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, 2008
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:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock, $.01 Par Value
(Title
of Class)
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 [ ]
Non-Accelerated
Filer [ ] (Do not check if a smaller reporting
company) Smaller
reporting company [X]
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 16, 2009, there were issued and outstanding 5,428,760 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, 2008, computed by reference
to the closing price of such stock as of June 30, 2008, was $31.1 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, 2008
TABLE
OF CONTENTS
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Page
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PART
I
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4
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21
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31
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31
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31
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31
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PART
II
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32
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34
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36
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56
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58
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87
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87
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87
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PART
III
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88
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90
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109
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111
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111
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PART
IV
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112
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113
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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,
either nationally or in our market areas; fluctuations in loan demand, the
number of unsold homes, other properties and real estate values; the quality or
composition of our loan or investment portfolios; our ability to manage loan
delinquency rates, which may be impacted by deterioration in the
housing and commercial real estate markets that may lead to increased losses and
non-performing assets in our loan portfolios, and may result in our allowance
for loan losses not being adequate to cover actual losses and may require us to
materially increase our reserves; fluctuations in interest rates, and changes in
the relative differences between short- and long-term interest rates; results of
examinations by the California Department of Financial Institutions (the “DFI”),
the Federal Deposit Insurance Corporation (the “FDIC”) or other regulatory
authorities, including the possibility that any such regulatory authority may,
among other things, require us to increase our reserve for loan losses,
write-down assets, change our regulatory capital position or affect our ability
to borrow funds or maintain or increase deposits, which could adversely affect
our liquidity and earnings; the possibility that we will be unable to comply
with the conditions imposed upon us by the Order to Cease and Desist issued by
the DFI and the FDIC, which could result in the imposition of additional
restrictions on our operations; our ability to control operating costs and
expenses; the use of estimates in determining fair value of certain of our
assets, which estimates may prove to be incorrect and result in significant
declines in valuation; difficulties in reducing risk associated with the loans
on our balance sheet; staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our work force and potential
associated charges; computer systems on which we depend could fail or experience
a security breach; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing, and savings habits; legislative or
regulatory changes that adversely affect our business, including changes in
regulatory polices and principles, including the interpretation of regulatory
capital or other rules; the availability of resources to address changes in
laws, rules, or regulations or to respond to regulatory actions; adverse changes
in the securities markets; the inability of key third-party providers to perform
their obligations to us; changes in accounting policies, principles
or guidance, as may be adopted by the financial institution regulatory agencies
or the Financial Accounting Standards Board, or their application to our
business or audit adjustments; the economic impact of any terrorist actions;
other economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products, and services; and other risks
detailed in this Form 10-K. 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 2009 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 unless the
context indicates otherwise.
PART
I
Item 1. Business
General
Imperial
Capital Bancorp, Inc. (“ICB” or the “Company”) is a diversified bank holding
company headquartered in San Diego County, California with consolidated assets
of $4.4 billion, consolidated net loans of $2.7 billion, consolidated deposits
of $2.9 billion and consolidated shareholders’ equity of $189.6 million as of
December 31, 2008. We conduct and manage our business principally through our
wholly-owned subsidiary, Imperial Capital Bank (the “Bank”), an institution with
$4.4 billion in assets and six retail branches located in California (Beverly
Hills, Costa Mesa, Encino, Glendale, San Diego, and San Francisco), two retail
branches located in Nevada (Carson City and Las Vegas), and one retail branch
located in Baltimore, Maryland. Our branch offices are primarily used
for our deposit services and lending business. The Bank has been in
business for 34 years.
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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Over the
last five years the Company has engaged in residential and condominium
construction lending and accumulated a construction portfolio of $373.5 million
at December 31, 2008. The economic events of 2008 have dramatically impacted the
Company with respect to this area of our operations. First, the national economy
is in a deepening recession due in part to the sub-prime mortgage
market. Many of our construction borrowers, who rely on the sales of
homes to repay loans, are not able to find buyers. Some of these
borrowers, in turn, have defaulted on loans, which has impaired our ability to
recognize interest and has resulted in significant charge-offs and related
provisions for loan losses.
In
connection with continuing turmoil in the economy, and more specifically, with
our construction and land development loan portfolio, we recorded a net loss of
$32.6 million for the year ended December 31, 2008. This loss was primarily
the result of considerable increases in provision for loan losses during the
year, a tightening interest margin caused by recent interest rate reductions,
increased amounts of non-accrual loans and other than temporary losses on
certain of our investment securities. The severe net loss resulted in
shareholders' equity at December 31, 2008 of $189.6 million, or 4.3% of total
assets, representing a decline of $38.0 million from $227.6 million, or 6.4% of
total assets, at December 31, 2007. As a result of our net loss, the
Bank was “adequately capitalized” at that date as further described in Note 15
—Regulatory Requirements. Our net loss has had a negative impact on our
operations, liquidity and capital adequacy and has resulted in mandates by our
regulators to require that we take certain actions to enhance our operations and
profitability, as noted below.
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.
Regulatory
Action
As noted
in Form 8-K filing on February 20, 2009, the Bank entered into a
stipulation and consent to the issuance of a February 17, 2009 order to
cease and desist (the “Order”) by the FDIC and the California Department of
Financial Institutions (the “DFI”).
The Order
is a formal corrective action pursuant to which the Bank has agreed to take
certain measures in the areas of management, capital, loan loss allowance
determination, risk management, liquidity management, board oversight and
monitoring of compliance, and restricts payment of dividends and the opening of
branch or other Bank offices. Specifically, the Order requires that the Bank
submit to the regulators within 60 days a detailed capital plan to address how
the Bank will remain “adequately capitalized” and within 180 days increase its
Tier 1 leverage above nine percent and total risk-based capital ratios above
thirteen percent. The Bank must also submit to the regulators within
prescribed time periods a revised policy for determining the allowance for loan
losses, plans for reducing commercial real estate loan concentrations and
brokered deposits, a liquidity plan, strategic business plan and profitability
plan. The Order will remain in effect until modified or terminated by the FDIC
and the DFI.
None of
the timeframes under the Order has lapsed and therefore we are in the process of
responding to the Order. In addition, the Federal Reserve Bank of San Francisco
(“FRB San Francisco”) notified the Company that it may not appoint any new
director or senior executive officer or change the responsibilities of any
current senior executive officers without notifying the FRB. In addition, the
Company may not make indemnification and severance payments without complying
with certain statutory restrictions, including prior written approval of the
Board of Governors of the Federal Reserve System (the “Federal Reserve Board”)
and concurrence from the FDIC. Further, the Company is generally prohibited from
receiving dividends from the Bank, making any dividend payments (including
distributions on its trust preferred securities) and increasing or renewing any
debt, without receiving prior approval from the FRB San Francisco of such
payments.
Business
Strategy
In
response to these financial challenges and increased regulatory supervision, we
have taken and are continuing to take a number of tactical actions aimed at
preserving existing capital, reducing our lending exposures and associated
capital requirements and increasing liquidity. The tactical actions taken
include, but are not limited to the following: slowing loan originations,
growing retail deposits, reducing brokered deposits, seeking commercial loan
participation and sales arrangements with other lenders or private equity
sources, reducing personnel and other operating costs, and eliminating the
payment of dividends. Our goal is to return to profitability by reducing our
size, stabilizing our losses, managing our problematic assets and reducing
overall expenses. We are working on the following four primary objectives as a
basis for long-term success of our franchise:
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Improve
Asset Quality. We have taken proactive steps to resolve
our non-performing loans, including negotiating repayment plans,
forbearances, loan modifications and loan extensions with our borrowers
when appropriate. We also have established a separate
department to monitor and attempt to reduce our exposure to a further
deterioration in asset quality. We have applied more
conservative underwriting practices to our new loans, including, among
other things, requiring more detailed credit information in certain
circumstances, increasing the amount of required collateral or equity
requirements and reducing loan-to-value
ratios.
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Reduce
Asset Base and Improve Regulatory Capital Ratios. We
expect to reduce our asset base which should help reduce our risk profile
and improve capital ratios through reductions in the amount of outstanding
loans and securities through normal principal amortization, and a
corresponding reduction of
liabilities.
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Continued
Expense Control. Beginning in 2008 and continuing into 2009,
management has undertaken several initiatives to reduce noninterest
expenses, and will continue to make it a priority to identify cost savings
opportunities throughout all phases of operations. Personnel reductions
have and will come primarily from the Bank’s lending operations, including
closing selected loan origination offices, as well as some reduction in
support areas of the Bank.
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Reduce
Reliance on Wholesale Funding Sources. We will continue
to focus on our strategy of reducing our reliance on wholesale funding
sources, which includes Federal Home Loan Bank (“FHLB”) advances and
brokered certificates of deposits, while increasing core deposits and
other retail deposit products through our branch and on-line deposit
network. The FHLB of San Francisco suspended our borrowing
facility on March 13, 2009, and we are required under the Order to develop
a plan to eliminate our reliance on brokered certificates of
deposits. Retail deposits have increased approximately 22% to
$2.2 billion during the six months from July to December
2008. The funding obtained through this channel will continue
to be utilized to retire wholesale fundings at their
maturities.
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We are
also evaluating various strategic options and are seeking the assistance of
investment banking services to evaluate and potentially pursue the prospects of
private equity investment or other capital raising alternatives. While we
continue to act upon both tactical and strategic alternatives to raise capital
and restructure our balance sheet, as has been widely publicized, access to
capital markets is extremely limited in the current economic environment, and we
can give no assurances that in the current financial environment our efforts
will be successful and will result in sufficient capital preservation or
infusion. Our ability to decrease our levels of non-performing assets is also
vulnerable to market conditions as our construction loan borrowers rely on an
active real estate market as a source of repayment, and the sale of loans in
this market is difficult. If the real estate market does not improve, our level
of non-performing assets may continue to increase.
While we
believe that we are taking appropriate steps to respond to these economic risks
and regulatory actions, further deterioration in the economic environment or
severe regulatory actions could adversely affect our continuing
operations.
Lending
Activities
General. During 2008, our
lending activities were focused as follows:
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Originating
real estate loans secured by income producing properties;
and
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Originating
entertainment finance loans.
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Income Producing Property (Real
Estate) Loans. Historically, we’ve originated and purchased 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, 2008, we had $2.3 billion of income producing property loans
outstanding, representing 84.5% of our total real estate loans, and 82.7% 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. At December 31, 2008, these offices were staffed by a total of 19 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, prior to 2008, multi-family loans were
made at a loan-to-value ratio up to 80%. During 2008, as part of our
implementation of more conservative underwriting practices, we reduced the limit
for multi-family loan originations to 75% of the appraised
value. Income producing property loans are generally made for terms
of between ten and 15 years, with amortization periods up to 30 years for
multi-family properties and 25 years for other property
types. 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 6.44% in 2008 compared to
7.39% in 2007. 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 50.8%
of our loan portfolio was adjustable at December 31, 2008, and approximately
41.2% 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, 2008, our hybrid loans had a weighted average of 2.6 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, 2008, approximately $2.4 billion, or 86.3%,
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, 2008, the weighted average floor
interest rate of these loans was 6.82%. At that date, approximately
$745.5 million, or 26.5%, of these loans were at the floor interest
rate. At December 31, 2008, 48.5% 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 11.87% at that
date. At December 31, 2008, 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 $345.1 million for
the year ended December 31, 2008, as compared to $1.2 billion and $1.6 billion,
for the years ended December 31, 2007 and 2006, respectively. Loan production in
2008 consisted of the origination of $155.8 million of commercial real estate
loans, $113.7 million of small balance multi-family real estate loans and $75.6
million of entertainment finance loans.
The
decline in loan production in 2008 was primarily due to a decrease in customer
demand and instability related to economic and real estate market
conditions. We are currently selling to Fannie Mae most of the income
producing property loans we originate.
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, 2008, our construction and
land loans amounted to $408.6 million, or 15.1%, of our loan
portfolio. Approximately $208.5 million, or 51.0%, of our
construction and land loan portfolio consisted of residential and condominium
construction loans, $165.3 million, or 40.4%, consisted of commercial and
multifamily real estate loans, and $35.0 million, or 8.6%, consisted of land
loans. At December 31, 2008, $179.6 million, or 44.0%, of our
construction projects were located in California, $84.5 million, or 20.7%, were
for projects located in New York, $50.5 million, or 12.4%, were for projects
located in Texas, $35.2 million, or 8.6%, were for projects located in Arizona,
$15.0 million, or 3.7%, were for projects located in Pennsylvania, and $11.2
million, or 2.7%, 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,
2008 of $10.0 million. At December 31, 2008, the unadvanced portion
of residential and condominium construction loans was $39.4
million. Commercial construction loans typically consist of mixed-use
retail and other commercial related projects. At December 31, 2008,
the average loan commitment for our commercial construction loans was $5.3
million and the unadvanced portion of these commitments was $46.0
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, 2008, the
average loan commitment for our land loans was $7.1 million and the unadvanced
portion of these commitments was $1.7 million.
Loans to
finance our construction projects are generally offered to experienced builders
and developers. All loans to builders and developers are underwritten
to pre-established standards that include estimated cash reserves to carry
projects through completion and sale of the project. 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 as published in
the Wall Street Journal and are generally interest only loans during the
construction phase. Disbursement of funds is at our discretion and
based on the progress of construction.
Although
construction lending affords us the opportunity to achieve higher interest rates
and fees with shorter terms to maturity than one- to four-family mortgage
lending, construction lending is considered to involve a higher degree of
risk. At the time these types of loans are made, the value of the
collateral securing the loan must be estimated based on the projected selling
price at the time the residence or income producing property is completed and on
estimated building and other costs (including interest
costs). Changes in the demand, such as for new housing and higher
than anticipated building costs may cause actual results to vary significantly
from those estimated. Accordingly, we may be confronted, at the time
the residence is completed, with a loan balance exceeding the value of the
collateral. Because construction loans require active monitoring of
the building process, including cost comparisons and on-site inspections, these
loans are more difficult and costly to monitor. Increases in market
rates of interest may have a more pronounced effect on construction loans by
rapidly increasing the end-purchasers' borrowing costs, thereby reducing the
overall demand for the project. Properties under construction are
often difficult to sell and typically must be completed in order to be
successfully sold also complicates the process of working out problem
construction loans. This may require us to advance additional funds
and/or contract with another builder to complete
construction. Furthermore, in the case of speculative construction
loans, there is the added risk associated with identifying an end-purchaser for
the finished project.
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, 2008 and 2007, our entertainment finance portfolio totaled $50.4
million and $76.3 million, respectively, representing 1.8% and 2.4% of our loan
portfolio as of these dates. Of these amounts, approximately $4.4
million and $14.1 million, respectively, were issued to producers domiciled
outside of the United States. The foreign loans outstanding at
December 31, 2008 were primarily issued to producers located in Australia and
Canada. Approximately $5.9 million, $8.6 million and $5.6 million of interest
income was earned during 2008, 2007 and 2006, respectively, in connection with
our entertainment finance portfolio.
Loan Underwriting. Initial
loan review for potential applications is performed by loan production staff, in
consultation with the Chief Lending 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 Loan Committee, which is comprised of
the following Bank officers:
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•Chairman,
President, and Chief Executive Officer
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•Senior
Managing Director/Chief Lending Officer
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•Vice
Chairman of the Board
•Executive
Managing Director/Chief Credit Officer
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•Deputy
Managing Director/Director of Portfolio Management
•Deputy
Managing Director/Chief Underwriter
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•Executive
Managing Director/Chief Operating Officer
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•First
Vice President/East Coast Credit Executive
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•Senior
Managing Director/Chief Risk Officer
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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 $2.0 million
require approval by any two members of the Bank’s loan committee, one of whom
must be the Chief Underwriter or the Chief Credit Officer, while loans in excess
of $2.0 million require approval of three loan committee members, two of whom
must be the Chief Underwriter and the Chief Credit Officer. Additionally, loans
over $3.0 million require the approval of the 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. Effective February 1, 2009, all loans over $5.0 million
must be approved by the Chief Operating Officer.
All
entertainment finance loans over $1.0 million are submitted to the 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, 2008, that limit was
approximately $64.3 million. Our largest combined credit extension to related
borrowers was $30.2 million at December 31, 2008. We had five other
relationships in excess of $20.0 million at December 31, 2008, with a combined
aggregate balance of $112.2 million at that date. At December 31,
2008, we had a total of 155 extensions of credit, with a combined outstanding
principal balance of $790.3 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 18 credits aggregating $135.8 million that were on nonaccrual
status at December 31, 2008. At December 31, 2008, we had 2,912 real
estate loans outstanding, with an average balance per loan of approximately
$952,000.
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 and special servicer
ratings of “SBPS3+” and “SBSS3+”, respectively, 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, 2008, Imperial
Capital REIT held real estate loans of $1.7 million. The cash flow from Imperial
Capital REIT loan pool provides cash flow on a monthly basis to
ICB. ICB recognized $142,000 of interest income from the loans held
in Imperial Capital REIT during the year ended December 31, 2008.
Non-performing
Assets and Other Loans of Concern
At
December 31, 2008, non-performing assets totaled $192.9 million or 4.34% of
total assets. Non-performing assets consisted of $154.9 million of non-accrual
loans and $38.0 million of other real estate and other assets owned consisting
of 41 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, 2008, we had loans with an aggregate outstanding balance of $114.6
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, 2008, we classified $269.4 million of loans as
“substandard”, none as “doubtful” and none as “loss” of which, $154.9 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, 2008 deposits
totaled $2.9 billion of which approximately 83.8% were term deposits that pay
fixed rates of interest for periods generally ranging from 90 days to five
years, 14.4% were adjustable rate passbook accounts and adjustable rate money
market accounts with limited checking features, and 1.8% were interest and
non-interest bearing checking accounts.
Our
retail checking account balance was $53.8 million at December 31, 2008. 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, 2008,
$739.9 million, or 25.2% of total deposits, were brokered
deposits. We are required under the Order to develop a plan to
eliminate our reliance on 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 of San Francisco (“FHLB”) 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. In March
2009, the Bank’s FHLB credit facility was frozen at the then outstanding
amount. The Bank is prohibited from receiving any new FHLB advances
until this suspension is lifted. At December 31, 2008, FHLB advances
outstanding totaled $1.2 billion. Additionally, the Bank has a $30.0
million repurchase agreement borrowing from an unaffiliated financial
institution that is secured by mortgage-backed securities. In March
2009, this repurchase agreement borrowing was called by the unaffiliated
financial institution and repaid in full. In addition, as of December
31, 2008, we had an available borrowing capacity under the Federal Reserve Bank
of San Francisco credit facility of $119.4 million. We also had
available $68.0 million of uncommitted, unsecured lines of credit with three
unaffiliated financial institutions. However, these uncommitted,
unsecured lines of credit were cancelled subsequent to December 31, 2008. See “Item 8. Financial
Statements and Supplementary Data — Notes to Consolidated Financial Statements —
Notes 8, 9, and 10”.
Regulation
Introduction
Banking
is a complex, highly regulated industry. The primary goals of the regulatory
scheme are to maintain a safe and sound banking system, protect depositors and
the FDIC’s insurance fund, not shareholders, and to facilitate the conduct of
sound monetary policy. In furtherance of these goals, Congress and the states
have created several largely autonomous regulatory agencies and enacted numerous
laws that govern banks, bank holding companies and the financial services
industry. Consequently, the growth and earnings performance of ICB and the Bank
can be affected not only by management decisions and general economic
conditions, but also by the requirements of applicable state and federal
statues, regulations and the policies of various governmental regulatory
authorities, including the Federal Reserve Board, the FDIC and the
DFI.
The
system of supervision and regulation applicable to financial services businesses
governs most aspects of the business of the Company and the Bank, including:
(i) the scope of permissible business; (ii) investments;
(iii) reserves that must be maintained against deposits; (iv) capital
levels that must be maintained; (v) the nature and amount of collateral
that may be taken to secure loans; (vi) the establishment of new branches;
(vii) mergers and consolidations with other financial institutions; and
(viii) the payment of dividends.
The
following is a brief summary of certain statutes and rules that affect or will
affect ICB and the Bank. This summary is qualified in its entirety by reference
to the particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of all applicable statutes and
regulations. From time to time, laws or regulations are enacted which have the
effect of increasing the cost of doing business, limiting or expanding the scope
of permissible activities, or changing the competitive balance between banks and
other financial and non-financial institutions. Proposals to change
the laws and regulations governing the operations of banks and bank holding
companies are frequently made in Congress, in the California legislature and by
various bank and other regulatory agencies. ICB is also subject to the
disclosure and regulatory requirements of the Securities Exchange Act of 1934,
as amended, as administered by the Securities and Exchange Commission (“SEC”).
Future changes in the laws, regulations or polices that impact ICB and the Bank
cannot necessarily be predicted, but they may have a material effect on the
business and earnings of ICB and the Bank.
Holding
Company Regulation
Bank
holding companies are subject to comprehensive regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956 or BHCA 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. The Federal
Reserve Board, under the BHCA, also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve’s determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company. If the Federal Reserve Board should determine that the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of ICB’s operations are unsatisfactory or
that ICB or our management is violating or has violated any law or regulation,
various remedies are available to and are utilized by the Federal Reserve
Board.
Under the
BHCA, 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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|
•
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acquiring
all or substantially all of the assets of another bank or bank holding
company; or
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•
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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 activities closely related to
the business of banking or managing or controlling banks, as discussed above.
Companies that qualify as financial holding companies may also engage in
securities, insurance and merchant banking activities.
The FRB
San Francisco has notified ICB that it may not appoint any new director or
senior executive officer or change the responsibilities of any current senior
executive officers without notifying the FRB San Francisco. The Bank is subject
to the same requirement for notice to the FDIC and DFI in such
circumstances. In addition, ICB may not make indemnification and
severance payments without complying with certain statutory restrictions,
including prior written approval of the Federal Reserve Board and concurrence
from the FDIC, and the Bank is subject to the same restrictions requiring
approval from the FDIC. Further, ICB is generally prohibited from receiving
dividends from the Bank, making any dividend payments (including distributions
on its trust preferred securities) and increasing or renewing any debt, without
receiving prior approval from the FRB San Francisco of such
payments.
Dividends. ICB
is a legal entity, separate and distinct from the Bank. Although ICB has the
ability to raise capital on its own behalf or borrow from external sources, ICB
has historically obtained funds from dividends paid by, and fees charged for
services provided to, the Bank. However, as discussed above, regulatory
constraints on both ICB and the Bank currently preclude the payment of dividends
by either party.
ICB is
entitled to receive dividends, when and as declared by the Bank's Board of
Directors upon the lifting of the regulatory restriction. Those dividends may
come from funds legally available for those dividends, as specified and limited
by the California Financial Code. Under the California Financial Code, funds
available for cash dividends by a California-chartered bank are restricted to
the lesser of: (i) the bank's retained earnings; or (ii) the bank's
net income for its last three fiscal years (less any distributions to
shareholders made during such period). With the prior approval of the DFI, cash
dividends may also be paid out of the greater of: (a) the bank's retained
earnings; (b) net income for the bank's last preceding fiscal year; or
(c) net income or the bank's current fiscal year. If the DFI
determines that the shareholders' equity of the bank paying the dividend is not
adequate or that the payment of the dividend would be unsafe or unsound for the
bank, the DFI may order the bank not to pay the dividend. Since the Bank is an
FDIC insured institution, it is also possible, depending upon its financial
condition and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, constitute an
unsafe or unsound practice and thereby prohibit such payments.
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. As a
result of the recent notification we received from the FRB San Francisco, we are
currently prohibited from paying dividends on our common stock or distributions
on our trust preferred securities without the approval of the FRB San
Francisco. See “—Regulatory Action.”
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. Due to its capital position, ICB
suspended its common stock repurchase program in 2008. In addition,
as a result of the recent notification we received from the FRB San Francisco,
we are currently prohibited from repurchasing our stock without the approval of
the FRB San Francisco. See “—Regulatory Action.”
Transactions with
Affiliates. ICB and any subsidiaries it may
purchase or organize are deemed to be affiliates of the Bank within the meaning
of Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve
Board's Regulation W. Under Sections 23A and 23B and
Regulation W, loans by the Bank to an affiliate, investments by the Bank in
an affiliate’s stock, and taking an affiliate’s stock as collateral for loans by
the Bank to any borrower is limited to 10% of the Bank's capital, in the case of
any one affiliate, and is limited to 20% of the Bank's capital, in the case of
all affiliates. In addition, transactions between the Bank and any affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices; in particular, a bank and its subsidiaries generally may not purchase
from an affiliate a low-quality asset, as defined in the Federal Reserve Act.
These restrictions also prevent a bank holding company and other affiliates of a
bank from borrowing from a banking subsidiary of the bank holding company unless
the loans are secured by eligible marketable collateral of designated amounts.
ICB and the Bank are also subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of
securities.
Regulatory Capital
Requirements. The Federal Reserve Board 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
risk-based capital standards are minimum requirements. Higher capital levels
will be required if warranted by the particular circumstances or risk profiles
of individual organizations. For example, the Federal Reserve Board's capital
guidelines contemplate that additional capital may be required to take adequate
account of, among other things, interest rate risk, or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. Moreover, any banking organization experiencing or anticipating
significant growth or expansion into new activities, particularly under the
expanded powers under the Gramm-Leach-Bliley Act (the “GLB Act”), would be
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
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, 2008, ICB’s ratio of total capital to
risk-weighted assets was 9.4% and ICB’s ratio of Tier 1 capital to risk-weighted
assets was 7.5%.
In
addition, the Federal Reserve Board 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, 2008, ICB’s required leverage ratio
was 4.0% and its actual leverage ratio was 5.6%.
To be
well capitalized, a bank holding company must have a ratio of total capital to
risk weighted assets of at least 10.0% and a ratio of Tier 1 capital to risk
weighted assets of at least 6.0%.
Failure
to meet capital guidelines can 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.
Federal Securities
Law. ICB has registered its common stock with the SEC under
the Securities Exchange Act of 1934, as amended or Exchange Act. As a result,
the proxy and tender offer rules, insider trading reporting requirements,
corporate governance, annual and periodic reporting and other requirements of
the Exchange Act are applicable to ICB.
Sarbanes-Oxley Act of
2002. As a public company, Imperial Capital Bancorp, is
subject to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which
implements a broad range of corporate governance and accounting measures for
public companies designed to promote honesty and transparency in corporate
America and better protect investors from corporate wrongdoing. The
Sarbanes-Oxley Act was signed into law on July 30, 2002 in response to public
concerns regarding corporate accountability in connection with various
accounting scandals. The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
corporate governance rules and required the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules. The Sarbanes-Oxley Act represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
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. If the regulators should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of our bank’s operations are unsatisfactory or that
the Bank or its management is violating or has violated any law or regulation,
various remedies are available to and are utilized by the regulators. Such
remedies include the power to enjoin unsafe or unsound practices, to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict growth, to assess civil monetary
penalties, to remove officers and directors and ultimately to request the FDIC
to terminate our bank’s deposit insurance.
On
February 17, 2009, the Bank agreed to the issuance of the Order. The Order
is a formal corrective action pursuant to which the Bank has agreed to take
certain measures in the areas of management, capital, loan loss allowance
determination, risk management, liquidity management, board oversight and
monitoring of compliance, and restricts payment of dividends and the opening of
branch or other Bank offices. Specifically, the Order requires that the Bank
submit to the regulators within sixty days a detailed capital plan to address
how the Bank will remain “adequately capitalized” and within 180 days increase
its Tier 1 leverage above nine percent and total risk-based capital ratios above
thirteen percent. The Bank must also submit to the regulators within
prescribed time periods a revised policy for determining the allowance for loan
losses, plans for reducing commercial real estate loan concentrations and
brokered deposits, a liquidity plan, strategic business plan and profitability
plan. The Order will remain in effect until modified or terminated by the FDIC
and the DFI. The Bank intends to achieve full compliance with the Order in a
timely manner.
Because
California permits commercial banks chartered by the state to engage in any
activity permissible for national banks, the Bank can form subsidiaries to
engage in certain activates under certain conditions. Presently, the Bank has
one subsidiary, as discussed below in this section under “Risk Based Capital
Requirements.”
Statutes
and regulations relate to virtually every aspect of the Bank’s operations,
including reserves against deposits, ownership of deposit accounts, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
Further, the Bank is required to maintain certain levels of capital. See
“Regulatory Capital Requirements” set forth in this section below.
Regulatory compliance requires us to incur ongoing additional expenses. This is
particularly the case with respect to the compliance aspects of the
Sarbanes-Oxley Act of 2002, the USA Patriot Act of 2001 and ongoing compliance
efforts with respect to the Order. At times, the cumulative costs of compliance
can be significant.
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 to
qualify as “adequately capitalized”: 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. At December 31, 2008 the Bank was deemed “adequately
capitalized” under the FDIC’s capital maintenance regulations.
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, 2008, the Bank’s required minimum tier 1 capital ratio was 4.0%
and its actual tier 1 capital ratio was 6.0%.
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, 2008 the Bank’s required minimum tier 1 risk-based
and total capital ratios were 4.0% and 8.0% respectively and its actual was 8.0%
and 9.3%, respectively.
During
2008, the Bank formed a wholly-owned subsidiary, Imperial Capital Bank
Resecuritization Trust 2008-1 (the Trust), for the purpose of re-securitizing
its portfolio of corporate sponsored CMOs. The Bank transferred all
of its right, title and other ownership interests in the CMOs to the Trust in
exchange for notes issued by the Trust (the Notes). These re-securitized bonds
were rated by independent rating agencies giving consideration to the purchase
discounts and credit enhancements associated with each specific
bond. The Notes issued by the Trust were then rated. These Note
ratings were risk-weighted in accordance with the Bank’s reading of applicable
regulatory capital guidance. This guidance, however, does not contemplate the
specific type of re-securitization transaction undertaken by the
Bank. The capital ratios above were calculated in accordance with the
Bank’s interpretation of the available guidance. After discussions
with the FDIC, the Bank was told to file its December 31, 2008 call report based
on the Bank’s understanding of the risk-based capital treatment of the
re-securitized portfolio of CMOs. The Bank’s calculation of its capital ratios
as well as its classified assets, allowance for loan losses and other matters is
expected to be reviewed as part of its next regulatory examination. If the
current ratings from the original CMOs were utilized in these December 31, 2008
capital ratios, the Bank’s Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios at December 31, 2008 would have been 6.0%, 7.4% and
8.6%, respectively. Likewise, ICB’s Tier 1 leverage, Tier 1
risk-based and total risk-based capital ratios at December 31, 2008 would have
been 5.6%, 6.9% and 8.7%, 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 federal banking agencies possess
broad powers to take prompt corrective action to resolve the problems of insured
banks. Each federal banking agency has issued regulations defining five capital
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under the
regulations, a bank shall be deemed to be:
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• |
"well
capitalized" if it has a total risk-based capital ratio of 10.0% or more,
has a Tier 1 risk-based capital ratio of 6.0% or more, has a leverage
capital ratio of 5.0% or more, and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure;
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|
• |
"adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier 1 risk-based capital ratio of 4.0% or more, and a leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of "well
capitalized";
|
|
•
|
"undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, a
Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage
capital ratio that is less than 4.0% (3.0% under certain
circumstances);
|
|
•
|
"significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%
or a leverage capital ratio that is less than 3.0%;
and
|
|
•
|
"critically
undercapitalized" if it has a ratio of tangible equity to total assets
that is equal to or less than 2.0%.
|
Banks are
prohibited from paying dividends or management fees to controlling persons or
entities if, after making the payment the bank would be "undercapitalized," that
is, the bank fails to meet the required minimum level for any relevant capital
measure. Asset growth and branching restrictions apply to "undercapitalized"
banks. Banks classified as "undercapitalized" are required to submit acceptable
capital plans guaranteed by their holding companies, if any. Broad regulatory
authority was granted with respect to "significantly undercapitalized" banks,
including forced mergers, growth restrictions, ordering new elections for
directors, forcing divestiture by their holding companies, if any, requiring
management changes, and prohibiting the payment of bonuses to senior management.
Even more severe restrictions are applicable to "critically undercapitalized"
banks, those with capital at or less than 2%. Restrictions for these banks
include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt corrective
action.
A bank,
based upon its capital levels, that is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" may be treated as though it were
in the next lower capital category if the appropriate federal banking agency,
after notice and opportunity for a hearing, determines that an unsafe or unsound
condition, or an unsafe or unsound practice, warrants such treatment. At each
successive lower capital category, an insured bank is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital ratios actually
warrant such treatment.
In
addition to measures taken under the prompt corrective action provisions,
insured banks may be subject to potential enforcement actions by the federal
banking agencies 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. Enforcement
actions may include the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, and the issuance of removal and
prohibition orders against institution-affiliated parties. The enforcement of
such actions through injunctions or restraining orders may be based upon a
judicial determination that the agency would be harmed if such equitable relief
was not granted.
The DFI,
as the primary regulator for state-chartered banks, also has a broad range of
enforcement measures, from cease and desist powers and the imposition of
monetary penalties to the ability to take possession of a bank, including
causing its liquidation.
Under
FDIC regulations, a bank that is not well-capitalized may not accept or renew
brokered deposits without first obtaining a waiver from the FDIC. If deemed
necessary, the Bank may apply for permission to continue to accept certain types
of brokered deposits. As further discussed in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Operating Strategy”, the Bank intends to reduce its reliance on these types of
non-core funding sources. At December 31, 2008 and 2007, the
Bank had brokered deposits of approximately $739.9 million and $379.4 million,
respectively. Due to increases in FDIC assessment rates for all
insured institutions as described above, the Bank’s capital level, and the
Order, the Bank’s assessment rates will be higher in 2009 than in the
past. In addition, due to the Bank’s capital level and the Order, the
Bank is or can become subject to certain additional reporting, filing and/or
recordkeeping requirements.
Deposit
Insurance. The Bank is a member of the Deposit Insurance Fund
(DIF), which is administered by the FDIC. Deposits are insured up to the
applicable limits, by the FDIC, backed by the full faith and credit of the
United States Government, including the Transaction Account Guarantee
Program. Under new legislation, during the period from October 3,
2008 through December 31, 2009, the basic deposit insurance limit is $250,000,
instead of the $100,000 limit in effect earlier.
The FDIC
assesses deposit insurance premiums on all FDIC-insured institutions quarterly
based on annualized rates for four risk categories. Each institution is assigned
to one of four risk categories based on its capital, supervisory ratings and
other factors. Well capitalized institutions that are financially sound with
only a few minor weaknesses are assigned to Risk Category I. Risk Categories II,
III and IV present progressively greater risks to the DIF. Under FDIC’s
risk-based assessment rules, effective April 1, 2009, the initial base
assessment rates prior to adjustments range from 12 to 16 basis points for Risk
Category I, and are 22 basis points for Risk Category II, 32 basis
points for Risk Category III, and 45 basis points for Risk Category
IV. Initial base assessment rates are subject to adjustments based on
an institution’s unsecured debt, secured liabilities and brokered deposits, such
that the total base assessment rates after adjustments range from 7 to 24 basis
points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58
basis points for Risk Category III, and 40 to 77.5 basis points for Risk
Category IV.
The rule
also includes authority for the FDIC to increase or decrease total base
assessment rates in the future by as much as three basis points without a formal
rulemaking proceeding.
In
addition to the regular quarterly assessments, due to losses and projected
losses attributed to failed institutions, the FDIC has adopted a rule imposing
on every insured institution a special assessment equal to 20 basis points of
its assessment base as of June 30, 2009, to be collected on September 30,
2009. The special assessment rule also authorizes the FDIC to
impose additional special assessments if the reserve ratio of the DIF is
estimated to fall to a level that the FDIC’s board believes would adversely
affect public confidence or that is close to zero or negative. Any
additional special assessment would be in amount up to 10 basis points on the
assessment base for the quarter in which it is imposed and would be collected at
the end of the following quarter. The FDIC has announced that the 20
basis point special assessment may be reduced, but has taken no final action to
reduce it.
FDIC-insured
institutions are required to pay a Financing Corporation assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the
1980s. For the quarter ended December 31, 2008, the Financing
Corporation assessment equaled 1.1 basis points for each $100 in domestic
deposits. These assessments, which may be revised based upon the
level of insured deposits, will continue until the bonds mature in the years
2017 through 2019.
We paid
$2.0 million of FDIC assessments in 2008, $250,000 in 2007, and $229,000 in
2006.
The FDIC
may terminate the deposit insurance of any insured depository institution,
including the Bank, if it determines after a hearing that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the
FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Bank's deposit
insurance.
On
October 3, 2008, pursuant to the EESA (discussed below), the FDIC increased
its insurance coverage limits on all deposits from $100,000 to $250,000 per
account until December 31, 2009. Effective November 21, 2008 and until
December 31, 2009, the FDIC expanded deposit insurance limits for certain
accounts under the FDIC's Temporary Liquidity Guarantee Program or TLGP.
Provided an institution has not opted out, the FDIC may (i) guarantee,
under the Debt Guarantee Program or DGP, certain newly issued senior unsecured
debt for certain periods and, (ii) under the Transaction Account Guarantee
Program or TAGP, will provide full FDIC deposit insurance coverage for
noninterest bearing transaction deposit accounts, Negotiable Order of Withdrawal
("NOW") accounts paying less than 0.5% interest per annum and Interest on
Lawyers Trust Accounts ("IOLTA") accounts held at participating FDIC-insured
institutions through December 31, 2009. Coverage under the TLGP was
available for the first 30 days without charge. Various fees are assessed
under the DGP. The fee assessment for TAGP coverage is 10 basis
points per quarter on amounts in covered accounts exceeding $250,000. We are
monitoring the many programs which continue to emerge as part of the Federal
government's efforts to stabilize and strengthen the nation's economy. All
programs are evaluated based on their applicability to us, and whether they will
provide benefit to us and our shareholders. The Bank is participating in
TAGP As neither ICB nor the Bank anticipate issuing qualifying debt,
they will not participate in the DGP.
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. We cannot
predict the nature or impact of future changes in monetary and fiscal
policies.
The
actions of the Federal Reserve Board in these areas influence the growth of bank
loans, investments, and deposits and also affect market interest rates. From
January 2001 to June 2003, the Federal Reserve Board decreased interest rates
numerous times, reducing the overnight "Federal Funds" rate from 6.50% to 1.00%,
the lowest level in four decades. From June 2004 to June 2006, the Federal
Reserve Board reversed direction and increased rates 17 times to 5.25%. From
September 2007 through December 2008, the Federal Reserve Board reduced rates
ten times to their current level of 0.25%. The nature and timing of any future
changes in such policies and their impact on us cannot be predicted. However,
depending on the degree to which our interest-earning assets and
interest-bearing liabilities are rate sensitive, increases in rates would have a
temporary effect of increasing our net interest margin, while decreases in
interest rates would have the opposite effect. In addition, adverse economic
conditions, including a downturn in the local or regional economy and rising
energy prices, could make a higher provision for loan losses a prudent course
and could cause higher loan charge-offs, thus adversely affecting our net income
or other operating costs.
Federal
Reserve Board regulations also require the Bank to maintain non-interest earning
reserves against the Bank’s transaction deposit accounts. Currently,
the first $10.3 million of otherwise reservable balances are exempt from the
reserve requirement, a 3% reserve requirement applies to balances over $10.3
million up to $44.4 million and a 10% reserve requirement applies to balances
over $44.4 million. The Bank was in compliance with these
requirements as of December 31, 2008.
Privacy
Provisions. Banking regulators, as required under the 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.
Environmental
Regulation. Federal, state and local laws and
regulations regarding the discharge of harmful materials into the environment
may have an impact on the Bank. Since the Bank is not involved in any business
that manufactures, uses or transports chemicals, waste, pollutants or toxins
that might have a material adverse effect on the environment, the Bank's primary
exposure to environmental laws is through its lending activities and through
properties or businesses the Bank may own, lease or acquire. Based on a general
survey of the Bank's loan portfolio, conversations with local appraisers and the
type of lending currently and historically done by the Bank, management is not
aware of any potential liability for hazardous waste contamination that would be
reasonably likely to have a material adverse effect on the Company as of
December 31, 2008.
Recent Regulatory
Developments. In light of current conditions in
the global financial markets and the global economy, regulators have increased
their focus on the regulation of the financial services industry. Proposals for
legislation that could substantially intensify the regulation of the financial
services industry are expected to be introduced in the U.S. Congress and in
state legislatures. The agencies regulating the financial services industry also
frequently adopt changes to their regulations. Substantial regulatory and
legislative initiatives, including a comprehensive overhaul of the regulatory
system in the U.S., are possible in the months or years ahead. Any such action
could have a materially adverse effect on our business, financial condition and
results of operations.
Recent
months have seen an unprecedented number of government initiatives designed to
respond to the stresses experienced in financial markets.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, the Emergency Economic Stabilization Act of 2008 ("EESA") was
signed into law on October 3, 2008. Pursuant to EESA, the U.S. Treasury was
given the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. Pursuant to EESA, the U.S. Treasury
established the Troubled Asset Relief Program ("TARP") and has since injected
capital into many financial institutions under the TARP Capital Purchase Program
("TARP CPP"). The Company thoroughly examined the Capital Purchase Program of
the Treasury's Troubled Assets Relief Program (the "TARP Capital Program"),
under which the Federal government injects capital into financial institutions
through the purchase of preferred stock and warrants, however, due to the Order,
is unable to participate in the TARP Capital Program.
On
February 10, 2009, the U.S. Treasury announced the Financial Stability Plan
("FSP"), which, among other things, proposes to establish a new Capital
Assistance Program ("CAP") through which eligible banking institutions will have
access to U.S. Treasury capital as a bridge to private capital until market
conditions normalize, and extends the TLGP to October 31, 2009. As a
complement to CAP, a new Public-Private Investment Fund on an initial scale of
up to $500 billion, with the potential to expand up to $1 trillion, was
announced to catalyze the removal of legacy assets from the balance sheets of
financial institutions. This proposed fund will combine public and private
capital with government financing to help free up capital to support new
lending. In addition, the existing Term Asset-Backed Securities Lending Facility
("TALF") would be expanded (up to $1 trillion) in order to reduce credit spreads
and restart the securitized credit markets that in recent years supported a
substantial portion of lending to households, students, small businesses, and
others. Furthermore, the FSP proposes a new framework of governance and
oversight to help ensure that banks receiving funds are held responsible for
appropriate use of those funds through stronger conditions on lending, dividends
and executive compensation along with enhanced reporting to the public. As of
the date of this report, we have not determined to seek to participate. However,
we will continue to monitor emerging government programs to evaluate whether
such programs would be applicable to, and beneficial to, us.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009
("ARRA") was signed into law. AARA is intended to provide tax breaks for
individuals and businesses, direct aid to distressed states and individuals, and
infrastructure spending. In addition, ARRA imposes new executive compensation
and expenditure limits on all previous and future TARP CPP recipients and
expands the class of employees to whom the limits and restrictions apply. ARRA
also provides the opportunity for additional repayment flexibility for existing
TARP CPP recipients. Among other things, ARRA prohibits the payment of bonuses,
other incentive compensation and severance to certain highly paid employees
(except in the form of restricted stock subject to specified limitations and
conditions), and requires each TARP CPP recipient to comply with certain other
executive compensation related requirements. These provisions modify the
executive compensation provisions that were included in EESA, and in most
instances apply retroactively for so long as any obligation arising from
financial assistance provided to the recipient under TARP remains outstanding.
To the extent that the executive compensation provisions in ARRA are more
restrictive than the restrictions described in the Treasury's
executive compensation guidelines already issued under EESA, the new ARRA
guidelines appear to supersede those restrictions. However, both ARRA and the
existing Treasury guidelines contemplate that the Secretary of the Treasury will
adopt standards to provide additional guidance regarding how the executive
compensation restrictions under ARRA and EESA will be applied. Because, as of
the date of this report, the Company is not a TARP CPP recipient, such
provisions are not currently applicable to the Company.
In
addition, ARRA directs the Secretary of the Treasury to review previously-paid
bonuses, retention awards and other compensation paid to the senior executive
officers and certain other highly-compensated employees of each TARP CPP
recipient to determine whether any such payments were excessive, inconsistent
with the purposes of ARRA or the TARP, or otherwise contrary to the public
interest. If the Secretary determines that any such payments have been made by a
TARP CPP recipient, the Secretary will seek to negotiate with the TARP CPP
recipient and the subject employee for appropriate reimbursements to the U.S.
government (not the TARP CPP recipient) with respect to any such compensation or
bonuses. ARRA also permits the Secretary, subject to consultation with the
appropriate federal banking agency, to allow a TARP CPP recipient to repay any
assistance previously provided to such TARP CPP recipient under the TARP,
without regard to whether the TARP CPP recipient has replaced such funds from
any source, and without regard to any waiting period. Any TARP CPP recipient
that repays its TARP assistance pursuant to this provision would no longer be
subject to the executive compensation provisions under ARRA. Because, as of the
date of this report, the Company is not a TARP CPP recipient, such provisions
are not currently applicable to us.
On
February 18, 2009, the U.S. Treasury announced the Homeowner Affordability
and Stability Plan ("HASP"), which proposes to provide refinancing for certain
homeowners, to support low mortgage rates by strengthening confidence in Fannie
Mae and Freddie Mac, and to establish a Homeowner Stability Initiative to reach
at-risk homeowners. Among other things, the Homeowner Stability Initiative would
offer monetary incentive to mortgage servicers and mortgage holders for certain
modifications of at-risk loans, and would establish an insurance fund designed
to reduce foreclosures.
It is not
clear at this time what impact EESA, the CPP, the TLGP, the FSP, AARA, HASP, or
other liquidity and funding initiatives will have on the financial markets and
the other difficulties described above, including the high levels of volatility
and limited credit availability currently being experienced, or on the U.S.
banking and financial industries and the broader U.S. and global economies.
Failure of these programs to address the issues noted above could have an
adverse effect on the Company and its business.
Future Legislation.
Additional 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, 2008, we had 196 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 18
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.
Risks
Relating to Our Industry
Recent
negative developments in the financial institutions industry and credit markets,
as well as the economy in general, may continue to adversely affect our
financial condition and results of operations.
The
recent negative events in the housing market, including significant and
continuing home price reductions coupled with the upward trends in delinquencies
and foreclosures, have resulted and will likely continue to result in poor
performance of mortgage and construction loans and in significant asset
write-downs by many financial institutions. This has caused and will likely
continue to cause many financial institutions to seek additional capital, to
merge with larger and stronger institutions and, in some cases, to seek
government assistance or bankruptcy protection. Bank failures and
liquidations or sales by the FDIC as receiver have also increased.
Reduced
availability of commercial credit and increasing unemployment have further
contributed to deteriorating credit performance of commercial and consumer
loans, resulting in additional write-downs. Financial market and economic
instability has caused many lenders and institutional investors to severely
restrict their lending to customers and to each other. This market turmoil
and credit tightening has exacerbated commercial and consumer deficiencies, the
lack of consumer confidence, market volatility and widespread reduction in
general business activity. Financial institutions also have experienced
decreased access to deposits and borrowings.
It is
difficult to predict how long these economic conditions will exist, which of our
markets and loan products will ultimately be most affected, and whether our
actions will effectively mitigate these external factors. The current economic
pressure on consumers and businesses and the lack of confidence in the financial
markets has adversely affected and may continue to adversely affect our
business, financial condition, results of operations and stock price. We do not
believe these conditions are likely to improve in the near future. As a
result of the challenges presented by these conditions, we face the following
risks:
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The
number of our borrowers unable to make timely repayments of their loans,
and/or decreases in the value of real estate collateral securing the
payment of such loans could continue to rise, resulting in additional
credit losses, which could have a material adverse effect on our operating
results.
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Potentially
increased regulation of our industry, including heightened legal standards
and regulatory requirements, as well as expectations imposed in connection
with recent and proposed legislation. Compliance with such
additional regulation will likely increase our operating costs and may
limit our ability to pursue business
opportunities.
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The
process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic conditions might impair the
ability of our borrowers to repay their loans. The level of uncertainty
concerning economic conditions may adversely affect the accuracy of our
estimates which may, in turn, impact the reliability of the
process.
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Further
disruptions in the capital markets or other events, which may result in an
inability to borrow on favorable terms or at all from other financial
institutions.
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Further
increases in FDIC insurance premiums, due to the increasing number of
failed institutions, which have significantly depleted the Deposit
Insurance Fund of the FDIC and reduced the ratio of reserves to insured
deposits. Our current risk profile will also cause us to pay
higher deposit insurance premiums.
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Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
The
recently enacted Emergency Economic Stabilization Act of 2008 (the “EESA”)
authorizes the United States Department of the Treasury (the “Treasury”) to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies, under a troubled asset relief program,
or “TARP.” The purpose of TARP is to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other. The EESA also increased
federal deposit insurance on most deposit accounts from $100,000 to
$250,000. This increase is in place until the end of
2009.
The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, the Treasury, the FDIC and
others to address the current liquidity and credit crisis that has followed the
sub-prime meltdown that commenced in 2007. These measures include
homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate; a
temporary guaranty program for money market funds; the establishment of a
commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address illiquidity and
other weaknesses in the banking sector. Treasury also recently announced its
Financial Stability Plan, to attack the current credit crisis, and its Homeowner
Affordability and Stability Plan, which seeks to help up to nine million
families restructure or refinance their mortgages to avoid
foreclosure. In addition, on February 17, 2009, President Obama
signed into law the American Recovery and Reinvestment Act. The
purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system, improve the flow of credit and foster an economic
recovery. The regulatory and legislative initiatives described above
may not have their desired effects, however. If the volatility in the
markets continues and economic conditions fail to improve or worsen, our
business, financial condition and results of operations could be materially and
adversely affected.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced
downward pressure on financial institution stock prices and credit availability
for certain issuers without regard to those issuers' underlying financial
strength. If current levels of market disruption and volatility continue or
worsen, there can be no assurance that we will not experience an adverse effect,
which may be material, on our ability to access capital in the future and on our
business, financial condition and results of operations.
The
actions and commercial soundness of other financial institutions could affect
our ability to engage in routine funding transactions.
Financial
service institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to different industries
and counterparties because we execute transactions with various counterparties
in the financial industry, including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other institutional clients.
Recent defaults by financial services institutions, and even rumors or questions
about one or more financial services institutions or the financial services
industry in general, have led to market wide liquidity problems and could lead
to losses or defaults by us or by other institutions. Many of these transactions
expose us to credit risk in the event of default of counterparty. Any such
losses could materially and adversely affect our results of
operations.
Risks
Relating to ICB and the Bank
Our
independent registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern.
Our
independent registered public accounting firm in their audit report for fiscal
year 2008 has expressed substantial doubt about our ability to continue as a
going concern. Continued operations may depend on our ability to comply with the
terms of the Order (discussed below) and the financing or other capital required
to do so may not be available or may not be available on acceptable
terms. Our audited financial statements were prepared under the
assumption that we will continue our operations on a going concern basis, which
contemplates the realization of assets and the discharge of liabilities in the
normal course of business. Our financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern. If we cannot continue as a going concern, our shareholders will lose
some or all of their investment in the Company.
Certain
regulatory actions were recently taken against us.
On
February 17, 2009, the Bank entered into a stipulation and consent to the
issuance of a February 17, 2009 order to cease and desist (the “Order”) by
the FDIC and the DFI. Under the terms of the Order, a formal
corrective action, the Bank has agreed to take certain measures in the areas of
management, capital, loan loss allowance determination, risk management,
liquidity management, board oversight and monitoring of compliance, and
restricts payment of dividends and the opening of branch or other Bank offices.
Specifically, the Order requires that the Bank submit to the regulators within
60 days a detailed capital plan to address how the Bank will remain “adequately
capitalized” and within 180 days increase its Tier 1 leverage ratio above 9% and
total risk-based capital ratio above 13%. The Bank must also submit
to the regulators a revised policy for determining the allowance for loan
losses, plans for reducing commercial real estate loan concentrations and
brokered deposits, a liquidity plan, strategic business plan and profitability
plan. The Order specifies certain timeframes for meeting these requirements, and
the Bank must furnish periodic progress reports to the FDIC and DFI regarding
its compliance with the order.
In
addition, the FRB San Francisco has notified ICB that it may not appoint any new
director or senior executive officer or change the responsibilities of any
current senior executive officers without notifying the FRB San
Francisco. Further, ICB may not make indemnification and severance
payments without complying with certain statutory restrictions, including prior
written approval of the Federal Reserve Board and concurrence from the
FDIC. ICB is also generally prohibited from receiving dividends from
the Bank, making any dividend payments to shareholders or distributions on its
trust preferred securities), and increasing or renewing any debt, without
receiving the prior approval from the FRB San Francisco.
Our
failure to comply with the Order or FRB San Francisco notification may
result in additional regulatory action, including the assessment of civil money
penalties against the Bank and its officers and directors or enforcement of the
Order through court proceedings.
We
may be required to raise additional capital, but that capital may not be
available and without additional capital other courses such as selling assets,
looking for merger partners may need to be pursued.
As noted
above, under the terms of the Order, the Bank is required to develop and adopt a
plan to address how it will remain “adequately capitalized” and within 180 days
increase its Tier 1 leverage ratio above 9% and total risk-based capital ratio
above 13%. Our ability to comply with the Order is contingent on
current and future economic conditions and on our financial performance which
may ultimately require us to seek additional capital. Capital market
conditions are currently unfavorable, and we do not anticipate any material
improvement in these markets in the near term. Accordingly, we cannot be certain
of our ability to raise additional capital on any terms. If we cannot raise
additional capital and/or continue to down-size operations or complete a
strategic merger or sale, we may not be able to sustain further deterioration in
our financial condition and other regulatory actions may be taken against
us.
Our
ability to pay cash dividends is restricted by law, by our regulators and by
contractual arrangements, and if the Bank is unable to pay ICB cash dividends to
meet its cash obligations, our business, financial condition, results of
operations and prospects will be adversely affected.
Dividends
paid by the Bank to ICB provide cash flow used to service the interest payments
on our trust preferred securities. Due to the Order, the Bank may not pay
dividends to ICB without FDIC, DFI and Federal Reserve prior approval, and we
are unable to pay distributions (interest payments) on our trust preferred
securities without prior Federal Reserve approval. We deferred payment on the
trust preferred securities for the first time during the first quarter of 2009
and do not anticipate resuming those payments in the near term. If we
are unable to resume payments on the trust preferred securities after five
years, we will be in default under those securities, which would give the
holders of those securities the right to demand payment of the liquidation
(principal) amount in full. The aggregate liquidation (principal)
amount of our currently outstanding trust preferred securities is $86.6
million. The acceleration of this amount would likely have a material
adverse affect on our financial condition.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business, as we must maintain sufficient funds to respond to
the needs of depositors and borrowers. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities could be impaired by
factors that affect the financial services industry in general or us
specifically, such as a decline in the level of our business activity due to a
market downturn or adverse action taken against us by our regulators or our
lenders. In this regard, the cease and desist order recently imposed
against us by the FDIC and DFI require us to develop a plan to eliminate our
reliance on brokered deposits, and our credit facility with the Federal Home
Loan Bank of San Francisco was temporarily suspended until further notice, which
currently prohibits us from receiving any additional Federal Home Loan Bank
advances. These developments may require us to seek more expensive
funding sources to support our operations, which would adversely affect our
results of operations.
Other-than-temporary
impairment charges in our held-to-maturity investment securities portfolio could
result in significant losses and cause the Company and the Bank to become
significantly undercapitalized and adversely affect our continuing
operations.
At
December 31, 2008, we maintained an $817.0 million portfolio of corporate
sponsored collateralized mortgage obligations (“CMOs”) that are classified as
held-to-maturity. These CMOs are secured by Alt A first lien
residential mortgage loans geographically dispersed across the United
States. At December 31, 2008 the fair value of these securities was
$591.5 million. Under U.S. generally accepted accounting principles,
when a security is deemed to be OTTI, it must be written down to its fair value
as a charge against net income. As of December 31, 2008, no OTTI
charges have been recorded on this portfolio.
We
closely monitor these and our other investment securities for changes in credit
risk, and intend to hold these CMOs until the market value recovers or they
mature. The valuation of these securities will also continue to be
influenced by external market and other factors, including implementation of
Securities and Exchange Commission and Financial Accounting Standards Board
guidance on fair value accounting, and default rates of specific CMOs,
rating agency actions, and the prices at which observable market transactions
occur. The current market environment significantly limits our
ability to mitigate our exposure to valuation changes in these securities by
selling them. Accordingly, if market conditions deteriorate further
and we determine our holdings of these or other investment securities are OTTI,
our future earnings, shareholders' equity, regulatory capital and continuing
operations could be materially adversely affected.
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. Given our current volume and mix of interest-bearing
assets and liabilities, our interest rate spread can be expected to increase
when market interest rates are rising, and to decline when market interest rates
are declining. While an increase in interest rates generally should positively
affect our net interest margin, it may also cause borrowers with variable loan
rates to have difficulty paying their loans and this may have the affect of
lowering our loan volume and profits. Changes in the level of
interest rates also may negatively affect our ability to originate loans, the
value and performance of our assets and our ability to realize gains from the
sale of our assets, all of which ultimately affect our earnings.
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:
• the
risk characteristics of various classifications of loans;
• general
portfolio trends relative to asset and portfolio size;
• potential
credit and geographic concentrations;
• delinquency
trends and nonaccrual levels;
• historical
loss and recovery experience and risks associated with changes in economic,
social and business conditions;
• the
amount and quality of the collateral;
• the
views of our regulators; and
• the
underwriting standards in effect when the loan is made.
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.
We
may suffer losses in our loan portfolio despite our underwriting
practices.
We seek
to mitigate the risks inherent in our loan portfolio by adhering to specific
underwriting practices. Although we believe that our underwriting
criteria are appropriate for the various kinds of loans we make, we may incur
losses on loans that meet our underwriting criteria, and these losses may exceed
the amounts set aside as reserves in our allowance for loan losses.
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 39.5% of our
real estate loans as of December 31, 2008 secured by collateral and made to
borrowers in that state. In addition, as of that date, approximately
5.4%, 4.6%, 5.5%, 3.3% and 13.3% of our real estate loans were secured by
collateral and made to borrowers in the States of Arizona, Florida, New York,
Ohio 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.
Our
provisions for loan losses increased substantially during the past year, and we
may be required to make further increases in our provisions for loan losses and
to charge off additional loans in the future.
Our
provision for loan losses was $78.0 million for the year ended December 31,
2008, compared to $11.1 million for the prior year. The increase in
the provision for loan losses was primarily due to the net increase in
non-performing loans, from $38.0 million at December 31, 2007 to $154.9 million
at December 31, 2008. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—2008 Compared to
2007-Provision for Loan Losses.” Primarily as a result of the
increased loan loss provision, we incurred a net loss for 2008 of $32.6 million,
compared to net income of $15.6 million in 2007. If the current
adverse trends in real estate markets and the economy continue, we expect we
will continue to experience elevated levels of non-performing loans and credit
losses. As a result, we may be required to make further increases in
our provision for loan losses and to charge off additional loans in the future,
which could adversely affect our results of operations.
The
level of our commercial real estate loan portfolio may subject us to additional
regulatory scrutiny.
The FDIC,
the Federal Reserve, the Office of Thrift Supervision and the Office of the
Comptroller of the Currency, have promulgated joint guidance on sound risk
management practices for financial institutions with concentrations in
commercial real estate lending. Under the guidance, a financial
institution that, like us, is actively involved in commercial real estate
lending should perform a risk assessment to identify concentrations. A financial
institution may have a concentration in commercial real estate lending if, among
other factors, (i) total reported loans for construction, land
acquisition and development, and other land represent 100% or more of total
capital or (ii) total reported loans secured by multi-family and non-farm
residential properties, loans for construction, land acquisition and development
and other land and loans otherwise sensitive to the general commercial real
estate market, including loans to commercial real estate related
entities, represent 300% or more of total capital. In addition, the guidance
requires in this event that management employ heightened risk management
practices including board and management oversight and strategic planning,
development of underwriting standards, risk assessment and monitoring through
market analysis and stress testing. We have concluded that we have a
concentration in commercial real estate lending under the foregoing
standards. The
Order requires us to develop a plan to reduce our commercial real estate loan
concentration.
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, 2008, we had $2.3 billion of loans secured by commercial and
multi-family real estate, representing 84.5% of our total real estate loans and
82.7% 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:
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changes
or continued weakness in general or local economic
conditions;
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changes
or continued weakness in specific industry
segments;
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declines
in real estate values;
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declines
in rental, room or occupancy rates in hotels, apartment complexes or
commercial properties;
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increases
in other operating expenses (including energy
costs);
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the
availability of refinancing at lower interest rates or better loan
terms;
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changes
in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental legislation and
taxation;
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increases
in interest rates, real estate and personal property tax rates,
and
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other
factors beyond the control of the borrower or the
lender.
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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, 2008,
$1.6 billion, or 60.5%, 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.
Although
we are not originating new construction loans, we historically originated
construction loans for income producing properties, as well as for single family
home construction. At December 31, 2008, construction and land loans
totaled $408.6 million, or 14.7% of loans receivable. Residential,
including condominium, construction loans consisted of $208.5 million, or 7.5%
of our total loan portfolio at December 31, 2008. 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.
Any
breach of representations and warranties made by us to our loan purchasers or
credit default on our loan sales may require use to repurchase or substitute
such loans we have sold.
We engage
in loan sales pursuant to agreements that generally require us to repurchase or
substitute loans in the event of a breach of a representation or warranty made
by us to the loan purchaser. Any misrepresentation during the
mortgage loan origination process or, in some cases, upon any fraud or first
payment default on such mortgage loans, may require us to repurchase or
substitute loans. Any claims asserted against us in the future by one of our
loan purchasers may result in liabilities or legal expenses that could have a
material adverse effect on our results of operations and financial
condition.
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.
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. In addition, we may not have
adequate remedies against the prior owner or other responsible parties or could
find it difficult or impossible to sell the affected properties, which could
also materially adversely affect our business, financial condition and results
of operations.
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.
A
natural disaster could harm our business.
Historically,
California has been susceptible to natural disasters, such as earthquakes,
floods and wildfires. These natural disasters could harm our operations through
interference with communications, including the interruption or loss of our
computer systems, which could prevent or impede us from gathering deposits,
originating loans and processing and controlling the flow of business, as well
as through the destruction of facilities and our operational, financial and
management information systems. Additionally, natural disasters could negatively
impact the values of collateral securing our loans and interrupt our borrowers’
abilities to conduct their businesses in a manner to support their debt
obligations, either of which could result in losses and increased provisions for
credit losses.
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. These and other restrictions limit the manner in which we
may conduct our business and obtain financing.
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. We also face increased competition from large investment
banks converting to bank holding companies.
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.
Changes
in accounting standards may affect our performance.
Our
accounting policies and methods are fundamental to how we record and report our
financial condition and results of operations. From time to time
there are changes in the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can
be difficult to predict and can materially impact how we report and record our
financial condition and results of operations. In some cases, we
could be required to apply a new or revised standard retroactively, resulting in
restating prior period financial statements.
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.
Our
business, financial condition and results of operations may be adversely
affected if we are unable to insure against or control our operations
risks.
We are
subject to various operations risks, including, but not limited to, data
processing system failures and errors, communications and information systems
failures, errors and breaches, customer or employee fraud, and catastrophic
failures resulting from terrorist acts or natural disasters. Should an event
occur that is not prevented or detected by our internal controls, or is
uninsured or in excess of applicable insurance limits, it could damage our
reputation, result in a loss of customer business, cause additional regulatory
scrutiny, and expose us to litigation risks and possible financial liability,
any of which could adversely affect our business, financial condition and
results of operations.
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.
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.
Risks
Relating to Our Common Stock
The
price of our common stock may fluctuate significantly, and this may make it
difficult for you to resell the common stock when you want or at prices you find
attractive.
We cannot
predict how the shares of our common stock will trade in the future. The market
price of our common stock will likely continue to fluctuate in response to a
number of factors, including the following, most of which are beyond our
control, as well as the other factors described in this “Risk Factors”
section:
|
•
|
actual
or anticipated quarterly fluctuations in our operating and financial
results;
|
|
•
|
developments
related to investigations, proceedings or litigation that involve
us;
|
|
•
|
actions
of our current shareholders, including sales of common stock by existing
shareholders and our directors and executive
officers;
|
|
•
|
fluctuations
in the stock prices and operating results of our
competitors;
|
|
•
|
regulatory
developments, whether affecting the industry in general or us in
particular; and
|
|
•
|
other
developments related to the financial services
industry.
|
Our
common stock was recently de-listed from the New York Stock Exchange (the
“NYSE”) because we fell below the NYSE’s continued listing standard regarding
average global market capitalization over a consecutive 30 trading-day period of
not less than $25,000,000, which is viewed as a minimum continued listing
threshold. Our common stock now trades over-the-counter in the “Pink
Sheets.” It is unknown whether our shares will ever again qualify for
listing on a national securities exchange. Unless and until this
occurs, a broadly followed, established trading market for our common stock will
be difficult to maintain. Furthermore, we cannot assure you that at
least one company will continue to make a market in our common
stock. This reduced trading market for our common stock may lower the
market value of the common stock and make it difficult to buy or sell our shares
on short notice. The limited trading market could also result in a
wider spread between the bid and ask price for the stock, meaning the highest
price being offered for shares for sale at any particular time may be further
from the lowest price being offered by buyers for the stock at the moment than
if the stock were more actively traded (the difference between the bid and ask
price being the “spread” for the stock). This could make it more
difficult to sell a large number of shares at one time and could mean the sale
of a large number of shares at one time could depress the market
price.
There
may be future sales of additional common stock or other dilution of our equity,
which may adversely affect the market price of our common stock.
The Order
requires us to increase our capital levels which may involve the sale of our
securities. We are not restricted from issuing additional common
stock, including any preferred or debt securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock or any
substantially similar securities. As a result of any such issuance,
our shareholders may experience dilution of their ownership interests, and the
newly issued securities could have rights superior to those of our common
stock. This could in turn result in a decline in the market price of
our common stock.
Anti-takeover
provisions could negatively impact our shareholders.
Provisions
in our certificate of incorporation and bylaws, the corporate law of the State
of Delaware and federal regulations could delay or prevent a third party from
acquiring us, despite the possible benefit to our shareholders, or otherwise
adversely affect the market price of our common stock. These
provisions include: a prohibition on voting shares of common stock beneficially
owned in excess of 10% of total shares outstanding, supermajority voting
requirements for certain business combinations with any person who beneficially
owns 10% or more of our outstanding common stock; the election of directors to
staggered terms of three years; advance notice requirements for nominations for
election to our Board of Directors and for proposing matters that shareholders
may act on at shareholder meetings, a requirement that only directors may fill a
vacancy in our Board of Directors and supermajority voting requirements to
remove any of our directors. Our certificate of incorporation also
authorizes our Board of Directors to issue and set the voting and other terms of
preferred stock without shareholder approval, and preferred stock could
therefore be issued as a defensive measure in response to a takeover
proposal. In addition, because we are a bank holding company,
purchasers of 10% or more of our common stock may be required to obtain
approvals under the Change in Bank Control Act of 1978, as amended, or the Bank
Holding Company Act of 1956, as amended (and in certain cases such approvals may
be required at a lesser percentage of ownership). Specifically, under
regulations adopted by the Federal Reserve, (a) any other bank holding company
may be required to obtain the approval of the Federal Reserve to acquire or
retain 5% or more of our common stock and (b) any person other than a bank
holding company may be required to obtain the approval of the Federal Reserve to
acquire or retain 10% or more of our common stock.
These
provisions may discourage potential takeover attempts, discourage bids for our
common stock at a premium over market price or adversely affect the market price
of, and the voting and other rights of the holders of, our common
stock. These provisions could also discourage proxy contests and make
it more difficult for holders of our common stock to elect directors other than
the candidates nominated by our Board of Directors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The
following sets forth our material facilities as of December 31,
2008.
|
Locations
|
Office
Uses
|
Square
Footage
|
Year
Current Lease Term
Expires
|
|
La
Jolla, CA
|
Corporate
Headquarters
|
21,903
|
2013
|
|
Glendale,
CA
|
Loan
Operations Division/Loan Administration/Asset Management/Operations
Support
|
39,188
|
2012
|
|
New
York, NY
|
East
Coast Corporate Headquarters
|
3,810
|
2009
|
|
Glendale,
CA
|
ICB
Entertainment Finance
|
1,795
|
2012
|
|
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
|
3,990
|
2011
|
|
San
Diego, CA
|
Bank
Branch
|
3,046
|
2011
|
|
Beverly
Hills, CA
|
Bank
Branch
|
2,218
|
2010
|
|
Carson
City, NV
|
Bank
Branch
|
3,000
|
2009
|
|
Baltimore,
MD
|
Bank
Branch
|
3,467
|
2013
|
|
Las
Vegas, NV
|
Bank
Branch
|
5,400
|
2014
|
|
Red
Bank, NJ
|
Loan
Origination Office
|
1,800
|
2009
|
|
Houston,
TX
|
Loan
Origination Office
|
3,420
|
2011
|
For
additional information regarding our premises, see “Item 8. Financial Statements
and Supplementary Data — Notes to Consolidated Financial Statements - Note
6”.
In
February 2009, we closed our offices in Red Bank, NJ and Houston, TX, in
connection with a reduction in our workforce.
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, 2008.
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
On
December 29, 2008, the trading of our shares on the New York Stock Exchange
(“NYSE”) was suspended due to our failure to meet the NYSE’s minimum global
market capitalization thresholds. Our shares are currently trading on
the Pink Sheets under the symbol “IMPC”. Prior to the NYSE’s
suspension of our common stock trading, our shares traded on the NYSE under the
symbol “IMP”. As of March 3, 2009, there were 76 holders of record of
ICB’s common stock representing an estimated 1,268 beneficial shareholders with
a total of 5,428,760 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
|
|||||||||||||
|
2008
4th
Quarter
|
$ | 10.50 | $ | 1.94 | $ | 2.25 | $ | 3.92 | ||||||||
|
3rd
Quarter
|
11.65 | 2.75 | 8.61 | 8.21 | ||||||||||||
|
2nd
Quarter
|
23.92 | 5.73 | 5.73 | 12.88 | ||||||||||||
|
1st
Quarter
|
27.87 | 13.68 | 21.62 | 20.88 | ||||||||||||
|
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 | ||||||||||||
|
Cash
dividends declared per share
|
2008
|
2007
|
||||||
|
1st
Quarter
|
$ | 0.16 | $ | 0.16 | ||||
|
2nd
Quarter
|
— | 0.16 | ||||||
|
3rd
Quarter
|
— | 0.16 | ||||||
|
4th
Quarter
|
— | 0.16 | ||||||
|
Total
|
$ | 0.16 | $ | 0.64 | ||||
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. Under the Order, however, the Bank
may not pay dividends to ICB without the approval of the FDIC and the
DFI. See “Item 1. Business—Regulatory Action.”
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.
The
Company, as a result of the notification it received recently from the FRB San
Francisco, is currently prohibited from making any dividend payments, including
distributions on its trust preferred securities, without the approval of the FRB
San Francisco. As a result, the Company is currently deferring the
payment of interest on its junior subordinated debentures and distributions on
the corresponding trust preferred securities are also being
deferred. See “Item 1. Business—Regulatory Action” and Note 16 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, 2008.
|
Period
|
Total
Number of Shares Purchased (1)
|
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
(2)
|
||||||||||||
|
October
1, 2008 to October
31, 2008
|
— | $ | — | — | 110,486 | |||||||||||
|
November
1, 2008 to November
30, 2008
|
48 | 3.50 | — | 110,486 | ||||||||||||
|
December
1, 2008 to December
31, 2008
|
— | — | — | 110,486 | ||||||||||||
|
Total
|
48 | $ | 3.50 | — | 110,486 | |||||||||||
_______________
|
(1)
|
Shares
purchased during the quarter ended December 31, 2008, represent open
market purchases by the Company’s rabbi trust in connection with our
Nonqualified Deferred Compensation
Plan.
|
|
(2)
|
There
were no repurchases under the twelfth extension of our stock repurchase
program during the three months ended December 31, 2008. 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, 2008, a total of 110,486
shares remained available for repurchase under this
extension.
|
The
Company is currently prohibited from repurchasing its stock without the approval
of the FRB San Francisco.
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,
2008. 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.
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
|||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
100.00 | 117.35 | 97.50 | 116.92 | 37.71 | 4.67 | ||||||||||||||||||
|
NYSE
Composite (1)
|
100.00 | 112.57 | 120.40 | 141.90 | 147.05 | 89.39 | ||||||||||||||||||
|
SNL
Bank Index
|
100.00 | 112.06 | 113.59 | 132.87 | 103.25 | 58.91 | ||||||||||||||||||
_______________
|
(1)
|
The
NYSE Composite Index has been used rather than a Pink Sheets related index
because we believe it is more relevant since we traded on the Pink Sheets
for only three trading days in
2008.
|
Item 6. Selected Financial Data
The
following condensed consolidated statements of operations and financial
condition and selected performance ratios as of December 31, 2008, 2007, 2006,
2005, and 2004 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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Condensed Consolidated
Statements of Operations
|
||||||||||||||||||||
|
Total
interest income
|
$ | 254,213 | $ | 251,271 | $ | 226,501 | $ | 178,158 | $ | 124,954 | ||||||||||
|
Total
interest expense
|
160,270 | 164,583 | 132,075 | 86,486 | 41,418 | |||||||||||||||
|
Net
interest income before provision for loan losses
|
93,943 | 86,688 | 94,426 | 91,672 | 83,536 | |||||||||||||||
|
Provision
for loan losses
|
77,965 | 11,077 | 5,000 | 10,250 | 4,725 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
15,978 | 75,611 | 89,426 | 81,422 | 78,811 | |||||||||||||||
|
Non-interest
(loss) income (1)
|
(10,250 | ) | 3,133 | 2,772 | 6,574 | 14,508 | ||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||||||
|
Compensation
and benefits
|
21,759 | 23,899 | 21,265 | 21,737 | 21,444 | |||||||||||||||
|
Occupancy
and equipment
|
7,558 | 7,832 | 7,439 | 7,177 | 5,924 | |||||||||||||||
|
Other
general and administrative expenses
|
21,730 | 19,633 | 17,743 | 17,344 | 14,666 | |||||||||||||||
|
Other
real estate and other assets owned expense, net
|
8,558 | 1,125 | 369 | 193 | 712 | |||||||||||||||
|
Total
non-interest expense
|
59,605 | 52,489 | 46,816 | 46,451 | 42,746 | |||||||||||||||
|
(Loss)
income before (benefit) provision for income taxes
|
(53,877 | ) | 26,255 | 45,382 | 41,545 | 50,573 | ||||||||||||||
|
(Benefit)
provision for income taxes
|
(21,281 | ) | 10,635 | 18,493 | 17,482 | 19,948 | ||||||||||||||
|
NET
(LOSS) INCOME
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | $ | 24,063 | $ | 30,625 | |||||||||
|
BASIC
(LOSSES) EARNINGS PER SHARE
|
$ | (6.01 | ) | $ | 2.85 | $ | 4.83 | $ | 4.19 | $ | 5.04 | |||||||||
|
DILUTED
(LOSSES) EARNINGS PER SHARE
|
$ | (6.01 | ) | $ | 2.81 | $ | 4.71 | $ | 4.04 | $ | 4.75 | |||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Condensed
Consolidated Statements of Financial Condition
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 403,119 | $ | 8,944 | $ | 30,448 | $ | 93,747 | $ | 87,580 | ||||||||||
|
Investment
securities available-for-sale, at fair value
|
146,799 | 117,924 | 99,527 | 92,563 | 66,845 | |||||||||||||||
|
Investment
securities held-to-maturity, at amortized cost
|
942,686 | 159,023 | 193,512 | 233,880 | 296,028 | |||||||||||||||
|
Stock
in Federal Home Loan Bank
|
63,498 | 53,497 | 48,984 | 43,802 | 23,200 | |||||||||||||||
|
Loans,
net
|
2,748,956 | 3,125,072 | 2,973,368 | 2,523,480 | 1,793,815 | |||||||||||||||
|
Interest
receivable
|
21,305 | 20,841 | 20,753 | 16,287 | 10,695 | |||||||||||||||
|
Other
real estate and other assets owned, net
|
38,031 | 19,396 | 6,729 | 3,960 | — | |||||||||||||||
|
Premises
and equipment, net
|
7,701 | 8,550 | 7,851 | 6,718 | 6,645 | |||||||||||||||
|
Deferred
income taxes
|
22,338 | 12,148 | 11,513 | 12,717 | 10,468 | |||||||||||||||
|
Goodwill
|
3,118 | 3,118 | 3,118 | 3,118 | 3,118 | |||||||||||||||
|
Other
assets
|
42,287 | 22,706 | 19,707 | 20,924 | 19,677 | |||||||||||||||
|
Total
Assets
|
$ | 4,439,838 | $ | 3,551,219 | $ | 3,415,510 | $ | 3,051,196 | $ | 2,318,071 | ||||||||||
|
Deposit
accounts
|
$ | 2,931,040 | $ | 2,181,858 | $ | 2,059,405 | $ | 1,735,428 | $ | 1,432,032 | ||||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,205,633 | 1,021,235 | 1,010,000 | 992,557 | 584,224 | |||||||||||||||
|
Account
payable and other liabilities
|
26,996 | 33,959 | 38,168 | 32,130 | 20,491 | |||||||||||||||
|
Junior
subordinated debentures
|
86,600 | 86,600 | 86,600 | 86,600 | 86,600 | |||||||||||||||
|
Shareholders’
equity
|
189,569 | 227,567 | 221,337 | 204,481 | 194,724 | |||||||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 4,439,838 | $ | 3,551,219 | $ | 3,415,510 | $ | 3,051,196 | $ | 2,318,071 | ||||||||||
|
Book
value per share
|
$ | 37.76 | $ | 44.22 | $ | 42.07 | $ | 37.85 | $ | 35.09 | ||||||||||
____________
|
(1)
|
For
2004, 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.
|
|
As
of and for the years ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Selected
Performance Ratios
|
||||||||||||||||||||
|
Return
on average assets
|
(0.83 | )% | 0.45 | % | 0.86 | % | 0.90 | % | 1.47 | % | ||||||||||
|
Return
on average shareholders’ equity
|
(14.35 | )% | 6.88 | % | 12.75 | % | 12.12 | % | 15.44 | % | ||||||||||
|
Net
interest margin (1)
|
2.42 | % | 2.51 | % | 3.06 | % | 3.43 | % | 4.12 | % | ||||||||||
|
Average
interest earning assets to average interest bearing
liabilities
|
106.44 | % | 107.74 | % | 108.21 | % | 109.32 | % | 127.50 | % | ||||||||||
|
Efficiency
ratio (2)
|
60.99 | % | 57.18 | % | 47.79 | % | 47.08 | % | 42.87 | % | ||||||||||
|
Total
general and administrative expense to average assets
|
1.30 | % | 1.47 | % | 1.49 | % | 1.73 | % | 2.02 | % | ||||||||||
|
Average
shareholders’ equity to average assets
|
5.78 | % | 6.52 | % | 6.78 | % | 7.39 | % | 9.51 | % | ||||||||||
|
Dividend
payout ratio (3)
|
(2.66 | )% | 22.78 | % | 12.74 | % | — | — | ||||||||||||
|
Nonperforming
assets to total assets
|
4.34 | % | 1.62 | % | 0.97 | % | 0.92 | % | 0.63 | % | ||||||||||
|
Allowance
for loan losses to loans held for investment, net (4)
|
1.81 | % | 1.51 | % | 1.53 | % | 1.71 | % | 1.94 | % | ||||||||||
|
Allowance
for loan loss to nonaccrual loans
|
32.66 | % | 125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | ||||||||||
|
Net
charge-offs to average loans held for investment, net
|
2.50 | % | 0.30 | % | 0.10 | % | 0.09 | % | 0.16 | % | ||||||||||
____________
|
(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 (loss) 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)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Interest
income
|
$ | 59,084 | $ | 63,367 | $ | 69,409 | $ | 62,353 | ||||||||
|
Interest
expense
|
39,006 | 38,594 | 40,512 | 42,158 | ||||||||||||
|
Net
interest income before provision for loan losses
|
20,078 | 24,773 | 28,897 | 20,195 | ||||||||||||
|
Provision
for loan losses
|
4,250 | 6,250 | 10,125 | 57,340 | ||||||||||||
|
Non-interest
income (loss)
|
268 | (1,149 | ) | (4,422 | ) | (4,947 | ) | |||||||||
|
General
and administrative expense
|
13,490 | 12,690 | 12,846 | 12,021 | ||||||||||||
|
Total
real estate and other assets owned expense, net
|
1,455 | 800 | 621 | 5,682 | ||||||||||||
|
Provision
(benefit) for income taxes
|
454 | 1,534 | 350 | (23,619 | ) | |||||||||||
|
Net
income (loss)
|
697 | 2,350 | 533 | (36,176 | ) | |||||||||||
|
Basic
earnings (losses) per share
|
$ | 0.13 | $ | 0.43 | $ | 0.10 | $ | (6.66 | ) | |||||||
|
Diluted
earnings (losses) per share
|
$ | 0.13 | $ | 0.43 | $ | 0.10 | $ | (6.66 | ) | |||||||
|
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 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 | ||||||||
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of
Operations
The
following discussion and analysis reviews our operating strategy and the
financial condition and results of our consolidated operations, including our
significant consolidated subsidiaries: Imperial Capital Bank and Imperial
Capital Real Estate Investment Trust. This information is intended to
facilitate the understanding and assessment of significant changes and trends
related to our financial condition and the results of our operations. This
discussion and analysis should be read in conjunction with our consolidated
financial statements and the accompanying notes presented elsewhere in this
report.
Operating
Strategy
Our
performance for the year ended December 31, 2008 was adversely affected by the
national economic slowdown and precipitous decline in housing prices and
illiquidity of the credit markets. These economic conditions affected
the banking industry, and contributed to significant deterioration in the credit
quality of our real estate loan portfolio, particularly our construction and
land development loan portfolio. Many of our construction borrowers, who rely on
the sales of homes to repay loans, are not able to find buyers. These borrowers,
in turn, have defaulted on loans, which has impaired our ability to recognize
interest and has resulted in significant provisions for loan losses. As a
result, we incurred a net loss of $32.6 million for the year ended December 31,
2008, received a going concern qualification in our audit report and the Bank
entered into the Order.
The
financial statements contained within this document have been prepared assuming
the Company is a going concern. We believe the Company has the
ability to meet its current obligations for the foreseeable future and we remain
focused on strengthening our liquidity position in order to support the
reduction of our wholesale funding sources. As of December 31, 2008,
we had in excess of $400 million of cash and cash equivalents, and remain
committed to increasing our liquidity positions through cash flows generated
from our retail deposit products and the anticipated principal amortization from
our loan and investment securities portfolios.
Despite
recording substantial charge-offs and a corresponding net loss for the first
time in the Company’s history as a publicly traded company, the charge-offs
incurred during the fourth quarter related primarily to the more speculative
components of our residential construction and land development portfolio, which
consists of land development loans and construction projects that were
substantially unfinished. The remaining loans within this portfolio
are not expected to have the same severity of loss exposure due to the markets
where the collateral is located and the fact that the majority of these
construction loans have finished product available for sale which will be a
source of repayment for these loans in the future. In addition, we
believe that the Company currently has sufficient projected revenue generation
capacity from its securities and loan portfolios to continue as a going
concern. Although our loss estimates are based on existing
information at the time of estimate, it is impossible to predict the effect that
future deterioration of economic conditions could have on the performance of our
loan portfolio and the losses that could occur.
In
response to these financial challenges and increased regulatory supervision, we
have taken and are continuing to take a number of tactical actions aimed at
preserving existing capital, reducing our lending exposures and associated
capital requirements and increasing liquidity. The tactical actions taken
include, but are not limited to the following: slowing loan originations,
growing retail deposits, reducing brokered deposits, seeking commercial loan
participation and sales arrangements with other lenders or private equity
sources, reducing personnel and other operating costs, and eliminating the
payment of dividends. Our goal is to return to profitability by reducing our
size, stabilizing our losses, managing our problematic assets and reducing
overall expenses. We are working on the following four primary objectives as a
basis for long-term success of our franchise:
|
•
|
Improve
Asset Quality. We have taken proactive steps to resolve
our non-performing loans, including negotiating repayment plans,
forbearances, loan modifications and loan extensions with our borrowers
when appropriate. We also have established a separate
department to monitor and attempt to reduce our exposure to a further
deterioration in asset quality. We have applied more
conservative underwriting practices to our new loans, including, among
other things, requiring more detailed credit information in certain
circumstances, increasing the amount of required collateral or equity
requirements and reducing loan-to-value
ratios.
|
|
•
|
Reduce
Asset Base and Improve Regulatory Capital Ratios. We
expect to reduce our asset base which should help reduce our risk profile
and improve capital ratios through reductions in the amount of outstanding
loans and securities through normal principal amortization, and a
corresponding reduction of
liabilities.
|
|
•
|
Continued
Expense Control. Beginning in 2008 and continuing into 2009,
management has undertaken several initiatives to reduce noninterest
expenses, and will continue to make it a priority to identify cost savings
opportunities throughout all phases of operations. Personnel reductions
have and will come primarily from the Bank’s lending operations, including
closing selected loan origination offices, as well as some reduction in
support areas of the Bank.
|
|
•
|
Reduce
Reliance on Wholesale Funding Sources. We will continue
to focus on our strategy of reducing our reliance on wholesale funding
sources, which includes Federal Home Loan Bank advances and brokered
certificates of deposits, while increasing core deposits and other retail
deposit products through our branch and on-line deposit
network. The FHLB of San Francisco suspended our borrowing
facility on March 13, 2009, and we are required under the Order to develop
a plan to eliminate our reliance on brokered certificates of
deposits. Retail deposits have increased approximately 22% to
$2.2 billion during the six months from July to December
2008. The funding obtained through this channel will continue
to be utilized to retire wholesale fundings at their
maturities.
|
We are
also evaluating various strategic options and are seeking the assistance of
investment banking services to evaluate and potentially pursue the prospects of
private equity investment or other capital raising alternatives. While we
continue to act upon both tactical and strategic alternatives to raise capital
and restructure our balance sheet, as has been widely publicized, access to
capital markets is extremely limited in the current economic environment, and we
can give no assurances that in the current financial environment our efforts
will be successful and will result in sufficient capital preservation or
infusion. Our ability to decrease our levels of non-performing assets is also
dependent upon market conditions as many of our borrowers rely on an active real
estate market as a source of repayment, particularly our construction loan
borrowers, and the sale of loans in this market is difficult. If the real estate
market does not improve, our level of non-performing assets may continue to
increase.
While
considerable risks to the Company’s future financial performance exist,
management believes that we can effectively respond to these risks and carry
on our operations, while we implement our business plan described above and
continue to evaluate available resources of capital. The accompanying
consolidated financial statements have been prepared on a going concern basis
and contemplate the realization of our assets and the discharge of our
liabilities in the normal course of business for the foreseeable
future.
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 and
investments accounted for under Statement of Position (SOP) 03-3 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 assets owned is generally determined
from appraisals obtained from independent appraisers.
Investments Accounted for Under SOP
03-3. Investment securities that are acquired at discounted amounts, in
part, due to credit quality concerns are accounted for under SOP 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a
Transfer”. At acquisition, management reviews each investment to
determine whether there is evidence of deterioration of credit quality since
origination and if it is probable that the Company will be unable to collect all
amounts due according to its contractual terms. If both conditions
exist, management determines whether the excess of the investment’s scheduled
contractual principal and contractual interest payments over all cash flows
expected at acquisition as an amount that should not be accreted. The remaining
amount—representing the excess of the investment’s cash flows expected to be
collected over the amount paid—is accreted into interest income over the
remaining life of the investment. Over the life of the investment,
management continues to estimate cash flows expected to be
collected. Management evaluates at the balance sheet date whether the
present value of its investment determined using the effective interest rates
has decreased and if so, recognizes a loss. For any increases in cash
flows expected to be collected, management adjusts the amount of accretable
yield recognized on a prospective basis over the investment’s remaining
life.
Adoption
and Pending Adoption of Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“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 was 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 was 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 was
effective for the Company on January 1, 2009 and did not have a significant
impact on the Company’s financial condition or results of
operations.
In March
2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No.133." SFAS
No. 161 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No. 133 to
provide greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
was effective for the Company on January 1, 2009 and did not have a significant
impact on the Company's financial condition or results of
operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS
No. 162 did not have a significant impact on the Company’s financial condition
or results of operation.
Executive
Summary
The
following discussion and analysis is intended to identify the major factors that
influenced our financial condition as of December 31, 2008 and 2007 and our
results of operations for the years ended December 31, 2008, 2007 and 2006. 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 loss in 2008 was $32.6 million, or $6.01 per diluted share, compared to net
income of $15.6 million, or $2.81 per diluted share in 2007 and $26.9 million,
or $4.71 per diluted share in 2006. Net interest income before
provision for loan losses increased 8.4% to $93.9 million for the year ended
December 31, 2008, compared to $86.7 million for the prior year. The
increase was primarily due to an increase in interest earned on our investment
securities held-to-maturity, as well as a decline in our average cost of funds,
as deposits have repriced to current market interest rates. During
the years ended December 31, 2008 and 2007, the average balance of our
investment securities held-to-maturity was $661.8 million and $176.4 million,
respectively. This increase was partially offset by a decline in
interest earned on our loan portfolio, caused by a decline in loan yields and a
decline in the average loans outstanding during 2008. The decline in
loan yields was primarily caused by adjustable rate loans repricing to lower
current market interest rates and an increase in the average balance of
non-performing loans. Net interest income was further impacted by an
increase in interest expense incurred on FHLB and other borrowings, which was
primarily caused by an increase in its average balance outstanding during 2008
as compared to 2007.
During
the current year, we recorded a provision for loan losses of $78.0 million
compared to $11.1 million for the same period last year. The increase
in the provision related primarily to the increase in our non-performing loans
during 2008. Non-performing loans as of December 31, 2008 were $154.9
million, compared to $38.0 million at December 31, 2007. The increase
in non-performing loans during the year was primarily related to non-performing
construction and land development loans, which increased from $8.8 million at
December 31, 2007 to $101.4 million at December 31, 2008. 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 construction and land loan
portfolio. Our construction and land loan portfolio at December 31,
2008 totaled $408.9 million, of which $238.2 million were residential and
condominium conversion construction loans and land development loans,
representing 8.5% of our total loan portfolio.
The net
loss for 2008 was further impacted by a $13.4 million variance in the
non-interest loss recorded during the current year compared to the prior
year. Non-interest loss was $10.3 million for the year ended December
31, 2008, compared to non-interest income of $3.1 million for
2007. The decline in non-interest income primarily related to $9.3
million other-than-temporary impairment charges recognized on our investment
securities available-for-sale during the current year. The net loss
was also impacted by a $7.1 million increase in non-interest expense during 2008
compared to 2007 primarily related to an increase in the provision for losses on
real estate and other assets owned.
Total
loan production, including the unfunded portion of loans, was $345.1 million for
the year ended December 31, 2008, as compared to $1.2 billion and $1.6 billion,
for the years ended December 31, 2007 and 2006, respectively. Loan
production in 2008 consisted of the origination of $155.8 million of commercial
real estate loans, $113.7 million of small balance multi-family real estate
loans and $75.6 million of entertainment finance loans. Loan
production for 2007 consisted 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. In addition, the Bank’s
wholesale loan operations acquired $47.3 million of commercial and multi-family
real estate loans during 2007. Loan originations during the current
year were impacted by a decline in customer demand as a result of uncertainty
regarding current real estate market conditions.
Our
average total assets increased approximately 12.8% during 2008 to $3.9
billion. Average cash and investment securities totaled $884.8
million in 2008 compared to $356.6 million in 2007, an increase of $528.2
million, or 148.1%. Average loans receivable totaled $3.0 billion in
2008 compared to $3.1 billion in 2007, a decrease of $96.0 million, or
3.1%. Average interest bearing deposit accounts totaled $2.4 billion
in 2008 compared to $2.1 billion in 2007, an increase of $278.5 million, or
13.2%. FHLB advances and other borrowings averaged $1.2 billion in
2008 compared to $1.0 billion in 2007, an increase of $166.7 million, or
16.5%.
The
allowance for loan losses as a percentage of our total loans was 1.8% and 1.5%
at December 31, 2008 and 2007, respectively. During the year ended
December 31, 2008, we had net charge-offs of $75.2 million, compared to $9.3
million during the prior year.
At
December 31, 2008, shareholders' equity totaled $189.6 million, or 4.3% of total
assets. During the year, we declared total dividends of $0.16 per
share, or approximately $868,000
in total, before our Board of Directors suspended cash dividends in March
2008. ICB’s book value per share of common stock was $37.76 as of
December 31, 2008, a decrease of 14.6% from $44.22 per share as of December 31,
2007.
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,
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
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
|
$ | 884,839 | $ | 58,825 | 6.65 | % | $ | 356,608 | $ | 17,522 | 4.91 | % | $ | 419,762 | $ | 19,181 | 4.57 | % | ||||||||||||||||||
|
Real
estate loans (1)
|
2,930,919 | 188,614 | 6.44 | % | 3,011,179 | 222,607 | 7.39 | % | 2,588,452 | 200,322 | 7.74 | % | ||||||||||||||||||||||||
|
Franchise
loans (1)
|
2,683 | 217 | 8.09 | % | 4,476 | 1,503 | 33.58 | % | 11,578 | 475 | 4.10 | % | ||||||||||||||||||||||||
|
Entertainment
finance loans (1)
|
61,906 | 5,907 | 9.54 | % | 73,947 | 8,587 | 11.61 | % | 59,262 | 5,620 | 9.48 | % | ||||||||||||||||||||||||
|
Commercial
and other loans (1)
|
9,098 | 650 | 7.14 | % | 11,053 | 1,052 | 9.52 | % | 8,962 | 903 | 10.08 | % | ||||||||||||||||||||||||
|
Total
loans receivable
|
3,004,606 | 195,388 | 6.50 | % | 3,100,655 | 233,749 | 7.54 | % | 2,668,254 | 207,320 | 7.77 | % | ||||||||||||||||||||||||
|
Total
interest earning assets
|
3,889,445 | $ | 254,213 | 6.54 | % | 3,457,263 | $ | 251,271 | 7.27 | % | 3,088,016 | $ | 226,501 | 7.33 | % | |||||||||||||||||||||
|
Non-interest
earning assets
|
89,281 | 70,491 | 70,936 | |||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(50,501 | ) | (45,265 | ) | (46,366 | ) | ||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 3,928,225 | $ | 3,482,489 | $ | 3,112,586 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing demand accounts
|
$ | 34,592 | $ | 1,086 | 3.14 | % | $ | 25,381 | $ | 922 | 3.63 | % | $ | 29,047 | $ | 836 | 2.88 | % | ||||||||||||||||||
|
Money
market and passbook accounts
|
304,481 | 11,400 | 3.74 | % | 238,231 | 11,779 | 4.94 | % | 207,962 | 9,379 | 4.51 | % | ||||||||||||||||||||||||
|
Time
certificates
|
2,050,297 | 88,999 | 4.34 | % | 1,847,220 | 97,410 | 5.27 | % | 1,603,210 | 74,941 | 4.67 | % | ||||||||||||||||||||||||
|
Total
interest bearing deposit accounts
|
2,389,370 | 101,485 | 4.25 | % | 2,110,832 | 110,111 | 5.22 | % | 1,840,219 | 85,156 | 4.63 | % | ||||||||||||||||||||||||
|
FHLB
advances and other borrowings
|
1,178,149 | 51,434 | 4.37 | % | 1,011,461 | 46,134 | 4.56 | % | 926,916 | 38,722 | 4.18 | % | ||||||||||||||||||||||||
|
Junior
subordinated debentures
|
86,600 | 7,351 | 8.49 | % | 86,600 | 8,338 | 9.63 | % | 86,600 | 8,197 | 9.47 | % | ||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
3,654,119 | $ | 160,270 | 4.39 | % | 3,208,893 | $ | 164,583 | 5.13 | % | 2,853,735 | $ | 132,075 | 4.63 | % | |||||||||||||||||||||
|
Non-interest
bearing demand accounts
|
9,456 | 10,657 | 12,738 | |||||||||||||||||||||||||||||||||
|
Other
non-interest bearing liabilities
|
37,527 | 35,988 | 35,173 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
227,123 | 226,951 | 210,940 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 3,928,225 | $ | 3,482,489 | $ | 3,112,586 | ||||||||||||||||||||||||||||||
|
Net
interest spread (2)
|
2.15 | % | 2.14 | % | 2.70 | % | ||||||||||||||||||||||||||||||
|
Net
interest income before provisions for loan losses
|
$ | 93,943 | $ | 86,688 | $ | 94,426 | ||||||||||||||||||||||||||||||
|
Net
interest margin (3)
|
2.42 | % | 2.51 | % | 3.06 | % | ||||||||||||||||||||||||||||||
_______________
|
(1)
|
Before
allowance for loan losses and net of deferred loan fees and costs. Net
loan fee accretion of $1.9 million, $2.4 million and $2.8 million was
included in net interest income for 2008, 2007 and 2006,
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, 2008, 2007 and 2006, our
ratio of average interest earning assets to average interest bearing liabilities
was 106.4%, 107.7% and 108.2%, 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.
|
2008
vs. 2007
|
2007
vs. 2006
|
|||||||||||||||||||||||
|
Increase
(Decrease) Due to:
|
Increase
(Decrease) Due to:
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Interest
and fees earned on:
|
||||||||||||||||||||||||
|
Loans,
net
|
$ | (7,035 | ) | $ | (31,326 | ) | $ | (38,361 | ) | $ | 32,725 | $ | (6,296 | ) | $ | 26,429 | ||||||||
|
Cash and investment
securities
|
33,329 | 7,974 | 41,303 | (3,020 | ) | 1,361 | (1,659 | ) | ||||||||||||||||
|
Total increase (decrease) in
interest income
|
26,294 | (23,352 | ) | 2,942 | 29,705 | (4,935 | ) | 24,770 | ||||||||||||||||
|
Interest
paid on:
|
||||||||||||||||||||||||
|
Deposit
accounts
|
13,423 | (22,049 | ) | (8,626 | ) | 13,370 | 11,585 | 24,955 | ||||||||||||||||
|
FHLB advances and other
borrowings
|
7,298 | (1,998 | ) | 5,300 | 3,712 | 3,700 | 7,412 | |||||||||||||||||
|
Junior subordinated
debentures
|
— | (987 | ) | (987 | ) | — | 141 | 141 | ||||||||||||||||
|
Total increase (decrease) in
interest expense
|
20,721 | (25,034 | ) | (4,313 | ) | 17,082 | 15,426 | 32,508 | ||||||||||||||||
|
Increase (decrease) in net
interest income
|
$ | 5,573 | $ | 1,682 | $ | 7,255 | $ | 12,623 | $ | (20,361 | ) | $ | (7,738 | ) | ||||||||||
2008 Compared to
2007
Net
Interest Income
Net
interest income before provision for loan losses increased to $93.9 million for
the year ended December 31, 2008, compared to $86.7 million for the prior year,
an increase of 8.4%. The increase was primarily due to an increase in interest
earned on our investment securities held-to-maturity, as well as a decrease in
our average cost of funds, as deposits have repriced to current market interest
rates. During the years ended December 31, 2008 and 2007, the average
balance of our investment securities held-to-maturity was $661.8 million and
$176.4 million, respectively. This increase was partially offset by a
decline in interest earned on our loan portfolio, caused by a decline in loan
yields and a decline in the average loans outstanding during
2008. The decline in loan yields was primarily caused by adjustable
rate loans repricing to lower current market interest rates and an increase in
the average balance of non-performing loans during 2008. Net interest
income was further impacted by an increase in interest expense incurred on FHLB
and other borrowings, which was primarily caused by an increase in its average
balance outstanding during 2008 as compared to 2007.
The
average yield on our total loan portfolio was 6.50% in 2008 compared to 7.54% in
2007. The average yield on our real estate loan portfolio was 6.44%
in 2008 compared to 7.39% in 2007. 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 50.8% of our loan portfolio was comprised of
adjustable rate loans at December 31, 2008, and approximately 41.2% 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, 2008, our hybrid
loans had a weighted average of 2.6 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, 2008, approximately $2.4 billion, or 86.3%, 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, 2008, the weighted average floor interest rate
of these loans was 6.82%. At that date, approximately $745.5 million,
or 26.5%, of these loans were at their floor interest rate. At
December 31, 2008, 48.5% 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 11.87% at that date. At December
31, 2008, none of the loans in our adjustable rate loan portfolio were at their
cap rate.
Interest
expense on interest bearing liabilities decreased $4.3 million, or 2.6%, to
$160.3 million in 2008 compared to $164.6 million in 2007. The decrease was
primarily due to a decline in interest expense on deposits, as deposits have
repriced to current market interest rates. The average rate paid on
deposits was 4.25% in 2008 compared to 5.22% in 2007. Interest
expense from deposit accounts decreased $8.6 million, or 7.8%, to $101.5 million
in 2008 compared to $110.1 million in 2007 despite an increase in the average
balance of interest bearing deposits during 2008. The average balance
of interest bearing deposits was $2.4 billion and $2.1 billion during 2008 and
2007, respectively.
Interest
expense on FHLB advances and other borrowings increased $5.3 million, or 11.5%,
to $51.4 million in 2008 compared to $46.1 million in 2007. This increase was
caused by additional borrowings during the year, which increased this average
balance by $166.7 million to $1.2 billion compared to $1.0 billion in 2007,
partially offset by a decline in the average rate paid as matured borrowings
were replaced with new borrowings at lower market interest rates. The
rate paid on FHLB advances and other borrowings was 4.37% in 2008 as compared to
4.56% in 2007. In March 2009, the FHLB San Francisco suspended our
FHLB borrowing facility. As a result, we cannot receive any
additional FHLB advances until we are notified that the suspension has been
lifted. Our inability to access additional FHLB advances may require
us to seek borrowings from other sources at higher rates.
Provision
for Loan Losses
The
provision for loan losses was $78.0 million for the year ended December 31,
2008, compared to $11.1 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 including specific reserves as of December 31, 2008
and 2007, respectively. The increase in provision for loan losses
during 2008 was primarily due to the net increase in our non-performing loans.
Non-performing loans as of December 31, 2008 were $154.9 million, compared to
$38.0 million at December 31, 2007. The increase in non-performing loans during
the year ended December 31, 2008 consisted of the addition of $255.9 million of
non-performing loans, partially offset by paydowns received of $24.0 million,
charge-offs of $75.5 million and loan upgrades of $2.3 million from
non-performing to performing status. Non-performing loans were also impacted by
the foreclosure and transfer of $37.1 million of non-performing loans to other
real estate and other assets owned during 2008. As of December 31,
2008, non-performing loans primarily consisted of $70.9 million residential and
condominium construction real estate loans, $14.3 million of residential land
development loans, $16.2 million of other construction projects and $52.8
million of multi-family and commercial real estate loans. The
increase in non-performing loans during the year was primarily related to
non-performing construction and land development loans, which increased from
$8.8 million at December 31, 2007 to $101.4 million at December 31,
2008. Of these non-performing construction and land development
loans, 11 relationships, with an aggregate balance of $65.0 million, were
located in California (Huntington Beach, Cathedral City, Indio, Riverside, Palm
Desert, Van Nuys, Tulare, Palmdale and Sylmar). As a percentage of
our total loan portfolio, the amount of non-performing loans was 5.53% and 1.20%
at December 31, 2008 and 2007, respectively. See also “Credit Risk
Elements – Allowance for Loan Losses and Nonperforming Assets”.
Non-interest
Income (Loss)
Non-interest
loss was $10.3 million for the year ended December 31, 2008, compared to
non-interest income of $3.1 million for the prior year. The decline in
non-interest income primarily related to a $4.6 million other than temporary
impairment recognized in September 2008 on our investment in FNMA preferred
stock, as well as a $4.7 million other than temporary impairment recognized in
December 2008 on our investment securities
available-for-sale. Non-interest income was further negatively
impacted by a loss provision recorded during the year ended December 31, 2008
for unfunded commitments, and a loss on sale of loans recognized in connection
with the sale of approximately $53.2 million of multi-family loans in June
2008. Non-interest income (loss) typically consists of late fees and
other related fee income earned on customer accounts.
Non-interest
Expense
General
and Administrative Expense
General
and administrative expenses decreased to $51.0 million for the year ended
December 31, 2008, compared to $51.4 million for the prior year. Our
efficiency ratio (defined as general and administrative expenses as percentage
of net revenue) was 61.0% for the year ended December 31, 2008, compared to
57.2% for the same period last year. Full time equivalent associates
averaged 216 in 2008 compared to 271 in 2007, as a result of personnel
reductions in 2008. The increase in our efficiency ratio was
primarily caused by the $13.4 million decrease in non-interest income, partially
offset by the $7.3 million increase in net interest income.
Income
Taxes
Benefit
for income taxes was $21.3 million in 2008 compared to provision for income
taxes of $10.6 million in 2007. The decrease in provision for income
taxes was primarily due to the decrease in taxable income earned in
2008. The effective tax rate was 39.50% and 40.51%, respectively, for
2008 and 2007.
At
December 31, 2008, we had a net deferred tax asset of $22.3
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. We also had a $3.2 million
deferred tax asset relating to a state net operating loss carryforward that
expires in 2028. During 2008, we established a valuation allowance of $2.1
million primarily related to the potential unrealizability of the state deferred
tax assets as of December 31, 2008. We recorded a valuation to reduce
the deferred tax assets to an amount that is more likely than not to be
realized.
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 2006, 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 were paid-off
and 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 2006. 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
2007, 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 2006. 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 2007
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 2007. 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.
Non-interest
Income
Non-interest
income was $3.1 million for the year ended December 31, 2007, compared to $2.8
million for 2006. 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 2006. 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
2006. 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.
Financial
Condition
At
December 31, 2008 Compared with December 31, 2007
Total
assets increased by $888.6 million, or 25.0%, to $4.4 billion at December 31,
2008 compared to $3.6 billion at December 31, 2007. The increase in
total assets was primarily due to a $783.7 million increase in investment
securities held-to-maturity, a $394.2 million increase in cash and cash
equivalents, a $28.9 million increase in investment securities
available-for-sale and an $18.6 million increase in other real estate and other
assets owned, partially offset by a $373.3 million decline in our loan
portfolio. At December 31, 2008, our investment securities
held-to-maturity totaled $942.7 million as compared to $159.0 million at
December 31, 2007. These increases were primarily related to the
purchase of approximately $878.1 million of corporate sponsored CMOs during the
current year. The CMOs are secured by Alt A first lien residential
mortgage loans and generally carry fixed interest rates. These CMOs
were acquired at an average cost of 87% of their current par value (actual cost
ranged from 68% to 97% of current par value, depending on estimated average
lives, credit enhancement through subordination levels, and underlying
collateral performance). These investments carry an average credit
enhancement of 8.6% through subordination provided by junior CMO tranches that
bear the initial losses on the underlying loans. The average expected
life of these CMOs is approximately five years. At the time of
acquisition, these securities were predominantly AAA-rated but, as of December
31, 2008, approximately 65.4% of the securities had been downgraded to a level
below investment grade. The decrease in the loan
portfolio was primarily due to loan repayments, as well as a decline in our loan
production during the year and an increase in loan charge-offs
incurred. In addition, our other real estate and other assets owned
increased by $18.6 million during 2008 to $38.0 million. At December
31, 2008, we owned 41 properties, consisting of $3.0 million of commercial real
estate, $18.7 million of multi-family real estate, $15.3 million of condominium
conversion construction and $1.0 million of entertainment finance
assets. The growth in assets was primarily funded by the increase in
deposits of $749.2 million and an increase in FHLB advances and other borrowings
of $184.4 million.
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 2007. In addition, our other real estate
and other assets owned increased by $12.7 million during 2007 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.
Loans
Receivable, Net
The
following table shows the comparison of our loan portfolio by major categories
as of the dates indicated.
|
December
31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Real estate
loans
|
$ | 2,305,789 | $ | 2,627,801 | $ | 2,524,182 | $ | 2,144,403 | $ | 1,386,042 | ||||||||||
|
Construction and land
loans
|
408,644 | 421,110 | 370,473 | 312,901 | 185,138 | |||||||||||||||
|
Total
real estate loans
|
2,714,433 | 3,048,911 | 2,894,655 | 2,457,304 | 1,571,180 | |||||||||||||||
|
Entertainment finance
loans
|
50,376 | 76,342 | 74,204 | 66,514 | 99,729 | |||||||||||||||
|
Franchise loans
|
2,615 | 2,718 | 9,334 | 13,705 | 137,477 | |||||||||||||||
|
Commercial and other
loans
|
6,610 | 14,631 | 9,346 | 7,264 | 11,931 | |||||||||||||||
| 2,774,034 | 3,142,602 | 2,987,539 | 2,544,787 | 1,820,317 | ||||||||||||||||
|
Unamortized
premium
|
11,246 | 13,776 | 18,138 | 14,582 | 6,346 | |||||||||||||||
|
Deferred loan origination
costs, net
|
14,250 | 16,477 | 13,740 | 7,928 | 2,635 | |||||||||||||||
| 2,799,530 | 3,172,855 | 3,019,417 | 2,567,297 | 1,829,298 | ||||||||||||||||
|
Allowance for loan
losses
|
(50,574 | ) | (47,783 | ) | (46,049 | ) | (43,817 | ) | (35,483 | ) | ||||||||||
| $ | 2,748,956 | $ | 3,125,072 | $ | 2,973,368 | $ | 2,523,480 | $ | 1,793,815 | |||||||||||
The
contractual maturities of our loan portfolio at December 31, 2008 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
|
$ | 126,484 | $ | 210,949 | $ | 1,968,356 | $ | 2,305,789 | ||||||||
|
Construction
and land
loans
|
386,362 | 22,282 | — | 408,644 | ||||||||||||
|
Entertainment
finance
loans
|
30,261 | 20,115 | — | 50,376 | ||||||||||||
|
Franchise
loans
|
— | 261 | 2,354 | 2,615 | ||||||||||||
|
Commercial
and other
loans
|
5,918 | 692 | — | 6,610 | ||||||||||||
| $ | 549,025 | $ | 254,299 | $ | 1,970,710 | $ | 2,774,034 | |||||||||
|
Loans
with fixed interest
rates
|
$ | 10,563 | $ | 44,256 | $ | 23,431 | $ | 78,250 | ||||||||
|
Loans
with adjustable interest
rates
|
538,462 | 210,043 | 1,947,279 | 2,695,784 | ||||||||||||
| $ | 549,025 | $ | 254,299 | $ | 1,970,710 | $ | 2,774,034 | |||||||||
|
Percentage with adjustable
interest rates
|
98.1 | % | 82.6 | % | 98.8 | % | 97.2 | % | ||||||||
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,
2008.
|
|
Range
of Principal Balance
|
|||||||||||||||||||||||||||
|
Number
of Loans
|
Gross
Loan Amount
|
Percent
of Total
|
Min
|
Max
|
Average
|
Non-Accrual
Loans
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Income
Producing Property Loans:
|
||||||||||||||||||||||||||||
|
Multi-family
(5 or more units)
|
2,328 | $ | 1,724,437 | 63.54 | % | $ | 1 | $ | 16,273 | $ | 741 | $ | 41,448 | |||||||||||||||
|
Retail
|
132 | 193,374 | 7.12 | % | 21 | 20,431 | 1,465 | — | ||||||||||||||||||||
|
Office
|
71 | 108,520 | 4.00 | % | 21 | 13,289 | 1,528 | — | ||||||||||||||||||||
|
Hotel
|
8 | 15,851 | 0.58 | % | 37 | 3,782 | 1,981 | — | ||||||||||||||||||||
|
Industrial/warehouse
|
45 | 59,895 | 2.21 | % | 58 | 6,985 | 1,331 | — | ||||||||||||||||||||
|
Mixed-use
|
80 | 90,447 | 3.33 | % | 4 | 12,170 | 1,131 | 11,336 | ||||||||||||||||||||
|
Mobile
home
parks
|
36 | 30,933 | 1.14 | % | 178 | 4,011 | 859 | — | ||||||||||||||||||||
|
Assisted
living
|
4 | 15,754 | 0.58 | % | 1,409 | 14,345 | 3,939 | — | ||||||||||||||||||||
|
Storage
|
16 | 43,193 | 1.59 | % | 675 | 5,950 | 2,700 | — | ||||||||||||||||||||
|
Other
|
27 | 12,172 | 0.45 | % | 1 | 1,381 | 451 | — | ||||||||||||||||||||
|
Total income
producing
|
2,747 | 2,294,576 | 84.54 | % | 52,784 | |||||||||||||||||||||||
|
Construction
and Land:
|
||||||||||||||||||||||||||||
|
Construction
|
91 | 373,541 | 13.76 | % | 1 | 18,772 | 4,105 | 87,097 | ||||||||||||||||||||
|
Land
|
11 | 35,103 | 1.29 | % | 1,300 | 8,885 | 3,191 | 14,260 | ||||||||||||||||||||
|
Total construction and
land
|
102 | 408,644 | 15.05 | % | 101,357 | |||||||||||||||||||||||
|
Single-family
mortgages:
|
||||||||||||||||||||||||||||
|
Single-family (1-4
units)
|
30 | 11,213 | 0.41 | % | 43 | 907 | 374 | 250 | ||||||||||||||||||||
| 2,879 | $ | 2,714,433 | 100.00 | % | $ | 154,391 | ||||||||||||||||||||||
The
following table sets forth the location of the collateral for our real estate
loan portfolios as of December 31, 2008.
|
Number
of
Loans
|
Gross
Loan Amount
|
Percent
of
Total
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Southern
California:
|
||||||||||||
|
Los Angeles
County
|
551 | $ | 470,178 | 17.32 | % | |||||||
|
Riverside
County
|
39 | 64,751 | 2.39 | % | ||||||||
|
Orange
County
|
40 | 59,727 | 2.20 | % | ||||||||
|
San Diego
County
|
51 | 47,859 | 1.76 | % | ||||||||
|
San Bernardino
County
|
37 | 28,485 | 1.05 | % | ||||||||
|
All other Southern California
Counties
|
5 | 4,061 | 0.15 | % | ||||||||
|
Total Southern
California
|
723 | 675,061 | 24.87 | % | ||||||||
|
Northern
California:
|
||||||||||||
|
San Francisco
County
|
51 | 69,411 | 2.56 | % | ||||||||
|
Alameda
County
|
75 | 67,661 | 2.49 | % | ||||||||
|
Contra Costa
County
|
32 | 38,256 | 1.41 | % | ||||||||
|
Fresno
County
|
41 | 28,640 | 1.06 | % | ||||||||
|
Santa Clara
County
|
31 | 24,633 | 0.91 | % | ||||||||
|
San Mateo
County
|
16 | 21,049 | 0.78 | % | ||||||||
|
San
Joaquin
|
27 | 19,436 | 0.72 | % | ||||||||
|
Kern
County
|
27 | 15,783 | 0.58 | % | ||||||||
|
Sacramento
|
18 | 12,623 | 0.47 | % | ||||||||
|
Monterey
|
5 | 12,178 | 0.45 | % | ||||||||
|
All other Northern California
Counties
|
77 | 86,270 | 3.16 | % | ||||||||
|
Total Northern
California
|
400 | 395,940 | 14.59 | % | ||||||||
|
Outside
California:
|
||||||||||||
|
Texas
|
268 | 361,286 | 13.31 | % | ||||||||
|
New
York
|
143 | 149,544 | 5.51 | % | ||||||||
|
Arizona
|
135 | 145,635 | 5.37 | % | ||||||||
|
Florida
|
111 | 124,496 | 4.59 | % | ||||||||
|
Ohio
|
103 | 89,572 | 3.30 | % | ||||||||
|
Georgia
|
60 | 79,804 | 2.94 | % | ||||||||
|
Nevada
|
55 | 48,413 | 1.78 | % | ||||||||
|
Massachusetts
|
97 | 48,104 | 1.77 | % | ||||||||
|
Oklahoma
|
40 | 39,112 | 1.44 | % | ||||||||
|
Tennessee
|
37 | 37,291 | 1.37 | % | ||||||||
|
Connecticut
|
91 | 36,571 | 1.35 | % | ||||||||
|
Colorado
|
48 | 34,066 | 1.25 | % | ||||||||
|
New
Hampshire
|
58 | 33,249 | 1.22 | % | ||||||||
|
North
Carolina
|
31 | 29,886 | 1.10 | % | ||||||||
|
Idaho
|
12 | 29,388 | 1.08 | % | ||||||||
|
Pennsylvania
|
33 | 27,576 | 1.02 | % | ||||||||
|
New
Jersey
|
50 | 26,220 | 0.97 | % | ||||||||
|
Oregon
|
40 | 24,806 | 0.91 | % | ||||||||
|
Mississippi
|
15 | 24,367 | 0.90 | % | ||||||||
|
Michigan
|
21 | 24,069 | 0.89 | % | ||||||||
|
New
Mexico
|
28 | 21,387 | 0.79 | % | ||||||||
|
Washington
|
26 | 18,310 | 0.67 | % | ||||||||
|
Alabama
|
20 | 17,566 | 0.65 | % | ||||||||
|
Utah
|
22 | 17,267 | 0.64 | % | ||||||||
|
Illinois
|
19 | 16,884 | 0.62 | % | ||||||||
|
Arkansas
|
17 | 15,551 | 0.57 | % | ||||||||
|
Other U.S.
states
|
176 | 123,012 | 4.53 | % | ||||||||
|
Total Outside
California
|
1,756 | 1,643,432 | 60.54 | % | ||||||||
| 2,879 | $ | 2,714,433 | 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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Gross
real estate loans originated
|
$ | 268,359 | $ | 1,052,138 | $ | 960,187 | ||||||
|
Gross
entertainment finance loans originated
|
75,621 | 114,354 | 102,703 | |||||||||
|
Gross
commercial and other loans originated (1)
|
1,101 | 1,240 | 26,662 | |||||||||
|
Gross
real estate loans purchased
|
5,000 | 47,343 | 497,785 | |||||||||
|
Total
loan production
|
$ | 350,081 | $ | 1,215,075 | $ | 1,587,337 | ||||||
|
Gross
loans at end of period
|
$ | 2,774,034 | $ | 3,142,602 | $ | 2,987,539 | ||||||
|
Gross
loans weighted-average portfolio yield
|
6.99 | % | 7.41 | % | 7.70 | % | ||||||
|
Average
size of loans retained in the Company’s portfolio
|
$ | 1,741 | $ | 1,605 | $ | 1,391 | ||||||
_______________
|
(1)
|
Includes
$25.4 million of commercial real estate participation loans acquired
during 2006.
|
Investment
Securities
At
December 31, 2008, our investment securities totaled $1.1 billion, or 24.5% of
our total assets. Our investment securities, including the mortgage-backed
securities portfolio and CMOs, 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. During 2008 we purchased approximately $861.8
million of corporate sponsored CMOs. The CMOs are secured by Alt A
first lien residential mortgage loans and generally carry fixed interest
rates. These CMOs were acquired at an average cost of 87% of their
current par value (actual cost ranged from 68% to 97% of current par value,
depending on estimated average lives, credit enhancement through subordination
levels, and underlying collateral performance). These investments
carry an average credit enhancement of 8.6% through subordination provided by
junior CMO tranches that bear the initial losses on the underlying
loans. The average expected life of these CMOs is approximately five
years. At the time of acquisition, these securities were
predominantly AAA-rated but, as of December 31, 2008, approximately 65.4% of the
securities had been downgraded to a level below investment grade. During 2008,
we recognized a $4.6 million other than temporary impairment on our investment
in FNMA preferred stock, as well as a $4.7 million other than temporary
impairment recognized on our investment securities
available-for-sale. Our investment securities portfolio at December
31, 2008, 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,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Investment
securities available-for-sale
|
||||||||||||||||||||||||
|
U.S. agency
securities
|
$ | 20,052 | $ | 20,192 | $ | 9,997 | $ | 9,986 | $ | 62,554 | $ | 62,184 | ||||||||||||
|
Collateralized mortgage
obligations
|
116,467 | 115,664 | 83,260 | 84,264 | 34,991 | 35,127 | ||||||||||||||||||
|
Mortgage-backed
securities
|
3,740 | 3,947 | 4,453 | 4,489 | — | — | ||||||||||||||||||
|
Corporate bonds
|
9,894 | 6,106 | 13,437 | 12,582 | — | — | ||||||||||||||||||
|
Residual interest in
securitized loans
|
695 | 695 | 1,318 | 1,318 | 1,911 | 2,039 | ||||||||||||||||||
|
Equity
securities
|
422 | 195 | 5,013 | 5,285 | 13 | 177 | ||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 151,270 | $ | 146,799 | $ | 117,478 | $ | 117,924 | $ | 99,469 | $ | 99,527 | ||||||||||||
|
Investment
securities held-to-maturity
|
||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
817,015 | 591,527 | — | — | — | — | ||||||||||||||||||
|
Mortgage-backed
securities
|
125,671 | 124,849 | 159,023 | 158,509 | 193,512 | 190,475 | ||||||||||||||||||
|
Total investment securities
held-to-maturity
|
$ | 942,686 | $ | 716,376 | $ | 159,023 | $ | 158,509 | $ | 193,512 | $ | 190,475 | ||||||||||||
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, 2008. 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
|
$ | 20,192 | 2.72 | % | $ | — | — | $ | — | — | $ | — | — | |||||||||||||||||||
|
Collateralized mortgage
obligations
|
— | — | — | — | 22,356 | 5.07 | % | 93,308 | 5.47 | % | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
— | — | — | — | — | — | 3,947 | 5.16 | % | |||||||||||||||||||||||
|
Corporate
bonds
|
— | — | — | — | — | — | 6,106 | 4.20 | % | |||||||||||||||||||||||
|
Residual interest in
securitized loans
|
— | — | 695 | — | — | — | — | — | ||||||||||||||||||||||||
|
Equity
securities
|
59 | — | — | — | — | — | 136 | — | ||||||||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 20,251 | $ | 695 | $ | 22,356 | $ | 103,497 | ||||||||||||||||||||||||
|
Investment securities
held-to-maturity
|
||||||||||||||||||||||||||||||||
|
Corporate
CMOs
|
— | — | — | — | 1,387 | 5.21 | % | 815,628 | 7.93 | % | ||||||||||||||||||||||
|
Mortgage-backed
securities
|
— | — | — | — | — | — | 125,671 | 4.26 | % | |||||||||||||||||||||||
|
Total investment securities
held-to-maturity
|
$ | — | $ | — | $ | 1,387 | $ | 941,299 | ||||||||||||||||||||||||
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. While, as of December 31, 2008, the Bank had remaining
available borrowing capacity under its credit facility with the FHLB of San
Francisco of $53.6 million, in March 2009 that facility was suspended by the
FHLB of San Francisco until further notice. As a result, the Bank is
prohibited from receiving any additional FHLB advances until this suspension is
lifted. As of December 31, 2008, we had an available borrowing capacity under
the Federal Reserve Bank of San Francisco credit facility of $119.4
million. We also had available $68.0 million of uncommitted,
unsecured lines of credit with three unaffiliated financial
institutions. However, these uncommitted, unsecured lines of credit
were cancelled subsequent to December 31, 2008. We do, however, believe although
these credit facilities are not presently available to us, that our current
liquidity position, on-going cashflow from operations, and retail deposits will
meet our anticipated funding needs.
Total
deposit accounts increased approximately $749.2 million to $2.9 billion at
December 31, 2008 from $2.2 billion at December 31, 2007. The increase in
deposits in 2008 was primarily related to an increase in time certificate of
deposits of $569.1 million, an increase in money market and passbook accounts of
$169.6 million and an increase in demand deposit accounts of $10.5
million. Brokered deposits totaled $739.9 million and $379.4 million
at December 31, 2008 and 2007, respectively. We are required under
the Order to develop a plan to eliminate our reliance on brokered
deposits. Total deposit accounts increased approximately $122.5
million to $2.2 billion at December 31, 2007 from $2.1 billion at December 31,
2006. In 2008, the funds provided from deposits were used primarily
to fund the growth in our held-to-maturity investment portfolio, as well as to
maintain an increased level of liquidity within our cash and cash equivalents.
At December 31, 2008, certificates of deposits amounted to $2.5
billion , or 84.0% of total deposits, including $1.8 billion that are scheduled
to mature by December 31, 2009. Historically, we have been able to
retain a significant amount of our deposits as they
mature. Management believes that we have adequate resources to fund
all loan commitments through deposits, and the sale of mortgage loans or
investments. Management also believes that we can adjust the offering
rates of savings, money market, and certificates of deposit to retain, increase,
or decrease deposits in changing interest rate environments. Because we are
adequately capitalized, however, we cannot accept, rollover, or renew a brokered
deposit, without first obtaining a regulatory waiver. If deemed necessary, we
may seek this waiver. We also may not pay a rate on our deposits more than 75
basis points over prevailing rates in our market area. As a result of these
requirements, we may be precluded from paying higher rates on deposits that may
be offered by our competitors and in the absence of a waiver, our interest
expense could increase substantially.
The
following table sets forth information regarding deposits outstanding at the
dates indicated.
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Non-interest
demand
accounts
|
$ | 10,761 | $ | 16,819 | $ | 23,171 | ||||||
|
Interest
demand
accounts
|
43,055 | 26,518 | 24,523 | |||||||||
|
Money
market and passbook
accounts
|
421,252 | 251,660 | 210,236 | |||||||||
|
Time
certificates under
$100,000
|
1,609,089 | 1,162,919 | 1,117,529 | |||||||||
|
Time
certificates $100,000 and
over
|
846,883 | 723,942 | 683,946 | |||||||||
| $ | 2,931,040 | $ | 2,181,858 | $ | 2,059,405 | |||||||
The
following table sets forth the maturities of certificates of deposit $100,000
and over at December 31, 2008 (in thousands):
|
Certificates
of deposit $100,000 and over:
|
||||
|
Maturing within three
months
|
$ | 216,263 | ||
|
After three but within six
months
|
281,437 | |||
|
After six but within twelve
months
|
318,433 | |||
|
After twelve
months
|
30,750 | |||
| $ | 846,883 | |||
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, 2008, we also had a residual
interest of $695,000 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 9 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, 2008, our approved loan origination commitments outstanding totaled
$164.9 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 13 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, 2008. Further discussion of these commitments is
included in Notes 7, 9, 10, and 14 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
|
$ | 1,205,633 | $ | 172,196 | $ | 546,367 | $ | 250,921 | $ | 236,149 | ||||||||||
|
Junior
subordinated debentures
|
86,600 | — | — | — | 86,600 | |||||||||||||||
|
Operating
lease obligations
|
13,108 | 3,429 | 5,890 | 3,592 | 197 | |||||||||||||||
|
Deposits
with stated maturity dates
|
2,455,972 | 1,733,642 | 493,137 | 229,098 | 95 | |||||||||||||||
|
Purchase
obligations
|
2,869 | 1,207 | 1,662 | — | — | |||||||||||||||
| $ | 3,764,182 | $ | 1,910,474 | $ | 1,047,056 | $ | 483,611 | $ | 323,041 | |||||||||||
FHLB
advances and other borrowings have defined terms and under certain circumstances
are callable at the option of the lender. In March 2009, the other
borrowing was called by the lender. The junior subordinated
debentures are callable by us under the circumstances and at the times described
in Note 9 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, 2008 of 5.6%, 7.5%, 9.4%, respectively, which, in the case of the
Tier 1 risk-based and total risk-based capital ratios, represents $47.5 million
and $(18.6) million, respectively, of capital in excess (deficit) of the amount
required to be “well capitalized” for bank holding company regulatory purposes.
These ratios were 8.4%, 9.7%, 11.3%, respectively, at December 31,
2007. Portions of our trust preferred securities presently qualify as
Tier 1 and total risk-based capital. See Note 9 and Note 15 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, 2008 of 6.0%, 8.0% and 9.3%, respectively, which represents $43.7
million, $64.5 million and $(22.3) million, respectively, of capital in excess
(deficit) of the amount required for the Bank to be “well capitalized” for
regulatory purposes. These ratios were 8.3%, 9.6% and 10.9%, respectively, as of
December 31, 2007. The Bank is required under the Order to increase
its Tier 1 leverage ratio above 9.0% and total risk-based capital ratio above
13% within 180 days of the issuance of the Order. The Bank is also
required under the Order to develop a plan within 60 days to remain at least
“adequately capitalized,” which requires Tier 1 leverage, Tier 1 risk-based and
total risk-based capital ratios of 4.0%, 4.0% and 8.0%,
respectively. As discussed above, in connection with the Order, the
Company is evaluating several tactical actions that would provide the Bank with
increased liquidity and Tier 1 capital.
Shareholders’
equity decreased to $189.6 million at December 31, 2008 from $227.6 million at
December 31, 2007. The change was primarily due to the decrease in
retained earnings as a result of $32.6 million of net loss recorded during the
year.
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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 47,783 | $ | 46,049 | $ | 43,817 | $ | 35,483 | $ | 33,401 | ||||||||||
|
Provision
for loan losses
|
77,965 | 11,077 | 5,000 | 10,250 | 4,725 | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Real
estate loans
|
(18,521 | ) | (6,843 | ) | (1,634 | ) | (1,584 | ) | (189 | ) | ||||||||||
|
Construction
and land loans
|
(56,243 | ) | (1,530 | ) | — | — | — | |||||||||||||
|
Entertainment
finance loans
|
— | (2,500 | ) | (2,500 | ) | (395 | ) | (2,180 | ) | |||||||||||
|
Franchise
loans
|
— | — | — | (451 | ) | — | ||||||||||||||
|
Commercial
and other loans
|
(1,159 | ) | — | — | — | (1,121 | ) | |||||||||||||
|
Total
charge-offs
|
(75,923 | ) | (10,873 | ) | (4,134 | ) | (2,430 | ) | (3,490 | ) | ||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Real
estate loans
|
184 | 796 | 894 | 88 | 89 | |||||||||||||||
|
Construction
and land loans
|
60 | — | — | — | — | |||||||||||||||
|
Entertainment
finance loans
|
505 | 470 | 472 | 426 | — | |||||||||||||||
|
Franchise
loans
|
— | 264 | — | — | — | |||||||||||||||
|
Commercial
and other loans
|
— | — | — | — | 758 | |||||||||||||||
|
Total
recoveries
|
749 | 1,530 | 1,366 | 514 | 847 | |||||||||||||||
|
Net
charge-offs
|
(75,174 | ) | (9,343 | ) | (2,768 | ) | (1,916 | ) | (2,643 | ) | ||||||||||
|
Balance
at end of the year
|
$ | 50,574 | $ | 47,783 | $ | 46,049 | $ | 43,817 | $ | 35,483 | ||||||||||
|
Average
loans outstanding during the year
|
$ | 3,004,606 | $ | 3,100,655 | $ | 2,668,254 | $ | 2,239,261 | $ | 1,606,125 | ||||||||||
|
Loans,
net, at end of the year (1)
|
$ | 2,799,530 | $ | 3,172,855 | $ | 3,019,417 | $ | 2,567,297 | $ | 1,829,298 | ||||||||||
|
Selected
Ratios:
|
||||||||||||||||||||
|
Net
charge-offs to average loans outstanding
|
2.50 | % | 0.30 | % | 0.10 | % | 0.09 | % | 0.16 | % | ||||||||||
|
Net
charge-offs to loans, net (1)
|
2.69 | % | 0.29 | % | 0.09 | % | 0.07 | % | 0.14 | % | ||||||||||
|
Allowance
for loan losses to loans, net (1)
|
1.81 | % | 1.51 | % | 1.53 | % | 1.71 | % | 1.94 | % | ||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
32.66 | % | 125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | ||||||||||
____________
|
(1)
|
Loans,
before allowance for loan losses and net of premium, deferred loan
origination costs and fees.
|
The
allowance for loan losses increased to $50.6 million or 1.81% of our total loan
portfolio at December 31, 2008 from $47.8 million or 1.51% of our total loan
portfolio at December 31, 2007. The increase in the allowance was due
primarily to the provision for loan losses of $78.0 million, less net
charge-offs of $75.2 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, 2008. 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. At December 31, 2008, only $783,000 of our allowance for
loan losses was specifically allocated to our non-performing loans, as compared
to $11.6 million for the same period last year. This decline was
primarily caused by the additional charge-offs recorded during the current
year. The remaining portion of our allowance for loan losses was
allocated to our performing loans based on the quantitative and qualitative
factors discussed below.
Non-performing
loans as of December 31, 2008 were $154.9 million, compared to $38.0 million at
December 31, 2007. The increase in non-performing loans during the year ended
December 31, 2008 consisted of the addition of $255.9 million of non-performing
loans, partially offset by paydowns received of $24.0 million, net charge-offs
of $75.5 million and loan upgrades of $2.3 million from non-performing to
performing status. Non-performing loans were also impacted by the foreclosure
and transfer of $37.1 million of non-performing loans to other real estate and
other assets owned during the year. As of December 31, 2008,
non-performing loans primarily consisted of $70.9 million of residential and
condominium construction real estate loans, $14.3 million of residential land
development loans, $16.2 million of other construction projects and $52.8
million of multi-family and commercial real estate loans. The
increase in non-performing loans during the year was primarily related to
non-performing construction and land development loans, which increased from
$8.8 million at December 31, 2007 to $101.4 million at December 31,
2008.
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 construction and land loan
portfolio. Our construction and land loan portfolio at December 31,
2008 totaled $408.9 million, of which $238.2 million were residential and
condominium conversion construction loans and land development loans,
representing 8.5% of our total loan portfolio. Within this portfolio,
approximately 56.1%, 27.5%, 4.7% and 4.5% were located in California, New York,
Florida and Arizona, respectively. At December 31, 2008, we had $85.2
million of non-performing lending relationships within our residential and
condominium conversion construction and land development loan portfolio,
consisting of 20 lending relationships. Of these non-performing
construction and land development loans, 11 relationships, with an aggregate
balance of $65.0 million, were located in California (Huntington Beach,
Cathedral City, Indio, Riverside, Palm Desert, Van Nuys, Tulare, Palmdale and
Sylmar). As a percentage of our total loan portfolio, the amount of
non-performing loans was 5.53% and 1.20% at December 31, 2008 and 2007,
respectively. During the year, the level of other loans of concern
increased from $27.4 million at December 31, 2007 to $114.6 million at December
31, 2008. The increase during the current year was primarily caused
by the addition of $17.5 million of other construction projects, and $70.0
million of commercial and multi-family real estate loans. 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. During 2008, we recorded net
charge-offs of $75.2 million, compared to $9.3 million in 2007.
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 2007 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 2007, 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.
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,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
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
|
$ | 37,435 | 83 | % | $ | 37,570 | 88 | % | $ | 31,666 | 84 | % | $ | 27,115 | 84 | % | $ | 21,993 | 76 | % | ||||||||||||||||||||
|
Construction
and land loans
|
12,270 | 15 | % | 7,421 | 9 | % | 6,618 | 12 | % | 7,107 | 12 | % | 1,555 | 10 | % | |||||||||||||||||||||||||
|
Entertainment
finance
|
473 | 2 | % | 1,995 | 2 | % | 5,616 | 3 | % | 6,770 | 3 | % | 7,828 | 5 | % | |||||||||||||||||||||||||
|
Franchise
|
261 | — | 629 | — | 1,833 | — | 2,685 | 1 | % | 4,032 | 8 | % | ||||||||||||||||||||||||||||
|
Commercial
and other
|
135 | — | 168 | 1 | % | 316 | 1 | % | 140 | — | 80 | 1 | % | |||||||||||||||||||||||||||
|
Total
|
$ | 50,574 | 100 | % | $ | 47,783 | 100 | % | $ | 46,049 | 100 | % | $ | 43,817 | 100 | % | $ | 35,483 | 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 on the
estimated collateral value if the loan is collateral dependent, as well as the
risk rating grades assigned to each of these loans as a result of our loan
management and review processes. Loans evaluated individually
(primarily loans considered impaired or substandard) are allocated reserves
based on the estimated collateral values. Homogenous groups of loans
are allocated reserves based on the loss ratio assigned to the pool based on its
collateral type and risk grade. The loss ratio 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.
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, 2008 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,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Period
of Delinquency
|
||||||||||||||||||||||||
|
30 – 59
days
|
$ | 54,586 | 1.95 | % | $ | 18,886 | 0.60 | % | $ | 10,120 | 0.34 | % | ||||||||||||
|
60 – 89
days
|
43,948 | 1.57 | % | 6,268 | 0.20 | % | 15,170 | 0.51 | % | |||||||||||||||
|
90 days or
more
|
127,336 | 4.55 | % | 31,334 | 1.00 | % | 23,937 | 0.80 | % | |||||||||||||||
|
Total
loans delinquent
|
$ | 225,870 | 8.07 | % | $ | 56,488 | 1.80 | % | $ | 49,227 | 1.65 | % | ||||||||||||
The
increase in total delinquent loans in 2008 was due primarily to an increase of
$56.3 million and $109.1 million, respectively, of past due real estate secured
loans and construction and land loans.
We have
established a policy that we review all loans for which we have received updated
financial and operating information and annual reviews on loans greater than
$2.5 million. 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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Nonaccrual
loans:(1)
|
||||||||||||||||||||
|
Real
estate
|
$ | 53,034 | $ | 29,145 | $ | 14,091 | $ | 6,117 | $ | 7,057 | ||||||||||
|
Construction
and land
|
101,357 | 8,804 | — | — | — | |||||||||||||||
|
Franchise
|
— | — | 4,549 | 7,366 | 3,874 | |||||||||||||||
|
Entertainment
finance
|
6 | 13 | 7,614 | 10,780 | 3,721 | |||||||||||||||
|
Other
|
463 | — | — | — | — | |||||||||||||||
|
Total nonaccrual
loans
|
154,860 | 37,962 | 26,254 | 24,263 | 14,652 | |||||||||||||||
|
Other
real estate and other assets owned, net
|
38,031 | 19,396 | 6,729 | 3,960 | — | |||||||||||||||
|
Total nonperforming
assets
|
192,891 | 57,358 | 32,983 | 28,223 | 14,652 | |||||||||||||||
|
Accruing
loans past-due 90 days or more with respect to principal or
interest
|
— | — | — | — | — | |||||||||||||||
|
Performing
troubled debt restructurings
|
7,965 | 7,802 | 7,994 | 10,758 | 3,096 | |||||||||||||||
| $ | 200,856 | $ | 65,160 | $ | 40,977 | $ | 38,981 | $ | 17,748 | |||||||||||
|
Nonaccrual
loans to total gross loans
|
5.53 | % | 1.20 | % | 0.88 | % | 0.95 | % | 0.80 | % | ||||||||||
|
Allowance
for loan losses to nonaccrual loans
|
32.66 | % | 125.87 | % | 175.40 | % | 180.59 | % | 242.17 | % | ||||||||||
|
Nonperforming
assets to total assets
|
4.34 | % | 1.62 | % | 0.97 | % | 0.92 | % | 0.63 | % | ||||||||||
________________
|
(1)
|
Includes
one loan with a net book balance of $1.2 million that was a nonperforming
troubled debt restructuring in 2008, 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,
and four loans with a net book balance of $5.7 million that were
nonperforming troubled debt restructurings in
2004.
|
Gross
interest income that would have been recorded on nonaccrual loans had they been
current in accordance with original terms was $8.1 million and $2.8 million for
the years ended December 31, 2008 and 2007, respectively. No interest income was
recorded for loans on nonaccrual status during the years ended December 31, 2008
and 2007. For the years ended December 31, 2008 and 2007, $720,000
and $1.4 million, respectively, of gross interest income would have been
recorded had the restructured loans been current in accordance with their
original terms compared to $600,000 and $1.0 million, respectively, of interest
income that was included in net income for the same periods.
At
December 31, 2008, we owned 41 properties, consisting of $3.0 million of
commercial real estate, $18.7 million of multi-family real estate, $15.3 million
of condominium conversion construction real estate and $1.0 million of
entertainment finance assets.
As of
December 31, 2008 and 2007, we had loans with an aggregate outstanding balance
of $114.6 million and $27.4 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, 2008, 26.5% 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 6.8%. At December 31, 2008, 48.5%
of the total loans outstanding had a lifetime interest rate cap, with a
weighted-average lifetime interest rate cap of 11.87%. At December
31, 2008, 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, 2008:
|
Changes
in Interest
rates (Basis
Points)
|
Percentage
Change in Net
Interest Income (12
Months)
|
|
|
+
200 Over One Year
|
-8.16%
|
|
|
+
100 Over One Year
|
-3.85%
|
|
|
-
100 Over One Year
|
12.59%
|
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, 2008.
|
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)
|
$ | 889,063 | $ | 561,176 | $ | 1,166,482 | $ | 182,809 | $ | — | $ | 2,799,530 | ||||||||||||
|
Cash
and cash equivalents
|
399,809 | — | — | — | 3,310 | 403,119 | ||||||||||||||||||
|
Investment
securities available-for-sale
|
13,953 | 34,087 | 80,062 | 18,697 | — | 146,799 | ||||||||||||||||||
|
Investment
securities held-to-maturity
|
10,909 | 202,359 | 567,410 | 162,008 | — | 942,686 | ||||||||||||||||||
|
Non-interest
earning assets less allowance for loan losses
|
— | — | — | — | 147,704 | 147,704 | ||||||||||||||||||
|
Total
assets
|
$ | 1,313,734 | $ | 797,622 | $ | 1,813,954 | $ | 363,514 | $ | 151,014 | $ | 4,439,838 | ||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||
|
Time
certificates under $100,000
|
$ | 328,967 | $ | 671,585 | $ | 608,442 | $ | 95 | $ | — | $ | 1,609,089 | ||||||||||||
|
Time
certificates $100,000 and more
|
216,263 | 599,870 | 30,750 | — | — | 846,883 | ||||||||||||||||||
|
Money
market and passbook accounts
|
421,252 | — | — | — | — | 421,252 | ||||||||||||||||||
|
Demand
deposit accounts
|
43,055 | — | — | — | 10,761 | 53,816 | ||||||||||||||||||
|
FHLB
advances and other borrowings
|
50,839 | 121,357 | 797,288 | 236,149 | — | 1,205,633 | ||||||||||||||||||
|
Other
liabilities
|
— | — | — | — | 26,996 | 26,996 | ||||||||||||||||||
|
Junior
subordinated debentures
|
25,800 | 30,900 | — | 29,900 | — | 86,600 | ||||||||||||||||||
|
Shareholders’
equity
|
— | — | — | — | 189,569 | 189,569 | ||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,086,176 | $ | 1,423,712 | $ | 1,436,480 | $ | 266,144 | $ | 227,326 | $ | 4,439,838 | ||||||||||||
|
Net
repricing assets over (under) repricing liabilities equals interest rate
sensitivity GAP
|
$ | 227,557 | $ | (626,090 | ) | $ | 377,474 | $ | 97,370 | $ | (76,312 | ) | ||||||||||||
|
Cumulative
interest rate sensitivity GAP
|
$ | 227,557 | $ | (398,532 | ) | $ | 356,414 | $ | 76,312 | $ | — | |||||||||||||
|
Cumulative
GAP as a percentage of total assets
|
5.13 | % | -8.98 | % | 8.03 | % | 1.72 | % | 0.00 | % | ||||||||||||||
____________
|
(1)
|
Approximately
50.8% of our loan portfolio was comprised of adjustable rate loans at
December 31, 2008, and approximately 41.2% 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 $154.9 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
|
|
|
Report
of Independent Registered Public Accounting Firm
|
59
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
60
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
61
|
|
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 2008, 2007 and
2006
|
62
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
63
|
|
Notes
to Consolidated Financial Statements
|
64
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and 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, 2008 and
2007, and the related consolidated statements of operations, changes in
shareholders’ equity and comprehensive income (loss), and cash flows for each of
the three years in the period ended December 31, 2008. 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and 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, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As further described in Note 1, at
December 31, 2008, the regulatory capital of the Company’s banking subsidiary
Imperial Capital Bank (the “Bank”) is below the regulatory minimums required to
be considered "well capitalized". The Company is currently operating
under a Cease and Desist Order (the “Order”) with the Federal Deposit Insurance
Corporation and the California Department of Financial
Institutions. The Order requires the Company to, among other things,
achieve specified regulatory capital ratios by August 11, 2009, and such minimum
ratios exceed the minimums required to be considered "well
capitalized". Failure to achieve all of the Order's requirements may
lead to additional regulatory actions. The ability of the Company to comply with
terms of this Order, together with other factors, raises substantial doubt about
the Company's ability to continue as a going concern. Management’s
plans in regard to these matters also are described in Note 1. The
2008 consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst
& Young LLP
Los
Angeles, California
March 30,
2009
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands, except share amounts)
|
||||||||
|
Assets
|
||||||||
|
Cash
and cash
equivalents
|
$ | 403,119 | $ | 8,944 | ||||
|
Investment
securities available-for-sale, at fair value
|
146,799 | 117,924 | ||||||
|
Investment
securities held-to-maturity, at amortized cost (fair value approximates
$716,376 and $158,509 in 2008 and 2007, respectively)
|
942,686 | 159,023 | ||||||
|
Stock
in Federal Home Loan Bank
|
63,498 | 53,497 | ||||||
|
Loans,
net (net of allowance for loan losses of $50,574 and $47,783 in 2008 and
2007, respectively)
|
2,748,956 | 3,125,072 | ||||||
|
Interest
receivable
|
21,305 | 20,841 | ||||||
|
Other
real estate and other assets owned, net
|
38,031 | 19,396 | ||||||
|
Premises
and equipment, net
|
7,701 | 8,550 | ||||||
|
Deferred
income taxes
|
22,338 | 12,148 | ||||||
|
Goodwill
|
3,118 | 3,118 | ||||||
|
Other
assets
|
42,287 | 22,706 | ||||||
|
Total
assets
|
$ | 4,439,838 | $ | 3,551,219 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Deposit
accounts
|
$ | 2,931,040 | $ | 2,181,858 | ||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,205,633 | 1,021,235 | ||||||
|
Accounts
payable and other liabilities
|
26,996 | 33,959 | ||||||
|
Junior
subordinated debentures
|
86,600 | 86,600 | ||||||
|
Total
liabilities
|
4,250,269 | 3,323,652 | ||||||
|
Commitments
and contingencies (Note 14)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, 5,000,000 shares authorized, none issued
|
— | — | ||||||
|
Contributed
capital – common stock, $.01 par value; 20,000,000 shares authorized,
9,146,256 and 9,142,256 issued in 2008 and 2007,
respectively
|
85,407 | 85,009 | ||||||
|
Retained
earnings
|
222,483 | 255,947 | ||||||
|
Accumulated
other comprehensive (loss) income, net
|
(2,682 | ) | 267 | |||||
| 305,208 | 341,223 | |||||||
|
Less
treasury stock, at cost – 4,126,116 and 3,995,634 shares in 2008 and 2007,
respectively
|
(115,639 | ) | (113,656 | ) | ||||
|
Total
shareholders’ equity
|
189,569 | 227,567 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 4,439,838 | $ | 3,551,219 | ||||
See
accompanying notes to the consolidated financial statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Interest
income:
|
||||||||||||
|
Loans
receivable, including fees
|
$ | 195,388 | $ | 233,749 | $ | 207,320 | ||||||
|
Cash,
cash equivalents and investment securities
|
58,825 | 17,522 | 19,181 | |||||||||
|
Total
interest income
|
254,213 | 251,271 | 226,501 | |||||||||
|
Interest
expense:
|
||||||||||||
|
Deposit
accounts
|
101,485 | 110,111 | 85,156 | |||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
51,434 | 46,134 | 38,722 | |||||||||
|
Junior
subordinated debentures
|
7,351 | 8,338 | 8,197 | |||||||||
|
Total
interest expense
|
160,270 | 164,583 | 132,075 | |||||||||
|
Net
interest income before provision for loan losses
|
93,943 | 86,688 | 94,426 | |||||||||
|
Provision
for loan losses
|
77,965 | 11,077 | 5,000 | |||||||||
|
Net
interest income after provision for loan losses
|
15,978 | 75,611 | 89,426 | |||||||||
|
Non-interest
(loss) income:
|
||||||||||||
|
Late
and collection fees
|
865 | 1,119 | 970 | |||||||||
|
Other
|
(11,115 | ) | 2,014 | 1,802 | ||||||||
|
Total
non-interest (loss) income
|
(10,250 | ) | 3,133 | 2,772 | ||||||||
|
Non-interest
expense:
|
||||||||||||
|
Compensation
and benefits
|
21,759 | 23,899 | 21,265 | |||||||||
|
Occupancy
and equipment
|
7,558 | 7,832 | 7,439 | |||||||||
|
Other
|
21,730 | 19,633 | 17,743 | |||||||||
|
Total
general and administrative
|
51,047 | 51,364 | 46,447 | |||||||||
|
Other
real estate and other assets owned expense, net
|
1,634 | 780 | 334 | |||||||||
|
Provision
for losses on other real estate and other assets owned
|
6,196 | 300 | — | |||||||||
|
Loss
on sale of other real estate and other assets owned
|
728 | 45 | 35 | |||||||||
|
Total
real estate and other assets owned expense
|
8,558 | 1,125 | 369 | |||||||||
|
Total
non-interest expense
|
59,605 | 52,489 | 46,816 | |||||||||
|
(Loss)
income before provision for income taxes
|
(53,877 | ) | 26,255 | 45,382 | ||||||||
|
(Benefit)
provision for income taxes
|
(21,281 | ) | 10,635 | 18,493 | ||||||||
|
NET
(LOSS) INCOME
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | |||||
|
BASIC
(LOSS) EARNINGS PER SHARE
|
$ | (6.01 | ) | $ | 2.85 | $ | 4.83 | |||||
|
DILUTED
(LOSS) EARNINGS PER SHARE
|
$ | (6.01 | ) | $ | 2.81 | $ | 4.71 | |||||
|
|
See
accompanying notes to the consolidated financial
statements.
|
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
Comprehensive
Income (Loss)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Reclassification
of
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Realized
Losses
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Number
of Shares
|
Shareholders’
Equity
|
Unrealized
|
Previously
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Gross
|
Net
|
Contributed
Capital
|
Accumulated
|
Gain
|
Recognized
in
|
|||||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Shares
|
Total
|
Other
|
Treasury
|
Net
|
(Loss)
on
|
Comprehensive
|
Total
|
||||||||||||||||||||||||||||||||||||||||
|
Issued
and
|
Treasury
|
Issued
and
|
Share
|
Earned
|
Contributed
|
Retained
|
Comprehensive
|
Stock,
|
Income
|
Securities,
|
Income
(Loss),
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||
|
Outstanding
|
Shares
|
Outstanding
|
Capital
|
Compensation
|
Capital
|
Earnings
|
Income
(Loss)
|
At
Cost
|
Total
|
(Loss)
|
Net
of Tax
|
Net
of Tax
|
Income
(Loss)
|
|||||||||||||||||||||||||||||||||||
|
(in
thousands except share amounts)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance
at January 1, 2006
|
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
|
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, 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 | |||||||||||||||||||||||||||||
|
Issuance
of common stock- employee stock options, net
|
4,000 | — | 4,000 | 39 | — | 39 | — | — | — | 39 | ||||||||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan / Recognition and
Retention Plan / Deferred Compensation Plan, net
|
— | (130,482 | ) | (130,482 | ) | — | 40 | 40 | — | — | (1,983 | ) | (1,943 | ) | ||||||||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.16 per common share)
|
— | — | — | — | — | — | (868 | ) | — | — | (868 | ) | ||||||||||||||||||||||||||||||||||||
|
Stock
compensation expense recognized in earnings
|
— | — | — | — | 319 | 319 | — | — | — | 319 | ||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | (32,596 | ) | — | — | (32,596 | ) | ||||||||||||||||||||||||||||||||||||
|
Other
comprehensive loss
|
— | — | — | — | — | — | — | (2,949 | ) | — | (2,949 | ) | $ | (32,596 | ) | $ | (8,501 | ) | $ | 5,552 | $ | (35,545 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
9,146,256 | (4,126,116 | ) | 5,020,140 | $ | 82,081 | $ | 3,326 | $ | 85,407 | $ | 222,483 | $ | (2,682 | ) | $ | (115,639 | ) | $ | 189,569 | ||||||||||||||||||||||||||||
See
accompanying notes to the consolidated financial statements.
IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net
(Loss) Income
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | |||||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization of premises and equipment
|
2,815 | 2,973 | 2,690 | |||||||||
|
Amortization
of premium on purchased loans
|
3,411 | 4,946 | 4,732 | |||||||||
|
Accretion
of deferred loan origination fees, net of costs
|
(1,862 | ) | (2,392 | ) | (2,846 | ) | ||||||
|
Accretion
of discounts on investment securities, net
|
(10,755 | ) | (1,085 | ) | (7 | ) | ||||||
|
Other-than-temporary
impairment on investment securities
|
9,290 | — | — | |||||||||
|
Provision
for loan losses
|
77,965 | 11,077 | 5,000 | |||||||||
|
Provision
for losses on other real estate owned
|
6,196 | 300 | — | |||||||||
|
Deferred
income tax (benefit) expense
|
(8,125 | ) | (799 | ) | 926 | |||||||
|
Other,
net
|
(799 | ) | (1,726 | ) | (2,013 | ) | ||||||
|
Increase
in interest receivable
|
(464 | ) | (88 | ) | (4,466 | ) | ||||||
|
(Increase)
decrease in other assets
|
(19,581 | ) | (2,999 | ) | 1,198 | |||||||
|
(Decrease)
increase in accounts payable and other liabilities
|
(6,140 | ) | (4,247 | ) | 5,231 | |||||||
|
Net
cash provided by operating
activities
|
19,355 | 21,580 | 37,334 | |||||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Purchases
of investment securities available-for-sale
|
(67,419 | ) | (82,195 | ) | (44,331 | ) | ||||||
|
Proceeds
from the maturity and calls of investment securities
available-for-sale
|
25,436 | 65,334 | 38,159 | |||||||||
|
Purchases
of investment securities held-to-maturity
|
(878,094 | ) | — | (7,771 | ) | |||||||
|
Proceeds
from the maturity and redemption of investment securities
held-to-maturity
|
104,125 | 34,434 | 48,019 | |||||||||
|
Purchase
of stock in Federal Home Loan Bank
|
(7,739 | ) | (1,887 | ) | (2,675 | ) | ||||||
|
Purchase
of loans
|
(5,892 | ) | (47,343 | ) | (497,785 | ) | ||||||
|
Proceeds
from the sale of loans
|
52,783 | — | — | |||||||||
|
Decrease
(increase) in loans, net
|
215,311 | (135,888 | ) | 38,072 | ||||||||
|
Proceeds
from sale of other real estate owned
|
8,359 | 4,400 | 135 | |||||||||
|
Cash
paid for capital expenditures
|
(2,035 | ) | (3,832 | ) | (3,823 | ) | ||||||
|
Net
cash used in investing
activities
|
(555,165 | ) | (166,977 | ) | (432,000 | ) | ||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds
from exercise of employee stock options
|
39 | 2,567 | 3,692 | |||||||||
|
Cash
paid to acquire treasury stock
|
(1,983 | ) | (9,062 | ) | (11,374 | ) | ||||||
|
Cash
dividends paid
|
(1,651 | ) | (3,300 | ) | (2,371 | ) | ||||||
|
Increase
in deposit accounts
|
749,182 | 122,453 | 323,977 | |||||||||
|
Net
(repayments of) proceeds from short-term borrowings
|
(100,000 | ) | (77,498 | ) | 89,293 | |||||||
|
Proceeds
from long-term borrowings
|
503,000 | 316,000 | 89,869 | |||||||||
|
Repayments
of long-term borrowings
|
(218,602 | ) | (227,267 | ) | (161,719 | ) | ||||||
|
Net
cash provided by financing
activities
|
929,985 | 123,893 | 331,367 | |||||||||
|
Net
increase (decrease) in cash and cash
equivalents
|
394,175 | (21,504 | ) | (63,299 | ) | |||||||
|
Cash
and cash equivalents, beginning of
period
|
8,944 | 30,448 | 93,747 | |||||||||
|
Cash
and cash equivalents, end of
period
|
$ | 403,119 | $ | 8,944 | $ | 30,448 | ||||||
|
Supplemental
Cash Flow Information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$ | 155,598 | $ | 164,495 | $ | 124,755 | ||||||
|
Cash
paid during the period for income taxes
|
$ | 2,194 | $ | 11,089 | $ | 16,668 | ||||||
|
Non-cash
Investing Transactions:
|
||||||||||||
|
Loans
transferred to other real estate and other assets owned
|
$ | 37,113 | $ | 17,896 | $ | 3,499 | ||||||
|
Loans
to facilitate the sale of other real estate owned
|
$ | 3,195 | $ | — | $ | 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, 2008, 2007 AND 2006
NOTE 1—ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization - Imperial
Capital Bancorp, Inc. 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, two branches in
Nevada and a branch in Baltimore, Maryland.
The Bank
is now a California state chartered commercial bank. ICB is supervised by the
Federal Reserve Bank and is registered as a bank holding company.
As
further described in Note 15 and 20, the Company is currently operating
under a Cease and Desist Order (the “Order”) with the FDIC and the California
Department of Financial Institutions (“DFI”), and the Company has been notified
by the Federal Reserve Board (FRB) that it has been designated to be in a
“troubled condition.” Among other things, the Order requires the Bank
to take certain measures in the areas of management, capital, loan loss
allowance determination, risk management and liquidity
management. The Order further requires the Company to increase and
hold the Bank’s Tier 1 leverage ratio above nine percent and the Bank’s Total
Risk-Based Capital ratio above thirteen percent by August 11, 2009 and for the
life of the Order. As of December 31, 2008, the Bank had a Tier 1
leverage ratio of 6.0% and the Bank’s Total Risk-Based Capital ratio was
9.3%.
As
discussed in Note 3, the Company’s loans consist largely of real estate loans
secured by income producing multi-family properties and income producing
commercial properties concentrated in the State of California. While
management believes that the Company has provided an allowance for loan losses
sufficient to cover losses inherent in the portfolio as of December 31, 2008,
uncertain conditions in the real estate markets in which the Company lends could
impact earnings and capital as a result of additional charge-offs, loss
provisions and reserves.
As
further described in Note 15, the Company’s and the Bank’s regulatory
capital positions have fallen below the level necessary to be considered “well
capitalized” and are now categorized as “adequately capitalized” under the
applicable regulatory framework. Adequately capitalized companies
must obtain a waiver from the FDIC in order to accept, renew or roll over
brokered deposits. As of December 31, 2008 the Company had brokered
deposits of $739.9 million. If deemed necessary, the Bank may apply
for permission to continue to accept certain types of brokered
deposits.
The above
factors, and, in particular, the Company’s ability to comply with the terms of
the Order requiring increased capital requirements raise substantial doubt about
the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that might result from the outcome
of this uncertainty.
Management’s
strategic plan in connection with addressing the going concern matters discussed
above, focuses on four primary objectives including: (1) improving the Bank’s
asset quality, (2) reducing the Bank’s asset base and improving regulatory
capital ratios, (3) continuing to control and reduce the Company’s expenses, and
(4) reducing the Bank’s reliance on wholesale funding sources.
Management
is also evaluating various strategic options and continues to act upon both
tactical and strategic alternatives to raise capital and restructure our balance
sheet. While considerable risks to the Company’s future financial
performance exist, management believes that the Company can effectively respond
to these risks and carry on its operations, while it implements this strategic
plan and evaluates opportunities with respect to capital resources.
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.
Investment
securities that are acquired at discounted amounts, in part, due to credit
quality concerns are accounted for under Statement of Position (SOP) 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a
Transfer”. At acquisition, management reviews each investment to
determine whether there is evidence of deterioration of credit quality since
origination and if it is probable that the Company will be unable to collect all
amounts due according to its contractual terms. If both conditions
exist, management determines whether the excess of the investment’s scheduled
contractual principal and contractual interest payments over all cash flows
expected at acquisition as an amount that should not be accreted. The remaining
amount—representing the excess of the investment’s cash flows expected to be
collected over the amount paid—is accreted into interest income over the
remaining life of the investment. Over the life of the investment,
management continues to estimate cash flows expected to be
collected. Management evaluates at the balance sheet date whether the
present value of its investment determined using the effective interest rates
has decreased and if so, recognizes a loss. For any increases in cash
flows expected to be collected, management adjusts the amount of accretable
yield recognized on a prospective basis over the investment’s remaining
life.
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, 2008
and 2007, and on an interim basis at July 1, 2008, 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 16 — 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 years ended December 31, 2008, 2007 and 2006 includes
compensation expense for unvested stock-based compensation awards that were
outstanding as of January 1, 2008, 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, 2008, 2007 and 2006 were approximately
$319,000 ($191,000, net of tax, or $0.04 per diluted share), $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. Unrecognized stock-based
compensation expense related to unvested stock options was approximately
$423,000, $793,000 and $66,000 at December 31, 2008, 2007 and 2006,
respectively. At those dates, the weighted-average period over which the
unrecognized expense was expected to be recognized was 1.45 years, 2.41 years
and 2.22 years, respectively.
No
options were granted during the year ended December 31, 2008. The
fair value of each option granted for the years ended December 31, 2007 and 2006
were 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
|
|
|
Dividend
Yield
|
1.87%
|
1.17%
|
|
Expected
Volatility
|
24.31%
|
22.86%
|
|
Risk-Free
Interest
Rates
|
4.67%
|
4.94%
|
|
Expected
Lives
|
5
Years
|
5
Years
|
|
Weighted-Average
Fair Value
|
$9.12
|
$13.68
|
Other Comprehensive Income —
Other comprehensive income is displayed in the Consolidated Statements of
Changes in Shareholders’ Equity and Comprehensive Income (Loss) 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.
Fair Value Measurements — On
January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” for financial assets and financial liabilities. 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. The adoption of SFAS No. 157 did not have a material impact
on the Company’s financial condition or results of operations. In
accordance with Financial Accounting Standards Board Staff Position (FSP) No.
SFAS 157-2, “Effective Date of FASB Statement No. 157,” the Company will
delay application of SFAS 157 for non-financial assets and non-financial
liabilities, until January 1, 2009. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
See Note 4 - Fair Value Measurements.
In
general, fair values of financial instruments are based upon quoted market
prices, where available. If such quoted market prices are not available, fair
value is based upon internally developed models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value. These adjustments may include amounts to reflect counterparty
credit quality and the Company’s creditworthiness, among other things, as well
as unobservable parameters. Any such valuation adjustments are applied
consistently over time.
New Accounting Pronouncements
— 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 was
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 was
effective for the Company on January 1, 2009 and did not have a significant
impact on the Company’s financial condition or results of
operations.
In March
2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No.133." SFAS
No. 161 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No. 133 to
provide greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
was effective for the Company on January 1, 2009 and did not have a significant
impact on the Company's financial condition or results of
operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS
No. 162 did not have a significant impact on the Company’s financial condition
or results of operation.
NOTE 2—INVESTMENT
SECURITIES
The
amortized cost and fair value of investment securities as of December 31, 2008
and 2007 are as follows:
|
|
|
Gross
Unrealized
|
||||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Gains
|
Losses
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
Investment securities
available-for-sale:
|
||||||||||||||||
|
U.S. agency
securities
|
$ | 20,052 | $ | 20,192 | $ | 140 | $ | — | ||||||||
|
Collateralized mortgage
obligations
|
116,467 | 115,664 | 2,999 | 3,802 | ||||||||||||
|
Mortgage-backed
securities
|
3,740 | 3,947 | 207 | — | ||||||||||||
|
Corporate
bonds
|
9,894 | 6,106 | 2 | 3,790 | ||||||||||||
|
Residual interest in
securitized loans
|
695 | 695 | — | — | ||||||||||||
|
Equity
securities
|
422 | 195 | 58 | 285 | ||||||||||||
|
Total investment securities
available-for-sale
|
$ | 151,270 | $ | 146,799 | $ | 3,406 | $ | 7,877 | ||||||||
|
Investment securities
held-to-maturity:
|
||||||||||||||||
|
Collateralized mortgage
obligations
|
817,015 | 591,527 | 9,129 | 234,617 | ||||||||||||
|
Mortgage-backed
securities
|
125,671 | 124,849 | 401 | 1,223 | ||||||||||||
|
Total investment securities
held-to-maturity
|
$ | 942,686 | $ | 716,376 | $ | 9,530 | $ | 235,840 | ||||||||
|
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 | ||||||||
The
amortized cost and approximate fair value of securities at December 31, 2008 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
|
$ | 20,052 | $ | 20,251 | $ | — | $ | — | ||||||||
|
Due
after one year through five years
|
708 | 695 | — | — | ||||||||||||
|
Due
after five years through ten years
|
21,701 | 22,356 | 1,387 | 1,392 | ||||||||||||
|
Due
after ten
years
|
108,809 | 103,497 | 941,299 | 714,984 | ||||||||||||
| $ | 151,270 | $ | 146,799 | $ | 942,686 | $ | 716,376 | |||||||||
At
December 31, 2008, the remaining contractual maturity and weighted average life
of the mortgage-backed securities held-to-maturity was approximately 26.9 and
5.5 years, respectively. Additionally, the remaining contractual maturity and
weighted average life of the collateralized mortgage obligations
held-to-maturity was approximately 28.5 and 5.5 years, at December 31, 2008. 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 101 securities and 22 securities had unrealized losses at December 31,
2008 and 2007, 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
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
December
31, 2008:
|
||||||||||||||||||||||||
|
Investment
securities available-for-sale:
|
||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
$ | 8,915 | $ | 3,802 | $ | — | $ | — | $ | 8,915 | $ | 3,802 | ||||||||||||
|
Corporate bonds
|
3,211 | 2,654 | 1,074 | 1,136 | 4,285 | 3,790 | ||||||||||||||||||
|
Equity
securities
|
136 | 275 | — | 10 | 136 | 285 | ||||||||||||||||||
|
Total investment securities
available-for-sale
|
$ | 12,262 | $ | 6,731 | $ | 1,074 | $ | 1,146 | $ | 13,336 | $ | 7,877 | ||||||||||||
|
Investment
securities held-to-maturity:
|
||||||||||||||||||||||||
|
Collateralized mortgage
obligations
|
$ | 548,709 | $ | 234,617 | $ | — | $ | — | $ | 548,709 | $ | 234,617 | ||||||||||||
|
Mortgage-backed
securities
|
76,430 | 1,223 | — | — | 76,430 | 1,223 | ||||||||||||||||||
|
Total investment securities
held-to-maturity
|
$ | 625,139 | $ | 235,840 | $ | — | $ | — | $ | 625,139 | $ | 235,840 | ||||||||||||
|
December
31, 2007:
|
||||||||||||||||||||||||
|
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 | ||||||||||||
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 or, in the case of securities accounted for under SOP
03-3, the contractually required payments less the nonaccretable difference.
Furthermore, with the exception of those securities noted below, as of December
31, 2008, 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 detailed above, with
the exception of the other-than-temporary impairment charge recorded on the
securities identified below and the nonaccretable difference identified at
acquisition with respect to the investments accounted for under SOP 03-3, are
impaired due to reasons of credit quality. Accordingly, as of December 31,
2008, management believes the impairments detailed in the table above are
temporary.
During
2008, the Company recorded an other-than-temporary impairment charge of $9.3
million in connection with a decline in fair value of its available-for-sale
investment portfolio. This charge included a $4.6 million
other-than-temporary impairment related to the Bank’s investment in FNMA
preferred stock. The new cost basis of the preferred stock was
approximately $400,000 at December 31, 2008. The substantial decline
in value occurred following the United States Department of Treasury and Federal
Housing Finance Agency (FHFA) announcement on September 7, 2008 that FNMA was
being placed under conservatorship, that control of its management was being
given to its regulator, the FHFA, and that it was prohibited from paying
dividends on its common and preferred stock. There can be no
assurance that the remaining value of the FNMA preferred stock will not decline
further, or that we will not have to recognize additional impairment charges
related to this investment. The remaining $4.7 million
other-than-temporary impairment charge primarily related to the declines in fair
value on certain corporate sponsored notes and CMOs that management determined
were other than temporary due to the duration and severity of the impairments,
as well as management’s estimates regarding the anticipated recovery of these
securities. These charges were included with other non-interest
income on the consolidated statements of income.
During
2008 and 2007, 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 and 2006.
During
the year ended December 31, 2008, the Company acquired a portfolio of CMOs at an
average discount dollar price of 87% of par that were classified as
held-to-maturity. Management determined at the time that these
securities were acquired that it was probable that all contractually required
payments would not be collected due, in part, to credit
quality. Accordingly, these investment securities are accounted for
under SOP 03-3, and as of December 31, 2008, the outstanding balance
(representing amounts owed to the Company at the balance sheet date) and
carrying amounts of those investments classified as held-to-maturity securities
are as follows:
|
(in
thousands)
|
||||
|
Outstanding
balance
|
$ | 937,910 | ||
|
Carrying
amount, net
|
817,015 | |||
|
(in
thousands)
|
||||
|
Accretable
Yield:
|
||||
|
Balance
at December 31, 2007
|
$ | — | ||
|
Additions
|
98,142 | |||
|
Accretion
|
(9,748 | ) | ||
|
Disposals
|
— | |||
|
Balance
at December 31, 2008
|
$ | 88,394 | ||
The
following table provides a detail of the held-to-maturity investment securities
acquired during the year ended December 31, 2008 that were accounted for in
accordance with SOP 03-3:
|
(in
thousands)
|
||||
|
Contractually
required payments receivable
|
$ | 1,009,197 | ||
|
Nonaccretable
difference
|
(32,500 | ) | ||
|
Cash
flows expected to be collected
|
976,697 | |||
|
Accretable
yield
|
7.98 | % | ||
|
Fair
value of acquired securities
|
$ | 878,555 | ||
NOTE 3—LOANS
Loans
consisted of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Real
estate
loans
|
$ | 2,305,789 | $ | 2,627,801 | ||||
|
Construction
and land
loans
|
408,644 | 421,110 | ||||||
|
Entertainment
finance
loans
|
50,376 | 76,342 | ||||||
|
Franchise
loans
|
2,615 | 2,718 | ||||||
|
Commercial
and other
loans
|
6,610 | 14,631 | ||||||
| 2,774,034 | 3,142,602 | |||||||
|
Unamortized
premium
|
11,246 | 13,776 | ||||||
|
Deferred
loan origination costs,
net
|
14,250 | 16,477 | ||||||
| 2,799,530 | 3,172,855 | |||||||
|
Allowance
for loan
losses
|
(50,574 | ) | (47,783 | ) | ||||
| $ | 2,748,956 | $ | 3,125,072 | |||||
At
December 31, 2008, approximately 28.8%, 70.7% and 0.5% 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, 2008, approximately 39.5% of our loans secured by
real estate were collateralized by properties located in
California. At December 31, 2008, construction and land loans
consisted of 51.0% of single-family residential and condominium projects, 40.4%
of commercial retail and multi-family development projects and 8.6% of land
loans.
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, 2008 and 2007, approximately $2.0 billion and $2.3 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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 47,783 | $ | 46,049 | $ | 43,817 | ||||||
|
Provision
for loan losses
|
77,965 | 11,077 | 5,000 | |||||||||
|
Charge-offs:
|
||||||||||||
|
Real
estate loans
|
(18,521 | ) | (6,843 | ) | (1,634 | ) | ||||||
|
Construction
and land loans
|
(56,243 | ) | (1,530 | ) | — | |||||||
|
Entertainment
finance loans
|
— | (2,500 | ) | (2,500 | ) | |||||||
|
Commercial
and other loans
|
(1,159 | ) | — | — | ||||||||
|
Total
charge-offs
|
(75,923 | ) | (10,873 | ) | (4,134 | ) | ||||||
|
Recoveries:
|
||||||||||||
|
Real
estate loans
|
184 | 796 | 894 | |||||||||
|
Construction
and land loans
|
60 | — | — | |||||||||
|
Entertainment
finance loans
|
505 | 470 | 472 | |||||||||
|
Franchise
loans
|
— | 264 | — | |||||||||
|
Total
recoveries
|
749 | 1,530 | 1,366 | |||||||||
|
Net
charge-offs
|
(75,174 | ) | (9,343 | ) | (2,768 | ) | ||||||
|
Balance
at end of year
|
$ | 50,574 | $ | 47,783 | $ | 46,049 | ||||||
As of
December 31, 2008 and 2007, there were $178,000 and $93,000 respectively, of
entertainment finance loan recoveries, related to borrowers domiciled outside of
the United States.
As of
December 31, 2008 and 2007, the accrual of income had been suspended on
approximately $154.9 million and $38.0 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, 2008, 2007 and 2006 was
approximately $8.1 million, $2.8 million, and $1.5 million,
respectively.
As of
December 31, 2008 and 2007, restructured loans totaled $9.2 million and $14.1
million, respectively. There were no related commitments to lend additional
funds on restructured loans. For the years ended December 31, 2008, 2007 and
2006, $720,000, $1.4 million, and $1.5 million, respectively, of gross interest
income would have been recorded had the loans been current in accordance with
their original terms compared to $600,000, $1.0 million, and $720,000,
respectively, of interest income that was included in net income for the same
periods. The average yield on restructured loans was 7.33% and 7.90%,
respectively, at December 31, 2008 and 2007.
As of
December 31, 2008 and 2007, impaired loans totaled $162.6 million and $47.0
million, respectively. There were $2.8 million of impaired loans in
2008 with a valuation allowance provided for these loans of
$783,000. In 2007, the valuation allowance for impaired loans was
$11.6 million. As of December 31, 2008 and 2007, impaired loans on
nonaccrual status were $154.9 million and $38.0 million, respectively. There
were $159.8 million of impaired loans without a valuation allowance as of
December 31, 2008. The average recorded investment in impaired loans
for the years ended December 31, 2008, 2007 and 2006 was $129.9 million, $44.6
million, and $32.3 million, respectively. Interest income recognized on impaired
loans for the years ended December 31, 2008, 2007 and 2006 was $730,000,
$824,000, and $826,000, respectively.
Loans
having carrying values of $37.1 million and $17.9 million were transferred to
OREO in 2008 and 2007, respectively.
NOTE
4 – COMPREHENSIVE INCOME (LOSS)
Comprehensive
(loss) income, which encompasses net income, the net change in unrealized gains
(losses) on investment securities available-for-sale and the reclassification of
net (gains) losses included in earnings, is presented below:
|
For
the Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
(Loss) Income
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | |||||
|
Other
comprehensive loss:
|
||||||||||||
|
Change
in net unrealized gains (losses) on investment securities
available-for-sale, net of tax benefit (expense) of $5,667, $(155) and
$(266) for the years ended December 31, 2008, 2007 and 2006,
respectively
|
(8,501 | ) | 232 | 399 | ||||||||
|
Reclassification
for net losses included in earnings, net of tax benefit of $(3,701) for
the year ended December 31, 2008
|
5,552 | — | — | |||||||||
|
Comprehensive
(Loss) Income
|
$ | (35,545 | ) | $ | 15,852 | $ | 27,288 | |||||
NOTE 5—OTHER REAL ESTATE
OWNED
Other
real estate and other assets owned was stated as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Other
real estate owned held for
sale
|
$ | 37,031 | $ | 14,317 | ||||
|
Other
assets owned held for
sale
|
1,000 | 5,079 | ||||||
|
Less:
valuation
allowance
|
— | — | ||||||
|
Other
real estate owned,
net
|
$ | 38,031 | $ | 19,396 | ||||
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Provision
for losses on other real estate owned
|
6,196 | 300 | — | |||||||||
|
Charge-offs
on other real estate owned
|
(6,196 | ) | (300 | ) | — | |||||||
|
Balance
at end of year
|
$ | — | $ | — | $ | — | ||||||
NOTE 6—PREMISES AND
EQUIPMENT
Premises
and equipment are stated at cost less accumulated depreciation and amortization
and consist of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Furniture,
fixtures and equipment
|
$ | 15,779 | $ | 15,277 | ||||
|
Leasehold
improvements
|
5,482 | 4,551 | ||||||
|
Automobiles
|
1,532 | 1,579 | ||||||
| 22,793 | 21,407 | |||||||
|
Accumulated
depreciation and amortization
|
(15,092 | ) | (12,857 | ) | ||||
| $ | 7,701 | $ | 8,550 | |||||
Depreciation
and amortization expense on premises and equipment for the years ended December
31, 2008, 2007 and 2006 was $2.8 million, $3.0 million, and $2.7 million,
respectively.
NOTE 7—DEPOSIT
ACCOUNTS
Deposit
accounts consist of the following:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Non-interest
demand accounts
|
$ | 10,761 | $ | 16,819 | ||||
|
Interest
demand accounts
|
43,055 | 26,518 | ||||||
|
Money
market and passbook accounts
|
421,252 | 251,660 | ||||||
|
Time
certificates under $100,000
|
1,609,089 | 1,162,919 | ||||||
|
Time
certificates $100,000 and over
|
846,883 | 723,942 | ||||||
| $ | 2,931,040 | $ | 2,181,858 | |||||
Demand
deposit accounts have no contractual maturity. The weighted average
contractual interest rate of the Bank’s interest-bearing demand deposit accounts
was 3.08% and 3.37% at December 31, 2008 and 2007, respectively. The
weighted average contractual interest rate of the Bank’s money market and
passbook accounts was 3.78% and 4.73% at December 31, 2008 and 2007,
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
3.92% and 5.07% at December 31, 2008 and 2007, respectively.
Interest
expense on time certificates $100,000 and over, which excludes broker deposits,
for the years ended December 31, 2008, 2007 and 2006 amounted to approximately
$28.9 million, $39.0 million, and $30.0 million, respectively.
As of
December 31, 2008, the contractual maturities of time certificate accounts were
as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2009
|
$ | 1,803,843 | ||
|
2010
|
216,506 | |||
|
2011
|
206,923 | |||
|
2012
|
158,771 | |||
|
2013
|
69,834 | |||
|
Thereafter
|
95 | |||
| $ | 2,455,972 | |||
NOTE 8 — LINES OF
CREDIT
As of
December 31, 2008 and 2007, the Bank had uncommitted, unsecured lines of credit
of $68.0 million and $131.0 million, respectively, with three unaffiliated
financial institutions renewable daily. There were no borrowings on
these lines at December 31, 2008 and 2007. Subsequent to December 31,
2008, the Bank was notified that these lines were no longer
available.
NOTE 9 — 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, and interest payments on the debentures are used to fund distributions
payable on the preferred and common securities issued by the trust. ICB has the
option to defer interest payments on the debentures for up to five years, during
which time it generally is prohibited from paying cash dividends on, or
repurchasing, its common stock. To the extent ICB defers interest
payments on the debentures, the trust(s) holding those debentures defer the
payment of distributions on the trust securities. 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 15 – Regulatory
Requirements.”
As more
fully discussed in “Note 20 – Subsequent Events”, the Company was notified by
the Federal Reserve Bank of San Francisco that it is prohibited from making any
dividend payments, including distributions on these Trust Preferred securities,
without the approval of the Federal Reserve Bank of San
Francisco. Accordingly, ICB is currently deferring the payment of
interest on the debentures issued to each of the five trusts.
NOTE 10 — FHLB ADVANCES AND OTHER
BORROWINGS
FHLB
advances represent $1.2 billion of collateralized obligations with the FHLB of
San Francisco. Other borrowings consist of $30.0 million of
securities sold under agreements to repurchase. FHLB advances and
other borrowings are summarized by contractual maturity as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2009
|
$ | 172,196 | ||
|
2010
|
363,915 | |||
|
2011
|
182,452 | |||
|
2012
|
142,921 | |||
|
2013
|
108,000 | |||
|
Thereafter
|
236,149 | |||
| $ | 1,205,633 | |||
The
Company has pledged real estate loans with a carrying value of $2.0 billion and
investment securities held-to-maturity with a carrying and fair value of $27.7
million and $27.8 million, respectively, and investment securities
available-for-sale with a carrying and fair value of $46.2 million and $47.3
million, respectively, to secure FHLB advances. The total FHLB borrowing
capacity available from the collateral that has been pledged is approximately
$1.2 billion, of which $53.6 million remained available to borrow as of December
31, 2008. Additionally, the Company has pledged investment securities
held-to-maturity with a carrying and fair value of $30.3 million and $30.0
million, respectively, and investment securities available-for-sale with a
carrying and fair value of $3.7 million and $3.9 million, respectively, 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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Short-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$ | 103,000 | $ | 228,000 | $ | 177,498 | ||||||
|
Weighted-average
daily balance outstanding
|
$ | 112,544 | $ | 145,458 | $ | 15,094 | ||||||
|
Weighted-average
rate paid during the year
|
2.62 | % | 5.14 | % | 4.96 | % | ||||||
|
Weighted-average
rate on balance at year-end
|
0.00 | % | 4.57 | % | 5.40 | % | ||||||
|
Balance
at
year-end
|
$ | — | $ | 130,000 | $ | 177,498 | ||||||
|
Interest
expense
|
$ | 2,948 | $ | 7,470 | $ | 749 | ||||||
|
Long-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$ | 1,205,633 | $ | 899,224 | $ | 973,571 | ||||||
|
Weighted-average
daily balance outstanding
|
$ | 1,065,605 | $ | 866,003 | $ | 911,822 | ||||||
|
Weighted-average
rate paid during the year
|
4.55 | % | 4.46 | % | 4.17 | % | ||||||
|
Weighted-average
rate on balance at year-end
|
4.45 | % | 4.64 | % | 4.25 | % | ||||||
|
Balance
at
year-end
|
$ | 1,205,633 | $ | 891,235 | $ | 832,502 | ||||||
|
Interest
expense
|
$ | 48,486 | $ | 38,664 | $ | 37,973 | ||||||
As noted
in “Note 20 – Subsequent Events,” the Bank’s credit facility with the FHLB of
San Francisco was temporarily suspended, and the Bank is prohibited from
receiving any further advances until that suspension is lifted.
NOTE 11 — 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 $413,000, $490,000, and $478,000, in 2008, 2007 and 2006,
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 $32,000, $42,000 and $36,000 in
2008, 2007 and 2006, respectively.
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. No compensation expense was
recognized in 2008, 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, 2008, the Company has
granted an aggregate of 2,000,750 options under the Stock Plan, of which
1,026,256 have been exercised and 448,011 have been forfeited. The exercise
price per share of the options outstanding at December 31, 2008 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
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Options
outstanding at the beginning of the year
|
570,400 | 545,984 | $ | 37.67 | $ | 35.73 | ||||||||||
|
Options
granted during the year
|
— | 103,000 | $ | — | $ | 36.34 | ||||||||||
|
Options
exercised during the year
|
(4,000 | ) | (76,584 | ) | $ | 16.00 | $ | 21.79 | ||||||||
|
Options
forfeited during the year
|
(39,917 | ) | (2,000 | ) | $ | 41.27 | $ | 47.92 | ||||||||
|
Options
outstanding at the end of the year
|
526,483 | 570,400 | $ | 37.57 | $ | 37.67 | ||||||||||
|
Options
exercisable at the end of the year
|
461,808 | 464,068 | $ | 37.72 | $ | 37.87 | ||||||||||
NOTE 12 — 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,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Components
of the deferred tax asset:
|
||||||||
|
Allowance
for loan losses
|
$ | 21,207 | $ | 20,091 | ||||
|
Net
operating loss carryforward
|
3,231 | — | ||||||
|
Credit
carryforwards
|
3,357 | — | ||||||
|
Accrued
expenses
|
4,043 | 3,641 | ||||||
|
Other
|
7,822 | 4,413 | ||||||
|
Valuation
allowance
|
(2,100 | ) | — | |||||
|
Total
deferred tax assets
|
37,560 | 28,145 | ||||||
|
Components
of the deferred tax liability:
|
||||||||
|
Deferred
loan origination costs
|
9,202 | 10,761 | ||||||
|
FHLB
stock dividends
|
6,000 | 5,049 | ||||||
|
Unrealized
gain on investment securities available-for-sale
|
20 | 187 | ||||||
|
Total
deferred tax liabilities
|
15,222 | 15,997 | ||||||
|
Net
deferred tax asset
|
$ | 22,338 | $ | 12,148 | ||||
At
December 31, 2008, the Company had a state net operating loss carryforward of
approximately $45.8 million, which will expire in 2028. During 2008,
the Company established a valuation allowance of $2.1 million primarily related
to the potential unrealizability of the state deferred tax assets as of December
31, 2008. Management recorded a valuation to reduce the deferred tax
assets to an amount that is more likely than not to be realized.
A summary
of the provision for income taxes follows:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
(benefit) provision:
|
||||||||||||
|
Federal
|
$ | (13,336 | ) | $ | 8,927 | $ | 13,678 | |||||
|
State
|
180 | 2,507 | 3,889 | |||||||||
| (13,156 | ) | 11,434 | 17,567 | |||||||||
|
Deferred
(benefit) provision:
|
||||||||||||
|
Federal
|
(4,996 | ) | (468 | ) | 540 | |||||||
|
State
|
(3,129 | ) | (331 | ) | 386 | |||||||
| (8,125 | ) | (799 | ) | 926 | ||||||||
| $ | (21,281 | ) | $ | 10,635 | $ | 18,493 | ||||||
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income tax, net of federal income tax benefit
|
7.2 | % | 7.0 | % | 7.0 | % | ||||||
|
Valuation
allowance
|
(3.9 | )% | — | — | ||||||||
|
State
income tax credit and other benefits
|
1.2 | % | (1.5 | )% | (1.3 | )% | ||||||
|
Effective
income tax rate
|
39.5 | % | 40.5 | % | 40.7 | % | ||||||
During
2008, 2007 and 2006, the Company recognized a $7,000, $898,000 and $627,000
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 for the
year ended December 31, 2007. The following table presents the activity in
unrecognized tax benefits:
|
Years
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Unrecognized
tax benefit, January 1
|
$ | 1,240 | $ | — | ||||
|
Gross
increases — tax positions in prior period
|
1,060 | 1,007 | ||||||
|
Gross
decreases — tax positions in prior period
|
— | — | ||||||
|
Gross
increases — tax positions in current period
|
370 | 233 | ||||||
|
Gross
decreases — tax positions in current period
|
— | — | ||||||
|
Settlements
|
— | — | ||||||
|
Lapse
of statute of limitations
|
(250 | ) | — | |||||
|
Unrecognized
tax benefit, December 31
|
$ | 2,420 | $ | 1,240 | ||||
Included
in the balance of unrecognized tax benefits at December 31, 2008 and 2007, are
approximately $1.6 million and $0.8 million, respectively, 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 $30,000 and interest
of $212,000 during 2008. 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 2004, 2005, 2006 and
2007.
NOTE 13 — 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 $164.9 million and $315.6 million at December 31, 2008 and 2007,
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 at December 31, 2008 and 2007.
NOTE 14 — 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, 2008 are as follows:
|
(in
thousands)
|
||||
|
2009
|
$ | 3,429 | ||
|
2010
|
3,020 | |||
|
2011
|
2,870 | |||
|
2012
|
2,192 | |||
|
2013
|
1,400 | |||
|
Thereafter
|
197 | |||
|
Total
|
13,108 | |||
|
Sub-Lease
income
|
(207 | ) | ||
|
Net
future minimum lease payments
|
$ | 12,901 | ||
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 $3.9 million, $4.5 million, and $4.5
million in 2008, 2007 and 2006, 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 15 — 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.
On August
8, 2008, in connection with its most recent examination by the FDIC, the members
of the Board of Directors of the Bank, entered into an informal supervisory
agreement (a memorandum of understanding) with the FDIC and the DFI to address
certain matters raised in the examination. Under the terms of the
agreement, the Bank agreed, among other things, to: (i) formulate a plan to
reduce the Bank’s risk exposure to certain classified assets and loan
concentrations, (ii) improve the internal and external loan grading process,
(iii) improve the credit underwriting and administrative functions in connection
with the Bank’s construction lending process, (iv) review and improve the Bank’s
methodology regarding determining the adequacy of its allowance for loan losses,
as well as establishing an appropriate reserve allocation for its unfunded loan
commitments, (v) develop and implement a strategic plan to improve earnings and
other key regulatory financial ratios, and (vi) reduce the Bank’s reliance on
volatile funding sources. In March 2009, the MOU was terminated in
consideration of an Order to Cease and Desist that was issued on February 17,
2009. Refer to Note 20 – Subsequent Events for additional
information. In addition, the Federal Reserve Bank of San Francisco
(“FRB San Francisco”) notified ICB that it had designated the Company to be in
“troubled condition” for purposes of Section 914 of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989. As a
result of that designation, the Company may not appoint any new director or
senior executive officer or change the responsibilities of any current senior
executive officers without notifying the FRB San Francisco. In
addition, the Company may not make indemnification and severance payments
without complying with certain statutory restrictions, including prior written
approval of the Federal Reserve Board and concurrence from the
FDIC. Further, the Company is generally prohibited from receiving
dividends from the Bank, making any dividend payments (including distributions
on its trust preferred securities) and increasing or renewing any debt, without
receiving prior approval from the FRB San Francisco of such
payments.
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, 2008 and 2007, 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 originally provided a five year transition period, to end March 31, 2009,
for application of the quantitative limits. On March 17, 2009, the
FRB announced that it adopted a final rule delaying the effective date for the
new requirement to March 31, 2011.
As of
December 31, 2008, the most recent notification from the FDIC categorized the
Bank as “adequately capitalized” under the applicable regulatory framework.
Similarly, the Company’s capital levels exceeded the levels necessary to be
considered “adequately capitalized”. To be categorized as “well capitalized”,
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
Capitalization” Designation
|
||||||||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
As of December 31, 2008
|
||||||||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 298,423 | 9.4 | % | $ | 253,587 | 8.0 | % | $ | 316,984 | 10.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 294,016 | 9.3 | % | $ | 253,038 | 8.0 | % | $ | 316,298 | 10.0 | % | ||||||||||||
|
Tier
I capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 237,649 | 7.5 | % | $ | 126,793 | 4.0 | % | $ | 190,190 | 6.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 254,324 | 8.0 | % | $ | 126,519 | 4.0 | % | $ | 189,779 | 6.0 | % | ||||||||||||
|
Tier
I capital (to average total assets)
|
||||||||||||||||||||||||
|
Imperial
Capital Bancorp, Inc.
|
$ | 237,649 | 5.6 | % | $ | 168,983 | 4.0 | % | $ | 211,229 | 5.0 | % | ||||||||||||
|
Imperial
Capital Bank
|
$ | 254,324 | 6.0 | % | $ | 168,463 | 4.0 | % | $ | 210,579 | 5.0 | % | ||||||||||||
|
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 | % | ||||||||||||
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. As a result of
the Order to Cease and Desist that was issued in February 2009, the Bank is
currently prohibited from paying dividends to the Company without prior
regulatory approval. See “Note 20 – Subsequent Events.”
NOTE 16—EARNINGS PER
SHARE
The
following is a reconciliation of the amounts used in the calculation of basic
(losses) earnings per share and diluted (losses) earnings per
share.
|
Net
Income
|
Weighted-Average
Shares
Outstanding
|
Per
Share
Amount
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Year ended December 31,
2008
|
||||||||||||
|
Basic
losses per share
|
$ | (32,596 | ) | 5,428 | $ | (6.01 | ) | |||||
|
Dilutive
effect of stock options
|
— | — | — | |||||||||
|
Diluted
losses per share
|
$ | (32,596 | ) | 5,428 | $ | (6.01 | ) | |||||
|
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 | |||||||
NOTE 17—FAIR VALUE
MEASUREMENTS
The
Company adopted the provisions of SFAS No. 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS No. 157 did not
materially impact its financial condition or results of operations, the Company
is now required to provide additional disclosures as part of its financial
statements. In accordance with FASB Staff Position No. 157-2,
"Effective Date of FASB Statement No. 157," the Company has delayed the
application of SFAS No. 157 for non-financial assets and non-financial
liabilities, until January 1, 2009.
SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
Investment
securities available-for-sale are reported at fair value utilizing Level 1
inputs with respect to valuing equity securities with quoted prices on an active
market, Level 2 inputs for investment and debt securities, and Level 3 inputs
related to the valuation of the Company’s residual interest in securitized
loans. The valuation for investment and debt securities utilizing
Level 2 inputs were primarily determined by an independent pricing service using
matrix pricing, which is a mathematical technique widely used in the industry to
value securities without relying exclusively on quoted market prices for the
specific securities, but rather by relying on the securities’ relationship to
other benchmark quoted securities.
The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at December 31, 2008, were as
follows:
|
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
at December 31, 2008
|
||||||||||||||||
|
Quoted Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Balance
at
December 31,
2008
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Investment
securities—available-for-sale
|
$ | 59 | $ | 146,045 | $ | 695 | $ | 146,799 | ||||||||
|
Changes
in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
Basis
|
||||||||||||||||||||||||
|
Balance
at
December
31, 2007
|
Total Realized
and Unrealized
Gains
Included in
Income
|
Total
Realized and
Unrealized
Gains
|
Purchases,
Sales, Other
Settlements and
Issuances,
net
|
Net Transfers
In and/or Out
of
Level 3
|
Balance
at
December 31, 2008
|
|||||||||||||||||||
|
Net Revaluation
of
Retained Interests
|
||||||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Investment
securities—available-for-sale
|
$ | 1,318 |
$
|
— | $ | — | $ | (623 | ) | $ | — | $ | 695 | |||||||||||
The
Company’s assets measured at fair value on a non-recurring basis subject to the
disclosure requirements of SFAS No. 157 at December 31, 2008, were as
follows:
|
Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis at
December 31, 2008
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs (Level 3)
|
Balance
at
December
31, 2008
|
|||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Impaired
loans
|
$ | — | $ | — | $ | 161,793 | $ | 161,793 | ||||||||
|
Other
real estate and assets owned
|
$ | — | $ | — | $ | 38,031 | $ | 38,031 | ||||||||
Impaired
loans, which are measured for impairment using the fair value of the collateral,
for collateral dependent loans, had a carrying amount $162.6 million, with a
valuation allowance of $783,000.
Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test. Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment. As stated above, SFAS No. 157 will be applicable to these
fair value measurements beginning January 1, 2009.
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 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 market quotes for similar assets or 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,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 403,119 | $ | 403,119 | $ | 8,944 | $ | 8,944 | ||||||||
|
Investment
securities available-for-sale
|
146,799 | 146,799 | 117,924 | 117,924 | ||||||||||||
|
Investment
securities held-to-maturity
|
942,686 | 716,376 | 159,023 | 158,509 | ||||||||||||
|
Stock
in Federal Home Loan Bank
|
63,498 | 63,498 | 53,497 | 53,497 | ||||||||||||
|
Loans,
net
|
2,748,956 | 2,660,800 | 3,125,072 | 3,145,088 | ||||||||||||
|
Accrued
interest receivable
|
21,305 | 21,305 | 20,841 | 20,841 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposit
accounts
|
$ | 2,931,040 | $ | 2,966,946 | $ | 2,181,858 | $ | 2,191,930 | ||||||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,205,633 | 1,278,496 | 1,021,235 | 1,041,398 | ||||||||||||
|
Junior
subordinated
debentures
|
86,600 | 58,216 | 86,600 | 91,889 | ||||||||||||
NOTE 18—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 2008, 2007 and 2006 is detailed
below:
|
Lending
Operations
|
All
Other
|
Eliminations
|
Consolidated
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As of and for the Year
Ended December 31,
2008
|
||||||||||||||||
|
Revenues
from external customers
|
$ | 245,473 | $ | (1,510 | ) | $ | — | $ | 243,963 | |||||||
|
Total
interest income
|
253,997 | 216 | — | 254,213 | ||||||||||||
|
Total
interest expense
|
152,919 | 7,351 | — | 160,270 | ||||||||||||
|
Depreciation
and amortization expense
|
2,366 | 428 | — | 2,794 | ||||||||||||
|
Benefit
for income taxes
|
(17,424 | ) | (3,857 | ) | — | (21,281 | ) | |||||||||
|
Capital
expenditures
|
1,876 | 324 | — | 2,200 | ||||||||||||
|
Total
assets
|
4,419,113 | 288,331 | (267,606 | ) | 4,439,838 | |||||||||||
|
Loss
before provision for income taxes
|
(41,420 | ) | (12,457 | ) | — | (53,877 | ) | |||||||||
|
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 | |||||||||||
NOTE 19—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,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
and cash
equivalents
|
$ | 4,324 | $ | 972 | ||||
|
Investment
securities available-for-sale, at fair value
|
754 | 1,503 | ||||||
|
Investments
in wholly-owned subsidiaries:
|
||||||||
|
Imperial Capital
Bank
|
258,306 | 296,161 | ||||||
|
Imperial Capital Real Estate
Investment Trust
|
1,666 | 1,764 | ||||||
|
Other
subsidiaries
|
108 | 108 | ||||||
|
Investments
in unconsolidated
subsidiaries
|
2,600 | 2,600 | ||||||
|
Other
assets
|
20,424 | 24,116 | ||||||
|
Total
assets
|
$ | 288,182 | $ | 327,224 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Junior
subordinated
debentures
|
$ | 86,600 | $ | 86,600 | ||||
|
Other
liabilities
|
12,013 | 13,057 | ||||||
|
Shareholders’
equity
|
189,569 | 227,567 | ||||||
|
Total liabilities and
shareholders’
equity
|
$ | 288,182 | $ | 327,224 | ||||
Condensed Statements of
Income
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Interest
income
|
$ | 216 | $ | 835 | $ | 1,125 | ||||||
|
Interest
expense
|
7,351 | 8,338 | 8,197 | |||||||||
|
Net
interest expense
|
(7,135 | ) | (7,503 | ) | (7,072 | ) | ||||||
|
Provision
for loan losses
|
(5 | ) | (3 | ) | (4 | ) | ||||||
|
Non-interest
expense:
|
||||||||||||
|
General
and administrative expense
|
3,601 | 3,316 | 3,052 | |||||||||
|
Other
|
1,726 | (273 | ) | (91 | ) | |||||||
|
Total
non-interest expense
|
5,327 | 3,043 | 2,961 | |||||||||
|
Loss
before income tax benefit and equity in net income of
subsidiaries
|
(12,457 | ) | (10,543 | ) | (10,029 | ) | ||||||
|
Income
tax benefit
|
(3,857 | ) | (3,890 | ) | (4,021 | ) | ||||||
|
Loss
before equity in net income of subsidiaries
|
(8,600 | ) | (6,653 | ) | (6,008 | ) | ||||||
|
Equity
in net (loss) income of subsidiaries
|
(23,996 | ) | 22,273 | 32,897 | ||||||||
|
Net
(loss) income
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | |||||
Condensed Statements of Cash
Flows
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net (loss)
income
|
$ | (32,596 | ) | $ | 15,620 | $ | 26,889 | |||||
|
Adjustments to net
income:
|
||||||||||||
|
Equity in undistributed net
income of subsidiaries
|
24,029 | (22,227 | ) | (32,897 | ) | |||||||
|
Provision for loan
losses
|
(5 | ) | (3 | ) | (4 | ) | ||||||
|
Other,
net
|
(1,325 | ) | (688 | ) | 29 | |||||||
|
Decrease (increase) in other
assets
|
5,674 | (4,373 | ) | (1,506 | ) | |||||||
|
(Decrease) increase in other
liabilities
|
(216 | ) | 1,675 | (445 | ) | |||||||
|
Net cash used in operating
activities
|
(4,439 | ) | (9,996 | ) | (7,934 | ) | ||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Capital distribution received
from Imperial Capital REIT
|
— | — | 1,857 | |||||||||
|
Dividends received from Imperial
Capital Bank
|
10,850 | 18,400 | 8,500 | |||||||||
|
Dividends received from Imperial
Capital REIT
|
200 | 700 | 251 | |||||||||
|
Other,
net
|
341 | 262 | 906 | |||||||||
|
Net cash provided by investing
activities
|
11,391 | 19,362 | 11,514 | |||||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds from exercise of
employee stock options
|
39 | 2,567 | 3,692 | |||||||||
|
Cash paid to acquire treasury
stock
|
(1,983 | ) | (9,062 | ) | (11,374 | ) | ||||||
|
Cash dividends
paid
|
(1,656 | ) | (3,300 | ) | (2,371 | ) | ||||||
|
Net cash used in financing
activities
|
(3,600 | ) | (9,795 | ) | (10,053 | ) | ||||||
|
Net increase (decrease) in cash
and cash equivalents
|
3,352 | (429 | ) | (6,473 | ) | |||||||
|
Cash and cash equivalents at
beginning of period
|
972 | 1,401 | 7,874 | |||||||||
|
Cash and cash equivalents at
end of period
|
$ | 4,324 | $ | 972 | $ | 1,401 | ||||||
NOTE
20—SUBSEQUENT EVENTS
On
February 17, 2009, the Bank entered into a stipulation and consent to the
issuance of the Order by the FDIC and the DFI.
The Order
is a formal corrective action pursuant to which the Bank has agreed to take
certain measures in the areas of management, capital, loan loss allowance
determination, risk management, liquidity management, board oversight and
monitoring of compliance, and restricts payment of dividends and the opening of
branch or other Bank offices. Specifically, the Order requires that
the Bank submit to the regulators within sixty days a detailed capital plan to
address how the Bank will remain “adequately capitalized” and within 180 days
increase its Tier 1 leverage above nine percent and total risk-based capital
ratios above thirteen percent. The Bank must also submit to the
regulators within prescribed time periods a revised policy for determining the
allowance for loan losses, plans for reducing commercial real estate loan
concentrations and brokered deposits, a liquidity plan, strategic business plan
and profitability plan. The Order will remain in effect until
modified or terminated by the FDIC and the DFI. None of the timeframes
under the Order has lapsed and therefore we are in the process of responding to
the Order.
In March
2009, the Bank’s $30 million repurchase agreement borrowing was called by the
lender prior to its maturity. The Bank incurred a $1.1 million
penalty expense in 2009 in connection with the early settlement of this
borrowing. Additionally, in March 2009, the Bank’s FHLB credit
facility was frozen at its then outstanding balance and no additional advances
will be available until this suspension is lifted.
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, 2008 under the supervision and with the
participation of the Company’s principal executive officer, principal 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
principal executive officer and principal financial officer concluded that, as
of December 31, 2008, 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 principal executive officer and principal 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, 2008, 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
On March
30, 2009, Robert R. Reed, a director of the Company and the Bank, was appointed
as a member of the executive committees of the boards of directors of the
Company and the Bank, effective April 1, 2009.
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
|
54
|
Chairman
of the Board, President and Chief Executive Officer of ICB and the Bank
(1)
|
|
Timothy
M. Doyle
|
52
|
Executive
Managing Director and Chief Financial Officer of ICB and the
Bank
|
|
Lyle
C. Lodwick
|
54
|
Executive
Managing Director and Chief Operating Officer of ICB and the
Bank
|
|
Phillip
E. Lombardi
|
52
|
Executive
Managing Director and Chief Credit Officer of ICB and the
Bank
|
_______________
|
(1)
|
As
reported in ICB’s Current Report on Form 8-K filed on February 27, 2009,
on February 25, 2009, Mr. Haligowski commenced a medical leave of absence
from ICB and the Bank. In his absence, his decision making
authority has been assumed by the executive committees of the boards of
directors 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.
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, are identified below.
Norval L. Bruce, age 67, has served as the Vice
Chairman of the Board of ICB and the Bank since June of 1999, and retired as an
executive officer effective December 31, 2008. He was 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.
Jeffrey L. Lipscomb, age 55,
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 61, 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 74, 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 72, 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.
Lipscomb is an “audit committee financial expert,” as defined in the SEC’s
rules, and that Mr. Lipscomb 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, 2008, 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
|
|
As
reported in our Current Report on Form 8-K filed on February 27, 2009, on
February 25, 2009, Mr. Haligowski commenced a medical leave of absence from ICB
and the Bank. In his absence, his decision making authority has been
assumed by the executive committees of the boards of directors of ICB and the
Bank. As reported in our Current Report on Form 8-K filed on December
29, 2008, Mr. Bruce retired as an executive office effective December 31,
2008.
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 have primarily consisted 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 deposit accounts (available to all employees and directors). In an
effort to reduce costs, the payment of preferential interest on deposit accounts
to directors, executive officers and all other employees was eliminated
effective December 31, 2008, except for time deposits, which will end on the
applicable expiration date. We also eliminated the home computer and
internet connection benefit being provided to certain executives and other
employees, as well as the corporate limousine and driver which had been made
available to certain executive officers for business use only. In
addition, certain other benefits previously provided to Mr. Haligowski were
eliminated, including his chartered air travel benefit, except for approximately
12 pre-paid hours set to expire if not used in 2009.
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
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.”
In
January 2009, the Committee and Mr. Haligowski agreed to submit to the FDIC
certain changes to Mr. Haligowski’s employment agreement and non-competition and
non-solicitation agreement and the Salary Continuation Plan to reduce, and in
some cases eliminate, Mr. Haligowski’s benefits under those
agreements. These changes will become effective upon confirmation
from the FDIC that they do not require regulatory approval under FDIC
regulations. See “Additional Information Regarding Executive
Compensation—Agreements with Mr. Haligowski.”
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 opportunity 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 levels remained unchanged in 2008 for our named executive officers other
than our Vice Chairman, Mr. Bruce. Mr. Bruce’s base salary was
reduced by 50% in July 2008 as a result of a reduction in his work
hours. The salary of our CEO is set by the Committee, but in
accordance with his employment agreement, was established at $590,000 for 2008,
the same as for 2007 and 2006. For 2009, the Committee determined not
to change the base salaries of the named executive officers, due to the
Company’s 2008 performance and the current operating environment.
Annual Cash Bonus
Opportunity. 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 typically 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 2008,
the maximum potential cash bonuses for the named executive officers, other than
Mr. Haligowski, were set at up to 25% of base salary and at up to 100% of base
salary for Mr. Haligowski. No bonuses were awarded for 2008 to the
named executive officers. The Committee’s decision to award no
bonuses was primarily based on their consideration of the fact that the Company
did not achieve many of its business plan financial objectives during 2008, as
well as the Company’s overall financial performance and financial
condition.
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, 2008-Stock Incentive Plans.”
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.
|
||
During
the last completed fiscal year, no equity awards were granted to our named
executive officers.
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, were eligible
to receive a preferential interest rate on interest-bearing deposit accounts
prior to the discontinuation of this benefit effective December 31, 2008. 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
2008, we maintained for Messrs. Haligowski, Doyle, 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.
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. This benefit was terminated
in December 2008.
|
|
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; however, the Committee determined in
December 2008 to eliminate this benefit on or before the vehicle lease
expiration in April 2009. Mr. Haligowski also receives a housing
allowance and reimbursement for financial counseling and tax preparation,
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 (“YPO”),
World Presidents’ Organization (“WPO”) and the Harvard Business School Alumni
Association, and tax reimbursement payments. In addition, Mr.
Haligowski had been provided with the use of a chartered aircraft for up to 35
hours per year; however, this benefit was eliminated in December 2008, except
for approximately 12 pre-paid hours set to expire if not used in
2009. 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, 2008, 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 was entered into in 2006 and was 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. We are currently generally prohibited under FDIC regulations
from paying any change in control or other severance benefits without the prior
approval of the Federal Reserve Board and concurrence from the
FDIC. In this regard, in January 2009, the Committee and Mr.
Haligowski agreed to submit to the FDIC certain changes to Mr. Haligowski’s
employment agreement that would, among other things, reduce his severance
benefits under his employment agreement. These changes will become
effective upon confirmation from the FDIC that they do not require regulatory
approval under FDIC regulations. See “Additional Information
Regarding Executive Compensation—Agreements with Mr. Haligowski.”
Additional
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
2008
Summary Compensation Table
The
following table sets forth the compensation earned for the year ended December
31, 2008 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
|
2008
|
$ | 590,000 | $ | — | $ | — | $ | 61,892 | $ | — | $ | 27,299 | $ | 415,053 | (3) | $ | 1,094,244 | |||||||||||||||
|
Chairman
of the
Board,
President
|
2007
|
$ | 590,000 | $ | 482,451 | $ | — | $ | 24,644 | $ | — | $ | 33,862 | $ | 440,774 | $ | 1,571,731 | ||||||||||||||||
|
and
Chief Executive Officer
|
|||||||||||||||||||||||||||||||||
|
Norval
L. Bruce
|
2008
|
$ | 62,050 | $ | — | $ | — | $ | 1,494 | $ | — | $ | 34,687 | $ | 56,536 | (4) | $ | 154,767 | |||||||||||||||
|
Vice
Chairman of the Board
|
2007
|
$ | 196,200 | $ | 31,025 | $ | — | $ | 988 | $ | — | $ | 32,116 | $ | 68,537 | $ | 328,866 | ||||||||||||||||
|
Timothy
M. Doyle
|
2008
|
$ | 259,875 | $ | — | $ | — | $ | 24,755 | $ | — | $ | — | $ | 36,837 | (5) | $ | 321,467 | |||||||||||||||
|
Executive
Managing Director and Chief
|
2007
|
$ | 259,900 | $ | 64,969 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 37,306 | $ | 372,037 | ||||||||||||||||
|
Financial
Officer
|
|||||||||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
2008
|
$ | 247,200 | $ | — | $ | — | $ | 24,755 | $ | — | $ | — | $ | 32,910 | (6) | $ | 304,865 | |||||||||||||||
|
Executive Managing
Director and Chief
|
2007
|
$ | 247,200 | $ | 61,800 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 24,451 | $ | 343,313 | ||||||||||||||||
|
Operating
Officer
|
|||||||||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
2008
|
$ | 205,000 | $ | — | $ | — | $ | 24,755 | $ | — | $ | — | $ | 29,139 | (7) | $ | 258,894 | |||||||||||||||
|
Executive
Managing Director and Chief
|
2007
|
$ | 192,600 | $ | 51,250 | $ | — | $ | 9,862 | $ | — | $ | — | $ | 15,430 | $ | 269,142 | ||||||||||||||||
|
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
2008, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$340,053, including: (a) $42,000 in supplemental housing payments, (b)
$131,106 in preferential interest on employee savings accounts in 2008
(available to all employees), (c) $87,840 for Mr. Haligowski’s personal
use of chartered air transportation service paid for by the Company, and
(d) $18,953 for club memberships and meeting attendance related
expenses. Additional amounts included within “All Other
Compensation” for 2008 include life insurance premiums, 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
2008, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$56,536, including $37,191 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2008 include life insurance premiums, employer
contributions to ICB’s 401(k) plan, home computer equipment and internet
service, and club memberships.
|
|
(5)
|
For
2008, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$36,837, including $13,357 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2008 include life insurance premiums, employer
contributions to ICB’s 401(k) plan, and home computer
equipment.
|
|
(6)
|
For
2008, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$32,910, including $8,212 in preferential interest on employee savings
accounts. Additional amounts included within “All Other
Compensation” for 2008 include life insurance premiums, and employer
contributions to ICB’s 401(k) plan.
|
|
(7)
|
For
2008, represents the aggregate incremental cost to us of perquisites and
other personal benefits, and other compensation provided, totaling
$29,139. Amounts included within “All Other Compensation” for
2008 include life insurance premiums, employer contributions to ICB’s
401(k) plan, and preferential interest on employee savings
accounts.
|
|
|
Agreements
with Mr. Haligowski
|
Set forth
below is a description of the current terms of Mr. Haligowski’s employment
agreement, non-competition and non-solicitation agreement and Salary
Continuation Plan, as well as changes to these agreements that the Compensation
Committee and Mr. Haligowski agreed in January 2009 to submit to the
FDIC. These changes will become effective upon confirmation from the
FDIC that they do not require regulatory approval under FDIC
regulations.
Employment Agreement – Current
Terms. 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.
Employment Agreement-Proposed
Changes. The proposed changes to Mr. Haligowski’s
employment agreement include the following:
|
-
|
A
shortening of the term of the agreement from five years to three,
renewable annually as under the current agreement. In addition,
a change in control severance benefit would be payable if Mr. Haligowski
is terminated in connection with or within two years after a change in
control, rather than within five years after a change in control, as the
agreement currently provides.
|
|
-
|
A
change in the automobile allowance provision, from a minimum of $2,600 per
month to a maximum of $1,000 per month or, as under the current agreement,
the use of a Company vehicle under the Company’s automobile
policy.
|
|
-
|
A
reduction in the severance benefit payable to Mr. Haligowski in the event
he is involuntarily terminated prior to a change in control to (1) a lump
sum payment equal to one-half of his annualized base salary then in effect
(which is consistent with the Company’s general severance policy of one
month’s salary for each month of employment with the Company, not to
exceed six months); and (2) a continuation of medical, dental and
disability benefits for six months (instead of five years) following the
termination of his employment.
|
|
-
|
A
change to the benefits payable to Mr. Haligowski in the event he is
involuntarily terminated in connection with or within two years (instead
of five years, as under the current agreement) following a change in
control to (1) a lump sum payment equal to three times the average cash
compensation earned by him (including deferred amounts) during the three
preceding calendar years and (ii) continued medical, dental and disability
coverage for 18 months.
|
|
-
|
The
elimination of the tax gross-up benefit provided under the current
agreement in the event Mr. Haligowski’s change in control benefits
(whether under his employment agreement or otherwise) exceed 299% of his
“base amount” under Section 280G of the Code. Instead, these
payments would be reduced, if necessary, to ensure that Mr. Haligowski’s
change in control benefits do not exceed 299% of his base
amount.
|
Non-competition and Non-solicitation
Agreement – Current Terms. 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.
Non-competition and Non-solicitation
Agreement – Proposed Changes. The proposed changes to the
non-competition and non-solicitation agreement would provide for total payments
to Mr. Haligowski in an amount equal to the lesser of (i) 1.5
times his total cash compensation (including deferred amounts) during the
calendar year preceding his termination of employment and (ii) $1.5
million. Thus, the proposed change would reduce the total payments to
Mr. Haligowski by at least 50%. In addition, the proposed changes
would give ICB the option to terminate the agreement after the first year of the
Restricted Period; no such right exists under the current
agreement.
Salary Continuation Plan – Current
Terms. 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.
Salary Continuation Plan – Proposed
Change. It has been proposed that the Salary Continuation
Plan be amended to eliminate the annual contribution that must be made by ICB to
a grantor trust to fund its obligations under the Salary Continuation
Plan. This would not eliminate ICB’s obligation to fully fund its
obligations under the Salary Continuation Plan in the event of a change in
control.
Information
regarding applicable severance and change in control benefits for Mr. Haligowski
under the current terms of his agreements 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.
2008
Grants of Plan-Based Awards
No stock
options or other plan-based awards were granted in 2008 to the named executive
officers.
Outstanding
Equity Awards At December 31, 2008
The
following table provides information regarding each unexercised stock option
held by each of our named executive officers as of December 31,
2008:
|
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
|
— | — | — | — | ||||||||||||||||||||||||
| 8,333 | 16,667 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
105,833 | 16,667 | |||||||||||||||||||||||||||||||
|
Norval
L. Bruce
|
10,500 | — | — | $ | 23.00 |
6/18/2009
|
— | — | — | — | |||||||||||||||||||||||
| 12,500 | — | — | $ | 48.46 |
6/18/2009
|
— | — | — | — | ||||||||||||||||||||||||
| 333 | — | — | $ | 30.75 |
6/18/2009
|
— | — | — | — | ||||||||||||||||||||||||
|
Total
|
23,333 | — | |||||||||||||||||||||||||||||||
|
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
|
— | — | — | — | ||||||||||||||||||||||||
| 3,333 | 6,667 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
63,333 | 6,667 | |||||||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
35,000 | — | — | $ | 54.25 |
8/8/2015
|
— | — | — | — | |||||||||||||||||||||||
| 12,500 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| 3,333 | 6,667 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
50,833 | 6,667 | |||||||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
22,500 | — | — | $ | 53.33 |
6/24/2015
|
— | — | — | — | |||||||||||||||||||||||
| 7,500 | — | — | $ | 48.46 |
12/19/2015
|
— | — | — | — | ||||||||||||||||||||||||
| 3,333 | 6,667 | (1) | — | $ | 30.75 |
8/8/2017
|
— | — | — | — | |||||||||||||||||||||||
|
Total
|
33,333 | 6,667 | |||||||||||||||||||||||||||||||
_______________
|
(1)
|
The
vesting schedule of this option is as follows: one-half on August 8, 2009
and one-half 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.
2008
Option Exercises and Stock Vested
During
the year ended December 31, 2008, no stock options were exercised by any named
executive officer and no shares of restricted stock vested for any named
executive officer.
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 (1)
|
Registrant
Contributions in Last FY
|
Aggregate
Earnings in Last FY (2)
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance at Last FYE
|
|||||||||||||||
|
George
W. Haligowski
|
$ | 456,580 | $ | — | $ | (1,784,350 | ) | $ | — | $ | 2,057,430 | |||||||||
|
Norval
L. Bruce
|
$ | 47,230 | $ | — | $ | 15,410 | $ | — | $ | 1,817,640 | ||||||||||
|
Timothy
M. Doyle
|
$ | 52,720 | $ | — | $ | (43,939 | ) | $ | — | $ | 8,780 | |||||||||
|
Lyle
C. Lodwick
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Phillip
E. Lombardi
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
_______________
|
(1)
|
The
entire amount is reported as compensation for 2008 in the Summary
Compensation Table under the “Salary” and “Bonus”
column.
|
|
(2)
|
Based
on the performance during 2008 of the investment options (including, among
others, our Common Stock). Of the amounts shown, $27,299 and $34,687,
representing the portion of the preferential interest credited to the
accounts of Mr. Haligowski and Mr. Bruce, respectively, were reported as
compensation for 2008 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
|
$ | — | $ | — | $ | (2,654,959 | ) | $ | — | $ | 381,929 | |||||||||
|
Norval
L. Bruce
|
$ | — | $ | — | $ | (615,898 | ) | $ | — | $ | 88,643 | |||||||||
|
Timothy
M. Doyle
|
$ | — | $ | — | $ | (513,839 | ) | $ | — | $ | 73,963 | |||||||||
|
Lyle
C. Lodwick
|
$ | — | $ | — | $ | (53,105 | ) | $ | — | $ | 7,843 | |||||||||
|
Phillip
E. Lombardi
|
$ | — | $ | — | $ | (45,382 | ) | $ | — | $ | 6,718 | |||||||||
____________
|
(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 2008 in the Summary Compensation
Table.
|
Change
of Control Agreements
We
entered into change in control severance agreements with 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
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. Mr. Bruce is no longer entitled
to change in control benefits under his agreement as a result of his retirement
effective December 31, 2008.
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 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, 2008 under the circumstances
shown (as opposed to, in the case of Mr. Bruce, termination as a result of
retirement on that date). The tables exclude (i) amounts accrued
through December 31, 2008 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 “Nonqualified Deferred
Compensation” and “Supplemental Executive Retirement Plan.” In
addition, we are currently generally prohibited under FDIC regulations from
providing the termination payments and benefits reflected in the tables without
the prior approval of the Federal Reserve Board and concurrence from the
FDIC. The amounts payable to Mr. Haligowski reflect the current terms
of his agreements, and not any of the proposed changes to those
agreements. See “Agreements with Mr. Haligowski.”
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
|
$ | — | $ | 4,682,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
If
“Involuntary Termination” under Employment Agreement (not in connection
with or within five years after change in control) occurs
|
$ | 483,000 | $ | 7,315,000 | $ | 66,545 | $ | — | $ | — | $ | 801,000 | $ | — | $ | — | ||||||||||||||||
|
If
“Involuntary Termination” under Employment Agreement in connection with or
after change in control occurs
|
$ | — | $ | 8,182,000 | $ | — | $ | — | $ | — | $ | — | $ | 8,816,000 | $ | — | ||||||||||||||||
|
If
termination occurs as a result of disability
|
$ | 483,000 | $ | 7,315,000 | $ | 66,545 | $ | — | $ | — | $ | 551,000 | $ | — | $ | — | ||||||||||||||||
|
If
termination occurs as a result of death
|
$ | 483,000 | $ | 7,315,000 | $ | 66,545 | $ | — | $ | 1,260,000 | $ | 551,000 | $ | — | $ | — | ||||||||||||||||
____________
|
(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% ($4,682,000); (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% ($4,682,000) and (B) the aggregate
amount of the total monthly salary and bonus continuation payments
(through December 29, 2010) under his employment agreement ($2,632,000, or
$109,667 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% ($4,682,000) 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, 2008, 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 $500,000 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, $109,000 for the transfer to Mr. Haligowski of title
to his company provided 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 | $ | 19,316 | $ | — | $ | 51,880 | ||||||||
____________
|
(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, 2008, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
the cost or value of $33,880 for the transfer to Mr. Bruce of title to his
company provided vehicle 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 | $ | 50,072 | $ | — | $ | — | $ | 39,270 | ||||||||||
|
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, 2008, 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 $39,270 for the transfer to Mr. Doyle of title to his
company provided vehicle.
|
Lyle
C. Lodwick
|
Termination
Scenario
|
Lump
Sum Payment (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
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$ | 432,600 | $ | 18,287 | $ | — | $ | — | $ | 75,280 | ||||||||||
|
If
termination occurs as a result of death
|
$ | — | $ | — | $ | — | $ | 250,000 | $ | — | ||||||||||
____________
|
(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, 2008, 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. Lodwick’s
benefit.
|
|
(5)
|
Represents
the cost or value of $75,280 for the transfer to Mr. Lodwick of title to
his company provided 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)
|
Death
Benefit under Supplemental Life Insurance Policy (4)
|
Other
Benefits (5)
|
|||||||||||||||
|
If
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$ | 358,750 | $ | 10,919 | $ | — | $ | — | $ | 73,740 | ||||||||||
|
If
termination occurs as a result of death
|
$ | — | $ | — | $ | — | $ | 250,000 | $ | — | ||||||||||
____________
|
(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, 2008, based on the closing price of the
Company’s stock on that date.
|
|
(4)
|
Represents
the cost or value of $73,740 for the transfer to Mr. Lombardi of title to
his company provided 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 2008. 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
|
$ | 51,000 | — | — | — | — | $ | 5,000 | $ | 56,000 | ||||||||||||||||||
|
Sandor
X. Mayuga
|
$ | 45,000 | — | — | — | — | $ | 5,000 | $ | 50,000 | ||||||||||||||||||
|
Hirotaka
Oribe
|
$ | 58,000 | — | — | — | — | $ | 15,000 | $ | 73,000 | ||||||||||||||||||
|
Robert
R. Reed
|
$ | 53,000 | — | — | — | — | $ | 7,500 | $ | 60,500 | ||||||||||||||||||
_______________
|
(1)
|
Amount
in the table represents the compensation cost of stock options recognized
for 2008 for financial statement reporting purposes pursuant to SFAS No.
123(R), and includes the cost attributable to grants made in 2008 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, 2008, total shares underlying stock
options held by the directors were as follows: Mr. Lipscomb - 4,500
shares; Mr. Mayuga - 5,500 shares; Mr. Oribe - 5,500 shares; and Mr. Reed
- 4,500 shares.
|
|
(2)
|
Amounts
in this column represent honorariums earned during 2008 to Mr. Lipscomb,
Mr. Mayuga, Mr. Oribe, and Mr.
Reed.
|
Director Compensation
Arrangements. During 2008, 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 2008, Director Lipscomb received an
honorarium of $5,000 for his active assistance with compensation matters and
chairmanship of the Compensation Committee, Director Oribe received an
honorarium of $15,000 for his extensive work with the Executive Committee and
large loan approval process and Director Mayuga received an honorarium of $5,000
for his active assistance in corporate governance matters. 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
2, 2009, we had 5,428,760 shares of common stock outstanding.
The
following table sets forth, as of March 2, 2009, 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
|
|
Howard
Amster
23811
Chagrin Boulevard, Suite 200
Beachwood,
OH 44122
|
489,000(1)
|
9.00%
|
|
Franklin
Mutual Advisers, LLC
51
John F. Kennedy Parkway
Short
Hills, NJ 07078
|
445,796
(2)
|
8.21%
|
|
Dimensional Fund Advisors,
LP
1299
Ocean Avenue, 11th
Floor
Santa
Monica, CA 90401
|
429,524
(3)
|
7.91%
|
|
George
W. Haligowski
888
Prospect Street, Suite 110
La
Jolla, CA 92037
|
399,408
(4)
|
7.23%
|
____________
|
(1)
|
As
reported by Howard Amster in a Schedule 13D filed on July 14, 2008 with
the Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended. Mr. Amster reported sole voting and
dispositive powers as to 106,400 shares and shared voting and dispositive
powers as to 382,600 shares.
|
|
(2)
|
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.
|
|
(3)
|
As
reported by Dimensional Fund Advisors, LP ("Dimensional") on a Schedule
13G amendment filed on February 9, 2009 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 429,524 shares, and shared voting and dispositive
powers as to none of the 429,524 shares covered by the
report.
|
|
(4)
|
Includes
95,833 shares underlying stock options which were exercisable as of March
2, 2009, 169,059 shares held in Mr. Haligowski’s SERP account in the rabbi
trust established by the Company, 134,216 shares held in Mr. Haligowski’s
deferred compensation plan account in the rabbi trust and 300 shares held
in Mr. Haligowski’s personal
account.
|
The
following table sets forth, as of March 2, 2009, 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
|
399,408 | 7.23 | % | |||||
|
Timothy
M.
Doyle
|
84,930 | 1.55 | ||||||
|
Norval
L.
Bruce
|
74,815 | 1.37 | ||||||
|
Lyle
C.
Lodwick
|
64,209 | 1.17 | ||||||
|
Phillip
E.
Lombardi
|
43,717 | 0.80 | ||||||
|
Hirotaka
Oribe
|
11,600 | 0.21 | ||||||
|
Robert
R.
Reed
|
11,000 | 0.20 | ||||||
|
Sandor
X.
Mayuga
|
10,300 | 0.19 | ||||||
|
Jeffrey
L.
Lipscomb
|
8,600 | 0.16 | ||||||
|
All
Directors and Executive Officers as a Group
(9
Persons)
|
708,579 | 12.43 | ||||||
____________
|
(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 2, 2009 as follows: Chairman Haligowski – 95,833
shares; Director Lipscomb – 4,500 shares; Director Mayuga – 4,500 shares;
Director Oribe – 4,500 shares; Director Reed – 4,500 shares; Vice Chairman
Bruce – 23,333 shares; Timothy M. Doyle – 48,333 shares; Lyle C. Lodwick –
50,833 shares; Phillip E. Lombardi – 33,333 shares; and all directors and
executive officers as a group – 269,665
shares.
|
|
(3)
|
Includes
vested SERP account shares held in the rabbi trust established by the
Company, as follows: Chairman Haligowski –169,059 shares; Vice Chairman
Bruce – 39,209 shares; Timothy M. Doyle – 32,711 shares; Lyle C. Lodwick –
3,376 shares; Phillip E. Lombardi – 2,884 shares and all directors and
executive officers as a group – 247,239 shares. Also includes
shares held in deferred compensation plan account in the rabbi trust as
follows: Mr. Haligowski – 134,216 shares; Mr. Bruce – 12,073 shares; Mr.
Doyle – 3,886 shares and all directors and executive officers as a group –
150,175 shares.
|
The
following table sets forth information as of December 31, 2008 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
|
526,483 | $ | 37.57 | 203,261 | ||||||||
|
Equity
compensation plans not approved by stockholders
|
N/A | N/A | N/A | |||||||||
|
Total
|
526,483 | $ | 37.57 | 203,261 | ||||||||
____________
|
(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 29,381 of the 58,761 shares remaining available for
issuance under that plan as of December 31, 2008 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 2008, this law firm received $2,000
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. Under our corporate governance guidelines, we
are required to have a majority of independent directors, as that term is
defined under the NYSE listing standards, and no director qualifies as
independent unless our Board of Directors has affirmatively determined that the
director has no material relationship with the Company. 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, 2008 and 2007, 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:
$347,000 - 2008; $360,000 - 2007.
|
|
|
(b)
|
Audit
Related Fees: Aggregate fees billed for professional services rendered
related to audits of employee benefit plans, consultation related to
accounting matters: $69,000 - 2008; $21,000 -
2007.
|
|
|
(c)
|
Tax
Fees: Aggregate fees billed for professional services rendered related to
tax compliance, tax advice and tax return preparation: $130,000 - 2008;
$105,000 - 2007.
|
|
|
(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: none - 2008; $5,000 -
2007.
|
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
|
|
|
Report
of Independent Registered Public Accounting Firm
|
59
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
60
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
61
|
|
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 2008, 2007 and
2006
|
62
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
63
|
|
Notes
to Consolidated Financial Statements
|
64
|
(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.
SIGNATURES
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 31, 2009
|
By:
|
/s/ Timothy M. Doyle
|
|
Timothy
M. Doyle
|
||
|
Executive
Managing Director
|
||
|
and
Chief Financial 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
|
||
|
Chairman
of the Board, President and
|
March
31, 2009
|
|||
|
George
W. Haligowski
|
Chief
Executive Officer
|
|||
|
/s/
Timothy M. Doyle
|
Executive
Managing Director and
|
March
31, 2009
|
||
|
Timothy
M. Doyle
|
Chief
Financial Officer
|
|||
|
(Principal
Financial and Accounting Officer)
|
||||
|
/s/
Norval L. Bruce
|
Director
and Executive Committee Member
|
March
31, 2009
|
||
|
Norval
L. Bruce
|
(Acting
Co-Principal Executive Officer)
|
|||
|
/s/
Jeffrey L. Lipscomb
|
Director
|
March
31, 2009
|
||
|
Jeffrey
L. Lipscomb
|
||||
|
/s/
Sandor X. Mayuga
|
Director
|
March
31, 2009
|
||
|
Sandor
X. Mayuga
|
||||
|
/s/
Robert R. Reed
|
Director
|
March
31, 2009
|
||
|
Robert
R. Reed
|
||||
|
/s/
Hirotaka Oribe
|
Director
and Executive Committee Member
|
March
31, 2009
|
||
|
Hirotaka
Oribe
|
(Acting
Co-Principal Executive Officer)
|
EXHIBIT
INDEX
|
Regulation
S-K Exhibit Number
|
Document
|
Reference
to Prior Filing
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
|
********
|
||
|
10.5c
|
Amendment
to Amended and Restated Employment Agreement with George W.
Haligowski
|
10.5c
|
||
|
10.6
|
Change
in Control Severance Agreement with Norval L. Bruce
|
********
|
||
|
10.6a
|
Amendment
to Change in Control Severance Agreement with Norval L.
Bruce
|
10.6a
|
||
|
10.7
|
Change
in Control Severance Agreement with Timothy M. Doyle
|
********
|
||
|
10.7a
|
Amendment
to Change in Control Severance Agreement with Timothy M.
Doyle
|
10.7a
|
||
|
10.8
|
Change
in Control Severance Agreement with Lyle C. Lodwick
|
********
|
||
|
10.8a
|
Amendment
to Change in Control Severance Agreement with Lyle C.
Lodwick
|
10.8a
|
||
|
10.9
|
Change
in Control Severance Agreement with Phillip E. Lombardi
|
***********
|
||
|
10.9a
|
Amendment
to Change in Control Severance Agreement with Phillip E.
Lombardi
|
10.9a
|
||
|
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
|
************
|
||
|
10.21
|
Stipulation
and Consent to the Issuance of an Order to Cease and
Desist
|
*************
|
||
|
10.22
|
Order
to Cease and Desist dated February 17, 2009 issued by the Federal Deposit
Insurance Corporation and the California Department of Financial
Institutions
|
*************
|
||
|
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 Co-Principal Executive
Officer
|
31.1
|
||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Co-Principal Executive
Officer
|
31.2
|
||
|
31.3
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
|
31.3
|
||
|
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.
|
|
* *
* * * * * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-K for the year ended December 31,
2007.
|
|
* *
* * * * * * * * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
February 20, 2009.
|
-114-