due to a $452.1 million increase in our loan
portfolio, partially offset by a $63.3 million decrease in cash and cash
equivalents and a $40.4 million decline in investment securities
held-to-maturity. The increase in the loan portfolio was primarily
due to our significant loan production, partially offset by loan repayments, as
well as loan prepayments, received during the year. The growth in
assets was primarily funded by the increase in deposits of $324.0 million and an
increase in FHLB advances and other borrowings of $17.4 million. The
increase in shareholders’ equity was primarily due to the retention of net
income and a $3.7 million increase in contributed capital, which was primarily
related to the exercise of stock options, partially offset by treasury stock
purchases of $11.3 million and cash dividends of $3.2 million.
Loans
Receivable, Net
The
following table shows the comparison of our loan portfolio by major categories
as of the dates indicated.
|
December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Real estate
loans
|
$ | 2,627,801 | $ | 2,524,182 | $ | 2,144,403 | $ | 1,386,042 | $ | 1,195,150 | ||||||||||
|
Construction and land
loans
|
421,110 | 370,473 | 312,901 | 185,138 | 131,119 | |||||||||||||||
|
Total
real estate loans
|
3,048,911 | 2,894,655 | 2,457,304 | 1,571,180 | 1,326,269 | |||||||||||||||
|
Entertainment finance
loans
|
76,342 | 74,204 | 66,514 | 99,729 | 98,630 | |||||||||||||||
|
Franchise loans
|
2,718 | 9,334 | 13,705 | 137,477 | 102,128 | |||||||||||||||
|
Commercial and other
loans
|
14,631 | 9,346 | 7,264 | 11,931 | 6,869 | |||||||||||||||
| 3,142,602 | 2,987,539 | 2,544,787 | 1,820,317 | 1,533,896 | ||||||||||||||||
|
Unamortized
premium
|
13,776 | 18,138 | 14,582 | 6,346 | 5,429 | |||||||||||||||
|
Deferred loan origination costs
(fees), net
|
16,477 | 13,740 | 7,928 | 2,635 | (500 | ) | ||||||||||||||
| 3,172,855 | 3,019,417 | 2,567,297 | 1,829,298 | 1,538,825 | ||||||||||||||||
|
Allowance for loan
losses
|
(47,783 | ) | (46,049 | ) | (43,817 | ) | (35,483 | ) | (33,401 | ) | ||||||||||
| $ | 3,125,072 | $ | 2,973,368 | $ | 2,523,480 | $ | 1,793,815 | $ | 1,505,424 | |||||||||||
The
contractual maturities of our loan portfolio at December 31, 2007 are as
follows:
|
Loans
Maturing in
|
||||||||||||||||
|
Less
Than
One
Year
|
Between
One
and
Five
Years
|
Greater
Than
Five
Years
|
Total
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Real
estate
loans
|
$ | 118,100 | $ | 220,965 | $ | 2,288,736 | $ | 2,627,801 | ||||||||
|
Construction
and land
loans
|
276,662 | 144,448 | — | 421,110 | ||||||||||||
|
Entertainment
finance
loans
|
50,804 | 25,538 | — | 76,342 | ||||||||||||
|
Franchise
loans
|
— | 289 | 2,429 | 2,718 | ||||||||||||
|
Commercial
and other
loans
|
13,387 | 1,244 | — | 14,631 | ||||||||||||
| $ | 458,953 | $ | 392,484 | $ | 2,291,165 | $ | 3,142,602 | |||||||||
|
Loans
with fixed interest
rates
|
$ | 9,667 | $ | 44,278 | $ | 25,099 | $ | 79,044 | ||||||||
|
Loans
with adjustable interest
rates
|
449,286 | 348,206 | 2,266,066 | 3,063,558 | ||||||||||||
| $ | 458,953 | $ | 392,484 | $ | 2,291,165 | $ | 3,142,602 | |||||||||
|
Percentage with adjustable
interest rates
|
97.9 | % | 88.7 | % | 98.9 | % | 97.5 | % | ||||||||
The table
above should not be regarded as a forecast of future cash collections because a
substantial portion of loans may be renewed or repaid prior to contractual
maturity and have adjustable interest rates. Included within loans
with adjustable interest rates are hybrid adjustable loans, which typically
reprice after an initial fixed period of three to five years.
The
following table sets forth certain information regarding the real property
collateral securing our real estate loan portfolio as of December 31,
2007.
|
Number
of
|
Gross
Loan
|
Percent
of
|
Range
of Principal Balance
|
Nonaccrual
|
||||||||||||||||||||||||
|
Loans
|
Amount
|
Total
|
Min
|
Max
|
Average
|
Loans
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Income
Producing Property Loans:
|
||||||||||||||||||||||||||||
|
Multi-family
(5 or more units)
|
2,689 | $ | 1,999,545 | 65.58 | % | $ | 3 | $ | 15,953 | $ | 744 | $ | 19,439 | |||||||||||||||
|
Retail
|
140 | 187,792 | 6.16 | % | 3 | 15,472 | 1,341 | 954 | ||||||||||||||||||||
|
Office
|
88 | 122,715 | 4.02 | % | 9 | 13,427 | 1,394 | — | ||||||||||||||||||||
|
Hotel
|
12 | 30,113 | 0.99 | % | 51 | 6,755 | 2,509 | — | ||||||||||||||||||||
|
Industrial/warehouse
|
51 | 67,316 | 2.21 | % | 69 | 7,000 | 1,320 | — | ||||||||||||||||||||
|
Mixed-use
|
87 | 93,310 | 3.06 | % | 7 | 12,302 | 1,073 | 1,138 | ||||||||||||||||||||
|
Mobile
home
parks
|
38 | 32,729 | 1.07 | % | 217 | 4,056 | 861 | 385 | ||||||||||||||||||||
|
Assisted
living
|
5 | 22,697 | 0.75 | % | 1,276 | 7,051 | 4,539 | — | ||||||||||||||||||||
|
Storage
|
10 | 30,860 | 1.01 | % | 682 | 5,950 | 3,086 | — | ||||||||||||||||||||
|
Other
|
35 | 25,350 | 0.83 | % | 1 | 10,069 | 724 | 6,847 | ||||||||||||||||||||
|
Total income
producing
|
3,155 | 2,612,427 | 85.68 | % | 28,763 | |||||||||||||||||||||||
|
Construction
and Land:
|
||||||||||||||||||||||||||||
|
Construction
|
88 | 359,977 | 11.81 | % | 19 | 22,137 | 4,498 | 8,804 | ||||||||||||||||||||
|
Land
|
14 | 61,133 | 2.00 | % | 368 | 17,075 | 4,202 | — | ||||||||||||||||||||
|
Total construction and
land
|
102 | 421,110 | 13.81 | % | 8,804 | |||||||||||||||||||||||
|
Single-family
mortgages:
|
||||||||||||||||||||||||||||
|
Single-family (1-4
units)
|
40 | 15,374 | 0.51 | % | 6 | 925 | 384 | 382 | ||||||||||||||||||||
| 3,297 | $ | 3,048,911 | 100.00 | % | $ | 37,949 | ||||||||||||||||||||||
The
following table sets forth the location of the collateral for our real estate
loan portfolios as of December 31, 2007.
|
Number
of
Loans
|
Gross
Loan
Amount
|
Percent
of
Total
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Southern
California:
|
||||||||||||
|
Los Angeles
County
|
687 | $ | 584,709 | 19.18 | % | |||||||
|
Riverside
County
|
38 | 92,230 | 3.03 | % | ||||||||
|
Orange
County
|
49 | 74,686 | 2.45 | % | ||||||||
|
San Diego
County
|
63 | 60,516 | 1.98 | % | ||||||||
|
San Bernardino
County
|
46 | 40,047 | 1.31 | % | ||||||||
|
All other Southern California
Counties
|
5 | 4,135 | 0.14 | % | ||||||||
|
Total Southern
California
|
888 | 856,323 | 28.09 | % | ||||||||
|
Northern
California:
|
||||||||||||
|
San Francisco
County
|
61 | 80,242 | 2.63 | % | ||||||||
|
Alameda
County
|
92 | 79,924 | 2.62 | % | ||||||||
|
Contra Costa
County
|
40 | 50,748 | 1.66 | % | ||||||||
|
Fresno
County
|
53 | 40,169 | 1.32 | % | ||||||||
|
Santa Clara
County
|
39 | 33,462 | 1.10 | % | ||||||||
|
Kern
County
|
33 | 23,663 | 0.78 | % | ||||||||
|
San Mateo
County
|
17 | 22,198 | 0.73 | % | ||||||||
|
San
Joaquin
|
31 | 21,526 | 0.71 | % | ||||||||
|
Monterey
|
5 | 17,180 | 0.56 | % | ||||||||
|
Sacramento
|
24 | 17,142 | 0.56 | % | ||||||||
|
San Luis
Obispo
|
5 | 12,096 | 0.40 | % | ||||||||
|
All other Northern California
Counties
|
82 | 79,804 | 2.61 | % | ||||||||
|
Total Northern
California
|
482 | 478,154 | 15.68 | % | ||||||||
|
Outside
California:
|
||||||||||||
|
Texas
|
280 | 338,812 | 11.11 | % | ||||||||
|
Arizona
|
166 | 170,435 | 5.59 | % | ||||||||
|
New
York
|
152 | 134,675 | 4.42 | % | ||||||||
|
Florida
|
110 | 131,816 | 4.32 | % | ||||||||
|
Georgia
|
66 | 103,642 | 3.40 | % | ||||||||
|
Ohio
|
101 | 77,805 | 2.55 | % | ||||||||
|
Massachusetts
|
120 | 61,280 | 2.01 | % | ||||||||
|
Nevada
|
66 | 55,839 | 1.83 | % | ||||||||
|
Tennessee
|
43 | 46,094 | 1.51 | % | ||||||||
|
Colorado
|
59 | 42,605 | 1.40 | % | ||||||||
|
Oklahoma
|
42 | 40,181 | 1.32 | % | ||||||||
|
Connecticut
|
101 | 37,864 | 1.24 | % | ||||||||
|
New
Hampshire
|
59 | 34,964 | 1.15 | % | ||||||||
|
North
Carolina
|
32 | 29,778 | 0.98 | % | ||||||||
|
New
Jersey
|
56 | 29,539 | 0.97 | % | ||||||||
|
Oregon
|
46 | 29,185 | 0.96 | % | ||||||||
|
Idaho
|
14 | 25,928 | 0.85 | % | ||||||||
|
Michigan
|
23 | 25,191 | 0.83 | % | ||||||||
|
Pennsylvania
|
36 | 25,121 | 0.82 | % | ||||||||
|
Washington
|
33 | 24,648 | 0.81 | % | ||||||||
|
Utah
|
23 | 23,189 | 0.76 | % | ||||||||
|
New
Mexico
|
31 | 20,611 | 0.68 | % | ||||||||
|
Mississippi
|
12 | 20,183 | 0.66 | % | ||||||||
|
Arkansas
|
19 | 19,707 | 0.65 | % | ||||||||
|
Illinois
|
21 | 18,429 | 0.60 | % | ||||||||
|
Other U.S.
states
|
216 | 146,913 | 4.81 | % | ||||||||
|
Total Outside
California
|
1,927 | 1,714,434 | 56.23 | % | ||||||||
| 3,297 | $ | 3,048,911 | 100.00 | % | ||||||||
Although
we generally seek to limit risks associated with our portfolio of real estate
and construction loans by limiting the geographic concentration and by varying
the types of underlying collateral, significant concentration risks still
remain. Concentrations of loans in certain geographic regions, for example,
cause our risk associated with these loans to be closely associated with the
general economic and social environment of the region. Localized economic and
competitive conditions, natural disasters, possible terrorist activities or
social conditions all may affect the values of collateral located within a
particular geographic area. In addition, certain types of properties may be more
or less subject to changes in prevailing economic, competitive or social
conditions.
The
following table sets forth certain information with respect to our loan
originations and purchases.
|
As
of and for the Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Gross
real estate loans originated
|
$ | 1,052,138 | $ | 960,187 | $ | 846,685 | ||||||
|
Gross
entertainment finance loans originated
|
114,354 | 102,703 | 68,687 | |||||||||
|
Gross
franchise loans originated
|
— | — | 2,352 | |||||||||
|
Gross
commercial and other loans originated (1)
|
1,240 | 26,662 | 1,863 | |||||||||
|
Gross
real estate loans purchased
|
47,343 | 497,785 | 723,822 | |||||||||
|
Total
loan production
|
$ | 1,215,075 | $ | 1,587,337 | $ | 1,643,409 | ||||||
|
Gross
loans at end of period
|
$ | 3,142,602 | $ | 2,987,539 | $ | 2,544,787 | ||||||
|
Gross
loans weighted-average portfolio yield
|
7.54 | % | 7.68 | % | 7.13 | % | ||||||
|
Average
size of loans retained in the Company’s portfolio
|
$ | 1,184 | $ | 1,110 | $ | 803 | ||||||
_______________
|
(1)
|
Includes
$25.4 million of commercial real estate participation loans acquired
during 2006.
|
Investment
Securities
At
December 31, 2007, our investment securities totaled $276.9 million, or 7.8% of
our total assets. Our investment securities, including the mortgage-backed
securities portfolio, are managed in accordance with a written investment policy
adopted by the Board of Directors. It is our general policy to primarily
purchase U.S. Government securities and federal agency obligations and other
investment grade securities. At December 31, 2007, our mortgage-backed
securities and collateralized mortgage obligations portfolios consisted of
investment grade securities. Our investment securities portfolio at December 31,
2007, contained neither securities of any issuer nor tax-exempt securities with
an aggregate book value in excess of 10% of stockholders’ equity, excluding
those issued by United States agencies including Fannie Mae, Freddie Mac and the
Federal Home Loan Bank. See “Item 8. Financial Statements and
Supplementary Data-Notes to Consolidated Financial Statements-Note
2”.
The
following table shows the amortized cost and approximate fair value of
investment securities at the dates indicated.
|
December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Investment
securities available-for-sale
|
||||||||||||||||||||||||
|
U.S. agency
securities
|
$ | 9,997 | $ | 9,986 | $ | 62,554 | $ | 62,184 | $ | 89,897 | $ | 88,829 | ||||||||||||
|
Collateralized mortgage
obligations
|
83,260 | 84,264 | 34,991 | 35,127 | — | — | ||||||||||||||||||
|
Mortgage-backed
securities
|
4,453 | 4,489 | — | — | — | — | ||||||||||||||||||
|
Corporate bonds
|
13,437 | 12,582 | — | — | — | — | ||||||||||||||||||
|
Residual interest in
securitized loans
|
1,318 | 1,318 | 1,911 | 2,039 | 3,257 | 3,570 | ||||||||||||||||||
|
Equity
securities
|
5,013 | 5,285 | 13 | 177 | 16 | 164 | ||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 117,478 | $ | 117,924 | $ | 99,469 | $ | 99,527 | $ | 93,170 | $ | 92,563 | ||||||||||||
|
Investment
securities held-to-maturity
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | 159,023 | $ | 158,509 | $ | 193,512 | $ | 190,475 | $ | 233,880 | $ | 229,025 | ||||||||||||
The
following table indicates the composition of the investment security portfolio
assuming these securities are held-to-maturity based on the final maturity of
each investment as of December 31, 2007. Mortgage-backed securities
and collateralized mortgage obligations are included in maturity categories
based on their stated maturity date. Expected maturities may differ
from contractual maturities because issuers may have the right to prepay
obligations. Equity securities classified as available-for-sale have
no maturity and are included in the due in one year or less column.
|
Due
in One Year
or Less
|
Due
after One Year
through
Five
Years
|
Due
after Five Years
through
Ten
Years
|
Due
after Ten
Years
|
|||||||||||||||||||||||||||||
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
|||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Investment securities
available-for-sale
|
||||||||||||||||||||||||||||||||
|
U.S. agency
securities
|
$ | 9,986 | 4.60 | % | $ | — | — | $ | — | — | $ | — | — | |||||||||||||||||||
|
Collateralized mortgage
obligations
|
— | — | — | — | 22,494 | 5.53 | % | 61,770 | 5.43 | % | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
— | — | — | — | — | — | 4,489 | 5.17 | % | |||||||||||||||||||||||
|
Corporate
bonds
|
— | — | — | — | — | — | 12,582 | 6.27 | % | |||||||||||||||||||||||
|
Residual interest in
securitized loans
|
— | — | 1,318 | — | — | — | — | — | ||||||||||||||||||||||||
|
Equity
securities
|
185 | — | — | — | — | — | 5,100 | 7.63 | % | |||||||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 10,171 | $ | 1,318 | $ | 22,494 | $ | 83,941 | ||||||||||||||||||||||||
|
Investment securities
held-to-maturity
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | — | — | $ | — | — | $ | — | — | $ | 159,023 | 4.24 | % | |||||||||||||||||||
Liquidity
and Deposit Accounts
Liquidity
refers to our ability to maintain cash flow adequate to fund operations and meet
obligations and other commitments on a timely basis, including the payment of
maturing deposits and the origination or purchase of new loans. We maintain a
cash and investment securities portfolio designed to satisfy operating and
regulatory liquidity requirements while preserving capital and maximizing
yield. In addition, the Bank’s liquidity position is supported by a
credit facility with the FHLB of San Francisco. As of December 31, 2007, the
Bank had remaining available borrowing capacity under this credit facility of
$415.6 million, net of the $13.2 million of additional FHLB stock that we would
be required to purchase to support those additional borrowings. As of December
31, 2007, we had an available borrowing capacity under the Federal Reserve Bank
of San Francisco credit facility of $178.5 million. We also had
available $131.0 million of uncommitted, unsecured lines of credit with four
unaffiliated financial institutions, and a $37.5 million revolving credit
facility with an unaffiliated financial institution.
Total
deposit accounts increased approximately $122.5 million to $2.2 billion at
December 31, 2007 from $2.1 billion at December 31, 2006. The increase in
deposits in 2007 was primarily related to an increase in time certificate of
deposits of $85.4 million and an increase in money market and passbook accounts
of $41.4 million, partially offset by a decrease in demand deposit accounts of
$4.4 million. Brokered deposits totaled $379.4 million and $332.8
million at December 31, 2007 and 2006, respectively. Total deposit
accounts increased approximately $324.0 million to $2.1 billion at December 31,
2006 from $1.7 billion at December 31, 2005. In both 2007 and 2006,
the funds provided from deposits were used primarily to fund the growth in our
loan portfolio. Although we compete for deposits primarily on the basis of
rates, based on our historical experience regarding retention of deposits,
management believes that a significant portion of deposits will remain with us
upon maturity on an ongoing basis.
The
following table sets forth information regarding deposits outstanding at the
dates indicated.
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Non-interest
demand
accounts
|
$ | 16,819 | $ | 23,171 | $ | 13,660 | ||||||
|
Interest
demand
accounts
|
26,518 | 24,523 | 38,197 | |||||||||
|
Money
market and passbook
accounts
|
251,660 | 210,236 | 186,453 | |||||||||
|
Time
certificates under
$100,000
|
784,697 | 784,732 | 763,701 | |||||||||
|
Time
certificates $100,000 and
over
|
1,102,164 | 1,016,743 | 733,417 | |||||||||
| $ | 2,181,858 | $ | 2,059,405 | $ | 1,735,428 | |||||||
The
following table sets forth the maturities of certificates of deposit $100,000
and over at December 31, 2007 (in thousands):
|
Certificates
of deposit $100,000 and over:
|
||||
|
Maturing within three
months
|
$ | 459,329 | ||
|
After three but within six
months
|
238,279 | |||
|
After six but within twelve
months
|
203,267 | |||
|
After twelve
months
|
201,289 | |||
| $ | 1,102,164 | |||
Off-Balance
Sheet Arrangements
In the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles are not
recorded in the financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity
risk. Such transactions are used by us to meet the financing needs of
our customers.
Our
off-balance sheet arrangements, which principally include lending commitments,
are described below. At December 31, 2007, we also had a residual
interest of $1.3 million in a qualified special purpose entity formed in 2002 to
issue $86.3 million of asset-backed notes in a securitization of substantially
all of our residential loan portfolio, and a $2.6 million equity interest in our
deconsolidated trusts through which we have issued trust preferred
securities. See Note 8 of our consolidated financial statements
included in Item 8 of this report.
Lending
Commitments. Lending commitments include loan commitments and
unused lines of credit. These instruments are not recorded in the
consolidated balance sheet until funds are advanced under the
commitments. We provide these lending commitments to customers in the
normal course of business.
At
December 31, 2007, our approved loan origination commitments outstanding totaled
$315.6 million. Unfunded commercial lines of credit totaled $1.7
million. These lines of credit are commitments for possible future
extension of credit to existing customers. These lines of credit are
typically uncollateralized and usually do not contain a specified maturity
date.
We apply
essentially the same credit policies and standards as we do in the lending
process when making these commitments. See Note 12 to the
consolidated financial statements included in Item 8 of this report for
additional information regarding lending commitments.
Contractual
Obligations
The
following table shows our contractual obligations by expected payment period, as
of December 31, 2007. Further discussion of these commitments is
included in Notes 6, 8, 9, and 13 to the consolidated financial statements
included in Item 8 of this report.
|
Contractual
Obligations
|
Total
|
Less
Than
One
Year
|
One
Through
Three
Years
|
Three
Through
Five
Years
|
More
Than
Five
Years
|
|||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Long-term
FHLB advances and other
borrowings
|
$ | 1,021,235 | $ | 318,602 | $ | 472,561 | $ | 211,923 | $ | 18,149 | ||||||||||
|
Junior
subordinated debentures
|
86,600 | — | — | — | 86,600 | |||||||||||||||
|
Operating
lease obligations
|
12,089 | 3,657 | 4,651 | 3,053 | 728 | |||||||||||||||
|
Deposits
with stated maturity dates
|
1,886,861 | 1,655,065 | 186,629 | 45,167 | — | |||||||||||||||
|
Purchase
obligations
|
4,049 | 1,280 | 1,989 | 780 | — | |||||||||||||||
| $ | 3,010,834 | $ | 1,978,604 | $ | 665,830 | $ | 260,923 | $ | 105,477 | |||||||||||
FHLB
advances and other borrowings have defined terms and under certain circumstances
are callable at the option of the lender. The junior subordinated debentures are
callable by us under the circumstances and at the times described in Note 8 to
the consolidated financial statements included in Item 8 of this
report.
Operating
leases represent obligations entered into by us for office
facilities. Certain of these noncancelable operating leases contain
rental escalation clauses based on increases in the consumer price
index. At the end of the lease obligations, renewal options may be
exercised by us for up to an additional ten years.
Purchase
obligations represent our contractual service and other operating and marketing
obligations.
Capital
Resources
ICB had
Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at
December 31, 2007 of 8.4%, 9.7%, 11.3%, respectively, which, in the case of the
Tier 1 risk-based and total risk-based capital ratios, represents $114.7 million
and $39.6 million, respectively, of capital in excess of the amount required to
be “well capitalized” for bank holding company regulatory purposes. These ratios
were 9.0%, 10.2%, 11.9%, respectively, at December 31, 2006. Portions
of our trust preferred securities presently qualify as Tier 1 and total
risk-based capital. See Note 8 and Note 14 to our consolidated financial
statements included in Item 8 of this report.
The Bank
had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at
December 31, 2007 of 8.3%, 9.6% and 10.9%,
respectively, which represents $116.7 million, $109.8 million and $26.0 million,
respectively, of capital in excess of the amount required for the Bank to be
“well capitalized” for regulatory purposes. These ratios were 9.1%, 10.3% and
11.5%, respectively, as of December 31, 2006.
Shareholders’
equity increased to $227.6 million at December 31, 2007 from $221.3 million at
December 31, 2006. The change was primarily due to the increase in
retained earnings as a result of $15.6 million of net income earned during the
year and a $2.9 million
increase in contributed capital, which was primarily related to the exercise of
employee stock options, partially offset by the purchase of $9.1 million of our
common stock currently held as treasury stock and cash dividends of $3.5
million.
Credit
Risk Elements
Allowance
for Loan Losses and Nonperforming Assets
The
following table provides certain information with respect to our total allowance
for loan losses, including charge-offs, recoveries and selected ratios, for the
periods indicated.
|
As
of and for the Years Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 46,049 | $ | 43,817 | $ | 35,483 | $ | 33,401 | $ | 33,009 | ||||||||||
|
Provision
for loan losses
|
11,077 | 5,000 | 10,250 | 4,725 | 7,760 | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Real
estate loans
|
(6,843 | ) | (1,634 | ) | (1,584 | ) | (189 | ) | (5,286 | ) | ||||||||||
|
Construction
and land loans
|
(1,530 | ) | — | — | — | — | ||||||||||||||
|
Entertainment
finance loans
|
(2,500 | ) | (2,500 | ) | (395 | ) | (2,180 | ) | (800 | ) | ||||||||||
|
Franchise
loans
|
— | — | (451 | ) | — | (661 | ) | |||||||||||||
|
Commercial
and other loans
|
— | — | — | (1,121 | ) | (700 | ) | |||||||||||||
|
Total
charge-offs
|
(10,873 | ) | (4,134 | ) | (2,430 | ) | (3,490 | ) | (7,447 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Real
estate loans
|
796 | 894 | 88 | 89 | 14 | |||||||||||||||
|
Entertainment
finance loans
|
470 | 472 | 426 | — | — | |||||||||||||||
|
Franchise
loans
|
264 | — | — | — | — | |||||||||||||||
|
Commercial
and other loans
|
— | — | — | 758 | 65 | |||||||||||||||
|
Total
recoveries
|
1,530 | 1,366 | 514 | 847 | 79 | |||||||||||||||
|
Net
charge-offs
|
(9,343 | ) | (2,768 | ) | (1,916 | ) | (2,643 | ) | (7,368 | ) | ||||||||||
|
Balance
at end of the year
|
$ | 47,783 | $ | 46,049 | $ | 43,817 | $ | 35,483 | $ | 33,401 | ||||||||||
|
Average
loans outstanding during the year
|
$ | 3,100,655 | $ | 2,668,254 | $ | 2,239,261 | $ | 1,606,125 | $ | 1,415,812 | ||||||||||
|
Loans,
net, at end of the year (1)
|
$ | 3,172,855 | $ | 3,019,417 | $ | 2,567,297 | $ | 1,829,298 | $ | 1,538,825 | ||||||||||
|
Selected
Ratios:
|
||||||||||||||||||||
|
Net
charge-offs to average loans outstanding
|
0.30 | % | 0.10 | % | 0.09 | % | 0.16 | % | 0.52 | % | ||||||||||
|
Net
charge-offs to loans, net (1)
|
0.29 | % | 0.09 | % | 0.07 | % | 0.14 | % | 0.48 | % | ||||||||||
|
Allowance
for loan losses to loans, net (1)
|
1.51 | % | 1.53 | % | 1.71 | % | 1.94 | % | 2.14 | % | ||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | 392.26 | % | ||||||||||
____________
|
(1)
|
Loans,
before allowance for loan losses and net of premium, deferred loan
origination costs and deferred loan
fees.
|
The
allowance for loan losses increased to $47.8 million or 1.51% of our total loan
portfolio at December 31, 2007 from $46.0 million or 1.53% of our total loan
portfolio at December 31, 2006. The increase in the allowance was due
primarily to the provision for loan losses of $11.1 million, less net
charge-offs of $9.3 million. The current period provision for loan
losses was recorded to provide reserves adequate to support the known and
inherent risk of loss in the loan portfolio, and for specific reserves required
as of December 31, 2007. The allowance for loan losses is impacted by
inherent risk in the loan portfolio, including the level of our non-performing
loans and other loans of concern, as well as specific reserves and charge-off
activity. Non-performing loans as of December 31, 2007 were $38.0
million, compared to $26.3 million at December 31, 2006. The increase in
non-performing loans during the year ended December 31, 2007 consisted of the
addition of $85.3 million of non-performing loans, partially offset by paydowns
received of $27.0 million, charge-offs of $10.9 million and loan upgrades of
$17.8 million from non-performing to performing status. Non-performing loans
were also impacted by the foreclosure and transfer of $17.9 million of
non-performing loans to other real estate and other assets owned during the
year. As of December 31, 2007 as compared to December 31, 2006, the
net increase in non-performing loans primarily consisted of $8.8 million of
residential construction real estate loans and $15.0 million of commercial and
multi-family loans, partially offset by decreases of $4.5 million of franchise
loans and $7.6 million of entertainment finance loans. As a percentage of our
total loan portfolio, the amount of non-performing loans was 1.20% and 0.88% at
December 31, 2007 and 2006, respectively. During the year, the level
of other loans of concern declined by 59.1%, from $67.0 million at December 31,
2006 to $27.4 million at December 31, 2007. Other loans of concern
consist of performing loans which have known information that has caused
management to be concerned about the borrower’s ability to comply with present
loan repayment terms.
In
addition to the factors described above, the ratio of allowance for loan losses
to loans, net was also impacted by the decline in non-performing entertainment
finance and franchise loans, which decreased by $7.6 million and $4.5 million,
respectively, during 2007, partially offset by an $8.8 million increase in our
non-performing construction loans. Entertainment finance, franchise
and construction loans have generally required a higher loss rate factor as
compared to the remainder of our loan portfolio. This ratio was
further affected by the national expansion of our small balance multi-family
real estate loan platform, which has improved the geographic diversity of the
loan portfolio and lowered the risk profile by increasing the amount of
multi-family loans in our loan portfolio. Multi-family loans have
typically required a lower reserve ratio than the other real estate loans within
our portfolio due to a lower average loan size, as well as a lower historical
loss rate. Historical loss rates are based on the actual performance
of a loan type during a specific time frame, typically five years. As
of December 31, 2007, over 56% of our real estate loans were secured by
properties located outside of the state of California compared to 46% in
2006. Our California loans are geographically diversified in most of
the larger metropolitan areas. In addition, this ratio is impacted by
the Bank’s aggressive recognition of charge-offs and the timing of the
identification of problem credits. During 2007, we recorded net
charge-offs of $9.3 million, compared to $2.8 million in 2006.
The
allowance for loan losses increased to $46.0 million or 1.53% of our total loan
portfolio at December 31, 2006 from $43.8 million or 1.71% of our total loan
portfolio at December 31, 2005. The increase in the allowance was due primarily
to the provision for loan losses of $5.0 million, less net charge-offs of $2.8
million. The 2006 provision for loan losses was recorded to provide
reserves adequate to support the known and inherent risk of loss in the loan
portfolio, and for specific reserves required as of December 31,
2006. The decrease in the percentage of the allowance for loan losses
to loans, net, primarily reflects the significant growth in our total loan
portfolio during the year, which increased by 17.6% compared to the prior year,
as well as the continuing decline in our overall risk profile due to a broader
geographic diversification of our real estate loan portfolio. As of
December 31, 2006, over 46% of our real estate loans were secured by properties
located outside of the state of California compared to 41% in
2005. In addition, the overall level of our other loans of concern
and non-performing loans remained relatively stable during 2006 as compared to
2005.
The
following table sets forth management’s historical allocation of the allowance
for loan losses by loan or contract category and the percentage of gross loans
in each category to total gross loans at the dates indicated.
|
December
31,
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
Loan Category:
|
Allowance
for
loan
losses
|
%
of loans
(1)
|
Allowance
for
loan
losses
|
%
of loans
(1)
|
Allowance
for
loan
losses
|
%
of loans
(1)
|
Allowance
for
loan
losses
|
%
of loans
(1)
|
Allowance
for
loan
losses
|
%
of loans
(1)
|
||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Secured
by real estate
|
$ | 37,570 | 88 | % | $ | 31,666 | 84 | % | $ | 27,115 | 84 | % | $ | 21,993 | 76 | % | $ | 23,392 | 78 | % | ||||||||||||||||||||
|
Construction
and land loans
|
7,421 | 9 | % | 6,618 | 12 | % | 7,107 | 12 | % | 1,555 | 10 | % | 2,130 | 9 | % | |||||||||||||||||||||||||
|
Entertainment
finance
|
1,995 | 2 | % | 5,616 | 3 | % | 6,770 | 3 | % | 7,828 | 5 | % | 4,354 | 6 | % | |||||||||||||||||||||||||
|
Franchise
|
629 | — | 1,833 | — | 2,685 | 1 | % | 4,032 | 8 | % | 3,185 | 7 | % | |||||||||||||||||||||||||||
|
Commercial
and other
|
168 | 1 | % | 316 | 1 | % | 140 | — | 80 | 1 | % | 340 | — | |||||||||||||||||||||||||||
|
Total
|
$ | 47,783 | 100 | % | $ | 46,049 | 100 | % | $ | 43,817 | 100 | % | $ | 35,483 | 100 | % | $ | 33,401 | 100 | % | ||||||||||||||||||||
____________
|
(1)
|
Percentage
represents gross loans in category to total gross
loans.
|
Management
believes the allowance for loan losses accounting policy is critical to the
portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this “critical accounting
policy” involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood.
Management
periodically assesses the adequacy of the allowance for loan losses by reference
to many quantitative and qualitative factors that may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements:
|
|
•
|
the
risk characteristics of various classifications of
loans;
|
|
|
•
|
general
portfolio trends relative to asset and portfolio
size;
|
|
|
•
|
asset
categories;
|
|
|
•
|
potential
credit and geographic
concentrations;
|
|
|
•
|
delinquency
trends within the loan portfolio;
|
|
|
•
|
changes
in the volume and severity of past due loans, classified loans and other
loans of concern;
|
|
|
•
|
historical
loss experience and risks associated with changes in economic, social and
business conditions; and
|
|
|
•
|
the
underwriting standards in effect when the loan was
made.
|
Accordingly,
the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of nonperforming assets. The quantitative
factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable
risks); and (2) homogeneous loans (groups of loan with similar characteristics).
We base the allocation for individual loans primarily on risk rating grades
assigned to each of these loans as a result of our loan management and review
processes. We then assign each risk-rating grade a loss ratio, which is
determined based on historical loss experience, augmented by the experience of
management with similar assets and our independent loan review
process. The loan review process begins at the loan’s origination
where we obtain information about the borrower and the real estate collateral,
such as personal financial statements, FICO scores, property rent rolls,
property operating statements, appraisals, market assessments, and other
pertinent data. Throughout the loan life, we obtain updated
information such as rent rolls, property cash flow statements, personal
financial statements, and for certain loans, updated property inspection
reports. This information, at the individual borrower and loan level,
provides input into our risk profile of our borrowers, and serves as the primary
basis for each loan’s risk grade.
We
estimate losses on impaired loans based on estimated cash flows discounted at
the loan’s original effective interest rate or based on the underlying
collateral value. We also assign loss ratios to groups of
loans. These loss ratios are assigned to the various homogenous
categories of the portfolio.
Loss
ratios for all categories of loans are evaluated on a quarterly basis and are
primarily determined based on historical loss experience. Loss ratios
associated with historical loss experience are determined based on a rolling
migration analysis of each loan category within our portfolio. This
migration analysis estimates loss factors based on the performance of each loan
category over a five year time period. These loss factors are then
adjusted for other identifiable risks specifically related to each loan category
or risk grade. We utilize market and other economic data, which we
accumulate on a quarterly basis, to evaluate and identify the economic and real
estate related trends within each regional market that we operate. In
addition to the information gathered from this data, we also typically consider
other risk factors, such as specific risks within a loan category, peer analysis
reports, and any other relevant trends or data, in determining any necessary
adjustments to our historical loss factors. To the extent that known
risks or trends exist, the loss ratios are adjusted accordingly, and
incorporated into our assessment of the adequacy of our allowance for loan
losses.
The
qualitative factors, included above, are also utilized to identify other risks
inherent in the portfolio and to determine whether the estimated credit losses
associated with the current portfolio might differ from historical loss trends
or the loss ratios discussed above. We estimate a range of exposure
for each applicable qualitative factor and evaluate the current condition and
trend of each factor. Based on this evaluation, we assign a positive,
negative or neutral grade to each factor to determine whether the portion of the
qualitative reserve is in the high, middle or low end of the range for each
factor. Because of the subjective nature of these factors and the
judgments required to determine the estimated ranges, the actual losses incurred
can vary significantly from the estimated amounts.
Management
believes that our allowance for loan losses as of December 31, 2007 was adequate
to absorb the known and inherent risks of loss in the loan portfolio at that
date. While management believes the estimates and assumptions used in its
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations. In
addition, the determination of the amount of the Bank’s allowance for loan
losses is subject to review by bank regulators, as part of the routine
examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination.
The
following table sets forth the delinquency status of our loan portfolios at each
of the dates indicated.
|
December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Period
of Delinquency
|
||||||||||||||||||||||||
|
30 – 59
days
|
$ | 18,886 | 0.60 | % | $ | 10,120 | 0.34 | % | $ | 5,060 | 0.20 | % | ||||||||||||
|
60 – 89
days
|
6,268 | 0.20 | % | 15,170 | 0.51 | % | 3,678 | 0.14 | % | |||||||||||||||
|
90 days or
more
|
31,334 | 1.00 | % | 23,937 | 0.80 | % | 22,533 | 0.89 | % | |||||||||||||||
|
Total
loans delinquent
|
$ | 56,488 | 1.80 | % | $ | 49,227 | 1.65 | % | $ | 31,271 | 1.23 | % | ||||||||||||
The
increase in total delinquent loans in 2007 was due primarily to an increase of
$8.2 million and $8.8 million, respectively, of past due real estate secured
loans and construction and land loans, partially offset by a $5.1 million
decrease in past due entertainment finance loans and a $4.5 million decrease in
past due franchise loans.
We have
established a policy that all loans greater than $2.5 million are reviewed
annually. This review usually involves obtaining updated information about the
collateral and source of repayment. In addition, independent outside consultants
periodically review our loan portfolio and report findings to management and the
audit committee of the Board of Directors. Loans considered to warrant special
attention are presented to the review and reserve committee, which meets at
least monthly to review the status of classified loans, consider new
classifications or declassifications, determine the need for and amount of any
charge offs, and recommend to our executive committee of the Board of Directors
the level of allowance for loan losses to be maintained. If management believes
that the collection of the full amount of principal is unlikely and the value of
the collateral securing the obligation is insufficient, the difference between
the loan balance and the fair market value of the collateral are recognized by a
partial charge-off of the loan balance to the collateral’s fair value. While
real property collateral is held for sale, it is subject to periodic evaluation
and/or appraisal. If an evaluation or appraisal indicates that the property will
ultimately sell for less than our recorded value plus costs of disposition, the
loss is recognized by a charge to allowance for other real estate owned
losses.
Loans are
placed on nonaccrual status when they become 90 days or more contractually
delinquent, or earlier if the collection of interest is considered by management
to be doubtful, unless the loan is considered well secured and in the process of
collection. Subsequent cash collections on nonaccrual loans are either
recognized as interest income on a cash basis, if the loan is well secured and
in management’s judgment the net book value is fully collectible, or recorded
entirely as a reduction of principal.
The
following table sets forth our nonperforming assets by category and troubled
debt restructurings as of the dates indicated:
|
December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual
loans:(1)
|
||||||||||||||||||||
|
Real
estate
|
$ | 29,145 | $ | 14,091 | $ | 6,117 | $ | 7,057 | $ | 4,686 | ||||||||||
|
Construction
and land
|
8,804 | — | — | — | — | |||||||||||||||
|
Franchise
|
— | 4,549 | 7,366 | 3,874 | 799 | |||||||||||||||
|
Entertainment
finance
|
13 | 7,614 | 10,780 | 3,721 | 3,030 | |||||||||||||||
|
Total nonaccrual
loans
|
37,962 | 26,254 | 24,263 | 14,652 | 8,515 | |||||||||||||||
|
Other
real estate and other assets owned, net
|
19,396 | 6,729 | 3,960 | — | 7,048 | |||||||||||||||
|
Total nonperforming
assets
|
57,358 | 32,983 | 28,223 | 14,652 | 15,563 | |||||||||||||||
|
Accruing
loans past-due 90 days or more with respect to principal or
interest
|
— | — | — | — | — | |||||||||||||||
|
Performing
troubled debt restructurings
|
7,802 | 7,994 | 10,758 | 3,096 | 4,709 | |||||||||||||||
| $ | 65,160 | $ | 40,977 | $ | 38,981 | $ | 17,748 | $ | 20,272 | |||||||||||
|
Nonaccrual
loans to total gross loans
|
1.20 | % | 0.88 | % | 0.95 | % | 0.80 | % | 0.55 | % | ||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | 392.26 | % | ||||||||||
|
Nonperforming
assets to total assets
|
1.62 | % | 0.97 | % | 0.92 | % | 0.63 | % | 0.86 | % | ||||||||||
________________
|
(1)
|
Includes
two loans with a net book balance of $6.3 million that were nonperforming
troubled debt restructurings in 2007, five loans with a net book balance
of $5.4 million that were nonperforming troubled debt restructurings in
2006, six loans with a net book balance of $8.5 million that were
nonperforming troubled debt restructurings in 2005, four loans with a net
book balance of $5.7 million that were nonperforming troubled debt
restructurings in 2004, and three loans with a net book balance of $3.8
million that were nonperforming troubled debt restructurings in
2003.
|
Gross
interest income that would have been recorded on nonaccrual loans had they been
current in accordance with original terms was $2.8 million and $1.5 million for
the years ended December 31, 2007 and 2006, respectively. No interest income was
recorded for loans on nonaccrual status during the years ended December 31, 2007
and 2006. For the years ended December 31, 2007 and 2006, $1.4
million and $1.5 million, respectively, of gross interest income would have been
recorded had the restructured loans been current in accordance with their
original terms compared to $1.0 million and $720,000, respectively, of interest
income that was included in net income for the same periods.
At
December 31, 2007, we owned 19 properties, consisting of $2.8 million of
commercial real estate, $9.5 million of multi-family real estate, $2.0 million
of condominium conversion construction real estate and $5.1 million of
entertainment finance assets.
As of
December 31, 2007 and 2006, we had loans with an aggregate outstanding balance
of $27.4 million and $67.0 million, respectively, with respect to which known
information concerning possible credit problems with the borrowers or the cash
flows of the properties securing the respective loans has caused management to
be concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in the
non-accrual loan category.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We
realize income principally from the differential or spread between the interest
earned on loans, investments and other interest-earning assets and the interest
paid on deposits and borrowings. Loan volumes and yields, as well as the volume
of and rates on investments, deposits and borrowings, are affected by market
interest rates. Additionally, because of the terms and conditions of many of our
loan agreements and deposit accounts, a change in interest rates could also
affect the duration of the loan portfolio and/or the deposit base, which could
alter our sensitivity to future changes in interest rates.
Interest
rate risk management focuses on maintaining consistent growth in net interest
income within board-approved policy limits while taking into consideration,
among other factors, our overall credit, operating income, operating cost and
capital profile. The asset/liability management committee, which includes senior
management representatives and reports to the Board of Directors, monitors and
manages interest rate risk to maintain an acceptable level of change in net
interest income as a result of changes in interest rates. See “Item 1. Business
– Nonperforming Assets and Other Loans of Concern”.
In
evaluating our exposure to changes in interest rates, certain risks inherent in
the method of analysis presented in the following tables must be considered. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees and at different times
to changes in market rates. Additionally, loan prepayments and early withdrawals
of time certificates could cause interest sensitivities to vary from those that
appear in the following table. Further, certain assets, such as adjustable rate
real estate loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. The majority of our adjustable
rate real estate loans may not adjust downward below their initial rate, with
increases generally limited to maximum adjustments of 2% per year and up to 5%
over the life of the loan. These loans may also be subject to prepayment
penalties. At December 31, 2007, 7.9% of our adjustable rate loan portfolio
could not adjust downward below the floor rate and the weighted-average minimum
interest rate for these loans was 8.1%. At December 31, 2007, 42.0%
of the total loans outstanding had a lifetime interest rate cap, with a
weighted-average lifetime interest rate cap of 11.80%. At December
31, 2007, none of the loans in our adjustable rate loan portfolio were at their
cap rate. The anticipated effects of these various factors are
considered by management in implementing interest rate risk management
activities.
We use an
internal earnings simulation model as a tool to identify and manage our interest
rate risk profile. The model is based on projected cash flows and repricing
characteristics for all financial instruments and incorporates market-based
assumptions regarding the impact of changing interest rates on current volumes
of applicable financial instruments, considering applicable interest rate floors
and caps and prepayment penalties associated with each financial instrument.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of changes
in interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management
strategies.
The
following table shows our estimated earnings sensitivity profile to immediate,
parallel shifts in interest rates as of December 31, 2007:
|
Changes
in Interest
rates (Basis
Points)
|
Percentage
Change in Net
Interest Income (12
Months)
|
|
|
+
200 Over One Year
|
-8.30%
|
|
|
+
100 Over One Year
|
-5.20%
|
|
|
-
100 Over One Year
|
7.06%
|
|
|
-
200 Over One Year
|
14.11%
|
Another
tool used to identify and manage our interest rate risk profile is the static
gap analysis. Interest sensitivity gap analysis measures the difference between
the assets and liabilities repricing or maturing within specific time periods.
The following table presents an estimate of our static GAP analysis as of
December 31, 2007.
|
Maturing
or Repricing in
|
||||||||||||||||||||||||
|
3
Months or
less
|
After
3 Months
But
Within
1 Year
|
After
1 Year But
Within 5
Years
|
After
5
Years
|
Non-Interest
Sensitive
|
Total
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Loans
(1)
|
$ | 991,738 | $ | 584,762 | $ | 1,521,876 | $ | 74,479 | $ | — | $ | 3,172,855 | ||||||||||||
|
Cash
and cash equivalents
|
6,310 | 200 | — | — | 2,434 | 8,944 | ||||||||||||||||||
|
Investment
securities available-for-sale
|
26,773 | 19,492 | 50,239 | 21,420 | — | 117,924 | ||||||||||||||||||
|
Investment
securities held-to-maturity
|
19,478 | 41,397 | 98,148 | — | — | 159,023 | ||||||||||||||||||
|
Stock
in Federal Home Loan Bank
|
53,497 | — | — | — | — | 53,497 | ||||||||||||||||||
|
Non-interest
earning assets less allowance for loan losses
|
— | — | — | — | 38,976 | 38,976 | ||||||||||||||||||
|
Total
assets
|
$ | 1,097,796 | $ | 645,851 | $ | 1,670,263 | $ | 95,899 | $ | 41,410 | $ | 3,551,219 | ||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||
|
Time
certificates under $100,000
|
$ | 347,620 | $ | 406,570 | $ | 30,507 | $ | — | $ | — | $ | 784,697 | ||||||||||||
|
Time
certificates $100,000 and more
|
459,329 | 441,546 | 201,289 | — | — | 1,102,164 | ||||||||||||||||||
|
Money
market and passbook accounts
|
251,660 | — | — | — | — | 251,660 | ||||||||||||||||||
|
Demand
deposit accounts
|
26,518 | — | — | — | 16,819 | 43,337 | ||||||||||||||||||
|
FHLB
advances and other borrowings
|
178,952 | 139,650 | 684,484 | 18,149 | — | 1,021,235 | ||||||||||||||||||
|
Other
liabilities
|
— | — | — | — | 33,959 | 33,959 | ||||||||||||||||||
|
Junior
subordinated debentures
|
25,800 | 30,900 | — | 29,900 | — | 86,600 | ||||||||||||||||||
|
Shareholders’
equity
|
— | — | — | — | 227,567 | 227,567 | ||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,289,879 | $ | 1,018,666 | $ | 916,280 | $ | 48,049 | $ | 278,345 | $ | 3,551,219 | ||||||||||||
|
Net
repricing assets over (under) repricing liabilities equals interest rate
sensitivity GAP
|
$ | (192,083 | ) | $ | (372,815 | ) | $ | 753,983 | $ | 47,850 | $ | (236,935 | ) | |||||||||||
|
Cumulative
interest rate sensitivity GAP
|
$ | (192,083 | ) | $ | (564,898 | ) | $ | 189,085 | $ | 236,935 | $ | — | ||||||||||||
|
Cumulative
GAP as a percentage of total assets
|
-5.41 | % | -15.91 | % | 5.32 | % | 6.67 | % | 0.00 | % | ||||||||||||||
____________
|
(1)
|
Approximately
49.3% of our loan portfolio was comprised of adjustable rate loans at
December 31, 2007, and approximately 46.5% of the loan portfolio was
comprised of hybrid loans, which become adjustable rate loans after an
initial fixed rate period of three or five years. Our adjustable rate
loans generally re-price on a quarterly or semi-annual basis with
increases generally limited to maximum adjustments of 2% per year up to 5%
for the life of the loan. Nonaccrual loans of approximately $38.0 million
are assumed to reprice after five
years.
|
Certain
shortcomings are inherent in a gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market rates, while interest
rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally,
the ability of some borrowers to service their debt may decrease in the event of
a severe interest rate increase.
Item 8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
43
|
|
Reports
of Independent Registered Public Accounting Firm
|
44
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
46
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
47
|
|
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income for
the Years Ended December 31, 2007, 2006 and 2005
|
48
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
49
|
|
Notes
to Consolidated Financial Statements
|
50
|
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2007 based on the framework in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2007.
The
effectiveness of our internal control over financial reporting as of December
31, 2007 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included elsewhere
herein.
/s/ George
W.
Haligowski
George W.
Haligowski
Chairman
of the Board, President and
Chief
Executive Officer
/s/ Timothy
M.
Doyle
Timothy
M. Doyle
Executive
Managing Director and
Chief
Financial Officer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Imperial Capital Bancorp,
Inc.:
We have
audited Imperial Capital Bancorp, Inc.’s (the “Company”) internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO criteria”). Imperial Capital
Bancorp, Inc.’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Imperial Capital Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Imperial
Capital Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in shareholders’ equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2007 and our report dated March 14,
2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Los
Angeles, California
March
14,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Shareholders of Imperial Capital Bancorp,
Inc.:
We have
audited the accompanying consolidated balance sheets of Imperial Capital
Bancorp, Inc. and subsidiaries (the “Company”), as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in
shareholders’ equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Imperial Capital
Bancorp, Inc. and subsidiaries at December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Imperial Capital Bancorp, Inc.’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
14,
2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Los
Angeles, California
March
14,
2008
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in thousands, except share
amounts)
|
||||||||
| Assets | ||||||||
|
Cash
and cash
equivalents
|
$ | 8,944 | $ | 30,448 | ||||
|
Investment
securities available-for-sale, at fair value
|
117,924 | 99,527 | ||||||
|
Investment
securities held-to-maturity, at amortized cost (fair value approximates
$158,509 and $190,475 in 2007 and 2006, respectively)
|
159,023 | 193,512 | ||||||
|
Stock
in Federal Home Loan Bank
|
53,497 | 48,984 | ||||||
|
Loans,
net (net of allowance for loan losses of $47,783 and $46,049 in 2007 and
2006, respectively)
|
3,125,072 | 2,973,368 | ||||||
|
Interest
receivable
|
20,841 | 20,753 | ||||||
|
Other
real estate and other assets owned, net
|
19,396 | 6,729 | ||||||
|
Premises
and equipment, net
|
8,550 | 7,851 | ||||||
|
Deferred
income taxes
|
12,148 | 11,513 | ||||||
|
Goodwill
|
3,118 | 3,118 | ||||||
|
Other
assets
|
22,706 | 19,707 | ||||||
|
Total
assets
|
$ | 3,551,219 | $ | 3,415,510 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Deposit
accounts
|
$ | 2,181,858 | $ | 2,059,405 | ||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,021,235 | 1,010,000 | ||||||
|
Accounts
payable and other liabilities
|
33,959 | 38,168 | ||||||
|
Junior
subordinated debentures
|
86,600 | 86,600 | ||||||
|
Total
liabilities
|
3,323,652 | 3,194,173 | ||||||
|
Commitments
and contingencies (Note 13)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, 5,000,000 shares authorized, none issued
|
— | — | ||||||
|
Contributed
capital – common stock, $.01 par value; 20,000,000 shares authorized,
9,142,256 and 9,065,672 issued in 2007 and 2006,
respectively
|
85,009 | 82,073 | ||||||
|
Retained
earnings
|
255,947 | 243,823 | ||||||
|
Accumulated
other comprehensive income, net
|
267 | 35 | ||||||
| 341,223 | 325,931 | |||||||
|
Less
treasury stock, at cost – 3,995,634 and 3,803,969 shares in 2007 and 2006,
respectively
|
(113,656 | ) | (104,594 | ) | ||||
|
Total
shareholders’ equity
|
227,567 | 221,337 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 3,551,219 | $ | 3,415,510 | ||||
See
accompanying notes to the consolidated financial statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in thousands, except per share
amounts)
|
||||||||||||
|
Interest
income:
|
||||||||||||
|
Loans
receivable, including fees
|
$ | 233,749 | $ | 207,320 | $ | 159,720 | ||||||
|
Cash,
cash equivalents and investment securities
|
17,522 | 19,181 | 18,438 | |||||||||
|
Total
interest income
|
251,271 | 226,501 | 178,158 | |||||||||
|
Interest
expense:
|
||||||||||||
|
Deposit
accounts
|
110,111 | 85,156 | 53,807 | |||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
46,134 | 38,722 | 25,508 | |||||||||
|
Junior
subordinated debentures
|
8,338 | 8,197 | 7,171 | |||||||||
|
Total
interest expense
|
164,583 | 132,075 | 86,486 | |||||||||
|
Net
interest income before provision for loan losses
|
86,688 | 94,426 | 91,672 | |||||||||
|
Provision
for loan losses
|
11,077 | 5,000 | 10,250 | |||||||||
|
Net
interest income after provision for loan losses
|
75,611 | 89,426 | 81,422 | |||||||||
|
Non-interest
income:
|
||||||||||||
|
Gain
on sale of loans, net
|
— | — | 4,911 | |||||||||
|
Late
and collection fees
|
1,119 | 970 | 536 | |||||||||
|
Other
|
2,014 | 1,802 | 1,127 | |||||||||
|
Total
non-interest income
|
3,133 | 2,772 | 6,574 | |||||||||
|
Non-interest
expense:
|
||||||||||||
|
Compensation
and benefits
|
23,899 | 21,265 | 21,737 | |||||||||
|
Occupancy
and equipment
|
7,832 | 7,439 | 7,177 | |||||||||
|
Other
|
19,633 | 17,743 | 17,344 | |||||||||
|
Total
general and administrative
|
51,364 | 46,447 | 46,258 | |||||||||
|
Other
real estate and other assets owned expense, net
|
780 | 334 | 204 | |||||||||
|
Provision
for losses on other real estate and other assets owned
|
300 | — | — | |||||||||
|
Loss
(gain) on sale of other real estate and other assets owned
|
45 | 35 | (11 | ) | ||||||||
|
Total
real estate and other assets owned expense
|
1,125 | 369 | 193 | |||||||||
|
Total
non-interest expense
|
52,489 | 46,816 | 46,451 | |||||||||
|
Income
before provision for income taxes
|
26,255 | 45,382 | 41,545 | |||||||||
|
Provision
for income taxes
|
10,635 | 18,493 | 17,482 | |||||||||
|
NET
INCOME
|
$ | 15,620 | $ | 26,889 | $ | 24,063 | ||||||
|
BASIC
EARNINGS PER SHARE
|
$ | 2.85 | $ | 4.83 | $ | 4.19 | ||||||
|
DILUTED
EARNINGS PER SHARE
|
$ | 2.81 | $ | 4.71 | $ | 4.04 | ||||||
|
|
See
accompanying notes to the consolidated financial
statements.
|
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
|
Comprehensive
Income
|
||||||||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Reclassification
of
|
|||||||||||||||||||||||||||||||||||||||||||
|
Number
of shares
|
Shareholders’
Equity
|
Realized
Gains
|
||||||||||||||||||||||||||||||||||||||||||
|
Gross
|
Net
|
Contributed
Capital
|
Accumulated
|
Unrealized
|
Previously
|
|||||||||||||||||||||||||||||||||||||||
|
Shares
|
Shares
|
Total
|
Other
|
Treasury
|
Gain
(Loss)
|
Recognized
in
|
Total
|
|||||||||||||||||||||||||||||||||||||
|
Issued
and
|
Treasury
|
Issued
and
|
Share
|
Earned
|
Contributed
|
Retained
|
Comprehensive
|
Stock,
|
Net
|
on
Securities,
|
Comprehensive
|
Comprehensive
|
||||||||||||||||||||||||||||||||
|
Outstanding
|
Shares
|
Outstanding
|
Capital
|
Compensation
|
Capital
|
Earnings
|
Income
(Loss)
|
At
Cost
|
Total
|
Income
|
Net
of Tax
|
Income,
Net of Tax
|
Income
|
|||||||||||||||||||||||||||||||
|
(in
thousands except share amounts)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance
at January 1, 2005
|
8,703,894 | (3,154,290 | ) | 5,549,604 | $ | 67,127 | $ | 2,200 | $ | 69,327 | $ | 196,032 | $ | 78 | $ | (70,713 | ) | $ | 194,724 | |||||||||||||||||||||||||
|
Issuance
of common stock - employee stock options
|
275,104 | — | 275,104 | 8,656 | — | 8,656 | — | — | — | 8,656 | ||||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan /Recognition and
Retention Plan, net
|
— | 9,333 | 9,333 | — | 21 | 21 | — | — | 84 | 105 | ||||||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
— | (431,738 | ) | (431,738 | ) | — | — | — | — | — | (22,625 | ) | (22,625 | ) | ||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | 24,063 | — | — | 24,063 | ||||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
— | — | — | — | — | — | — | (442 | ) | — | (442 | ) | $ | 24,063 | $ | (442 | ) | $ | — | $ | 23,621 | |||||||||||||||||||||||
|
Balance
at December 31, 2005
|
8,978,998 | (3,576,695 | ) | 5,402,303 | $ | 75,783 | $ | 2,221 | $ | 78,004 | $ | 220,095 | $ | (364 | ) | $ | (93,254 | ) | $ | 204,481 | ||||||||||||||||||||||||
|
Issuance
of common stock-employee stock options, net
|
86,674 | — | 86,674 | 3,692 | — | 3,692 | — | — | — | 3,692 | ||||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan / Recognition and
Retention Plan, net
|
— | 1,735 | 1,735 | — | 111 | 111 | — | — | (75 | ) | 36 | |||||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
— | (229,009 | ) | (229,009 | ) | — | — | — | — | — | (11,265 | ) | (11,265 | ) | ||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.60 per common share)
|
— | — | — | — | — | — | (3,161 | ) | — | — | (3,161 | ) | ||||||||||||||||||||||||||||||||
|
Stock
compensation expense recognized in earnings
|
— | — | — | — | 266 | 266 | — | — | — | 266 | ||||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | 26,889 | — | — | 26,889 | ||||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
— | — | — | — | — | — | — | 399 | — | 399 | $ | 26,889 | $ | 399 | $ | — | $ | 27,288 | ||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
9,065,672 | (3,803,969 | ) | 5,261,703 | $ | 79,475 | $ | 2,598 | $ | 82,073 | $ | 243,823 | $ | 35 | $ | (104,594 | ) | $ | 221,337 | |||||||||||||||||||||||||
|
Issuance
of common stock- employee stock options, net
|
76,584 | — | 76,584 | 2,567 | — | 2,567 | — | — | — | 2,567 | ||||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan / Recognition and
Retention Plan / Deferred Compensation Plan, net
|
— | (4,190 | ) | (4,190 | ) | — | 158 | 158 | — | — | (173 | ) | (15 | ) | ||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
— | (187,475 | ) | (187,475 | ) | — | — | — | — | — | (8,889 | ) | (8,889 | ) | ||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.64 per common share)
|
— | — | — | — | — | — | (3,496 | ) | — | — | (3,496 | ) | ||||||||||||||||||||||||||||||||
|
Stock
compensation expense recognized in earnings
|
— | — | — | — | 211 | 211 | — | — | — | 211 | ||||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | 15,620 | — | — | 15,620 | ||||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
— | — | — | — | — | — | — | 232 | — | 232 | $ | 15,620 | $ | 232 | $ | — | $ | 15,852 | ||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
9,142,256 | (3,995,634 | ) | 5,146,622 | $ | 82,042 | $ | 2,967 | $ | 85,009 | $ | 255,947 | $ | 267 | $ | (113,656 | ) | $ | 227,567 | |||||||||||||||||||||||||
See
accompanying notes to the consolidated financial statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net
Income
|
$ | 15,620 | $ | 26,889 | $ | 24,063 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization of premises and equipment
|
2,973 | 2,690 | 2,682 | |||||||||
|
Amortization
of premium on purchased loans
|
4,946 | 4,732 | 3,114 | |||||||||
|
Accretion
of deferred loan origination fees, net of costs
|
(2,392 | ) | (2,846 | ) | (2,897 | ) | ||||||
|
Provision
for loan losses
|
11,077 | 5,000 | 10,250 | |||||||||
|
Provision
for losses on other real estate owned
|
300 | — | — | |||||||||
|
Gain
on sale of loans, net
|
— | — | (4,911 | ) | ||||||||
|
Deferred
income tax (benefit) expense
|
(799 | ) | 926 | (1,940 | ) | |||||||
|
Other,
net
|
(2,811 | ) | (2,020 | ) | 2,928 | |||||||
|
Increase
in interest receivable
|
(88 | ) | (4,466 | ) | (5,592 | ) | ||||||
|
(Increase)
decrease in other assets
|
(2,999 | ) | 1,198 | (1,247 | ) | |||||||
|
(Decrease)
increase in accounts payable and other liabilities
|
(4,247 | ) | 5,231 | 11,639 | ||||||||
|
Net
cash provided by operating
activities
|
21,580 | 37,334 | 38,089 | |||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Purchases
of investment securities available-for-sale
|
(82,195 | ) | (44,331 | ) | (42,770 | ) | ||||||
|
Proceeds
from the maturity and calls of investment securities
available-for-sale
|
65,334 | 38,159 | 16,238 | |||||||||
|
Purchases
of investment securities held-to-maturity
|
— | (7,771 | ) | — | ||||||||
|
Proceeds
from the maturity and redemption of investment securities
held-to-maturity
|
34,434 | 48,019 | 62,033 | |||||||||
|
Purchase
of stock in Federal Home Loan Bank
|
(1,887 | ) | (2,675 | ) | (19,252 | ) | ||||||
|
Purchase
of loans
|
(47,343 | ) | (497,785 | ) | (723,822 | ) | ||||||
|
Proceeds
from the sale of franchise loans
|
— | — | 115,508 | |||||||||
|
(Increase)
decrease in loans, net
|
(135,888 | ) | 38,072 | (130,937 | ) | |||||||
|
Proceeds
from sale of other real estate owned
|
4,400 | 135 | 81 | |||||||||
|
Cash
paid for capital expenditures
|
(3,832 | ) | (3,823 | ) | (2,755 | ) | ||||||
|
Net
cash used in investing
activities
|
(166,977 | ) | (432,000 | ) | (725,676 | ) | ||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds
from exercise of employee stock options
|
2,567 | 3,692 | 4,650 | |||||||||
|
Cash
paid to acquire treasury stock
|
(9,062 | ) | (11,374 | ) | (22,625 | ) | ||||||
|
Cash
dividends paid
|
(3,300 | ) | (2,371 | ) | — | |||||||
|
Increase
in deposit accounts
|
122,453 | 323,977 | 303,396 | |||||||||
|
Net
(repayments of) proceeds from short-term borrowings
|
(77,498 | ) | 89,293 | (77,795 | ) | |||||||
|
Proceeds
from long-term borrowings
|
316,000 | 89,869 | 586,215 | |||||||||
|
Repayments
of long-term borrowings
|
(227,267 | ) | (161,719 | ) | (100,087 | ) | ||||||
|
Net
cash provided by financing
activities
|
123,893 | 331,367 | 693,754 | |||||||||
|
Net
(decrease) increase in cash and cash
equivalents
|
(21,504 | ) | (63,299 | ) | 6,167 | |||||||
|
Cash
and cash equivalents, beginning of
period
|
30,448 | 93,747 | 87,580 | |||||||||
|
Cash
and cash equivalents, end of
period
|
$ | 8,944 | $ | 30,448 | $ | 93,747 | ||||||
|
Supplemental
Cash Flow Information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$ | 164,495 | $ | 124,755 | $ | 82,326 | ||||||
|
Cash
paid during the period for income taxes
|
$ | 11,089 | $ | 16,668 | $ | 10,033 | ||||||
|
Non-cash
Investing Transactions:
|
||||||||||||
|
Loans
transferred to other real estate and other assets owned
|
$ | 17,896 | $ | 3,499 | $ | 4,030 | ||||||
|
Loans
to facilitate the sale of other real estate owned
|
$ | — | $ | 560 | $ | — | ||||||
|
Cash
dividends declared but not yet paid
|
$ | 828 | $ | 790 | $ | — | ||||||
See
accompanying notes to the consolidated financial statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
NOTE 1—ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization - Imperial
Capital Bancorp, Inc. (formerly ITLA Capital Corporation) and subsidiaries
(“ICB” or “the Company”) is primarily engaged in the origination of real estate
loans secured by income producing real estate and, to a lesser extent, the
origination of entertainment finance loans. Through its principal operating
subsidiary, Imperial Capital Bank (“Imperial” or “the Bank”), the Company
accepts deposits insured by the Federal Deposit Insurance Corporation (“FDIC”)
which are used primarily to fund loan production. The Company also holds certain
multi-family and commercial real estate loans through its subsidiary, Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”).
Imperial
began operating as a California industrial bank in 1974, and became a publicly
traded company in October 1995, when its shares were sold in an initial public
offering. Imperial operates six retail branches in California, a branch in
Carson City, Nevada and a branch in Baltimore, Maryland, along with 25 loan
origination offices serving the Western United States, the Southeast region, the
Mid-Atlantic region, the Ohio Valley, the Metro New York area and New
England.
The Bank
is a California state chartered commercial bank. ICB is supervised by the
Federal Reserve Bank and is registered as a bank holding company.
Financial Statement Presentation —
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States (“GAAP”) and to
prevailing practices within the financial services industry. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to the presentation in the current period. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents — We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Investment Securities —
Investment securities available-for-sale are carried at fair value with
unrealized gains or losses reported net of taxes as a component of accumulated
other comprehensive income (loss) until realized. Realized gains and losses are
determined using the specific identification method. Investment securities
held-to-maturity represent investments that the Company has the ability and
intent to hold to maturity. These investments are reported at cost and are
adjusted for the accretion and amortization of premiums and discounts on the
effective interest method. Declines in fair value that are deemed
other than temporary, if any, are reported in non-interest income.
Loans — Loans, which include
real estate loans, construction and land loans, franchise loans, entertainment
finance loans, and commercial and other loans, are generally carried at
principal amounts outstanding plus purchase premiums and the net deferred loan
origination costs, less charge-offs. Deferred loan origination costs include
deferred unamortized loan origination costs net of loan fees and other unearned
income collected in connection with the origination of a loan. Interest income
is accrued as earned. Net purchase premiums or discounts and deferred loan
origination costs are amortized or accreted into interest income using the
interest method.
Loans are
placed on nonaccrual status when they become 90 days or more contractually
delinquent or earlier if the collection of interest is considered by management
to be unlikely. When a loan is placed on nonaccrual status, all previously
accrued but uncollected interest is reversed against current period operating
results. Subsequent cash collections on nonaccrual loans are either recognized
as interest income on a cash basis if the loan is well secured and in
management’s judgment the net book value is fully collectible, or recorded as a
reduction of principal.
Loans are
considered impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all principal and interest
amounts due according to the original contractual terms of the loan agreement on
a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a
loan is determined to be impaired, the impairment is measured based on the
present value of the expected future cash flows discounted at the loan’s
effective interest rate or by using the loan’s most recent market value or the
fair value of the collateral if the loan is collateral dependent.
When the
measurement of an impaired loan is less than the recorded amount of the loan, a
valuation allowance is established by recording a charge to the provision for
loan losses. Subsequent increases or decreases in the valuation allowance for
impaired loans are recorded by adjusting the existing valuation allowance for
the impaired loan with a corresponding charge or credit to the provision for
loan losses.
Our
policy for recognizing interest income on impaired loans is the same as that for
nonaccrual loans.
Allowance for Loan Losses — We
maintain an allowance for loan losses at a level considered adequate to cover
probable losses on loans. In evaluating the adequacy of the allowance for loan
losses, management estimates the amount of the loss for each loan that has been
identified as having more than standard credit risk. Those estimates give
consideration to, among other factors, economic conditions, estimated real
estate collateral value and cash flow, and the financial strength and commitment
of the borrower or guarantors, where appropriate. Additionally, an estimate for
loan loss is calculated for the remaining portion of the portfolio giving
consideration to the Company’s historical loss experience in the portfolio,
adjusted, as appropriate, for the estimated effects of current economic
conditions and changes in the composition of the loan portfolio over time. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance, or portion thereof, has been
confirmed.
Other Real Estate and Other Assets
Owned — Other real estate and other assets owned (“OREO”) represents real
estate and other assets acquired through or in lieu of
foreclosure. OREO is held for sale and is initially recorded at fair
value less estimated costs of disposition at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
cost or estimated fair value less costs of disposition. The net operating
results from OREO are recognized as non-interest expense.
Premises and Equipment —
Premises and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets ranging from three to ten
years. Amortization of leasehold improvements is calculated on the straight-line
method over the shorter of the estimated useful lives of the assets or the
corresponding contractual lease term, which does not generally include renewal
options.
Goodwill — The Company
accounts for goodwill in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142
ceased the amortization of goodwill and requires an annual assessment for
impairment by applying a fair-value-based test. In accordance with
SFAS No. 142, the Company assesses the goodwill for impairment on an annual
basis, or on an interim basis if events or circumstances indicate the fair value
of the goodwill has decreased below its carrying value. As of December 31, 2007
and 2006, the Company evaluated its goodwill, and determined that no impairment
was required.
Income Taxes — Provision for
income taxes is the amount of estimated tax due reported on our tax returns and
the change in the amount of deferred tax assets and liabilities. Deferred income
taxes represent the estimated net income tax expense payable (or benefits
receivable) for temporary differences between the carrying amounts for financial
reporting purposes and the amounts used for tax purposes.
Earnings Per Share — Earnings
per share (“EPS”) for all periods presented in the consolidated statements of
income are computed in accordance with the provisions of SFAS No. 128, “Earnings
Per Share”, and are based on the weighted-average number of shares outstanding
during each year. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS includes the effect of common stock
equivalents of the Company, which include only shares issuable on the exercise
of outstanding options. A reconciliation of the computation of Basic EPS and
Diluted EPS is presented in Note 15 — Earnings Per Share.
Stock-Based Compensation
— Prior to
January 1, 2006, the Company’s stock-based compensation plans were accounted for
in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Under APB Opinion No. 25, no
compensation expense was recognized for a stock option grant if the exercise
price of the stock option at measurement date was equal to or greater than the
fair market value of the common stock on the date of grant. The Company also
applied SFAS No. 123, “Accounting for Stock-Based Compensation”, for disclosure
purposes only. SFAS No. 123 disclosures include pro forma net income
and earnings per share as if the fair value-based method of accounting had been
used.
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment”, which requires the recognition of the expense related to the fair
value of stock-based compensation awards within the consolidated statement of
income. The Company elected the modified prospective transition method as
permitted by SFAS No. 123(R), and accordingly, results from prior periods have
not been restated. Under this transition method, stock-based compensation
expense for the year ended December 31, 2007 and 2006 includes compensation
expense for unvested stock-based compensation awards that were outstanding as of
January 1, 2007 and 2006, respectively, for which the requisite service was
rendered during the year. The stock-based compensation costs for
these awards granted prior to January 1, 2006 were based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123.
Compensation expense for all stock-based compensation awards granted subsequent
to January 1, 2006 were based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123(R).
Total
stock-based compensation expense included in our consolidated statement of
income for the years ended December 31, 2007 and 2006 were approximately
$212,000 ($127,000, net of tax, or $0.02 per diluted share) and $266,000
($160,000, net of tax, or $0.03 per diluted share), respectively. No stock-based
compensation expense was included in the consolidated statements of income for
the year ended December 31, 2005. Unrecognized stock-based compensation expense
related to unvested stock options was approximately $793,000 and $66,000 at
December 31, 2007 and 2006, respectively. At that date, the weighted-average
period over which the unrecognized expense was expected to be recognized was
2.41 years and 2.22 years, respectively.
Prior to
the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the
exercise of stock options as operating cash flows in our consolidated statements
of cash flows. In accordance with SFAS No. 123(R), for the years ended December
31, 2007 and 2006, the presentation of our statement of cash flows has changed
from prior periods to report the excess tax benefits from the exercise of stock
options as financing cash flows. For the years ended December 31,
2007 and 2006, $898,000 and $627,000, respectively, of excess tax benefits were
reported as financing cash flows.
The table
below illustrates the effect on net earnings and earnings per share as if we had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation during the year ended December 31, 2005.
|
(in
thousands, except per share amounts)
|
||||
|
Net
income, as reported
|
$ | 24,063 | ||
|
Less:
Stock-based employee compensation expense determined under the fair value
method, net of tax
|
(4,189 | ) | ||
|
Pro
forma net income
|
$ | 19,874 | ||
|
Earnings
per share:
|
||||
|
Basic
– as reported
|
$ | 4.19 | ||
|
Basic
– pro forma
|
$ | 3.46 | ||
|
Diluted
– as reported
|
$ | 4.04 | ||
|
Diluted
– pro forma
|
$ | 3.33 | ||
Effective
December 8, 2005, the Company accelerated the vesting of all unvested stock
options previously awarded to employees and officers under the Company’s stock
option plans. The decision to accelerate the vesting of these options as of that
date was made primarily to reduce non-cash compensation expense that would
otherwise have been recorded in the Company’s statement of income beginning on
January 1, 2006 upon the adoption of SFAS No. 123(R). The stock based
compensation expense for the year ended December 31, 2005 determined under the
fair value method, net of related tax effects, shown above includes the effect
of acceleration of the vesting of the options outstanding. The impact on the
stock based compensation expense disclosure above for fiscal year 2005 was an
additional $0.2 million, or $0.04 per fully diluted weighted average
share.
The fair
value of each option grant was estimated on the date of grant using an option
pricing model with the following weighted-average assumptions for option
grants:
|
Weighted-Average
Assumptions for Option Grants
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Dividend
Yield
|
1.87 | % | 1.17 | % | 0.00 | % | ||||||
|
Expected
Volatility
|
24.31 | % | 22.86 | % | 37.59 | % | ||||||
|
Risk-Free
Interest
Rates
|
4.67 | % | 4.94 | % | 4.33 | % | ||||||
|
Expected
Lives
|
5
Years
|
5
Years
|
5.5
Years
|
|||||||||
|
Weighted-Average
Fair Value
|
$ | 9.12 | $ | 13.68 | $ | 20.69 | ||||||
Other Comprehensive Income —
Other comprehensive income is displayed in the Consolidated Statements of
Changes in Shareholders’ Equity and Comprehensive Income and consists of the
change in net unrealized holding gain or loss on securities classified as
available-for-sale, net of the related income tax effect.
New Accounting Pronouncements
— In February 2006, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” — an
amendment of SFAS Nos. 133 and 140. SFAS No. 155 permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, and amends SFAS No.
140 to eliminate the prohibition on a qualifying special purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This statement
was effective for the Company on January 1, 2007. The adoption of
SFAS No. 155 did not have a material impact on the Company’s financial condition
or results of operations.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities”, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires companies to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract. The statement permits a company to
choose either the amortized cost method or fair value measurement method for
each class of separately recognized servicing assets. This statement was
effective for the Company on January 1, 2007. The adoption of SFAS
No. 156 did not have a material impact on the Company’s financial condition or
results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for the Company on January 1, 2008. The adoption of SFAS No. 157 did
not have a material impact on the Company’s financial condition or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for us on
January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on
the Company’s financial condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB Statement No.
51.” SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS No. 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company’s financial condition or results of
operations.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
establishes a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition requirements. FIN 48 was effective for the
Company on January 1, 2007. The adoption of FIN 48 did not have a
material impact on the Company’s financial condition or results of
operations.
NOTE 2—INVESTMENT
SECURITIES
The
amortized cost and fair value of investment securities as of December 31, 2007
and 2006 are as follows:
|
|
|
Gross
Unrealized
|
||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Gains
|
Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2007:
|
||||||||||||||||
|
Investment securities
available-for-sale:
|
||||||||||||||||
|
U.S. agency
securities
|
$ | 9,997 | $ | 9,986 | $ | 2 | $ | 13 | ||||||||
|
Collateralized mortgage
obligations
|
83,260 | 84,264 | 1,046 | 42 | ||||||||||||
|
Mortgage-backed
securities
|
4,453 | 4,489 | 36 | — | ||||||||||||
|
Corporate
bonds
|
13,437 | 12,582 | — | 855 | ||||||||||||
|
Residual interest in
securitized loans
|
1,318 | 1,318 | — | — | ||||||||||||
|
Equity
securities
|
5,013 | 5,285 | 281 | 9 | ||||||||||||
|
Total investment securities
available-for-sale
|
$ | 117,478 | $ | 117,924 | $ | 1,365 | $ | 919 | ||||||||
|
Investment securities
held-to-maturity:
|
||||||||||||||||
|
Mortgage-backed
securities
|
$ | 159,023 | $ | 158,509 | $ | 305 | $ | 819 | ||||||||
|
December
31, 2006:
|
||||||||||||||||
|
Investment securities
available-for-sale:
|
||||||||||||||||
|
U.S. agency
securities
|
$ | 62,554 | $ | 62,184 | $ | 3 | $ | 373 | ||||||||
|
Collateralized mortgage
obligations
|
34,991 | 35,127 | 163 | 27 | ||||||||||||
|
Residual interest in
securitized loans
|
1,911 | 2,039 | 128 | — | ||||||||||||
|
Equity
securities
|
13 | 177 | 170 | 6 | ||||||||||||
|
Total investment securities
available-for-sale
|
$ | 99,469 | $ | 99,527 | $ | 464 | $ | 406 | ||||||||
|
Investment securities
held-to-maturity:
|
||||||||||||||||
|
Mortgage-backed
securities
|
$ | 193,512 | $ | 190,475 | $ | 105 | $ | 3,142 | ||||||||
The
amortized cost and approximate fair value of securities at December 31, 2007 are
presented below by contractual maturity. Mortgage-backed securities
and collateralized mortgage obligations are included in maturity categories
based on their stated maturity date. Expected maturities may differ
from contractual maturities because issuers may have the right to prepay
obligations. Equity securities classified as available-for-sale that
have no maturity are included in the due in one year or less
column.
|
Available-for-Sale
|
Held-to-Maturity
|
|||||||||||||||
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Due
in one year or
less
|
$ | 9,998 | $ | 10,171 | $ | — | $ | — | ||||||||
|
Due
after one year through five years
|
1,331 | 1,318 | — | — | ||||||||||||
|
Due
after five years through ten years
|
22,182 | 22,494 | — | — | ||||||||||||
|
Due
after ten
years
|
83,967 | 83,941 | 159,023 | 158,509 | ||||||||||||
| $ | 117,478 | $ | 117,924 | $ | 159,023 | $ | 158,509 | |||||||||
At
December 31, 2007, the remaining contractual maturity and weighted average life
of the mortgage-backed securities held-to-maturity was approximately 26.7 and
5.3 years, respectively. Additionally, the remaining contractual maturity and
weighted average life of the collateralized mortgage obligations was
approximately 16.5 and 3.5 years, at December 31, 2007. The weighted average
life of mortgage-backed securities and collateralized mortgage obligations
differs from the contractual maturity due to anticipated principal
prepayments.
A total
of 22 securities and 25 securities had unrealized losses at December 31,
2007 and 2006, respectively. These securities, with unrealized losses segregated
by length of impairment, were as follows:
|
Less
than 12 months
|
More
than 12 months
|
Total
|
||||||||||||||||||||||
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
|
December
31, 2007:
|
(in
thousands)
|
|||||||||||||||||||||||
|
Investment
securities available-for-sale:
|
||||||||||||||||||||||||
|
U.S. agency
securities
|
$ | 3,986 | $ | 13 | $ | — | $ | — | $ | 3,986 | $ | 13 | ||||||||||||
|
Collateralized mortgage
obligations
|
17,062 | 42 | — | — | 17,062 | 42 | ||||||||||||||||||
|
Corporate bonds
|
12,582 | 855 | — | — | 12,582 | 855 | ||||||||||||||||||
|
Equity
securities
|
— | — | 2 | 9 | 2 | 9 | ||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 33,630 | $ | 910 | $ | 2 | $ | 9 | $ | 33,632 | $ | 919 | ||||||||||||
|
Investment
securities held-to-maturity:
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | 24,438 | $ | 2 | $ | 81,921 | $ | 817 | $ | 106,359 | $ | 819 | ||||||||||||
|
December
31, 2006:
|
||||||||||||||||||||||||
|
Investment
securities available-for-sale:
|
||||||||||||||||||||||||
|
U.S. agency
securities
|
$ | — | $ | — | $ | 56,214 | $ | 373 | $ | 56,214 | $ | 373 | ||||||||||||
|
Collateralized mortgage
obligations
|
9,022 | 27 | — | — | 9,022 | 27 | ||||||||||||||||||
|
Equity
securities
|
— | — | 4 | 6 | 4 | 6 | ||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 9,022 | $ | 27 | $ | 56,218 | $ | 379 | $ | 65,240 | $ | 406 | ||||||||||||
|
Investment
securities held-to-maturity:
|
||||||||||||||||||||||||
|
Mortgage-backed
securities
|
$ | — | $ | — | $ | 182,953 | $ | 3,142 | $ | 182,953 | $ | 3,142 | ||||||||||||
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair
value.
Management
has the ability and intent to hold the securities classified as held-to-maturity
until they mature, at which time the Company expects to receive the face or par
value of the securities. Furthermore, as of December 31, 2007, management also
had the ability and intent to hold the securities classified as
available-for-sale for a period of time sufficient for a recovery of cost. The
unrealized losses are largely due to increases in market interest rates over the
yields available at the time the underlying securities were purchased. The fair
value is expected to recover as these securities approach their maturity date or
repricing date or if market yields for such investments decline. Management does
not believe any of the securities are impaired due to reasons of credit quality.
Accordingly, as of December 31, 2007, management believes the impairments
detailed in the table above are temporary and no other-than-temporary impairment
loss has been realized in the Company’s consolidated statements of
income.
During
2007 and 2006, no securities were sold prior to their maturity or call
date. There were no realized gains or losses on investment securities
for the years ended December 31, 2007, 2006 and 2005.
NOTE 3—LOANS
Loans
consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Real
estate
loans
|
$ | 2,627,801 | $ | 2,524,182 | ||||
|
Construction
and land
loans
|
421,110 | 370,473 | ||||||
|
Entertainment
finance
loans
|
76,342 | 74,204 | ||||||
|
Franchise
loans
|
2,718 | 9,334 | ||||||
|
Commercial
and other
loans
|
14,631 | 9,346 | ||||||
| 3,142,602 | 2,987,539 | |||||||
|
Unamortized
premium
|
13,776 | 18,138 | ||||||
|
Deferred
loan origination costs,
net
|
16,477 | 13,740 | ||||||
| 3,172,855 | 3,019,417 | |||||||
|
Allowance
for loan
losses
|
(47,783 | ) | (46,049 | ) | ||||
| $ | 3,125,072 | $ | 2,973,368 | |||||
At
December 31, 2007, approximately 27.0%, 72.4% and 0.6% of the Bank’s real estate
loans were secured by income producing commercial properties, income producing
multi-family properties and residential one-to-four family properties,
respectively. At December 31, 2007, approximately 43.8% of our loans secured by
real estate were collateralized by properties located in
California. At December 31, 2007, construction and land loans
consisted of 60.1% of single-family residential and condominium projects, 25.4%
of commercial retail and multi-family development projects and 14.5% of land
loans.
At
December 31, 2006, approximately 24.5%, 73.9% and 1.6% of the Bank’s real estate
loans were secured by income producing commercial properties, income producing
multi-family properties and residential one-to-four family properties,
respectively. At December 31, 2006, approximately 54.4% of our loans secured by
real estate were collateralized by properties located in
California. At December 31, 2006, construction and land loans
consisted of 56.1% of single-family residential and condominium projects, 38.6%
of commercial retail and multi-family development projects and 5.3% of land
loans.
At
December 31, 2007 and 2006, approximately $2.3 billion and $2.0 billion,
respectively, of loans were pledged to secure a borrowing facility at the
Federal Home Loan Bank (“FHLB”) of San Francisco.
The
following is the activity in the allowance for loan losses on loans for the
periods indicated.
|
As
of and for the Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 46,049 | $ | 43,817 | $ | 35,483 | ||||||
|
Provision
for loan losses
|
11,077 | 5,000 | 10,250 | |||||||||
|
Charge-offs:
|
||||||||||||
|
Real
estate loans
|
(6,843 | ) | (1,634 | ) | (1,584 | ) | ||||||
|
Construction
and land loans
|
(1,530 | ) | — | — | ||||||||
|
Entertainment
finance loans
|
(2,500 | ) | (2,500 | ) | (395 | ) | ||||||
|
Franchise
loans
|
— | — | (451 | ) | ||||||||
|
Total
charge-offs
|
(10,873 | ) | (4,134 | ) | (2,430 | ) | ||||||
|
Recoveries:
|
||||||||||||
|
Real
estate loans
|
796 | 894 | 88 | |||||||||
|
Entertainment
finance loans
|
470 | 472 | 426 | |||||||||
|
Franchise
loans
|
264 | — | — | |||||||||
|
Total
recoveries
|
1,530 | 1,366 | 514 | |||||||||
|
Net
charge-offs
|
(9,343 | ) | (2,768 | ) | (1,916 | ) | ||||||
|
Balance
at end of year
|
$ | 47,783 | $ | 46,049 | $ | 43,817 | ||||||
As of
December 31, 2007 and 2006, there were $93,000 and $61,000 respectively, of
entertainment finance loan recoveries, related to borrowers domiciled outside of
the United States.
As of
December 31, 2007 and 2006, the accrual of income had been suspended on
approximately $38.0 million and $26.3 million, respectively, of loans. Interest
income that was contractually due on loans that were on nonaccrual status that
was not recognized during the years ended December 31, 2007, 2006 and 2005 was
approximately $2.8 million, $1.5 million, and $1.6 million,
respectively.
As of
December 31, 2007 and 2006, restructured loans totaled $14.1 million and $13.4
million, respectively. There were $100,000 related commitments to lend
additional funds on restructured loans. For the years ended December 31, 2007,
2006 and 2005, $1.4 million, $1.5 million, and $1.9 million, respectively, of
gross interest income would have been recorded had the loans been current in
accordance with their original terms compared to $1.0 million, $720,000, and
$1.4 million, respectively, of interest income that was included in net income
for the same periods. The average yield on restructured loans was 7.90% and
9.15%, respectively, at December 31, 2007 and 2006.
As of
December 31, 2007 and 2006, impaired loans totaled $47.0 million and $35.5
million, respectively, with a valuation allowance provided for these loans of
$11.6 million and $8.5 million, respectively. As of December 31, 2007
and 2006, impaired loans on nonaccrual status were $38.0 million and $26.3
million, respectively. There were no impaired loans without a valuation
allowance as of December 31, 2007 and 2006. The average recorded
investment in impaired loans for the years ended December 31, 2007, 2006 and
2005 was $44.6 million, $32.3 million, and $28.7 million, respectively. Interest
income recognized on impaired loans for the years ended December 31, 2007, 2006
and 2005 was $824,000, $826,000, and $945,000, respectively.
Loans
having carrying values of $17.9 million and $3.5 million were transferred to
OREO in 2007 and 2006, respectively.
NOTE 4—OTHER REAL ESTATE
OWNED
Other
real estate and other assets owned was stated as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Other
real estate owned held for
sale
|
$ | 14,317 | $ | 6,729 | ||||
|
Other
assets owned held for
sale
|
5,079 | — | ||||||
|
Less:
valuation
allowance
|
— | — | ||||||
|
Other
real estate owned,
net
|
$ | 19,396 | $ | 6,729 | ||||
The
activity in the valuation allowance for other real estate and other assets owned
was as follows:
|
As
of and for the Years Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Provision
for losses on other real estate owned
|
300 | — | — | |||||||||
|
Charge-offs
on other real estate owned
|
(300 | ) | — | — | ||||||||
|
Balance
at end of year
|
$ | — | $ | — | $ | — | ||||||
NOTE 5—PREMISES AND
EQUIPMENT
Premises
and equipment are stated at cost less accumulated depreciation and amortization
and consist of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Furniture,
fixtures and equipment
|
$ | 15,277 | $ | 16,876 | ||||
|
Leasehold
improvements
|
4,551 | 6,327 | ||||||
|
Automobiles
|
1,579 | 1,476 | ||||||
| 21,407 | 24,679 | |||||||
|
Accumulated
depreciation and amortization
|
(12,857 | ) | (16,828 | ) | ||||
| $ | 8,550 | $ | 7,851 | |||||
Depreciation
and amortization expense on premises and equipment for the years ended December
31, 2007, 2006 and 2005 was $3.0 million, $2.7 million, and $2.7 million,
respectively.
NOTE 6—DEPOSIT
ACCOUNTS
Deposit
accounts consist of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Non-interest
demand accounts
|
$ | 16,819 | $ | 23,171 | ||||
|
Interest
demand accounts
|
26,518 | 24,523 | ||||||
|
Money
market and passbook accounts
|
251,660 | 210,236 | ||||||
|
Time
certificates under $100,000
|
784,697 | 784,732 | ||||||
|
Time
certificates $100,000 and over
|
1,102,164 | 1,016,743 | ||||||
| $ | 2,181,858 | $ | 2,059,405 | |||||
Demand
deposit accounts have no contractual maturity. The weighted average
contractual interest rate of the Bank’s interest-bearing demand deposit accounts
was 3.37% and 2.96% at December 31, 2007 and 2006, respectively. The
weighted average contractual interest rate of the Bank’s money market and
passbook accounts was 4.73% and 4.90% at December 31, 2007 and 2006,
respectively. Additionally, some money market accounts have limited checking
features which allow three check withdrawals per month. The weighted
average contractual interest rate of the Bank’s time certificate accounts was
5.07% and 5.16% at December 31, 2007 and 2006, respectively.
Interest
expense on time certificates $100,000 and over, which includes broker deposits,
for the years ended December 31, 2007, 2006 and 2005 amounted to approximately
$54.3 million, $40.1 million, and $22.7 million, respectively.
The Bank
is a member of the FDIC and its deposits are insured up to $100,000 each per
insured depositor. In addition, insurance coverage of up to $250,000
are available for “self-directed” retirement accounts.
As of
December 31, 2007, the contractual maturities of time certificate accounts were
as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2008
|
$ | 1,655,065 | ||
|
2009
|
53,905 | |||
|
2010
|
132,724 | |||
|
2011
|
41,271 | |||
|
2012
|
3,896 | |||
| $ | 1,886,861 | |||
NOTE 7 — LINES OF
CREDIT
As of
December 31, 2007 and 2006, the Bank had uncommitted, unsecured lines of credit
of $131.0 million and $128.0 million, respectively, with four unaffiliated
financial institutions renewable daily. There were no borrowings on
these lines at December 31, 2007 and 2006.
The
Company also has a $37.5 million revolving credit facility with an unaffiliated
financial institution. There were no borrowings on this line of
credit at December 31, 2007.
NOTE 8 — JUNIOR SUBORDINATED
DEBENTURES
The
Company has created five trusts, ITLA Capital Statutory Trust I (“Trust I”),
ITLA Capital Statutory Trust II (“Trust II”), ITLA Capital Statutory Trust III
(“Trust III”), ITLA Capital Statutory Trust IV (“Trust IV”), and ITLA Capital
Statutory Trust V (“Trust V”). Trust I issued $14.0 million of 10.60% cumulative
trust preferred securities in September 2000, Trust II issued $15.0 million of
10.20% cumulative trust preferred securities in February 2001, Trust III issued
$20.0 million of variable rate cumulative trust preferred securities in October
2002, Trust IV issued $10.0 million of variable rate cumulative trust preferred
securities in December 2002, and Trust V issued $25.0 million of variable rate
cumulative trust preferred securities in December 2002 (referred to collectively
as the “Trust Preferred securities”). ICB has fully and unconditionally
guaranteed the Trust Preferred securities along with all obligations of each
trust under their respective trust agreements. Each trust was formed for the
exclusive purpose of issuing their respective Trust Preferred securities and
common securities and using the proceeds to acquire ICB’s junior subordinated
deferrable interest debentures. Trust I acquired an aggregate principal amount
of $14.4 million of ICB’s 10.60% junior subordinated deferrable interest
debentures due September 7, 2030 that pay interest each March 7 and September 7
during the term of this security. Trust II acquired an aggregate principal
amount of $15.5 million of ICB’s 10.20% junior subordinated deferrable interest
debentures due February 22, 2031 that pays interest each February 22 and August
22 during the term of this security. Trust III acquired an aggregate principal
amount of $20.6 million of ICB’s variable rate junior subordinated deferrable
interest debentures due October 30, 2032 that pays interest on each April 30 and
October 30 during the term of the security. Trust IV acquired an aggregate
principal amount of $10.3 million of ICB’s variable rate junior subordinated
deferrable interest debentures due December 10, 2032 that pays interest each
June 15 and December 15 during the term of the security. Trust V acquired an
aggregate principal amount of $25.8 million of ICB’s variable rate junior
subordinated deferrable interest debentures due December 26, 2032 that pays
interest quarterly on March 26, June 26, September 26, and December 26 during
the term of the security. The sole assets of each trust are the debentures it
holds. Each of the debentures is redeemable, in whole or in part, at ICB’s
option on or after ten years after issuance for Trust I and Trust II (at
declining premiums during the 11th through the 20th year after issuance and at
par during the 21st year and thereafter until maturity), and five years after
issuance for Trust III, Trust IV, and Trust V (at par until
maturity). Each of the debentures is also redeemable, in whole and
not in part, at ICB’s option any time prior to maturity, upon the occurrence of
certain special events, which include, among others, a determination by the
Federal Reserve Board that the Trust Preferred securities do not qualify as Tier
1 capital (discussed below).
The
Company used the proceeds from the debentures for general corporate purposes,
including an aggregate of $81.3 million in capital contributions to the Bank to
support future growth. The costs associated with the Trust Preferred securities
issuance were netted with proceeds and are being amortized using a method that
approximates the interest method over a period of five to ten
years.
The trust
preferred securities qualify as Tier 1 capital for ICB to the extent permitted
under Federal Reserve Board regulations. See “Note 14 – Regulatory
Requirements.”
NOTE 9 — FHLB ADVANCES AND OTHER
BORROWINGS
FHLB
advances represent $991.2 million of collateralized obligations with the FHLB of
San Francisco. Other borrowings consist of $30.0 million of
securities sold under agreements to repurchase, which mature within one
year. FHLB advances and other borrowings are summarized by
contractual maturity as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2008
|
$ | 318,602 | ||
|
2009
|
164,646 | |||
|
2010
|
307,915 | |||
|
2011
|
145,002 | |||
|
2012
|
66,921 | |||
|
Thereafter
|
18,149 | |||
| $ | 1,021,235 | |||
The
Company has pledged real estate loans with a carrying value of $2.3 billion and
investment securities held-to-maturity with a carrying and fair value of $9.1
million and $9.2 million, respectively, to secure FHLB advances. The total FHLB
borrowing capacity available from the collateral that has been pledged is
approximately $1.4 billion, of which $415.6 million remained available to borrow
as of December 31, 2007, net of the $13.2 million of additional FHLB stock that
we would be required to purchase to support the additional
borrowing. Additionally, the Company has pledged investment
securities held-to-maturity with a carrying and fair value of $27.5 million and
$27.6 million, respectively, and investment securities available-for-sale with a
carrying and fair value of $5.9 million to secure securities sold under
agreements to repurchase.
The
following table represents a summary of short and long-term borrowings for the
periods indicated. Short-term borrowings shown in the table consist
entirely of FHLB advances.
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Short-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$ | 228,000 | $ | 177,498 | $ | 112,000 | ||||||
|
Weighted-average
daily balance outstanding
|
$ | 145,458 | $ | 15,094 | $ | 38,566 | ||||||
|
Weighted-average
rate paid during the year
|
5.14 | % | 4.96 | % | 3.19 | % | ||||||
|
Weighted-average
rate on balance at year-end
|
4.57 | % | 5.40 | % | 4.18 | % | ||||||
|
Balance
at
year-end
|
$ | 130,000 | $ | 177,498 | $ | 88,205 | ||||||
|
Interest
expense
|
$ | 7,470 | $ | 749 | $ | 1,230 | ||||||
|
Long-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$ | 899,224 | $ | 973,571 | $ | 906,457 | ||||||
|
Weighted-average
daily balance outstanding
|
$ | 866,003 | $ | 911,822 | $ | 668,825 | ||||||
|
Weighted-average
rate paid during the year
|
4.46 | % | 4.17 | % | 3.63 | % | ||||||
|
Weighted-average
rate on balance at year-end
|
4.64 | % | 4.25 | % | 4.00 | % | ||||||
|
Balance
at
year-end
|
$ | 891,235 | $ | 832,502 | $ | 904,352 | ||||||
|
Interest
expense
|
$ | 38,664 | $ | 37,973 | $ | 24,278 | ||||||
NOTE 10 — BENEFIT
PLANS
Salary Savings Plan. The
Company has a salary savings plan (the “Savings Plan”) that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may contribute a portion of
their pretax earnings, not to exceed the annual limits established by the
Internal Revenue Service. We match 50% of each employee’s salary deferral, up to
a maximum 6% of the employee’s salary. Employees vest in employer contributions
and the earnings thereon over a five-year period. Matching contributions to the
Savings Plan were $490,000, $478,000, and $452,000, in 2007, 2006 and 2005,
respectively.
Nonqualified Deferred Compensation
Plans. The Company has deferred compensation plans designed to provide
additional retirement benefits for certain officers and key employees who cannot
take full advantage of the Savings Plan. The costs associated with these
deferred compensation plans were approximately $42,000 in 2007 and $36,000 in
both 2006 and 2005.
Supplemental Executive Retirement
Plan. The Company has adopted a Supplemental Executive Retirement Plan
(the “SERP”) for certain officers and key employees which provides for
participants to be awarded shares of common stock of the Company on a tax
deferred basis from the Recognition and Retention Plan (“RRP”) previously
approved by the shareholders. All of the shares granted under the RRP
have been awarded and are fully vested. The Company recognized
$106,000 of compensation expense from the vesting of allocated SERP/RRP shares
in 2005. No compensation expense was recognized in 2007 and 2006 in
connection with this plan.
Stock Plans. The Company
adopted an employee stock incentive plan and stock option plan for nonemployee
directors (collectively, “the Stock Plan”) which together provide for the award
of up to 1,631,000 shares of common stock to officers, directors and employees
as compensation for future services. An amendment to the Stock Plan increasing
the number of shares authorized for award under the Stock Plan by 320,000 shares
and 311,000 shares, respectively, were approved by the Company’s shareholders on
July 27, 2005 and June 29, 2001. As of December 31, 2007, the Company has
granted an aggregate of 2,000,750 options under the Stock Plan, of which
1,022,256 have been exercised and 408,094 have been forfeited. The exercise
price per share of the options outstanding at December 31, 2007 ranges from
$11.00 to $58.00 per share and generally vest 33-1/3% per year, beginning with
the first anniversary of the date of each individual grant.
The
number of options and weighted-average exercise prices of options for each of
the following groups of options, for the periods indicated, are as
follows:
|
Number
of Options
|
Weighted-Average
Exercise
Price
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Options
outstanding at the beginning of the year
|
545,984 | 630,818 | $ | 35.73 | $ | 35.61 | ||||||||||
|
Options
granted during the year
|
103,000 | 7,250 | $ | 36.34 | $ | 51.10 | ||||||||||
|
Options
exercised during the year
|
(76,584 | ) | (86,674 | ) | $ | 21.79 | $ | 35.36 | ||||||||
|
Options
forfeited during the year
|
(2,000 | ) | (5,410 | ) | $ | 47.92 | $ | 48.11 | ||||||||
|
Options
outstanding at the end of the year
|
570,400 | 545,984 | $ | 37.67 | $ | 35.73 | ||||||||||
|
Options
exercisable at the end of the year
|
464,068 | 538,484 | $ | 37.87 | $ | 35.50 | ||||||||||
NOTE 11 — INCOME
TAXES
Deferred
income taxes reflect the net effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Significant
components of our deferred tax assets and liabilities are as
follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Components
of the deferred tax asset:
|
||||||||
|
Allowance
for loan losses
|
$ | 20,091 | $ | 18,933 | ||||
|
Accrued
expenses
|
3,641 | 3,462 | ||||||
|
State
income taxes
|
661 | 1,314 | ||||||
|
Other
|
3,752 | 939 | ||||||
|
Total
deferred tax assets
|
28,145 | 24,648 | ||||||
|
Components
of the deferred tax liability:
|
||||||||
|
Deferred
loan origination costs
|
10,761 | 9,167 | ||||||
|
FHLB
stock dividends
|
5,049 | 3,945 | ||||||
|
Unrealized
gain on investment securities available-for-sale
|
187 | 23 | ||||||
|
Total
deferred tax liabilities
|
15,997 | 13,135 | ||||||
|
Net
deferred tax asset
|
$ | 12,148 | $ | 11,513 | ||||
The
deferred tax asset is considered fully realizable, as when the temporary
differences associated with the deferred tax asset are recognized for income tax
purposes, those deductions are expected to be fully offset, either by carryback
against previously taxed income or by reducing future taxable income.
Accordingly, we have not established a valuation allowance on the deferred tax
asset.
A summary
of the provision for income taxes follows:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
provision:
|
||||||||||||
|
Federal
|
$ | 8,927 | $ | 13,678 | $ | 14,709 | ||||||
|
State
|
2,507 | 3,889 | 4,713 | |||||||||
| 11,434 | 17,567 | 19,422 | ||||||||||
|
Deferred
(benefit) provision:
|
||||||||||||
|
Federal
|
(468 | ) | 540 | (1,448 | ) | |||||||
|
State
|
(331 | ) | 386 | (492 | ) | |||||||
| (799 | ) | 926 | (1,940 | ) | ||||||||
| $ | 10,635 | $ | 18,493 | $ | 17,482 | |||||||
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income tax, net of federal income tax benefit
|
7.0 | % | 7.0 | % | 7.0 | % | ||||||
|
State
income tax credit and other benefits
|
(1.5 | )% | (1.3 | )% | — | |||||||
|
Effective
income tax rate
|
40.5 | % | 40.7 | % | 42.0 | % | ||||||
The
income tax provision (benefit) component of accumulated other comprehensive
income was $164,000, $278,000, and ($309,000) for the years ended December 31,
2007, 2006 and 2005, respectively. During 2007, 2006 and 2005, the
Company recognized a $898,000, $627,000 and $4.0 million income tax benefit
related to the exercise of employee stock options. The benefit was
recorded in contributed capital within the consolidated balance
sheets.
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized an approximate
$1.2 million increase in the liability for unrecognized tax benefits. The
following table presents the activity in unrecognized tax benefits for
2007:
|
Amount
|
||||
|
(in
thousands)
|
||||
|
Unrecognized
tax benefit at adoption, January 1
|
$ | — | ||
|
Gross
increases — tax positions in prior period
|
1,007 | |||
|
Gross
decreases — tax positions in prior period
|
— | |||
|
Gross
increases — tax positions in current period
|
233 | |||
|
Gross
decreases — tax positions in current period
|
— | |||
|
Settlements
|
— | |||
|
Lapse
of statute of limitations
|
— | |||
|
Unrecognized
tax benefit, December 31
|
$ | 1,240 | ||
Included
in the balance of unrecognized tax benefits at December 31, 2007, are
approximately $1.2 million of tax benefits that, if recognized, would affect the
effective tax rate.
The
Company recognizes accrued interest related to unrecognized tax benefits and
penalties as a component of provision for income taxes. Related to the uncertain
tax benefits noted above, the Company accrued penalties of $35,000 and interest
of $91,000 during 2007. The Company does not expect that unrecognized
tax benefits will significantly increase or decrease within the next 12
months.
The
Company is subject to taxation in the United States and various states and local
jurisdictions. The tax years that remain open for examination for the Company’s
major jurisdictions of the United States and California are 2003, 2004, 2005 and
2006.
NOTE 12 — FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
We are a
party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of our customers. These financial
instruments primarily consist of commitments to extend credit. These instruments
may involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheet. The contractual amounts of
those instruments reflect the extent of involvement we have in particular
classes of financial instruments.
We have
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit. This exposure is
represented by the contractual amount of those instruments and the Company uses
the same lending policies for these instruments as it does for the loan
portfolio. We had outstanding unfunded loan commitments, consisting primarily of
the unfunded portion of construction and entertainment finance loans, of
approximately $315.6 million and $256.7 million at December 31, 2007 and 2006,
respectively.
Unfunded
commitments under commercial lines of credit, revolving credit lines and
overdraft protection agreements are commitments for possible extensions of
future extensions of credit to existing customers. These lines of
credit are typically uncollateralized and usually do not contain a specific
maturity date and often are not drawn upon to the total extent to which the
Company is committed. We had outstanding commercial lines of credit
totaling $1.7 million and $1.1 million at December 31, 2007 and 2006,
respectively.
NOTE 13 — COMMITMENTS AND
CONTINGENCIES
Commitments
We lease
office facilities under noncancelable operating leases. Estimated future minimum
lease payments required under leases with initial or remaining noncancelable
terms in excess of one year at December 31, 2007 are as follows:
|
(in
thousands)
|
||||
|
2008
|
$ | 3,657 | ||
|
2009
|
2,587 | |||
|
2010
|
2,064 | |||
|
2011
|
1,887 | |||
|
2012
|
1,166 | |||
|
Thereafter
|
728 | |||
|
Total
|
12,089 | |||
|
Sub-Lease
income
|
(556 | ) | ||
|
Net
future minimum lease payments
|
$ | 11,533 | ||
Certain
leases contain rental escalation clauses based on increases in the consumer
price index, and renewal options of up to ten years, which may be exercised by
the Company. We incurred rent expense of $4.5 million, $4.5 million, and $4.2
million in 2007, 2006 and 2005, respectively.
Contingencies
We are
subject to various pending legal actions which arise in the normal course of
business. We maintain reserves for losses from legal actions which are both
probable and estimable. Although the amount of the ultimate exposure, if any,
cannot be determined at this time, in management’s opinion, based upon advice of
counsel, the disposition of claims currently pending are not expected to have a
material adverse effect on our financial condition or results of
operations.
NOTE 14 — REGULATORY
REQUIREMENTS
The
Company is subject to supervision by the Federal Reserve Board
(“FRB”). The Bank is subject to supervision and regulation by the
FDIC and the Department of Financial Institutions (“DFI”) of the State of
California under the provisions of the California Banking Law. These provisions
authorize the Bank’s issuance of deposits, place limits on the size of loans the
Bank can make, and specify the maintenance of minimum liquidity
levels.
The
Company and the Bank are also subject to various capital requirements
administered by the FRB and FDIC, respectively. The FRB and the FDIC
have substantially similar risk-based capital ratio and leverage ratio
guidelines for banking organizations. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary action by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial statements and the
Bank’s operations. Under the applicable capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company’s and 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
Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average total assets (“Leverage Ratio”). Management believes,
as of December 31, 2007 and 2006, that the Company and the Bank meet all
applicable capital adequacy requirements.
On March
1, 2005, the FRB adopted a final rule that allows the continued inclusion of
trust preferred securities in the tier 1 capital of bank holding
companies. The final rule limits restricted core capital elements
(which include trust preferred securities) to 25 percent of all core capital
elements, net of goodwill less any associated deferred tax
liability. Amounts of restricted core capital elements in excess of
these limits generally may be included in tier 2 capital. The final
rule provides a five year transition period, ending March 31, 2009, for
application of the quantitative limits.
As of
December 31, 2007, the most recent notification from the FDIC categorized the
Bank as “well capitalized” under the applicable regulatory framework. Similarly,
the Company’s capital levels exceeded the levels necessary to be considered
“well capitalized”. To be categorized as “well capitalized”, the Company and the
Bank must maintain minimum Total Risk-Based and Tier 1 Risk-Based Ratios, and
the Bank must also maintain a minimum Tier 1 Leverage Ratio as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Company’s and the Bank’s
category.
ICB and
the Bank’s actual regulatory capital amounts and ratios are presented in the
following table:
|
Actual
|
Minimum
Requirement
for
Capital Adequacy Purposes
|
Capital
Required to
Maintain
“Well
Capitalized” Designation
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
As of December 31, 2007
|
||||||||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 346,687 | 11.3 | % | $ | 245,654 | 8.0 | % | $ | 307,068 | 10.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 331,141 | 10.9 | % | $ | 244,095 | 8.0 | % | $ | 305,119 | 10.0 | % | ||||||||||||
|
Tier
I capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 298,909 | 9.7 | % | $ | 122,828 | 4.0 | % | $ | 184,242 | 6.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 292,879 | 9.6 | % | $ | 122,048 | 4.0 | % | $ | 183,072 | 6.0 | % | ||||||||||||
|
Tier
I capital (to average total assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 298,909 | 8.4 | % | $ | 141,680 | 4.0 | % | $ | 177,100 | 5.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 292,879 | 8.3 | % | $ | 140,919 | 4.0 | % | $ | 176,149 | 5.0 | % | ||||||||||||
|
As of December 31, 2006
|
||||||||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 337,868 | 11.9 | % | $ | 227,517 | 8.0 | % | $ | 284,396 | 10.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 325,500 | 11.5 | % | $ | 226,322 | 8.0 | % | $ | 282,903 | 10.0 | % | ||||||||||||
|
Tier
I capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 290,912 | 10.2 | % | $ | 113,759 | 4.0 | % | $ | 170,639 | 6.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 290,013 | 10.3 | % | $ | 113,162 | 4.0 | % | $ | 169,743 | 6.0 | % | ||||||||||||
|
Tier
I capital (to average total assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 290,912 | 9.0 | % | $ | 128,696 | 4.0 | % | $ | 160,870 | 5.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 290,013 | 9.1 | % | $ | 127,974 | 4.0 | % | $ | 159,968 | 5.0 | % | ||||||||||||
Additionally,
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the retained
earnings of the Bank, and loans or advances are limited to 10 percent of the
Bank's capital stock and surplus on a secured basis.
At
December 31, 2007, the Bank's retained earnings available for the payment of
dividends was $142.9 million. Accordingly, $153.2 million of the
Company's equity in the net assets of the Bank was restricted at December 31,
2007. Funds available for loans or advances by the Bank to the Company
amounted to $15.3 million. In addition, dividends paid by the Bank to
the Company would be prohibited if the effect thereof would cause the Bank's
capital to be reduced below applicable minimum capital
requirements.
NOTE 15—EARNINGS PER
SHARE
The
following is a reconciliation of the amounts used in the calculation of basic
earnings per share and diluted earnings per share.
|
Net
Income
|
Weighted-Average
Shares
Outstanding
|
Per
Share Amount
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Year ended December 31,
2007
|
||||||||||||
|
Basic
earnings per share
|
$ | 15,620 | 5,473 | $ | 2.85 | |||||||
|
Dilutive
effect of stock options
|
— | 94 | (0.04 | ) | ||||||||
|
Diluted
earnings per share
|
$ | 15,620 | 5,567 | $ | 2.81 | |||||||
|
Year
ended December 31, 2006
|
||||||||||||
|
Basic
earnings per share
|
$ | 26,889 | 5,562 | $ | 4.83 | |||||||
|
Dilutive
effect of stock options
|
— | 150 | (0.12 | ) | ||||||||
|
Diluted
earnings per share
|
$ | 26,889 | 5,712 | $ | 4.71 | |||||||
|
Year
ended December 31, 2005
|
||||||||||||
|
Basic
earnings per share
|
$ | 24,063 | 5,749 | $ | 4.19 | |||||||
|
Dilutive
effect of stock options
|
— | 214 | (0.15 | ) | ||||||||
|
Diluted
earnings per share
|
$ | 24,063 | 5,963 | $ | 4.04 | |||||||
NOTE 16—DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
Fair
value estimates are based on judgments regarding credit risk, expectations of
future economic conditions, normal cost of administration of these instruments
and other risk characteristics, including interest rate risk and prepayment
risk. These estimates are subjective in nature, involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. The
fair value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
We use
the following methods and assumptions to estimate the fair value of each class
of financial instruments for which it is practicable to estimate
value:
Cash and Cash Equivalents —
The carrying values reported in the balance sheet approximate fair values
due to the short-term nature of the assets.
Investment Securities — Fair
values are based on bid prices and quotations published and/or received from
established securities dealers. In those limited situations where
quotations are not available, values are determined using present value of
estimated future cash flows.
Stock in Federal Home Loan Bank —
The carrying value approximates fair value based on the redemption
provisions of the FHLB.
Loans — The fair value is
estimated using the present value of future cash flows, discounted using the
current rate at which similar loans would be made to borrowers with similar
credit ratings and for the same maturities and giving consideration to estimated
prepayment risk and credit risk.
Accrued Interest Receivable —
The carrying values reported in the balance sheet approximate the fair values
due to the short-term nature of the asset.
Deposit Accounts — The fair
value of demand deposit, money market and passbook accounts is estimated to be
the amount payable on demand due to the short-term nature of these deposits. The
fair values for time certificates, both over and under $100,000, are estimated
by discounting the expected cash flows at current market rates over expected
maturities.
Federal Home Loan Bank Advances and
Other Borrowings — The fair value is
estimated by discounting the expected cash flows at current market rates over
contractual maturities.
Junior Subordinated
Debentures — The
fair value is estimated using the present value of future cash flows, discounted
using the current rate at which a similar debenture would be
issued.
The
carrying amounts and estimated fair values of our financial instruments are as
follows:
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 8,944 | $ | 8,944 | $ | 30,448 | $ | 30,448 | ||||||||
|
Investment
securities available-for-sale
|
117,924 | 117,924 | 99,527 | 99,527 | ||||||||||||
|
Investment
securities held-to-maturity
|
159,023 | 158,509 | 193,512 | 190,475 | ||||||||||||
|
Stock
in Federal Home Loan Bank
|
53,497 | 53,497 | 48,984 | 48,984 | ||||||||||||
|
Loans,
net
|
3,125,072 | 3,145,088 | 2,973,368 | 3,008,621 | ||||||||||||
|
Accrued
interest receivable
|
20,841 | 20,841 | 20,753 | 20,753 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposit
accounts
|
$ | 2,181,858 | $ | 2,191,930 | $ | 2,059,405 | $ | 2,061,922 | ||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,021,235 | 1,041,398 | 1,010,000 | 998,219 | ||||||||||||
|
Junior
subordinated
debentures
|
86,600 | 91,889 | 86,600 | 90,425 | ||||||||||||
NOTE 17—BUSINESS SEGMENT
INFORMATION
SFAS No.
131, “Disclosures About Segments of an Enterprise and Related Information”
requires disclosure of segment information in a manner consistent with the
“management approach”. The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance.
The main
factors used to identify operating segments were the specific product and
business lines of the various operating segments of the Company. Operating
segments are organized separately by product and service offered. We have
identified one operating segment that meets the criteria of being a reportable
segment in accordance with the provisions of SFAS No. 131. This reportable
segment is the Company’s lending operations, which by its legal form, is
identified as operations of the Bank and Imperial Capital REIT. This segment
derives the majority of its revenue from interest received on loans originated
and purchased. Other operating segments of the Company that did not meet the
criteria of being a reportable segment in accordance with SFAS No. 131 have been
aggregated and reported as “All Other”. Transactions from all of our operating
segments occur primarily in the United States. The Company has no transactions
with a single external customer that exceeds ten percent of the Company’s
consolidated revenues.
Transactions
between the reportable segment of the Company and its other operating segments
are made at terms which approximate arm’s-length transactions and in accordance
with GAAP. There is no significant difference between the measurement of the
reportable segment’s assets and profits and losses disclosed below and the
measurement of assets and profits and losses in the consolidated balance sheets
and statements of income. Accounting allocations are made in the same manner for
all operating segments.
Required
reported segment information for 2007, 2006 and 2005 is detailed
below:
|
Lending
Operations
|
All
Other
|
Eliminations
|
Consolidated
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As of and for the Year
Ended December 31,
2007
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 253,296 | $ | 1,108 | $ | — | $ | 254,404 | ||||||||
|
Total
interest income
|
250,436 | 835 | — | 251,271 | ||||||||||||
|
Total
interest expense
|
156,245 | 8,338 | — | 164,583 | ||||||||||||
|
Depreciation
and amortization expense
|
2,497 | 476 | — | 2,973 | ||||||||||||
|
Provision
(benefit) for income taxes
|
14,525 | (3,890 | ) | — | 10,635 | |||||||||||
|
Capital
expenditures
|
3,351 | 481 | — | 3,832 | ||||||||||||
|
Total
assets
|
3,527,164 | 327,373 | (303,318 | ) | 3,551,219 | |||||||||||
|
Income
(loss) before provision for income taxes
|
36,798 | (10,543 | ) | — | 26,255 | |||||||||||
|
As of and for the Year
Ended December 31,
2006
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 228,057 | $ | 1,216 | $ | — | $ | 229,273 | ||||||||
|
Total
interest income
|
225,376 | 1,125 | — | 226,501 | ||||||||||||
|
Total
interest expense
|
123,878 | 8,197 | — | 132,075 | ||||||||||||
|
Depreciation
and amortization expense
|
2,305 | 393 | — | 2,698 | ||||||||||||
|
Provision
(benefit) for income taxes
|
22,513 | (4,020 | ) | — | 18,493 | |||||||||||
|
Capital
expenditures
|
2,286 | 325 | — | 2,611 | ||||||||||||
|
Total
assets
|
3,396,079 | 319,554 | (300,123 | ) | 3,415,510 | |||||||||||
|
Income
(loss) before provision for income taxes
|
55,410 | (10,028 | ) | — | 45,382 | |||||||||||
|
As of and for the Year
Ended December 31,
2005
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 182,580 | $ | 2,152 | $ | — | $ | 184,732 | ||||||||
|
Total
interest income
|
175,855 | 2,303 | — | 178,158 | ||||||||||||
|
Total
interest expense
|
79,315 | 7,171 | — | 86,486 | ||||||||||||
|
Depreciation
and amortization expense
|
2,290 | 392 | — | 2,682 | ||||||||||||
|
Provision
(benefit) for income taxes
|
20,113 | (2,631 | ) | — | 17,482 | |||||||||||
|
Capital
expenditures
|
2,232 | 523 | — | 2,755 | ||||||||||||
|
Total
assets
|
3,029,118 | 302,351 | (280,273 | ) | 3,051,196 | |||||||||||
|
Income
(loss) before provision for income taxes
|
49,362 | (7,817 | ) | — | 41,545 | |||||||||||
NOTE 18—PARENT COMPANY ONLY CONDENSED
FINANCIAL STATEMENTS
The
parent company only financial statements of Imperial Capital Bancorp, Inc. are
as follows:
Condensed Balance
Sheets
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
and cash
equivalents
|
$ | 972 | $ | 1,401 | ||||
|
Investment
securities available-for-sale, at fair value
|
1,503 | 2,216 | ||||||
|
Investments
in wholly-owned subsidiaries:
|
||||||||
|
Imperial Capital
Bank
|
296,161 | 292,990 | ||||||
|
Imperial Capital Real Estate
Investment Trust
|
1,764 | 1,504 | ||||||
|
Other
subsidiaries
|
108 | 177 | ||||||
|
Investments
in unconsolidated
subsidiaries
|
2,600 | 2,600 | ||||||
|
Other
assets
|
24,116 | 18,393 | ||||||
|
Total
assets
|
$ | 327,224 | $ | 319,281 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Junior
subordinated
debentures
|
$ | 86,600 | $ | 86,600 | ||||
|
Other
liabilities
|
13,057 | 11,344 | ||||||
|
Shareholders’
equity
|
227,567 | 221,337 | ||||||
|
Total liabilities and
shareholders’
equity
|
$ | 327,224 | $ | 319,281 | ||||
Condensed Statements of
Income
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Interest
income
|
$ | 835 | $ | 1,125 | $ | 2,303 | ||||||
|
Interest
expense
|
8,338 | 8,197 | 7,171 | |||||||||
|
Net
interest expense
|
(7,503 | ) | (7,072 | ) | (4,868 | ) | ||||||
|
Provision
for loan losses
|
(3 | ) | (4 | ) | (64 | ) | ||||||
|
Non-interest
expense:
|
||||||||||||
|
General
and administrative expense
|
3,316 | 3,052 | 2,809 | |||||||||
|
Other
|
(273 | ) | (91 | ) | 140 | |||||||
|
Total
non-interest expense
|
3,043 | 2,961 | 2,949 | |||||||||
|
Loss
before income tax benefit and equity in net income of
subsidiaries
|
(10,543 | ) | (10,029 | ) | (7,753 | ) | ||||||
|
Income
tax benefit
|
(3,890 | ) | (4,021 | ) | (2,609 | ) | ||||||
|
Loss
before equity in net income of subsidiaries
|
(6,653 | ) | (6,008 | ) | (5,144 | ) | ||||||
|
Equity
in net income of subsidiaries
|
22,273 | 32,897 | 29,207 | |||||||||
|
Net
income
|
$ | 15,620 | $ | 26,889 | $ | 24,063 | ||||||
Condensed Statements of Cash
Flows
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net
income
|
$ | 15,620 | $ | 26,889 | $ | 24,063 | ||||||
|
Adjustments to net
income:
|
||||||||||||
|
Equity in undistributed net
income of subsidiaries
|
(22,227 | ) | (32,897 | ) | (29,207 | ) | ||||||
|
Provision for loan
losses
|
(3 | ) | (4 | ) | (64 | ) | ||||||
|
Other,
net
|
(688 | ) | 29 | 3,465 | ||||||||
|
Increase in other
assets
|
(4,373 | ) | (1,506 | ) | (335 | ) | ||||||
|
Increase (decrease) in other
liabilities
|
1,675 | (445 | ) | 524 | ||||||||
|
Net cash used in operating
activities
|
(9,996 | ) | (7,934 | ) | (1,554 | ) | ||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Capital distribution received
from Imperial Capital REIT
|
— | 1,857 | 11,065 | |||||||||
|
Dividends received from Imperial
Capital Bank
|
18,400 | 8,500 | 3,000 | |||||||||
|
Dividends received from Imperial
Capital REIT
|
700 | 251 | 3,756 | |||||||||
|
Other,
net
|
262 | 906 | 1,376 | |||||||||
|
Net cash provided by investing
activities
|
19,362 | 11,514 | 19,197 | |||||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds from exercise of
employee stock options
|
2,567 | 3,692 | 4,650 | |||||||||
|
Cash paid to acquire treasury
stock
|
(9,062 | ) | (11,374 | ) | (22,625 | ) | ||||||
|
Cash dividends
paid
|
(3,300 | ) | (2,371 | ) | — | |||||||
|
Net cash used in financing
activities
|
(9,795 | ) | (10,053 | ) | (17,975 | ) | ||||||
|
Net decrease in cash and cash
equivalents
|
(429 | ) | (6,473 | ) | (332 | ) | ||||||
|
Cash and cash equivalents at
beginning of period
|
1,401 | 7,874 | 8,206 | |||||||||
|
Cash and cash equivalents at
end of period
|
$ | 972 | $ | 1,401 | $ | 7,874 | ||||||
Item 9. Changes In
and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Control and Procedures
Evaluation
of Disclosure Controls and Procedures
An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was
carried out as of December 31, 2007 under the supervision and with the
participation of the Company’s Chief Executive Officer, Chief Financial Officer
and several other members of the Company’s senior management. In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our
disclosure controls and procedures have been designed to meet, and management
believes that they meet, reasonable assurance standards. Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Based on their evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that, as of December 31, 2007, the
Company’s disclosure controls and procedures were effective at the reasonable
assurance level in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and (ii) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms.
Changes
in Internal Control Over Financial Reporting
During
the quarter ended December 31, 2007, no changes occurred in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
The
Company does not expect that its internal control over financial reporting will
prevent all error and all fraud. A control procedure, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control procedure are
met. Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control procedure, misstatements due to error or fraud may occur and not be
detected.
The
annual report of management on the effectiveness of our internal control over
financial reporting and the attestation report thereon issued by our independent
registered public accounting firm are set forth under “Management’s Report on
Internal Control Over Financial Reporting” and “Report of Independent Registered
Public Accounting Firm” under “Item 8. Financial Statements and Supplementary
Data.”
Item 9B. Other Information
None.
PART
III
Item 10. Directors, Executive Officers and Corporate
Governance
Executive
Officers and Directors of the Registrant
The
executive officers of the Registrant are identified below.
|
Name
|
Age
|
Position
|
|
George
W. Haligowski
|
53
|
Chairman
of the Board, President and Chief Executive Officer of ICB and the
Bank
|
|
Norval
L. Bruce
|
66
|
Vice
Chairman of the Board of ICB and the Bank
|
|
Timothy
M. Doyle
|
51
|
Executive
Managing Director and Chief Financial Officer of ICB and the
Bank
|
|
Lyle
C. Lodwick
|
53
|
Executive
Managing Director and Chief Operating Officer of ICB and the
Bank
|
|
Phillip
E. Lombardi
|
51
|
Executive
Managing Director and Chief Credit Officer of ICB and the
Bank
|
George W. Haligowski has
served as ICB’s Chairman of the Board, President and Chief Executive Officer
since inception. He has also served as the Bank’s Chairman of the Board and
Chief Executive Officer since 1992, and was the Bank’s President from 1992 to
October 1997. In 2000 he was again appointed as President of the Bank. From 1990
to 1992, he served as President, Chief Executive Officer and Principal of
Halivest International, Ltd., an international finance and asset management
company. He was previously employed as a Vice President by Shearson Lehman
Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to 1988), and by
Avco Financial Services as Regional Director of its Japanese branch operations
(1976 to 1981), as Training Coordinator for Avco Thrift and Loan (1976) and as a
Branch Manager (1974 to 1976). Mr. Haligowski’s post secondary education
consists of the following programs: He graduated from the Securities Industry
Institute held at the University of Pennsylvania Wharton School. He also became
an alumnus of the Harvard Business School by completing the Owners Presidents
Management Program. He completed the Advanced Management Program at the
University of Southern California. He received his Masters of Banking diploma
from L.S.U. Graduate School of Banking. Mr. Haligowski also serves on several
boards, including Operation Hope, Chairman Emeritus of the Young Presidents
Organization of San Diego, and is Chairman of the University of California San
Diego Scripps Institute of Oceanography's Advisory Board the Director's
Cabinet.
Norval L. Bruce has served as
the Vice Chairman of the Board of ICB and the Bank since June of 1999. He was
also Chief Credit Officer from June 1999 through August 2007 and prior to that
he was President and Chief Operating Officer of the Bank from October 1997 to
June 1999, and previously was the Executive Vice President and Chief Credit
Officer of the Bank from 1990 to October 1997. Mr. Bruce was appointed a
director of the Bank and ICB in January 1997 and September 1997, respectively.
From 1988 to 1989, he served as Executive Vice President and Chief Credit
Officer of Security Pacific Bank, Nevada. He was previously employed by Security
Pacific Bank from 1965 to 1988 in a variety of positions including management
positions in which he was responsible for both loan origination and credit
quality. Mr. Bruce has an Associates of Arts degree from Clark College of
Vancouver Washington, and attended the University of Washington where he studied
economics and engineering. He is a graduate of the Southwestern Graduate School
of Banking at Southern Methodist University and he has completed the Executive
Program in Management from the John E. Anderson Graduate School of Management at
UCLA.
Timothy M. Doyle has served
as Executive Managing Director and Chief Financial Officer of ICB and the Bank
since August 2005. He was previously Senior Managing Director and Chief
Financial Officer of ICB and the Bank from May 2000 to August 2005, and prior to
that he was Managing Director and Chief Administrative Officer of ICB and the
Bank from May 1996 to May 2000. Before joining the Bank, he was the Controller
and Director of Operations at Northeastern Plastics from 1995 to 1996; Assistant
Controller of Alpha Wire Corporation from 1992 to 1994; and Vice President and
Chief Financial Officer of Halivest International, Ltd. from 1989 to 1991. From
1982 to 1988, he was the Corporate Controller of the Shepaug Corporation. Mr.
Doyle graduated with a Bachelor of Science degree in Accounting from Western New
England College, and has completed the International Business Management Senior
Executive Program of the London Business School.
Lyle C. Lodwick has served as
Executive Managing Director and Chief Operating Officer of ICB and the Bank
since August 2005. Prior to joining ICB, Mr. Lodwick served as
Executive Vice President and Chief Operating Officer of Sunwest Bank and, prior
to that, he served as Executive Vice President and Chief Credit Officer at
Pacific Crest Capital, Inc. During his tenure at Pacific Crest
Capital, Inc. from 1992 to 2004, he held several senior level positions with the
company. From 1982 to 1985, he was Assistant Regional Credit Manager,
Western Region, with Commercial Credit Corporation. Mr. Lodwick has a BA from
Whittier College and an MBA from the University of LaVerne.
Phillip E. Lombardi has
served as Executive Managing Director - Chief Credit Officer of ICB and the Bank
since August 2005. Prior to joining ICB, he was Vice President and
Manager of the Los Angeles Real Estate Industries lending division of Bank of
the West (formerly Sanwa Bank of California) from 2001 to 2004. He was
previously Vice President and Relationship Manager for Citicorp Real Estate,
Inc. and the Commercial Asset Management unit of Citibank, F.S.B. from 1985
through 2000; and Construction Superintendent and later Marketing Director for
666 Venture, Inc. from 1981 to 1985. Mr. Lombardi has an MBA from the University
of Chicago with a Specialization in Finance, and a BA from the University of
Puget Sound.
The
directors of ICB, excluding Mr. Haligowski and Mr. Bruce, are identified
below.
Jeffrey L. Lipscomb, age 54,
is a Chartered Financial Consultant (ChFC), and an Investment Advisory Associate
with AXA Advisors and formerly was a Registered Principal and Assistant Manager
of the San Diego office of Equitable Financial Companies since 1986, handling
corporate group benefits and personal financial planning. Additionally, he is an
Executive Vice-President of Excelsior Financial Network, LLC, a wealth planning
management group. Mr. Lipscomb was also with Kidder Peabody from 1983 to 1986.
Mr. Lipscomb received a Bachelor of Arts Degree in General Psychology from the
University of California, Santa Barbara in 1976.
Sandor X. Mayuga, age 60, is
a member of the California State Bar and has been Of Counsel to the law firm of
Keesal, Young & Logan since April 2004. Prior to that, he was a
member of the law firm of Tisdale & Nicholson, LLP since 1994. He conducted
his own law practice from 1983 to 1994 and was a partner in the Financial
Institutions Department of Finley, Kumble, Wagner, Heine, Underberg, Manly &
Casey, a New York-based national law firm, from 1980 to 1983. Previously, he
served as Assistant General Counsel of Hunt-Wesson Foods, Inc., a subsidiary of
Norton Simon, Inc., and was associated with two large regional law firms in Los
Angeles County. Since 1980, Mr. Mayuga’s practice has focused on the
representation of financial institutions and other finance-related businesses in
corporate, transactional and regulatory matters. Mr. Mayuga is a graduate of the
University of Pennsylvania School of Law (Juris Doctoris, 1974), and the
University of California, Santa Barbara (A.B., Political Science, with High
Honors, 1970). While at the University of Pennsylvania, he also studied at The
Wharton School of Finance and Commerce. He also earned a Certificate in Private
International Law at Academie du Droit Internationale de la Haye
(1975).
Hirotaka Oribe, age 73, is a
licensed architect with international experience in real estate development and
urban planning. Since 1993, Mr. Oribe has served as an advisor to Kajima
Development Resources, Inc. From 1979 to 1993, Mr. Oribe was Executive Vice
President, Chief Operating Officer and a Director of Kajima Development
Corporation, a firm engaged in development and construction of single-family and
multi-family housing, office buildings, retail space and land development. Mr.
Oribe previously held other positions with affiliates of Kajima Corporation of
Japan from 1973 to 1979 and was a practicing architect from 1962 to 1973. Mr.
Oribe holds a Bachelor and Masters of Engineering from Waseda University in
Tokyo, and holds a Master of Architecture in Urban Design from Harvard
University's Graduate School of Design. He is also a licensed architect with the
State of California and the Commonwealth of Massachusetts.
Robert R. Reed, age 71, is
retired from Household International where he was employed in various positions
from 1960 to 1992. Mr. Reed served as Vice President of Household Bank from 1980
to 1992. Mr. Reed was previously employed in management positions with Household
Financial Corporation from 1962 to 1980. From 1995 to 2000, Mr. Reed
served as a director of the Santa Ana City Cable Television Review
Board.
Audit
Committee Membership
The Audit
Committee of ICB’s Board of Directors consists of Directors Reed (Chairman),
Lipscomb and Oribe. The Board of Directors has determined that Mr.
Reed is an “audit committee financial expert,” as defined in the SEC’s rules,
and that Mr. Reed is “independent,” as independence is defined for audit
committee members in the listing standards of the NYSE Stock
Market.
Code
of Ethics
We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, and persons
performing similar functions, and to all of our other employees and our
directors. A copy of our code of ethics is available on our website,
located at www.imperialcapitalbancorp.com.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires ICB’s directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
ICB. Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish ICB with copies of all Section 16(a) forms they
file.
To our
knowledge, based solely on a review of the copies of such reports furnished to
us and written representations that no other reports were required, during the
fiscal year ended December 31, 2007, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with.
Item 11. Executive Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
In this
section, we provide an overview and analysis of our compensation program and
policies, the material compensation decisions we have made under those programs
and policies, and the material factors that we considered in making those
decisions. Following this section, under the heading “Additional Information
Regarding Executive Compensation,” you will find a series of tables containing
specific information about compensation paid or payable to the following
individuals, whom we refer to as our named executive officers:
|
•
|
George
W. Haligowski, Chairman, President and Chief Executive
Officer
|
|
|
•
|
Norval
L. Bruce, Vice Chairman of the Board
|
|
|
•
|
Timothy
M. Doyle, Executive Managing Director and Chief Financial
Officer
|
|
|
•
|
Lyle
C. Lodwick, Executive Managing Director and Chief Operating
Officer
|
|
|
•
|
Phillip
E. Lombardi, Executive Managing Director and Chief Credit
Officer
|
|
The
discussion below is intended to help you understand the detailed information
provided in those tables and put that information into context within our
overall compensation program.
Compensation
Philosophy and Objectives
The
policies of the Compensation Committee of our Board of Directors, or the
Committee, with respect to the compensation of executive officers, including the
Chief Executive Officer, or CEO, are designed to provide compensation sufficient
to attract, motivate and retain executives of outstanding ability and
potential. Overall, we seek to provide total compensation packages
that are competitive in terms of total potential value to our executives, in
order to create a compensation program that will adequately reward our
executives for their roles in creating value for our shareholders. We intend to
be competitive with other similarly situated companies in the banking and
financial services industries.
Our
compensation decisions with respect to executive officer salaries, annual
incentives, and long-term incentive compensation opportunities are influenced by
(a) the executive’s level of responsibility and function within ICB,
(b) the performance and profitability of ICB and the individual’s
performance, and (c) our assessment of the competitive marketplace,
including peer companies. Our philosophy is to focus on total direct
compensation opportunities through a mix of base salary, annual cash bonus, and
long-term incentives, including equity-based awards in the form of stock
options, other benefits and perquisites, post-termination severance and
acceleration of stock option vesting for certain named executive officers upon
termination and/or a change in control. Our other benefits and perquisites for
our named executive officers primarily consist of life and health insurance
benefits, a qualified 401(k) savings plan, nonqualified deferred compensation
plans, reimbursement for certain club memberships, use of a Company-owned
automobile or automobile allowance and payment of preferential interest on
savings accounts (available to all employees). Mr. Haligowski also receives an
allowance for housing related expenses and chartered air travel. Our
philosophy is to position the aggregate of these elements at a level that is
commensurate with our size and sustained performance, and we believe it is
important to maintain a strong link between executive incentives and the
creation of shareholder value. The use of these programs enables us to reinforce
our pay for performance philosophy, as well as strengthen our ability to attract
and retain highly qualified executives. We believe that this combination of
programs provides an appropriate mix of fixed and variable pay, balances
short-term operational performance with long-term shareholder value, and
encourages executive recruitment, motivation and retention.
During
February 2006, the Committee conducted an overall review of our compensation
plans and agreements. This review was prompted by the requirement to
conform our compensation plans to Section 409A of the Internal Revenue Code of
1986, as amended (the “Code”), and by the fact that all shares of restricted
stock under our Recognition and Retention Plan (the “RRP”), originally adopted
in 1995, were allocated as of December 31, 2005. All shares allocated
were also fully vested as of December 31, 2005. Our supplemental
executive retirement plan (the “SERP”) provided for allocations of restricted
stock issued under the RRP on a tax deferred basis through the SERP. Under his
employment agreement with us dated January 28, 2000 (the “Original Employment
Agreement”) and the SERP, Mr. Haligowski was entitled to receive annually an
allocation under our SERP of a RRP restricted stock award equal to one-third of
his base salary and an additional contribution to his SERP account following a
change in control equal to 3.95 times his base salary. The SERP
entitled all other SERP participants to receive an annual award equal to
one-fifth of base salary. In order to provide our executive officers,
including Mr. Haligowski, with a benefit comparable to what we had been
providing under the SERP prior to the utilization of all remaining RRP shares in
2005, and to maximize the tax deductibility of compensation payments, we entered
into (1) an amendment and restatement of Mr. Haligowski’s employment agreement,
and executed a non-competition and non-solicitation agreement, with Mr.
Haligowski; (2) executed change in control severance agreements with nine
executive officers, including: Messrs. Bruce, Doyle, Lodwick and Lombardi (in
the case of Messrs. Bruce and Doyle these agreements replaced their existing
change in control severance agreements with us); (3) amended and restated our
employer securities and non-employer securities non-qualified deferred
compensation plans (the “Deferred Compensation Plans”) and our SERP primarily to
conform those plans with Section 409A of the Code; (4) amended and restated our
salary continuation plan (the “Salary Continuation Plan”) to conform that plan
with Section 409A of the Code and to make certain other changes described below;
and (5) made a clarifying amendment to our 2005 Re-Designated, Amended and
Restated Employee Stock Incentive Plan (the “ESIP”) intended to ensure the
deductibility under Section 162(m) of the Code of compensation attributable to
stock options or stock appreciation rights that may be granted under that plan
to executive officers.
Mr.
Haligowski’s employment agreement was amended and the non-competition and
non-solicitation agreement was entered into so that the change in control
benefits he would have received under the Original Employment Agreement
inclusive of the SERP change in control benefit described above under the
Original Employment Agreement, together with the payments to be made to Mr.
Haligowski under the non-competition and non-solicitation agreement, would not
be substantially greater or less. The Salary Continuation Plan, which was
originally adopted by us in March 2000 and in which Mr. Haligowski is currently
the only participant, was amended to eliminate an enhanced change in control
benefit, which was to provide for an increased monthly payout over ten years
instead of over 15 years as with other types of termination, and to eliminate
the reduction in benefit that was to occur if the participant voluntarily
terminated his employment before retirement age. In addition, a
number of other amendments were made to the Salary Continuation Plan to conform
the plan to Section 409A of the Code, including changes to definitions, the
elimination of our ability to accelerate benefits and changes to plan
termination provisions. All of these plans and agreements are
summarized below under “Additional Information Regarding Executive
Compensation.”
Determination of Appropriate Pay
Levels
In
General. Generally, the compensation of our executive officers
is currently composed of a base salary, an annual cash bonus and equity awards
in the form of stock options. For each of our named executive
officers, the Committee reviews and approves all elements of compensation,
taking into consideration recommendations from Mr. Haligowski (for compensation
other than his own), and the individual contributions of the particular
executive. With respect to Mr. Haligowski, the Committee has utilized
the assistance of an independent compensation consultant, Nash and Company,
Inc., which provides competitive market data with respect to CEO salary
compensation. The comparison group includes other banks and thrifts
in California with assets ranging from $1.0 to $10.0 billion. In
addition to information provided by Nash and Company, Inc., the Committee has
historically taken into account information from other sources in setting the
compensation for Mr. Haligowski and other executive officers, including
information from other independent members of the board of directors and
publicly available data relating to the compensation practices and policies of
other companies within our industry.
The
annual cash bonus is a discretionary incentive compensation award determined by
the Committee based on its assessment of the achievement of the objectives set
forth in our annual business plan, including but not limited to annual loan
production, asset quality, performance and earnings and individual performance.
In addition, stock options are granted to provide the opportunity for long-term
compensation based upon the performance of our common stock over
time.
Base Salary. We
provide the opportunity for our named executive officers and other executives to
earn a competitive annual base salary. We provide this opportunity to attract
and retain an appropriate caliber of talent for the position, and to provide a
base wage that is not subject to our performance risk.
Our base
salary levels reflect a combination of factors, including competitive pay
levels, the executive’s experience and tenure, our overall annual strategic plan
for salary increases, the Company’s performance, the executive’s individual
performance, and changes in responsibility. We review salary levels annually to
recognize these factors. We do not target base salary at any particular percent
of total compensation.
Base
salary increases in 2007 for our named executive officers other than our CEO and
our Vice Chairman, Mr. Bruce, were generally consistent with the aggregate 5.00%
pay increase approved by the Committee for our departments for
2007. For 2007, the average increase in the salaries of the executive
officers, excluding the CEO and the Vice Chairman, from 2006 salaries was
6.34%. Base salary increases granted to Messrs. Doyle, Lodwick
and Lombardi for 2007 ranged from 5.0 to 8.8% and were established after
considering job performance, internal pay alignment and equity, and marketplace
competitiveness. Mr. Bruce’s base salary was initially left unchanged
for 2007 in anticipation of a reduction in his work hours to occur later in the
year; as a result of this reduction in Mr. Bruce’s work hours, his base salary
was reduced by 50% in August 2007. The salary of our CEO is set by
the Committee, but in accordance with his employment agreement, was established
at $590,000 for 2007, the same as for 2006 and 2005. Although it is
generally customary for the Committee to adjust Mr. Haligowski’s base salary on
a bi-annual basis, and despite Nash and Company, Inc. stating that a 10% to 14%
salary increase would be in line with the practices of a peer group of
companies, the Committee determined not to adjust Mr. Haligowski’s base salary
for 2007. For 2008, the Committee determined not to change the base
salaries of the named executive officers, due to the Company’s 2007 performance
and the current operating environment, except that Mr. Bruce’s base salary will
be further reduced by 50% effective July 1, 2008.
Annual Cash Bonus Plan. We
provide the opportunity for our named executive officers and other executives to
earn an annual cash bonus, to be awarded by the Committee in its discretion. We
provide this opportunity to attract and retain an appropriate caliber of talent
for the position and to motivate executives to achieve our annual business
goals. We establish annual maximum potential bonuses annually in December or
January expressed as a percentage of base salary to be paid during the ensuing
fiscal year. Factors to be considered by the Committee in deciding
whether to award bonuses for a particular year include the extent to which we
have achieved goals set forth in our business plan for the year, individual
performance and the recommendation of the CEO (for awards other than his
own).
For 2007,
the maximum potential cash bonuses for the named executive officers, other than
Mr. Haligowski, were set at up to 50% of base salary and at up to 200% of base
salary for Mr. Haligowski. The actual bonuses awarded for 2007 to the
named executive officers other than Mr. Haligowski were equal to 25% of each
named executive officer’s base salary, or 50% of their maximum potential bonus
for 2007. The Committee’s decision to award 50% of the maximum
potential bonus was primarily based on their consideration of the fact that the
Company achieved many of its business plan financial objectives during the first
half of 2007 but failed to achieve its business plan financial objectives for
the 2007 full year due to the unexpectedly harsh industry-wide conditions in the
second half of 2007. Mr. Haligowski was awarded a bonus for 2007
equal to approximately 82% of his base salary, or approximately 41% of his
maximum potential bonus for 2007. In awarding this bonus to Mr.
Haligowski, the Committee considered, as it did for the bonuses awarded to the
other named executive officers, the fact that the Company did not achieve its
targeted business plan financial objectives for the 2007 year because of the
difficult operating environment in the second half of the year. The
Committee also considered the fact that, notwithstanding these challenging
conditions, the Company remained profitable in the second half of 2007, due
largely to Mr. Haligowski’s leadership and operational skills.
For 2008,
due to current difficult operating environment, the Committee determined to
reduce the maximum potential bonuses payable to the named executive officers
other than Mr. Haligowski from 50% of base salary to 25% of base salary, and to
reduce the maximum potential bonus payable to Mr. Haligowski from 200% of base
salary to 100% of base salary.
Equity Awards. We
provide the opportunity for our named executive officers and other executives to
earn long-term equity incentive awards. Long-term equity incentive awards
provide employees with the incentive to stay with us for longer periods of time,
which in turn, provides us with greater stability. Stock options and other
equity awards also align the incentives of our executives with the interests of
our shareholders and with our long-term success. The Committee and board develop
their equity award determinations based on their judgments as to whether the
complete compensation packages provided to our executives, including prior
equity awards, are sufficient to retain, motivate and adequately award the
executives. We have traditionally used stock options as our form of
equity compensation because stock options provide a relatively straightforward
incentive for our executives, result in less immediate dilution of existing
shareholders’ interests and, prior to our adoption of SFAS No. 123(R), resulted
in less compensation expense for us relative to other types of equity
awards.
We grant
equity awards to employees through our ESIP, which was adopted by our board and
shareholders to permit the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares and performance
units. The material terms of the ESIP are further described below
under “Additional Information Regarding Executive Compensation—Outstanding
Equity Awards at December 31, 2007-Stock Incentive Plans.”
For the
last completed fiscal year, the Committee awarded stock options to our named
executive officers to align their interests with ours and our
stockholders. For detail regarding these grants, refer below under
“2007 Grants of Plan-Based Awards”.
We do not
coordinate the timing of equity award grants with the release of material
non-public information. The exercise price for stock options is established at
the fair market value of the closing price of our stock on the date the
Committee approves the grant. Our stock options generally have a
10-year contractual exercise term.
In
general, option grants are also subject to the following post-termination and
change in control provisions:
|
Event
|
Award
Vesting
|
Exercise
Term
|
|
Termination
by Us Other than Cause; Disability, Retirement or
Death
|
Forfeit
Unvested
|
Earlier
of: (1) three (3) months or (2) Remaining Option
Period
|
|
Disability,
Retirement or Death
|
Forfeit
Unvested
|
Earlier
of: (1) six (6) months or (2) Remaining Option
Period
|
|
Termination
for Cause
|
Forfeit
Vested and Unvested
|
Expire
|
|
Other
Termination
|
Forfeit
Unvested
|
Earlier
of: (1) Remaining Option Period or (2) 30 Days from Date of
Termination
|
|
Change
in Control
|
Accelerated*
|
*
|
|
______________
*In
the event of a change in control as defined in the ESIP, any outstanding
awards that are unexercisable or otherwise unvested will become fully
vested and immediately exercisable. If there is a termination of
employment, the
applicable termination provisions regarding exercise term will
apply.
|
||
Executive
Benefits and Perquisites
Our named
executive officers and other executives participate in our broad based employee
benefit plans, including medical, dental, vision, insurance and our 401(k) plan
(including matching contributions) and, like all other employees, may receive a
preferential interest rate on interest-bearing deposit accounts. These plans and
benefits are available to all salaried employees and do not discriminate in
favor of executive officers. We also make the SERP available to our named
executive officers and the Deferred Compensation Plans available to our named
executive officers and other highly compensated employees. Mr.
Haligowski is currently the only participant in our Salary Continuation Plan.
The material terms of these plans are further described below under “Additional
Information Regarding Executive Compensation—Agreements with Mr.
Haligowski—Salary Continuation Plan,” “—Nonqualified Deferred Compensation” and
“—Supplemental Executive Retirement Plan.”
During
2007, we maintained for Messrs. Haligowski and Doyle, and in 2008, we began to
also maintain for Messrs. Lodwick and Lombardi, a supplemental term life
insurance benefit. We pay the policy premiums and gross-up the officers’
compensation for the tax liability they incur as a result of this
benefit. Per his employment agreement, Mr. Haligowski’s policy is for
$1,700,000 (four times his base salary). The policy amount for each
of Messrs. Doyle, Lodwick and Lombardi is $250,000.
We also
provide additional personal benefits and perquisites as an additional incentive
for our executives, to remain competitive in the general marketplace for
executive talent and to minimize distractions from the executive’s attention to
important ICB initiatives. The Committee periodically reviews the levels of
perquisites and other personal benefits provided to executive officers. We have
no current plans to make material changes to levels of benefits and perquisites
provided to our executives.
For the
last completed fiscal year, we provided the following personal benefits and
perquisites to our named executive officers:
|
Executive
Benefit
|
Description
|
|
|
Automobile
Plan
|
|
Certain
executives are provided with a Company-owned automobile or an automobile
allowance pursuant to our automobile policy.
|
|
Reimbursed
Life Insurance Premiums
|
|
We
reimburse certain executives for certain life insurance premium
payments.
|
|
Computer
Equipment and Internet Connection Service
|
|
We
provide certain executives with computer equipment and an internet
connection for use in their homes.
|
|
Club
Memberships
|
Certain
executives have their club membership dues
reimbursed.
|
In
addition, ICB makes available a corporate limousine and driver to certain
executive officers for business use only. Mr. Haligowski also
receives a housing allowance, reimbursement for financial counseling and tax
preparation, the use of a chartered aircraft for up to 35 hours per year,
reimbursement for a non-equity membership in one private club in an initial
amount not to exceed $7,500 with monthly dues of $400 (as may be increased or
decreased by the club), reimbursement for his reasonable expenses and costs
associated with his memberships in the Young Presidents’ Organization and the
Harvard Business School Alumni Association, and tax reimbursement
payments. The cost for chartered aircraft use is based on the
duration of the flight, not on the number of passengers. We do not incur any
additional costs for adding passengers when there are seats available on the
aircraft. Accordingly, we do not assign any cost for family members accompanying
Mr. Haligowski on any of those flights. We gross-up his compensation or
otherwise reimburse his taxes on any income imputed as a result of personal
aircraft usage. However, as a result of Internal Revenue Service rules,
executives are imputed income for any family members or other personal guests
who may accompany the executive officer on any flights. In instances where
family member or other personal guest attendance has been related to the
business purpose of the trip, we have grossed-up Mr. Haligowski’s compensation
to cover taxes on any income imputed as a result of their
attendance. The Committee believes that such benefits are appropriate
and often assist with Mr. Haligowski fulfilling his employment
obligations.
Attributed
costs of the personal benefits described above for the named executive officers
for the fiscal year ended December 31, 2007, are included in the “All Other
Compensation” column of the Summary Compensation Table.
Change
in Control and Severance Benefits
We
provide the opportunity for Mr. Haligowski and our executive officers to be
protected in the event of a change of control and/or an “involuntary
termination” of employment following a change of control of ICB. Mr. Haligowski
may also receive certain payments and benefits pursuant to his employment
agreement if his employment is involuntarily terminated not in connection with a
change in control. The purpose of providing these change in control payments and
benefits is to attract and retain executives of the highest caliber and mitigate
the risk to these executives that their employment will be involuntarily
terminated in the event we are acquired.
Mr.
Haligowski’s employment agreement and his non-competition and non-solicitation
agreement, and Mr. Bruce’s and Mr. Doyle’s change of control agreements provide
for certain payments and benefits upon a change of control. Each of these
agreements were entered into in 2006 and were individually negotiated by the
Committee and management. In Mr. Haligowski’s case these agreements
were negotiated to be generally consistent with the amount of benefits and terms
of his prior severance benefits under his original employment
agreement. In the case of Messrs. Bruce and Doyle, these agreements
replaced the requirement contained in their prior change of control agreements
that an involuntary termination occur with any termination of employment (other
than for cause) as a trigger for payment. The Committee eliminated
this requirement in recognition of their years of service to us relative to the
other executive officers, and that these individuals are not receiving any
substituted benefit to make up for the lack of SERP allocations in 2006 and
thereafter. A cap was placed on the amount of their cash
payment.
The
change of control agreements for Messrs. Lodwick and Lombardi provide for
certain payments and benefits if their employment is involuntarily terminated in
connection with or within 24 months after a change in control of
ICB. Each of these change in control severance agreements thus
requires a “double trigger” in order for any payments or benefits to be provided
to the named executive officer in connection with or following a change in
control – in other words, both a change in control and an involuntary
termination of employment (which includes a voluntary termination by the
executive following a material reduction in his duties, responsibilities or
benefits) must occur. At the same time, the mere sale of ICB will not
automatically trigger a payout, as our intention is to induce the executive to
remain employed following a change in control so long as the acquiring Company
so desires without a material reduction in the executive’s duties,
responsibilities or benefits. Our severance and change in control provisions for
the named executive officers are summarized in “Additional Information Regarding
Executive Compensation—Agreements with Mr. Haligowski” and “—Change of Control
Agreements.”
We
believe these severance and change in control benefits are an essential element
of our executive compensation package and assist us in recruiting and retaining
talented individuals. We also believe that our severance and change in control
provisions are consistent with the provisions and benefit levels of other
companies disclosing such provisions as reported in public SEC filings.
Information regarding applicable severance and change in control benefits for
the named executive officers is provided under the heading “Potential Payments
Upon Termination of Employment.”
Impact
of Accounting and Tax Treatments of Compensation
Section
162(m) of the Internal Revenue Code generally eliminates the deductibility of
compensation over $1 million paid to certain highly compensated executive
officers of publicly held corporations, excluding certain qualified
performance-based compensation. The Committee has reviewed and will
continue to review on an ongoing basis our executive compensation programs, and
propose appropriate modifications to these programs, if the Committee deems them
necessary, with a view toward implementing our compensation programs in a manner
that avoids or minimizes any disallowance of tax deductions under Section
162(m). The Committee will balance these considerations against the
need to be able to compensate executives in a manner commensurate with
performance and the competitive environment for executive
talent. While stock options and stock appreciation rights as a
general matter automatically constitute qualified performance-based compensation
(provided that the certain plan content and grant procedure requirements are
met), cash and other equity-based awards (including but not limited to
restricted stock) must be subject to stockholder-approved performance criteria
in order to so qualify. In this regard, the ESIP approved by
stockholders authorizes the awarding of equity-based performance awards that
constitute qualified performance-based compensation exempt from the $1 million
deductibility limit of Section 162(m).
With our
adoption, effective January 1, 2006, of SFAS No. 123(R), “Share-Based
Payment” (“SFAS No. 123R”), which requires the recognition of compensation
expense for stock options, we do not expect the accounting treatment of
differing forms of equity awards to vary significantly. Accordingly,
accounting treatment is not expected to have a material effect on the selection
of forms of equity compensation in the foreseeable future.
Role
of Executive Officers in Determining Compensation
Our Chief
Executive Officer, Mr. Haligowski, recommends to the Committee
base salary, maximum potential cash bonus levels, actual bonus payments and
long-term incentive grants for our executive officers (other than
himself). Mr. Haligowski makes these recommendations to the Committee
based on publicly available industry data and qualitative judgments regarding
individual performance. Mr. Haligowski is not involved with any
aspect of determining his own compensation.
ADDITIONAL
INFORMATION REGARDING EXECUTIVE COMPENSATION
2007
Summary Compensation Table
The
following table sets forth the compensation earned for the year ended December
31, 2007 by the named executive officers:
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards (1)
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
All
Other Compensation (2)
|
Total
Compensation
|
|||||||||||||||||||||||||
|
George
W. Haligowski
|
2007
|
$ | 590,000 | $ | 482,451 | $ | — | $ | 24,644 | $ | — | $ | 33,862 | $ | 440,774 | (3) | $ | 1,571,731 | |||||||||||||||
|
Chairman
of the
Board,
President
|
2006
|
$ | 590,000 | $ | 969,750 | $ | — | $ | — | $ | — | $ | 33,451 | $ | 394,523 | $ | 1,987,724 | ||||||||||||||||
|
and
Chief Executive Officer
|
|||||||||||||||||||||||||||||||||
|
Norval
L. Bruce
|
2007
|
$ | 196,200 | $ | 31,025 | $ | — | $ | 988 | $ | — | $ | 32,116 | $ | 68,537 | (4) | $ | 328,866 | |||||||||||||||
|
Vice
Chairman of the Board
|
2006
|
$ | 248,200 | $ | 124,100 | $ | — | $ | — | $ | — | $ | 23,718 | $ | 82,832 | $ | 478,850 | ||||||||||||||||
|
Timothy
M. Doyle
|
2007
|
$ | 259,900 | $ | 64,969 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 37,306 | (5) | $ | 372,037 | |||||||||||||||
|
Executive
Managing Director and Chief
|
2006
|
$ | 247,500 | $ | 123,750 | $ | — | $ | — | $ | — | $ | — | $ | 33,371 | $ | 404,621 | ||||||||||||||||
|
Financial
Officer
|
|||||||||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
2007
|
$ | 247,200 | $ | 61,800 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 24,451 | (6) | $ | 343,313 | |||||||||||||||
|
Executive Managing
Director and Chief
|
2006
|
$ | 235,000 | $ | 117,498 | $ | — | $ | — | $ | — | $ | — | $ | 23,700 | $ | 376,198 | ||||||||||||||||
|
Operating
Officer
|
|||||||||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
2007
|
$ | 192,600 | $ | 51,250 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 15,430 | (7) | $ | 269,142 | |||||||||||||||
|
Executive
Managing Director and Chief
|
2006
|
$ | 170,000 | $ | 85,000 | $ | — | $ | — | $ | — | $ | — | $ | 13,482 | $ | 268,482 | ||||||||||||||||
|
Credit
Officer
|
|||||||||||||||||||||||||||||||||
____________
|
(1)
|
Reflects
the dollar amount recognized for financial statement reporting purposes,
in accordance with SFAS No. 123(R), of stock options awarded under our
ESIP (disregarding
for this purpose the estimate of forfeitures related to service-based
vesting conditions). The assumptions we used in calculating
this amount are set forth in Item 8. Financial Statements and
Supplementary Data--Condensed Consolidated Financial Statements—Notes to
Financial Statements—Note 1—Summary of Significant Accounting
Policies—Stock-Based Compensation.
|
|
(2)
|
Included
within this column is the incremental cost to the Company associated with
the named executive’s personal use of a Company-owned automobile, based on
the depreciation expense incurred by the Company for the
year.
|
|
(3)
|
For
2007, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$440,774, including: (a) $42,000 in supplemental housing payments, (b)
$155,887 in preferential interest on employee savings accounts in 2007
(available to all employees), (c) $66,720 for Mr. Haligowski’s personal
use of chartered air transportation service paid for by the Company, and
(d) $104,000 for club memberships and meeting attendance related
expenses. Additional amounts included within “All Other
Compensation” for 2007 include life insurance premiums, imputed income
related to the split dollar life insurance policy, employer contributions
to ICB’s 401(k) plan, financial counseling and tax preparation fees, home
computer equipment and internet service, and reimbursements for tax
obligations incurred by Mr. Haligowski.
|
|
(4)
|
For
2007, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$68,537, including $39,835 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2007 include life insurance premiums, employer
contributions to ICB’s 401(k) plan, home computer equipment and internet
service, and club memberships.
|
|
(5)
|
For
2007, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$37,306, including $14,635 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2007 include life insurance premiums, employer
contributions to ICB’s 401(k) plan, and home computer
equipment.
|
|
(6)
|
For
2007, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$24,451, including $13,781 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2007 include life insurance premiums, and employer
contributions to ICB’s 401(k) plan.
|
|
(7)
|
For
2007, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$15,430. Amounts included within “All Other Compensation” for
2007 include life insurance premiums, employer contributions to ICB’s
401(k) plan, and preferential interest on employee savings
accounts.
|
|
|
Agreements
with Mr. Haligowski
|
Employment
Agreement. On February 24, 2006, we entered into an amended
and restated employment agreement with Mr. Haligowski, which constituted an
amendment and restatement of his Original Employment Agreement with ICB dated
January 28, 2000 (the "Employment Agreement"). The Employment
Agreement has a five-year term which commenced effective as of January 1, 2006
and is renewable on each subsequent January 1st, as long as neither ICB, nor the
Bank, has notified Mr. Haligowski at least 90 days in advance that the term will
not be so extended. If a "change in control" (as defined in the Employment
Agreement) occurs during the term of the Employment Agreement, then
notwithstanding the delivery of any notice of non-renewal to Mr. Haligowski, the
employment term will automatically be extended until five years after the date
of the change in control.
The
Employment Agreement entitles Mr. Haligowski to: (1) an annual base salary of
not less than $590,000; (2) participate in any performance-based awards and
discretionary bonuses paid to executive officers; (3) receive a minimum monthly
housing allowance of $3,500 and, at his election, a minimum monthly automobile
allowance of $2,600 or the use of a vehicle pursuant to our automobile policy;
(4) receive a personal life insurance policy, with premiums paid by us,
providing a death benefit of at least four times his annual base salary; (5)
receive memberships paid by us in certain organizations and clubs; (6) up to
$6,500 per year, plus imputed taxes, for the maintenance of his personal estate
and tax planning; and (7) participate in benefit plans and receive other fringe
benefits provided by us.
The
Employment Agreement provides that if Mr. Haligowski is "involuntarily
terminated" prior to a change in control, then he will: (1) receive a prorated
lump sum payment based on the amount of cash bonus and other cash incentive
compensation paid to him for our last completed fiscal year; (2) either (a)
continue to receive monthly through the remaining term of the agreement
one-twelfth of his base salary at the highest annual rate in effect during the
three years before the termination date and one-twelfth of the average amount of
cash bonus and cash incentive compensation earned by him during the two fiscal
years preceding the termination date or (b) at his election, receive the amount
of all payments described in (a) in a lump sum; (3) either (a) continue to
receive for himself and his dependents substantially the same medical, dental
and disability benefits at the same cost to him for five years after the date of
termination, reduced to the extent he receives substantially the same coverage
at substantially the same cost to him from another employer, or (b) at his
election (or at our election, if coverage under our group plan is not available
to Mr. Haligowski and his dependents), receive an amount in cash equal to the
premium cost being paid by us before the termination date; (4) be provided with
office space and secretarial support of the same type provided during his
employment for 18 months after the termination date; (5) receive title to owned
or leased vehicle being used by him; (6) receive all interests maintained by us
in life insurance policies maintained on his life, including the cash surrender
values; and (7) become vested in all of his outstanding unvested stock options
and restricted stock awards held in the SERP.
The
Employment Agreement provides that if Mr. Haligowski is involuntarily terminated
in connection with or within five years after a change in control of ICB, then
he will receive a lump sum payment equal to 299% of his "base amount," as
defined in Section 280G of the Code, less the present value of the benefits to
be received by him under ICB's Salary Continuation Plan and the accelerated
vesting present value of stock options and restricted stock, to the extent such
amounts are required to be considered in the calculation of parachute payments
under Section 280G of the Code (the "Lump Sum Change in Control Payment").
Instead of receiving the full amount of the Lump Sum Change in Control Payment,
however, Mr. Haligowski may elect to receive the continued health, medical and
disability insurance benefits, 18 months of office space and secretarial
support, title to his Company-owned or leased vehicle and ICB's interests in the
life insurance policies on his life, each as described in the immediately
preceding paragraph, in which case the amount of the Lump Sum Change in Control
Payment will be reduced by the present value of these elected benefits (the
"Elective Benefits"). In no event may the Lump Sum Change in Control Payment,
prior to reduction for Elective Benefits, exceed the aggregate of 100% of the
total value of the payments and benefits Mr. Haligowski would receive under the
Employment Agreement if the involuntarily termination occurred prior to a change
in control, plus 150% of his annual base salary in effect before the change in
control. This resulting aggregate amount is equal to the value of Mr.
Haligowski's change in control benefits under the Original Employment Agreement,
excluding the SERP change in control benefit referred to in the Original
Employment Agreement of 3.95 times his annual base salary but inclusive of the
life insurance benefit described in the preceding paragraph (the "Original
Agreement Adjusted Change in Control Benefit"). The Employment Agreement
provides that if a change in control occurs on or after January 1, 2008, the
Lump Sum Change in Control Payment prior to reduction for Elective Benefits may
not be less than the Original Agreement Adjusted Change in Control Benefit less
$1.0 million, notwithstanding the fact that this amount exceeds 299% of Mr.
Haligowski's base amount.
The
Employment Agreement provides that if any of the change in control payments or
benefits to be provided under the agreement in combination with any payments or
benefits under other plans or arrangements constitute "excess parachute
payments" under Section 280G of the Code, Mr. Haligowski will be paid an
additional amount (referred to as a "gross up payment") that will offset, on an
after tax basis, the effect of any excise tax consequently imposed upon him
under Section 4999 of the Code.
The term
"Change in Control" means the occurrence of any of the following events with
respect to ICB, or with respect to the Bank: (1) any person (as the term is used
in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act") is or becomes the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of ICB, or the Bank
representing 33.33% or more of ICB's or the Bank's outstanding securities; (2)
individuals who are members of the Board of Directors of ICB or the Bank on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least two-thirds of
the directors comprising the Incumbent Board, or whose nomination for election
by ICB's or the Bank's stockholders was approved by the nominating committee
serving under an Incumbent Board, shall be considered a member of the Incumbent
Board; (3) a reorganization, merger, consolidation, sale of all or substantially
all of the assets of ICB or the Bank, or a similar transaction in which ICB or
the Bank is not the resulting entity (unless the continuing ownership
requirements clause (4) below are met with respect to the resulting entity); or
(4) a merger or consolidation of ICB or the Bank with any other corporation
other than a merger or consolidation in which the voting securities of ICB or
the Bank outstanding immediately prior thereto represent at least 66.67% of the
total voting power represented by the voting securities of ICB or the Bank or
the surviving entity outstanding immediately after such merger or consolidation.
The term "Change in Control" shall not include: (1) an acquisition of securities
by an employee benefit plan of ICB or the Bank; (2) any of the above mentioned
events or occurrences involving any other subsidiary of ICB or the Bank,
although this may be amended at a later date; or (3) any of the above mentioned
events or occurrences which require but do not receive the requisite government
or regulatory approval to bring the event or occurrence to fruition. The term
"involuntary termination" is defined to include termination of Mr. Haligowski's
employment by ICB or the Bank (other than for cause or due to retirement after
attaining age 65) without his consent, by Mr. Haligowski following a material
reduction of or interference with his duties, responsibilities or benefits
without his consent or by ICB or the Bank (or their successors) or by Mr.
Haligowski at the time of or within five years after a Change in
Control.
Under the
Employment Agreement, if Mr. Haligowski is terminated due to disability or
death, then he or his estate will be entitled to the same payments and benefits
to which he would have been entitled if he were involuntarily terminated prior
to a change in control, other than the continued use of office space and
secretarial support, plus a prorated amount of any bonus or other incentive
compensation for the year in which the termination occurs. If Mr. Haligowski
voluntarily terminates his employment other than for a reason that constitutes
involuntary termination or other than in connection with or within five years
after a change in control, he will receive his base salary and benefits earned
through the date of termination plus any benefit continuation required by law.
If Mr. Haligowski's employment is terminated for cause, ICB will have no
obligations to him under the Employment Agreement, other than any benefit
continuation required by law.
Non-competition and Non-solicitation
Agreement. We entered into a non-competition and
non-solicitation agreement (the "Non-Competition Agreement") with Mr. Haligowski
on February 24, 2006. Like the Employment Agreement, the Non-Competition
Agreement has a five-year term which commenced effective as of January 1, 2006.
Mr. Haligowski's forbearance obligations under the Non-Competition Agreement
begin on his employment termination in connection with or following an
acquisition of ICB or the Bank and continue for three years thereafter (the
"Restricted Period"). Mr. Haligowski will receive aggregate payments of $3.5
million during the Restricted Period in consideration of his compliance with his
obligations under the Non-Competition Agreement during the Restricted Period.
ICB has the unilateral right to extend the term of the Non-Competition Agreement
for an additional five year term by adjusting the compensation to be paid to Mr.
Haligowski under that agreement.
Salary Continuation
Plan. The Salary Continuation Plan, which was originally
adopted by ICB in March 2000 and in which Mr. Haligowski is currently the only
participant, provides that if the participant's employment is terminated for any
reason other than cause, or if the participant retires after attaining age 65,
the participant will begin receiving an annual salary continuation benefit six
months thereafter (or starting on the first day of the next calendar month, if
termination is due to death or disability), payable monthly over 15
years. The amount of Mr. Haligowski's annual salary continuation
benefit is 75% of his average annual base salary for the three full calendar
years preceding the year in which termination occurs or in which he attains age
65.
Information
regarding applicable severance and change in control benefits for Mr. Haligowski
is provided under the heading “Potential Payments Upon Termination of
Employment.”
Split-Dollar
Agreement. In 1996, the Company entered into a
split-dollar agreement with Mr. Haligowski relating to a $1.2 million policy on
his life. Mr. Haligowski is the owner of this policy and currently
pays the annual premium. Upon Mr. Haligowski’s death,
the Company will be entitled to a portion of the policy proceeds equal to
the amount of premiums it paid in previous years, with Mr. Haligowski’s
beneficiary entitled to the remaining policy proceeds.
2007
Grants of Plan-Based Awards
The
following table sets forth information regarding plan-based awards to our named
executive officers in 2007:
|
Name
|
Grant
Date
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/Sh)
|
Grant
Date Fair Value of Stock and Option Awards (1)
|
|||||||||
|
George
W. Haligowski
|
8/8/2007
|
25,000 | $ | 30.75 | $ | 185,795 | |||||||
|
Norval
L. Bruce
|
8/8/2007
|
1,000 | $ | 30.75 | $ | 7,432 | |||||||
|
Timothy
M. Doyle
|
8/8/2007
|
10,000 | $ | 30.75 | $ | 74,318 | |||||||
|
Lyle
C. Lodwick
|
8/8/2007
|
10,000 | $ | 30.75 | $ | 74,318 | |||||||
|
Phillip
E. Lombardi
|
8/8/2007
|
10,000 | $ | 30.75 | $ | 74,318 | |||||||
_______________
|
(1)
|
Represents the grant date fair
value determined in accordance with SFAS No. 123(R). The assumptions we used in
calculating this amount are set forth in Item 8. Financial Statements and
Supplementary Data--Condensed Consolidated Financial Statements—Notes
to Financial Statements—Note
1—Summary of Significant Accounting Policies—Stock-Based
Compensation.
|
Outstanding
Equity Awards At December 31, 2007
The
following table provides information regarding each unexercised stock option
held by each of our named executive officers as of December 31,
2007:
|
Option
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
|
||||||||||||||||||||||||
|
George
W. Haligowski
|
10,000 | — | — | $ | 14.00 |
2/2/2009
|
— | — | — | — | |||||||||||||||||||||||
| 37,500 | — | — | $ | 23.00 |
2/19/2012
|
— | — | — | — | ||||||||||||||||||||||||
| 50,000 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| — | 25,000 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
97,500 | 25,000 | |||||||||||||||||||||||||||||||
|
Norval
L. Bruce
|
10,500 | — | — | $ | 23.00 |
2/19/2012
|
— | — | — | — | |||||||||||||||||||||||
| 12,500 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| — | 1,000 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
23,000 | 1,000 | |||||||||||||||||||||||||||||||
|
Timothy
M. Doyle
|
15,000 | — | — | $ | 14.00 |
2/2/2009
|
— | — | — | — | |||||||||||||||||||||||
| 5,000 | — | — | $ | 11.00 |
1/31/2010
|
— | — | — | — | ||||||||||||||||||||||||
| 15,000 | — | — | $ | 23.00 |
2/19/2012
|
— | — | — | — | ||||||||||||||||||||||||
| 25,000 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| — | 10,000 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
60,000 | 10,000 | |||||||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
35,000 | — | — | $ | 54.25 |
8/8/2015
|
— | — | — | — | |||||||||||||||||||||||
| 12,500 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| — | 10,000 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
47,500 | 10,000 | |||||||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
22,500 | — | — | $ | 53.33 |
6/24/2015
|
— | — | — | — | |||||||||||||||||||||||
| 7,500 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| — | 10,000 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
30,000 | 10,000 | |||||||||||||||||||||||||||||||
_______________
|
(1)
|
The
vesting schedule of this option is as follows: one-third on August 8,
2008, one-third on August 8, 2009 and one-third on August 8,
2010.
|
Stock Incentive
Plans. On July 27, 2005, ICB’s shareholders approved the ESIP
and the 2005 Re-Designated, Amended and Restated Stock Option Plan For
Nonemployee Directors (the “Director Option Plan” and together with the ESIP the
“Stock Option Plans”). The Stock Option Plans were originally
approved by shareholders on October 18, 1995 and amendments and restatements of
these plans were approved by shareholders on July 27, 2005.
In
accordance with the Stock Option Plans, officers, directors and our employees
are eligible to receive options to purchase common stock. Under the
ESIP, officers and employees are also eligible for awards of stock appreciation
rights, restricted stock, restricted stock units, performance shares and
performance units. The purpose of the Stock Option Plans is to enable
us to attract, retain and motivate employees by providing for or increasing
their proprietary interests in ICB, and in the case of nonemployee directors, to
attract such directors and further align their interests with our interests.
Every one of our employees is eligible to be considered for the grant of awards
under the ESIP. The maximum number of shares of common stock that may be issued
pursuant to awards granted under the ESIP is 1,561,000 shares, provided that
each share issued pursuant to awards of stock appreciation rights, restricted
stock, restricted stock units, performance shares and performance units counts
against this limit as two shares. The maximum number of shares of
common stock that may be issued pursuant to awards granted under the Director
Option Plan is 70,000 shares. The maximum number of shares of common
stock and shares with respect to outstanding awards under the Stock Option Plan
are subject to adjustment in the event of a stock dividend, stock split,
recapitalization or similar event.
The Stock
Option Plans are administered by the Committee and, other than with respect to
formula awards under the Director Option Plan described below, the Committee has
full authority to select the employees and directors to receive awards and to
grant such awards. Subject to provisions of the Stock Option Plans, the
Committee has a wide degree of flexibility in determining the terms and
conditions of awards and the number of shares to be issued pursuant thereto. The
expenses of administering the Stock Option Plans are borne by us.
The ESIP
authorizes the Committee to enter into any type of arrangement with an eligible
employee that, by its terms, involves or might involve the issuance of common
stock or any other security or benefit with a value derived from the value of
common stock. Awards to employees are not restricted to any specified form or
structure and may include but are not limited to stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
shares and performance units. Under the Director Option Plan, each
person who was a non-employee director on the original effective date of the
plan (October 18, 1995) automatically received as of that date, and each person
who became or becomes a non-employee director after the original effective date
of the plan automatically received or will receive, as of the date such person
became or becomes a non-employee director, non-qualified stock options to
acquire 5,000 shares of common stock, subject to adjustment as described above,
vesting in full on the one-year anniversary of the date of grant (referred to as
the “initial award”). On the first, second, third, fourth and fifth
anniversaries of the initial award, each non-employee director automatically
received or will receive non-qualified stock options to acquire 1,000 shares of
common stock, subject to adjustment as described above, vesting in full on the
one-year anniversary of the date of grant (referred to as the “anniversary
awards”). In addition to the anniversary awards, each non-employee director is
eligible to receive grants of non-qualified stock options from time to time in
the sole discretion of the Committee.
In the
event of a change in control of ICB all awards under the Stock Option Plans
shall vest 100%. For purposes of the Stock Option Plans, a "change in
control" shall mean any of the following events:
(a) we receive a report on Schedule 13D
filed with the Securities and Exchange Commission pursuant to Section 13(d) of
the Exchange Act disclosing that any person, group, corporation or other entity
is the beneficial owner directly or indirectly of 30% or more of our outstanding
common stock;
(b) any person (as such term is defined
in Section 13(d) of the Exchange Act), group, corporation or other entity other
than us or any corporation owned directly or indirectly by our stockholders in
substantially the same proportions as their ownership of stock in us, purchases
shares pursuant to a tender offer or exchange offer to acquire any of our common
stock, (or securities convertible into our common stock) for cash, securities or
any other consideration, provided that after consummation of the offer, the
person, group, corporation or other entity in question is the beneficial owner
(as such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of our outstanding common stock;
(c) our stockholders approve (a) any
consolidation or merger in which we or any corporation owned directly or
indirectly by our stockholders in substantially the same proportions as their
ownership of our common stock is not the continuing or surviving corporation or
pursuant to which shares of our common stock would be converted into cash,
securities or other property, or (b) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of our assets; or
(d) there shall have been a change in a
majority of the members of our Board of Directors within a 12 month period
unless the election or nomination for election by our stockholders of each new
director was approved by the vote of two-thirds of the directors then still in
office who were in office at the beginning of the 12 month period.
Awards
may not be granted under the Stock Option Plans after July 27, 2015, the tenth
anniversary of the shareholder approvals of the amendments and restatements of
the Stock Option Plans.
2007
Option Exercises and Stock Vested
The
following table sets forth information about stock options exercised and shares
of restricted stock vested during the year ended December 31, 2007 for each
named executive officer:
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized
on
Exercise
|
Number
of Shares Acquired on Vesting (#)
|
Value
Realized
on
Vesting
|
||||||||||||
|
George
W. Haligowski
|
45,000 | $ | 1,551,600 | — | — | |||||||||||
|
Norval
L. Bruce
|
— | — | — | — | ||||||||||||
|
Timothy
M. Doyle
|
15,000 | $ | 517,853 | — | — | |||||||||||
|
Lyle
C. Lodwick
|
— | — | — | — | ||||||||||||
|
Phillip
E. Lombardi
|
— | — | — | — | ||||||||||||
Nonqualified
Deferred Compensation
The
following table sets forth information about compensation payable to each named
executive officer under the Deferral Plan (as defined below):
|
Name
|
Executive
Contributions
in
Last FY
|
Registrant
Contributions
in
Last FY
|
Aggregate
Earnings
in
Last FY (2)
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance
at
Last FYE
|
|||||||||||||||
|
George
W. Haligowski
|
$ | — | $ | — | $ | (1,000,900 | ) | $ | — | $ | 3,385,200 | |||||||||
|
Norval
L. Bruce
|
$ | 161,250 | (1) | $ | — | $ | 119,900 | $ | — | $ | 1,755,000 | |||||||||
|
Timothy
M. Doyle
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Lyle
C. Lodwick
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Phillip
E. Lombardi
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
_______________
|
(1)
|
The
entire amount is reported as compensation for 2007 in the Summary
Compensation Table under the “Salary” and “Bonus”
column.
|
|
(2)
|
Based
on the performance during 2007 of the investment options (including, among
others, our Common Stock). Of the amounts shown, $33,862 and $32,116,
representing the portion of the preferential interest credited to the
accounts of Mr. Haligowski and Mr. Bruce, respectively, were reported as
compensation for 2007 in the Summary Compensation Table under the “Change
in Pension Value and Non-qualified Deferred Compensation Earnings”
column.
|
The
Imperial Capital Bancorp, Inc. Supplemental Salary Savings Plan (the
“Supplemental Plan”) and Nonqualified Deferred Compensation Plan (the “Deferral
Plan”) are designed to provide additional retirement benefits for certain
officers and highly compensated employees. The Supplemental Plan provides
participating employees with an opportunity to make up benefits not available
under the 401(k) Plan due to any application of limitations on compensation and
maximum benefits under the 401(k) Plan. Benefits under the Supplemental Plan are
provided at the same time and in the same form as benefits under the 401(k)
Plan, and become taxable to the participant at that point. None of the named
executive officers currently participates in the Supplemental Plan. The Deferral
Plan allows a participant to defer receipt of, and current taxation upon,
designated portions of the participant’s direct cash compensation until a future
date specified by the participant. Both of these plans are unfunded plans,
meaning that all benefits payable thereunder are payable from our general
assets, and funds available to pay benefits are subject to the claims of our
general creditors. We have established a Rabbi Trust with a third party FDIC
insured financial institution which holds the contributions to the Supplemental
Plan and Deferral Plan, for the purpose of providing the benefits set forth
under the terms of the plans. Participants only have the rights of unsecured
creditors with respect to the Rabbi Trust assets.
Supplemental
Executive Retirement Plan
Pursuant
to the SERP, the Committee allocated to participants on a tax-deferred basis
shares of restricted stock issued to the SERP under our RRP. The last
remaining RRP shares held in the SERP were allocated to SERP participants in
2005. Under the terms of the SERP, Mr. Haligowski received an annual
restricted stock allocation equal to one-third of his base salary and all other
participants received an annual restricted stock allocation equal to one-fifth
of base salary, subject to the approval of the Committee, which could also
allocate a greater or lesser award or no award in its discretion. For this
purpose, each share of common stock issued to the SERP has been valued at $9.00
per share, the fair market value of the common stock on the date of issuance
from the RRP to the SERP. All awards made under the SERP are now
fully vested. The following table sets forth information about the
SERP benefits payable to each named executive officer:
|
Name
|
Executive
Contributions
in
Last FY
|
Registrant
Contributions
in
Last FY
|
Aggregate
Earnings
in
Last FY (1)
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance
at
Last FYE
|
|||||||||||||||
|
George
W. Haligowski
|
$ | — | $ | — | $ | (6,423,290 | ) | $ | — | $ | 3,036,888 | |||||||||
|
Norval
L. Bruce
|
$ | — | $ | — | $ | (1,490,132 | ) | $ | — | $ | 704,541 | |||||||||
|
Timothy
M. Doyle
|
$ | — | $ | — | $ | (1,243,312 | ) | $ | — | $ | 587,802 | |||||||||
|
Lyle
C. Lodwick
|
$ | — | $ | — | $ | (128,707 | ) | $ | — | $ | 60,948 | |||||||||
|
Phillip
E. Lombardi
|
$ | — | $ | — | $ | (109,991 | ) | $ | — | $ | 52,100 | |||||||||
____________
|
(1)
|
Includes
value of additional shares allocated pursuant to dividend reinvestment, as
well as the change in fair value during the year related to SERP shares
maintained within each participants’ respective trust
account. None of these amounts were reported as compensation
for 2007 in the Summary Compensation
Table.
|
Change
of Control Agreements
We
entered into change in control severance agreements with Messrs. Bruce, Doyle
and Lodwick and Lombardi. In the case of Messrs. Bruce and Doyle,
these agreements replaced their existing change in control severance agreements
with the Company. The terms of the agreements are three years for the agreements
with Messrs. Bruce and Doyle and one year for the agreements with Messrs.
Lodwick and Lombardi, beginning effective as of February 1, 2006 and renewable
on each subsequent February 1st, as long as neither the Company nor the officer
gives notice to the other at least 90 days in advance that the term will not be
so extended. If a "change in control" occurs during the term of the agreement,
then notwithstanding the delivery of any non-renewal notice, the agreement term
will automatically be extended until three years, in the case of the agreements
with Messrs. Bruce and Doyle, or two years, in the case of the agreements with
Messrs. Lodwick and Lombardi, after the date of the change in
control.
The
agreements with Messrs. Bruce and Doyle provides that if their employment is
“terminated without cause” which means a termination for any reason other than
cause within six months before or within three years after a change in control,
or if the officer terminates his employment for any reason within one year after
a change in control, he will: (1) receive a lump sum payment equal to 299% of
his "base amount" (not to exceed $1.0 million in the case of Mr. Bruce and $1.25
million in the case of Mr. Doyle); (2) either (a) continue to receive
substantially the same health, dental and life insurance benefits for two years
after the termination date, in the case of Mr. Bruce, and three years after the
termination date, in the case of Mr. Doyle, or (b) at his election, (or at The
Company's election, if coverage under The Company's group plan is not available
to the officer) receive an amount in cash equal to the premium cost being paid
by The Company before the termination date; (3) receive title to The
Company-owned or leased vehicle being used by him or, if the officer receives a
monthly car allowance in lieu of a Company vehicle, an amount in cash equal to
24 times, in the case of Mr. Bruce, and 36 times, in the case of Mr. Doyle, the
greater of the monthly allowance on the date of the change in control or on the
termination date; and (4) become vested in all of his outstanding unvested stock
options and restricted stock awards.
The
agreements with Messrs. Lodwick and Lombardi provide that if the officer's
employment is "involuntarily terminated" in connection with or within two years
after a change in control, he or she will: (1) receive a lump sum payment equal
to the sum of (a) 1.5 times his base salary on the date of the change in control
or the date of termination, whichever is greater and (b) a prorated bonus amount
for the year in which the termination occurs based on the officer's prior year
annual bonus, (2) either (a) continue to receive substantially the same health,
dental and life insurance benefits for 18 months after the termination date or
(b) at his election (or at The Company's election, if coverage under The
Company's group plan is not available to the officer), receive an amount in cash
equal to the premium cost being paid by The Company before the termination date;
(3) receive title to The Company-owned or leased vehicle being used by him or,
if the officer receives a monthly car allowance in lieu of a Company vehicle, an
amount in cash equal to 18 times the greater of the monthly allowance on the
date of the change in control or on the termination date; and (4) become vested
in all of his outstanding unvested stock options and restricted stock
awards. The term "Involuntary Termination" means the termination of
the employment of the executive without his express written consent or a
material diminution of or interference with the executive's duties,
responsibilities and benefits as these same duties, responsibilities and
benefits exist the day prior to the Change of Control, including (without
limitation) any of the following actions unless consented to in writing by the
executive: (1) a requirement that the executive be based at a place other than
the executive's work location immediately prior to the Change of Control or
within 35 miles thereof, except for reasonable business travel; (2) a material
demotion of the executive; (3) a material reduction in the number or seniority
of other personnel reporting to the executive or a material reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the executive, other than as part of a
company-wide reduction in staff; (4) a material adverse change in the
executive's salary, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the
company; (5) a material permanent increase in the required hours of work or the
workload of the executive; (6) a material change in the reporting relationship
to which the executive reports prior to the Change of Control; or (7) a material
increase or decrease in business responsibilities and duties, such that the
executive's qualifications as utilized prior to the Change of Control are no
longer consistent with the qualifications needed for the revised position. The
term "Involuntary Termination" does not include termination for cause,
termination of employment due to retirement on or after the executive attains
age 65, death, or termination of employment by us due to
disability.
Each
agreement provides that to the extent the value and amounts of benefits under
the agreement, together with any other amounts and the value of other benefits
received by the officer in connection with a change in control would cause any
amount to be non-deductible by The Company pursuant to Section 280G of the Code,
then the amounts and benefits under the agreement will be reduced to the extent
necessary to avoid the non-deductibility of any such amounts and benefits under
Section 280G, assuming a change in control.
A “Change
in Control” means the occurrence of any of the following events with respect to
the Company: (1) any person (as the term is used in section 13(d) and 14(d) of
the Exchange Act is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the Company
representing 33.33% or more of The Company's outstanding securities; (2)
individuals who are members of the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least two thirds of the
directors comprising the Incumbent Board, or whose nomination for
election by the Company 's stockholders was approved by the nominating committee
serving under an Incumbent Board, shall be considered a member of the Incumbent
Board; (3) a reorganization, merger, consolidation, sale of all or substantially
all of the assets of the Company or a similar transaction in which the Company
is not the resulting entity (unless the continuing ownership requirements clause
(4) below are met with respect to the resulting entity); or (5) a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation in which the voting securities of the Company outstanding
immediately prior thereto represent at least 66.67% of the total voting power
represented by the voting securities of the Company or the surviving entity
outstanding immediately after such merger or consolidation. The term
"Change in Control" shall not include: (1) an acquisition of securities by an
employee benefit plan of the Company; or (2) any of the above mentioned events
or occurrences which require but do not receive the requisite government or
regulatory approval to bring the event or occurrence to
fruition.
Potential
Payments Upon Termination of Employment
The
following tables summarize the approximate value of the termination payments and
benefits that the named executive officers would have received if their
employment had been terminated on December 31, 2007 under the circumstances
shown. The tables exclude (i) amounts accrued through December 31,
2007 that would be paid in the normal course of continued employment, such as
accrued but unpaid salary and bonus amounts, (ii) vested account balances under
our 401(k) plan, and (iii) vested account balances under our Deferral Plan and
the SERP, as described under “Nonqualifed Deferred Compensation” and
“Supplemental Executive Retirement Plan.”
George
W. Haligowski
|
Termination
Scenario
|
Lump
Sum Prorated Bonus (1)
|
Salary/Bonus
Continuation and Non-Compete (2)
|
Health
Coverage Continuation (3)
|
Accelerated
Vesting of Stock and Option Awards (4)
|
Death
Benefit Under Life Insurance Policies (5)
|
Other
Benefits (6)
|
Payment
of 299% of “Base Amount” (7)
|
Tax
Gross Up Payment (8)
|
||||||||||||||||||||||||
|
If
termination for cause occurs
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
If
voluntary termination (not constituting “Involuntary Termination” under
Employment Agreement) occurs
|
$ | — | $ | 4,441,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
If
“Involuntary Termination” under Employment Agreement (not in connection
with or within five years after change in control) occurs
|
$ | 970,000 | $ | 9,135,000 | $ | 63,000 | $ | — | $ | — | $ | 837,000 | $ | — | $ | — | ||||||||||||||||
|
If
“Involuntary Termination” under Employment Agreement in connection with or
after change in control occurs
|
$ | — | $ | 7,941,000 | $ | — | $ | — | $ | — | $ | — | $ | 10,578,700 | $ | — | ||||||||||||||||
|
If
termination occurs as a result of disability
|
$ | 970,000 | $ | 9,135,000 | $ | 63,000 | $ | — | $ | — | $ | 587,000 | $ | — | $ | — | ||||||||||||||||
|
If
termination occurs as a result of death
|
$ | 970,000 | $ | 9,135,000 | $ | 63,000 | $ | — | $ | 2,460,000 | $ | 587,000 | $ | — | $ | — | ||||||||||||||||
____________
|
(1)
|
Payable
to Mr. Haligowski (or to his estate or designated beneficiary, in the
event of death) under his employment agreement if his employment is
“Involuntarily Terminated” not in connection with or after a change in
control or due to disability or
death.
|
|
(2)
|
Payable to Mr. Haligowski
under his employment agreement and non-competition and non-solicitation
agreement and the Salary Continuation Plan for the applicable period
described under “Agreements with Mr. Haligowski-Employment Agreement,”
“-Non-Competition and Non-Solicitation Agreement” and “-Salary
Continuation Plan.” These payments are comprised of the
following: (i) in the case of voluntary termination not constituting
“Involuntary Termination” under Mr. Haligowski’s employment agreement, the
present value of the total payments that would be made to him under the
Salary Continuation Plan, using a discount rate of 5% ($4,441,000); (ii)
in the case of Involuntary Termination not in connection with or after a
change in control, or termination due to disability or death (A) the
present value of the total payments that would be made to him (or his
beneficiary, in the event of his death) under the Salary Continuation
Plan, using a discount rate of 5% ($4,441,000) and (B) the aggregate
amount of the total monthly salary and bonus continuation payments
(through December 29, 2010) under his employment agreement ($4,694,000, or
$130,390 per month); and (iii) in the case of Involuntary Termination in
connection with or after a change in control, (A) the present value of the
total payments that would be made to him under the Salary Continuation
Plan, using a discount rate of 5% ($4,441,000) and (B) the total payments
that would be made under his non-competition and non-solicitation
agreement ($3,500,000).
|
|
(3)
|
Represents
the cost of providing the medical, dental and disability benefits
described under “Agreements with Mr. Haligowski-Employment
Agreement.”
|
|
(4)
|
Represents
the benefit, if any, associated with accelerating of unvested options
outstanding at December 31, 2007, based on the closing price of the
Company’s stock on that date.
|
|
(5)
|
Represents
aggregate of death benefit under supplemental life insurance policy
maintained for Mr. Haligowski of $1,700,000 and death benefit under split
dollar life insurance policy, net of proceeds paid to the Company, of
$760,000.
|
|
(6)
|
Represents
the cost or value of $250,000 for continued use of office space and
secretarial support, $146,000 for the transfer to Mr. Haligowski of title
to his leased vehicle, and $441,000 representing the transfer to Mr.
Haligowski of our interest in life insurance policies on his
life. The cost of office space and secretarial support are
excluded if termination occurs as a result of disability or death as these
benefits would not be provided under such
circumstances.
|
|
(7)
|
Represents
lump sum amount payable to Mr. Haligowski under his employment agreement
in the event his employment is Involuntarily Terminated in connection with
or following a change in control of the Company, as described under
“Agreements with Mr. Haligowski-Employment
Agreement.”
|
|
(8)
|
Based
on the amounts shown in the table, no tax gross up payment would be
payable to Mr. Haligowski under his employment agreement. See “Agreements
with Mr. Haligowski – Employment
Agreement.”
|
Norval
L. Bruce
|
Termination
Scenario
|
Payment
of 299% of “Base Amount” (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
||||||||||||
|
If
“Termination Without Cause” under his Change of Control Agreement in
connection with or within 36 months after change in control
occurs
|
$ | 1,000,000 | $ | 24,017 | $ | — | $ | 71,833 | ||||||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Bruce under his change of control agreement
in the event his employment is terminated in connection with or following
a change in control of the Company, as described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
Represents
the benefit, if any, associated with accelerating of unvested options
outstanding at December 31, 2007, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
the cost or value of $48,400 for the transfer to Mr. Bruce of title to his
leased vehicle, $5,430 for the transfer to Mr. Bruce of home-based
computer equipment and $18,000 for the transfer to Mr. Bruce of our
interest in a golf club membership.
|
Timothy
M. Doyle
|
Termination
Scenario
|
Payment
of 299% of “Base Amount” (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Death
Benefit under Supplemental Life Insurance Policy (4)
|
Other
Benefits (5)
|
|||||||||||||||
|
If
“Termination Without Cause” under his Change of Control Agreement in
connection with or within 36 months after change in control
occurs
|
$ | 1,250,000 | $ | 47,198 | $ | — | $ | — | $ | 60,056 | ||||||||||
|
If
termination occurs as a result of death
|
$ | — | $ | — | $ | — | $ | 250,000 | $ | — | ||||||||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Doyle under his change of control agreement
in the event his employment is terminated in connection with or following
a change in control of the Company, as described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
Represents
the benefit, if any, associated with accelerating of unvested options
outstanding at December 31, 2007, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
death benefit payable under supplemental life insurance policy maintained
by the Company for Mr. Doyle’s
benefit.
|
|
(5)
|
Represents
the cost or value of $52,740 for the transfer to Mr. Doyle of title to his
leased vehicle and $7,320 for the transfer to Mr. Doyle of home-based
computer equipment.
|
Lyle
C. Lodwick
|
Termination
Scenario
|
Lump
Sum Payment (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
||||||||||||
|
If
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$ | 412,488 | $ | 17,463 | $ | — | $ | 35,900 | ||||||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Lodwick under his change of control
agreement in the event his employment is “Involuntarily Terminated” in
connection with or following a change in control of the Company, as
described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
Represents
the benefit, if any, associated with accelerating of unvested options
outstanding at December 31, 2007, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
the cost or value of $35,900 for the transfer to Mr. Lodwick of title to
his leased vehicle.
|
Phillip
E. Lombardi
|
Termination
Scenario
|
Lump
Sum Payment (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
||||||||||||
|
If
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$ | 392,500 | $ | 10,214 | $ | — | $ | 23,220 | ||||||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Lombardi under his change of control
agreement in the event his employment is “Involuntarily Terminated” in
connection with or following a change in control of the Company, as
described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
Represents
the benefit, if any, associated with accelerating of unvested options
outstanding at December 31, 2007, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
the cost or value of $23,220 for the transfer to Mr. Lombardi of title to
his leased vehicle.
|
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis contained above with management and, based on such review and
discussion, the Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this Annual Report
on Form 10-K.
Submitted
by the Compensation Committee of ICB’s Board of Directors:
Jeffrey L.
Lipscomb
Sandor X.
Mayuga
Hirotaka
Oribe
Compensation
Committee Interlocks and Insider Participation
No member
of the Compensation Committee is a current or former officer or employee of ICB
or any of its subsidiaries. None of our executive officers has served
on the board of directors or the Committee of any other entity that had an
executive officer serving on our Board of Directors or on the Compensation
Committee of our Board of Directors.
Director
Compensation
The
following table sets forth certain information regarding the compensation earned
by or awarded to each director, who is not also a named executive officer, who
served on our Board of Directors in 2007. Directors who are employees
of ICB are not compensated for their service as directors.
|
Name
|
Fees
Earned or
Paid
in Cash
|
Stock
Awards
|
Option
Awards (1)
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
All
Other Compensation (2)
|
Total
|
|||||||||||||||||||||
|
Jeffrey
L. Lipscomb
|
$ | 44,000 | — | — | — | — | $ | 5,000 | $ | 49,000 | ||||||||||||||||||
|
Preston
Martin (3)
|
$ | 16,250 | — | $ | 12,380 | — | — | $ | 6,250 | $ | 34,880 | |||||||||||||||||
|
Sandor
X. Mayuga
|
$ | 39,000 | — | — | — | — | $ | — | $ | 39,000 | ||||||||||||||||||
|
Hirotaka
Oribe
|
$ | 47,000 | — | — | — | — | $ | 15,000 | $ | 62,000 | ||||||||||||||||||
|
Robert
R. Reed
|
$ | 47,000 | — | — | — | — | $ | 7,500 | $ | 54,500 | ||||||||||||||||||
_______________
|
(1)
|
Amount
in the table represent the compensation cost of stock options recognized
for 2007 for financial statement reporting purposes pursuant to SFAS No.
123(R), and includes the cost attributable to grants made in 2007 and in
prior years. The assumptions we used in calculating this amount are set
forth in Item 8. Financial Statements and Supplementary Data--Condensed
Consolidated Financial Statements—Notes to Financial Statements—Note
1—Summary of Significant Accounting Policies—Stock-Based
Compensation. As of December 31, 2007, total shares underlying stock
options held by the directors were as follows: Mr. Lipscomb - 6,500
shares; Mr. Martin - 10,000 shares; Mr. Mayuga - 6,500 shares; Mr. Oribe -
6,500 shares; and Mr. Reed - 5,500 shares.
|
|
(2)
|
Amounts
in this column represent honorariums earned during 2007 to Mr.
Lipscomb, Mr. Oribe, and Mr. Reed, as well as an annual retainer fee for
Mr. Martin, as explained below.
|
|
(3)
|
Mr.
Martin passed away in May 2007. Under the terms of the Director
Option Plan, the stock options outstanding, referenced above in (1), will
be exercisable for 12 months following his
passing.
|
Director Compensation
Arrangements. During 2007, each non-employee director was paid a monthly
fee of $2,250 for serving on our Board of Directors and $1,000 for each Board or
Committee meeting attended for service on such committee. In addition, Director
Reed received an honorarium of $7,500 for his active assistance in legislative
and audit committee matters during 2007, Director Lipscomb received an
honorarium of $5,000 for his active assistance with compensation matters and
chairmanship of the Compensation Committee, and Director Oribe received an
honorarium of $15,000 for his extensive work with the Executive Committee and
large loan approval process. In 2007, Director Martin received an annual
retainer fee of $6,250 for his service as Chairman of the Audit
Committee. Directors are also eligible to receive stock options under
the Director Stock Option Plan (see “—Stock Incentive Plans”).
We pay
for or reimburse our directors’ travel, lodging and other reasonable
out-of-pocket expenses in connection with attendance at board, committee and
stockholder meetings, and for other reasonable expenses related to board service
such as director education.
Voluntary Retainer Stock and
Deferred Compensation Plan. In 1996, we adopted the Voluntary
Retainer Stock and Deferred Compensation Plan for Outside Directors (the
“Outside Director Plan”). The Outside Director Plan provides for the deferral of
compensation earned by non-employee directors in the form of Stock Units (“Stock
Units”) in a Stock Unit account (“Stock Unit Account”). Directors may elect to
have up to 100% of their fees converted into stock units.
For
dividends paid with respect to our common stock, each non-employee director has
credited to his Stock Unit Account an additional number of Stock Units in an
amount determined under the Outside Director Plan. Each non-employee director’s
Stock Unit Account will be settled by delivering to the non-employee director
(or his beneficiary) the number of shares of our common stock equal to the
number of whole Stock Units then credited to the non-employee director’s Stock
Unit Account, in either (i) a lump sum or (ii) substantially equal annual
installments over a period not to exceed ten years.
To date,
no amounts have been deferred under the Outside Director Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
At March
3, 2008, we had 5,426,760 shares of common stock outstanding.
The
following table sets forth, as of March 3, 2008, certain information as to those
persons who were known by management to be beneficial owners of more than five
percent of our common stock outstanding.
|
Beneficial
Owner
|
Shares
Beneficially Owned
|
Percent
of Class
|
||||||
|
Thomson
Horstmann & Bryant, Inc.
|
478,209 | (1) | 8.81 | % | ||||
|
Park
80 West, Plaza One
Saddle
Brook, NJ 07663
Dimensional
Fund Advisors, LP
|
449,658 | (2) | 8.29 | % | ||||
|
1299
Ocean Avenue, 11th
Floor
Santa
Monica, CA 90401
Franklin
Mutual Advisers, LLC
|
445,796 | (3) | 8.21 | % | ||||
|
51
John F. Kennedy Parkway
Short
Hills, NJ 07078
George
W. Haligowski
|
335,711 | (4) | 6.08 | % | ||||
|
888
Prospect Street, Suite 110
La
Jolla, CA 92037
Barclays
Global Advisors, NA, et. al
|
321,121 | (5) | 5.92 | % | ||||
|
45
Fremont Street
San
Francisco, CA 94105
Wellington
Management Company, LLP
|
313,130 | (6) | 5.77 | % | ||||
|
75
State Street
Boston,
MA 02109
|
||||||||
____________
|
(1)
|
As
reported by Thomson Horstmann & Bryant, Inc., ("Thomson") on a
Schedule 13G amendment filed on February 6, 2008 with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended. Thomson reported sole voting power as to 259,006
shares, sole dispositive power as to all of the 478,209 shares, and shared
voting and dispositive power as to none of the 478,209 shares covered by
the report.
|
|
(2)
|
As
reported by Dimensional Fund Advisors, LP ("Dimensional") on a Schedule
13G amendment filed on February 6, 2008 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as
amended. Dimensional reported sole voting and dispositive
powers as to all of the 449,658 shares, and shared voting and dispositive
powers as to none of the 449,658 shares covered by the
report.
|
|
(3)
|
As
reported by Franklin Mutual Advisers, LLC ("Franklin") on a Schedule 13G
amendment filed on February 11, 2005 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as
amended. Franklin reported sole voting and dispositive powers
as to all of the 445,796 shares, and shared voting and dispositive powers
as to none of the 445,796 shares covered by the
report.
|
|
(4)
|
Includes
97,500 shares underlying stock options which were exercisable as of March
3, 2008, 167,528 shares held in Mr. Haligowski’s SERP account in the rabbi
trust established by the Company, 70,383 shares held in Mr. Haligowski’s
deferred compensation plan account in the rabbi trust and 300 shares held
in Mr. Haligowski’s personal
account.
|
|
(5)
|
As
reported by Barclays Global Investors, NA., Barclays Global Fund Advisors,
Barclays Global Investors, Ltd., Barclays Global Investors Japan Trust and
Banking Company Limited, Barclays Global Investors Japan Limited, Barclays
Global Investors Canada Limited, Barclays Global Investors Australia
Limited and Barclays Global Investors (Deutschland) AG on a Schedule 13G
filed on February 5, 2008 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. With
respect to the 321,121 shares listed, Barclays Global Investors, NA.,
reported sole voting power as to 186,939 shares, sole dispositive power as
to 230,516 shares and shared voting and dispositive powers as to none of
such shares, and Barclays Global Fund Advisors reported sole voting and
dispositive powers as to 90,605 shares, and shared voting and dispositive
powers as to none of such shares.
|
|
(6)
|
As
reported by Wellington Management Company, LLP ("WMC") on a Schedule 13G
amendment filed on February 14, 2008 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as
amended. WMC reported sole voting and dispositive powers as to
none of the 313,130 shares, shared voting power as to 217,100 shares, and
shared dispositive power as to all of the 313,130 shares covered by the
report.
|
The
following table sets forth, as of March 3, 2008, certain information as to the
shares of common stock beneficially owned by the directors and named executive
officers and by all directors and executive officers of ICB as a
group.
|
Beneficial
Owner
|
Shares
Beneficially
Owned
(1)(2)(3)
|
Percent
of
Class
|
||||||
|
George
W.
Haligowski
|
335,711 | 6.08 | % | |||||
|
Timothy
M.
Doyle
|
92,421 | 1.68 | ||||||
|
Norval
L.
Bruce
|
63,127 | 1.16 | ||||||
|
Lyle
C.
Lodwick
|
60,849 | 1.11 | ||||||
|
Phillip
E.
Lombardi
|
34,211 | 0.63 | ||||||
|
Sandor
X.
Mayuga
|
11,300 | 0.21 | ||||||
|
Robert
R.
Reed
|
9,000 | 0.17 | ||||||
|
Jeffrey
L.
Lipscomb
|
7,600 | 0.14 | ||||||
|
Hirotaka
Oribe
|
7,600 | 0.14 | ||||||
|
All
Directors and Executive Officers as a Group (9
Persons)
|
621,819 | 10.90 | ||||||
____________
|
(1)
|
Includes
shares held directly, as well as shares held in retirement accounts or by
certain members of the named individual's families or corporations for
which an individual is an officer or director or held by trust of which an
individual is trustee or a substantial beneficiary, over which shares the
individual may be deemed to have sole or shared voting and/or dispositive
power.
|
|
(2)
|
Includes
shares underlying exercisable options and options exercisable within 60
days of March 3, 2008 as follows: Chairman Haligowski – 97,500
shares; Director Lipscomb – 5,500 shares; Director Mayuga – 5,500 shares;
Director Oribe – 5,500 shares; Director Reed – 5,500 shares; Vice Chairman
Bruce – 23,000 shares; Timothy M. Doyle – 60,000 shares; Lyle C. Lodwick –
47,500 shares; Phillip E. Lombardi – 30,000 shares; and all directors and
executive officers as a group – 280,000
shares.
|
|
(3)
|
Includes
vested SERP account shares held in the rabbi trust established by the
Company, as follows: Chairman Haligowski –167,528 shares; Vice Chairman
Bruce – 38,861 shares; Timothy M. Doyle – 32,421 shares; Lyle C. Lodwick –
3,349 shares; Phillip E. Lombardi – 2,861 shares and all directors and
executive officers as a group – 245,020 shares. Also includes
shares held in deferred compensation plan account in the rabbi trust as
follows: Mr. Haligowski – 70,383 shares; Mr. Bruce – 1,066 shares and all
directors and executive officers as a group – 71,449
shares.
|
The
following table sets forth information as of December 31, 2007 with respect to
compensation plans under which shares of our common stock may be
issued:
Equity
Compensation Plan Information
|
Plan
Category
|
Number
of Shares to
be
issued upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
And
Rights
|
Number
of Shares Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Shares Reflected in the First Column) (1)
|
|||||||||
|
Equity
compensation plans approved by stockholders
|
464,068 | $ | 37.67 | 163,344 | ||||||||
|
Equity
compensation plans not approved by stockholders
|
N/A | N/A | N/A | |||||||||
|
Total
|
464,068 | $ | 37.67 | 163,344 | ||||||||
|
(1)
|
This
amount includes 125,000 shares issuable under our 1996 Voluntary Retainer
Stock and Deferred Compensation Plan for Outside Directors, described
under “Item 11. Executive Compensation — Directors Compensation.” Under
the Company’s 2005 Re-Designated, Amended and Restated Employee Stock
Incentive Plan, up to 14,922 of the 29,844 shares remaining available for
issuance under that plan as of December 31, 2007 could be issued to plan
participants pursuant to awards of restricted stock, restricted stock
units, performance shares and/or performance
units.
|
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Certain Relationships and Related
Transactions. Our Code of Business Conduct and Ethics provides
that all related party transactions (defined as transactions requiring
disclosure under Item 404 of Securities and Exchange Commission Regulation S-K)
must be approved reviewed and approved by a majority of our disinterested
independent directors.
During
the year, we also retained the services of Keesal, Young & Logan. Director
Mayuga is a partner in that law firm. During 2007, this law firm received $4,000
in legal fees from ICB and the Bank.
Imperial
Capital Bancorp, Inc. entered into a lending agreement with Mr. Haligowski as of
January 20, 2000 for a seven hundred thousand dollar ($700,000) line of
credit. To date, no funds have been drawn down from this
line.
The Bank
may from time to time make loans and other extensions of credit to our directors
and executive officers and members of their immediate families and affiliated
entities. All of such currently outstanding loans or extensions of
credit were made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable loans to persons not related to the Bank, and do not involve
more than the normal risk of collectibility or present other unfavorable
features.
Director
Independence. Pursuant to the NYSE’s listing standards, we are
required to have a majority of independent directors, and no director qualifies
as independent unless our Board of Directors has affirmatively determined that
the director has no material relationship with the Company. As
permitted by the NYSE’s listing standards, our Board of Directors has adopted
categorical standards to assist it in making determinations of
independence. These standards are contained in Section 1 of our
Corporate Governance Guidelines, which are posted on our website at www.imperialcapitalbancorp.com,
under “Investor Relations” and then under “Governance.” Our Board has
determined that Directors Lipscomb, Mayuga, Oribe and Reed have no material
relationships with us, and therefore are independent directors of the
Company. This determination was based upon the fact that other than
Director Mayuga, none of these directors has any relationship with the Company
other than as a director and member of committees of the Board. In
making its determination that Director Mayuga is independent, the Board
considered the relationship disclosed above under “-Certain Relationships and
Related Transactions.”
Item 14. Principal Accountant Fees and Services
During
the fiscal years ended December 31, 2007 and 2006, Ernst & Young LLP
provided various audit, audit related and non-audit services to the
Company. Set forth below are the aggregate fees billed for these
services:
|
|
(a)
|
Audit
Fees: Aggregate fees billed for professional services rendered for the
audits of the Company’s annual financial statements and internal controls
over financial reporting, and reviews of financial statements included in
the Company’s Quarterly Reports on Form 10-Q for those fiscal years:
$360,000 - 2007; $332,000 - 2006.
|
|
|
(b)
|
Audit
Related Fees: Aggregate fees billed for professional services rendered
related to audits of employee benefit plans, consultation related to the
implementation of the Sarbanes-Oxley Act, and consultation on accounting
matters: $21,000 - 2007; $20,000 -
2006.
|
|
|
(c)
|
Tax
Fees: Aggregate fees billed for professional services rendered related to
tax compliance, tax advice and tax return preparation: $105,000 - 2007;
$95,000 - 2006.
|
|
|
(d)
|
All
other fees: Aggregate fees billed for professional services rendered in
connection with the review and consultation on various issues relating to
employment and other benefit related contracts: $5,000 - 2007; $22,000 -
2006.
|
The audit
committee preapproves all audit and permissible non-audit services to be
provided by Ernst & Young LLP and the estimated fees for these
services. None of the services provided by Ernst & Young LLP
described in items (a) – (d) above was approved by the audit committee pursuant
to a waiver of the pre-approved requirements of the SEC’s rules and
regulations.
PART
IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial
Statements:
Our
consolidated financial statements, and Report of Independent Registered Public
Accountants thereon, are included in this Form 10-K at the pages listed
below:
|
Page
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
43
|
|
Reports
of Independent Registered Public Accounting Firm
|
44
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
46
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
47
|
|
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income for
the Years Ended December 31, 2007, 2006 and 2005
|
48
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
49
|
|
Notes
to Consolidated Financial Statements
|
50
|
(a)(2) Financial
Statement Schedules:
All
financial statement schedules have been omitted as the required information is
inapplicable or has been included in the Notes to Consolidated Financial
Statements.
(a)(3) Exhibits:
See
Exhibit Index.
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IMPERIAL
CAPITAL BANCORP, INC.
|
Date:
March 17, 2008
|
By:
|
/s/ George W.
Haligowski
|
|
George
W. Haligowski
|
||
|
Chairman
of the Board, President
|
||
|
and
Chief Executive Officer
|
||
|
(Duly
Authorized Representative)
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ George
W. Haligowski
|
Chairman
of the Board, President and
|
March
17, 2008
|
||
|
George
W. Haligowski
|
Chief
Executive Officer
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/ Timothy
M. Doyle
|
Executive
Managing Director and
|
March
17, 2008
|
||
|
Timothy
M. Doyle
|
Chief
Financial Officer
|
|||
|
(Principal
Financial and Accounting Officer)
|
||||
|
/s/ Norval
L. Bruce
|
Director
|
March
17, 2008
|
||
|
Norval
L. Bruce
|
||||
|
/s/ Jeffrey
L. Lipscomb
|
Director
|
March
17, 2008
|
||
|
Jeffrey
L. Lipscomb
|
||||
|
/s/ Sandor
X. Mayuga
|
Director
|
March
17, 2008
|
||
|
Sandor
X. Mayuga
|
||||
|
/s/ Robert
R. Reed
|
Director
|
March
17, 2008
|
||
|
Robert
R. Reed
|
||||
|
/s/ Hirotaka
Oribe
|
Director
|
March
17, 2008
|
||
|
Hirotaka
Oribe
|
EXHIBIT
INDEX
|
Regulation
S-K Exhibit Number
|
Document
|
Reference
to Prior Filling or Exhibit Number Attached Hereto
|
||
|
3.1
|
Certificate
of Incorporation
|
************
|
||
|
3.2
|
Bylaws,
as amended
|
***
|
||
|
4
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
**********
|
||
|
10.1
|
2005
Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
Directors (“NEDP”)
|
*****
|
||
|
10.2
|
2005
Re-Designated, Amended and Restated Employee Stock Incentive Plan
(“ESIP”)
|
********
|
||
|
10.3a
|
409A
Consolidated Nonqualified (Employer Securities Only) 2005 Deferred
Compensation Plan
|
***
|
||
|
10.3b
|
409A
Consolidated Nonqualified (Non-Employer Securities) 2005 Deferred
Compensation Plan
|
***
|
||
|
10.3c
|
Consolidated
Nonqualified (Employer Securities Only) Deferred Compensation
Plan
|
***
|
||
|
10.3d
|
Consolidated
Nonqualified (Non-Employer Securities) Deferred Compensation
Plan
|
***
|
||
|
10.4
|
Supplemental
Salary Savings Plan
|
*
|
||
|
10.5a
|
Amended
and Restated Employment Agreement with George W.
Haligowski
|
********
|
||
|
10.5b
|
Non-Competition
and Non-Solicitation Agreement with George W. Haligowski
|
********
|
||
|
10.6
10.7
10.8
10.9
|
Change
in Control Severance Agreement with Norval L. Bruce
Change
in Control Severance Agreement with Timothy M. Doyle
Change
in Control Severance Agreement with Lyle C. Lodwick
Change
in Control Severance Agreement with Phillip E. Lombardi
|
********
********
********
***********
|
||
|
10.10
|
Recognition
and Retention Plan
|
**
|
||
|
10.11
|
Voluntary
Retainer Stock and Deferred Compensation Plan for Outside
Directors
|
****
|
||
|
10.12
|
Amended
and Restated Supplemental Executive Retirement Plan
|
********
|
||
|
10.13
|
Amended
and Restated ITLA Capital Corporation Rabbi Trust
Agreement
|
*********
|
||
|
10.14
|
Amended
and Restated Salary Continuation Plan
|
********
|
||
|
10.15
|
Form
of Incentive Stock Option Agreement under ESIP
|
******
|
||
|
10.16
10.17
|
Form
of Non-Qualified Stock Option Agreement under the ESIP
Form
of Non-Qualified Stock Option Agreement under the NEDP
|
******
*******
|
||
|
10.18
|
Description
of Named Executive Officer Salary, Bonus and Perquisite Arrangements
for 2008
|
10.18
|
||
|
10.19
|
Description
of Director Fee Arrangements
|
10.19
|
||
|
10.20
|
Split Dollar Agreement |
10.20
|
||
|
11
|
Statement
Regarding Computation of Per Share Earnings
|
Not
Required
|
||
|
13
|
Annual
Report to Security Holders
|
None
|
||
|
18
|
Letter
Regarding Change in Accounting Principles
|
None
|
||
|
21
|
Subsidiaries
of the Registrant
|
21
|
||
|
22
|
Published
Report Regarding Matters Submitted to Vote of Security
Holders
|
None
|
||
|
23.1
|
Consent
of Ernst & Young LLP
|
23.1
|
||
|
24
|
Power
of Attorney
|
None
|
||
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.1
|
||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
31.2
|
||
|
32
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial
Officer
|
32
|
|
*
|
Filed
as an exhibit to Imperial’s Registration Statement on Form S-1 (File No.
33-96518) filed with the Commission on September 1, 1995, pursuant to
Section 5 of the Securities Act of 1933.
|
|
*
*
|
Filed
as an exhibit to the Company’s Registration Statement on Form S-4 (File
No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
Section 5 of the Securities Act of 1933.
|
|
* *
*
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
December 7, 2007.
|
|
* *
* *
|
Filed
as an exhibit to Amendment No. Two to the Company’s Registration Statement
on Form S-4 (File No. 333-03551) filed with the Commission on June 19,
1996.
|
|
* *
* * *
|
Filed
as an appendix to the Company’s definitive proxy materials filed on June
27, 2005.
|
|
* *
* * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on August
9, 2005.
|
|
* *
* * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
November 4, 2005.
|
|
* *
* * * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
February 24, 2006.
|
|
* *
* * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2006.
|
|
* *
* * * * * * * *
|
The
Company hereby agrees to furnish the SEC, upon request, copies of the
instruments defining the rights of the holders of each issue of the
Company's long-term debt.
|
|
* *
* * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-K for the year ended December 31,
2006.
|
|
* *
* * * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2007 (File No. 01-33199).
|
-94-