<PAGE>
As filed with the Securities and Exchange Commission on November 14, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-7722
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-2575576
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding at November 8, 2000
Common stock, no par 44,373,855
This report contains a total of 38 pages.
<PAGE>
IMPERIAL BANCORP
FORM 10-Q
TABLE OF CONTENTS
Part I Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income and Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Part II Other Information
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
</TABLE>
Page 1 of 38
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
==========================================================================================================================
September 30, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
==========================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 439,980 $ 307,770
Federal funds sold and securities purchased under resale agreements 1,395,000 1,555,000
Trading instruments 101,427 86,540
Securities available for sale, at fair value 1,070,329 1,040,285
Securities held to maturity (fair value of $3,620 and $3,744 for 2000 and 1999, respectively) 3,620 3,744
Loans held for sale (fair value of $82,462 and $83,613 for 2000 and 1999, respectively) 79,789 83,044
Loans:
Loans, net of unearned income and deferred loan fees 4,141,848 3,612,148
Less allowance for loan losses (90,088) (71,677)
--------------------------------------------------------------------------------------------------------------------------
Total net loans 4,051,760 3,540,471
--------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 53,232 41,245
Accrued interest receivable 53,759 33,565
Real estate and other assets owned, net 826 935
Deferred tax asset 32,166 26,092
Other assets 160,066 138,011
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,441,954 $ 6,856,702
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 3,514,497 $ 2,538,850
Savings 19,401 21,075
Money market 1,135,499 1,492,138
Time - under $100 128,893 154,597
Time - $100 and over 1,727,915 1,697,940
--------------------------------------------------------------------------------------------------------------------------
Total deposits 6,526,205 5,904,600
--------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 18,877 15,883
Income taxes payable 16,884 -
Federal funds purchased and securities sold under repurchase agreements 9,538 55,139
Other short-term borrowings 43,460 101,524
Long-term borrowings:
Notes and debentures 99,459 99,411
Other borrowed funds 8,247 4,125
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated deferrable interest debentures 63,677 73,430
Minority interest 31,356 35,528
Other liabilities 119,264 93,655
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,936,967 6,383,295
--------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 43,769,436 shares at
September 30, 2000, and 44,903,937 shares at
December 31, 1999, issued and outstanding 372,789 312,677
Unearned employee stock ownership plan shares: 429,065 (7,453) (3,659)
Deferred stock compensation (30,351) (37,615)
Accumulated other comprehensive income, net of tax (108) 9,998
Retained earnings 170,110 192,006
--------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 504,987 473,407
--------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,441,954 $ 6,856,702
==========================================================================================================================
</TABLE>
Page 2 of 38
<PAGE>
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
==========================================================================================================================
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
(Dollars in thousands, except per share data) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
==========================================================================================================================
<S> <C> <C> <C> <C>
Interest income:
Loans $ 103,311 $ 83,134 $ 290,074 $ 235,287
Trading instruments 1,910 748 5,380 2,617
Interest-bearing deposits 63 - 250 -
Securities available for sale 19,882 9,719 49,378 25,740
Securities held to maturity 69 70 202 214
Federal funds sold and securities purchased under resale
agreements 5,690 3,944 23,480 12,369
Loans held for sale 1,369 1,532 3,845 2,569
--------------------------------------------------------------------------------------------------------------------------
Total interest income 132,294 99,147 372,609 278,796
--------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 38,149 26,108 103,115 70,275
Short-term borrowings 623 955 3,351 3,114
Long-term borrowings 3,995 3,660 12,241 8,663
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 42,767 30,723 118,707 82,052
--------------------------------------------------------------------------------------------------------------------------
Net interest income 89,527 68,424 253,902 196,744
Provision for loan losses 19,300 6,000 53,794 20,820
--------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 70,227 62,424 200,108 175,924
--------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 2,452 1,857 6,417 5,636
Trust fees - 4 - 3,382
Gain on sale of loans 312 553 1,437 812
Gain from exercise of Official Payments Corp. stock options - - 922 -
Equity in net income of Imperial Credit Industries, Inc. - - - 1,644
(Loss) gain on sale of Imperial Credit Industries, Inc. stock - (3,136) - 2,255
Other service charges and fees 6,384 5,953 19,036 16,897
Merchant and credit card fees 4,816 3,231 12,987 7,972
International income and fees 5,082 2,680 13,574 8,611
Gain (loss) on sales of securities available for sale 2,308 (112) 13,639 (58)
Gain on sales of trading instruments 453 982 1,523 1,365
Gain on sale of the trust business - - 2,631 8,817
Gain on exercise of warrants and related sale of equity
securities 12,616 2,173 22,831 9,555
Other income 5,224 2,586 18,975 8,473
--------------------------------------------------------------------------------------------------------------------------
Total noninterest income 39,647 16,771 113,972 75,361
--------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits 45,333 30,250 133,310 90,492
Net occupancy expense 3,235 2,656 9,037 7,944
Furniture and equipment 4,603 3,066 12,695 8,783
Data processing 3,010 2,778 8,355 8,179
Customer services 4,773 4,519 13,644 17,099
Professional and legal fees 3,691 2,604 9,617 11,185
Business development 2,239 1,563 12,905 5,116
Other expense 9,887 7,269 27,128 20,766
--------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 76,771 54,705 226,691 169,564
--------------------------------------------------------------------------------------------------------------------------
Minority interest in loss of consolidated subsidiary 2,464 148 10,348 127
--------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,567 24,638 97,737 81,848
Income tax provision 12,350 9,786 34,706 32,962
--------------------------------------------------------------------------------------------------------------------------
Net income $ 23,217 $ 14,852 $ 63,031 $ 48,886
==========================================================================================================================
Basic earnings per share $ 0.53 $ 0.33 $ 1.41 $ 1.09
Diluted earnings per share 0.51 0.32 1.36 1.05
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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Page 3 of 38
<PAGE>
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
============================================================================================================================
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
(Dollars in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 23,217 $ 14,852 $ 63,031 $ 48,886
Other comprehensive loss, net of tax:
Reclassification adjustments for (gains) losses
included in net income net of tax effect of ($298),
($5,909), $12 (411) - (8,144) 16
Unrealized loss on securities available for sale,
net of tax effect of ($1,687), ($1,677), ($1,423),
($2,716) (2,325) (2,312) (1,962) (3,743)
----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss (2,736) (2,312) (10,106) (3,727)
----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 20,481 $ 12,540 $ 52,925 $ 45,159
============================================================================================================================
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
============================================================================================================================
Accumulated
Deferred Other Total
Common Stock Retained Comprehensive Shareholders'
(Dollars in thousands) (Unaudited) Stock Compensation Earnings Income Equity
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance December 31, 1999 $ 309,018 $ (37,615) $ 192,006 $ 9,998 $ 473,407
Common stock dividend 84,907 - (84,927) - (20)
Common stock issued under option plan 2,587 - - - 2,587
Common stock repurchased (30,498) - - - (30,498)
Tax benefit of employee stock option 2,971 - - - 2,971
Unearned ESOP shares and ESOP tax benefit (3,791) - - - (3,791)
Deferred stock compensation - 7,264 - - 7,264
Other 142 - - - 142
Comprehensive income:
Net income - - 63,031 - 63,031
Other comprehensive loss (10,106) (10,106)
----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - 63,031 (10,106) 52,925
----------------------------------------------------------------------------------------------------------------------------
Balance September 30, 2000 $ 365,336 $ (30,351) $ 170,110 $ (108) $ 504,987
============================================================================================================================
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 4 of 38
<PAGE>
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=====================================================================================================================
Nine months ended September 30,
2000 1999
(Dollars in thousands) (Unaudited) (Unaudited)
=====================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 63,031 $ 48,886
Adjustments for noncash charges (credits):
Depreciation and amortization 10,779 9,494
Amortization of loan fees (19,586) (17,236)
Provision for loan losses 53,794 20,820
Equity in net income of Imperial Credit Industries, Inc. - (1,644)
Gain on sale of Imperial Credit Industries, Inc. stock - (2,255)
Gain on exercise of warrants and sale of equity securities (22,831) (9,555)
Gain on sale of the trust business (2,631) (8,817)
Gain resulting from the exercise of OPAY stock options (922) -
Other gains (2,039) (2,371)
Benefit for deferred taxes (3,100) (24,489)
Gain (loss) on securities available for sale (13,639) 58
Net change in trading instruments (14,887) 3,778
Net change in loans held for sale 4,692 (3,979)
Net change in accrued interest receivable/payable (17,200) (3,691)
Net change in income taxes receivable/payable 27,478 2,822
Net change in other assets/liabilities 2,445 (19,409)
Net change in minority interest (4,172) (127)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 61,212 (7,715)
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity 124 105
Proceeds from sales of securities available for sale 5,042,977 1,524,297
Proceeds from maturities of securities available for sale 228,755 1,431,765
Proceeds from sale of Imperial Credit Industries, Inc. stock - 61,010
Purchase of securities available for sale (5,299,627) (3,019,932)
Proceeds from exercise of warrants and sale of equity securities 22,831 9,555
Proceeds from sale of the trust business 2,631 8,817
Net change in Federal funds sold and securities purchased under resale
agreements 160,000 156,833
Net change in loans (545,497) (287,459)
Capital expenditures (22,173) (10,492)
Proceeds from sale of real estate and other assets owned 107 138
Proceeds from sale of premises and equipment 281 1,057
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (409,591) (124,306)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings, and money market accounts 617,334 (263,882)
Net change in time deposits 4,271 351,013
Net change in Federal funds purchased and other short-term borrowings (103,665) 41,003
Net proceeds from issuance of subordinated capital notes - 98,364
Net proceeds from ESOP loan 6,000 5,985
Net change in long-term borrowings 372 (3,615)
Redemption of capital securities (9,793) -
Repurchase of common stock for ESOP (6,000) (5,985)
Repurchase of common stock (30,498) (9,248)
Proceeds from exercise of employee stock options 2,587 1,056
Other (19) (19)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 480,589 214,672
---------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks 132,210 82,651
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year 307,770 355,317
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 439,980 $ 437,968
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-------------------------------------------------------------------------------
Page 5 of 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) ORGANIZATION
Imperial Bancorp (the "Company") is a financial holding company that was
incorporated in California in 1968. The Company's principal subsidiary, Imperial
Bank (the "Bank"), is a California-chartered bank with headquarters in
Inglewood, California. The Bank offers a wide range of financial products and
services to corporate customers, entrepreneurs and professionals. The Bank
operates 15 regional banking offices; 12 throughout California; and out-of-state
offices in Arizona, Colorado and Washington. In addition, the Bank operates 16
loan production offices located throughout the United States. The Bank owns 56%
of the outstanding common stock of Official Payments Corporation ("OPAY")
(Nasdaq: OPAY).
On October 31, 2000, Imperial Bancorp entered into a definitive agreement to be
acquired by Comerica Inc. (NYSE: CMA). Comerica is a bank holding company
headquartered in Detroit, Michigan with approximately $41 billion in assets.
Comerica Bank-California, a subsidiary of Comerica Inc., has 31 offices in the
state of California. The Agreement, which is subject to regulatory approvals and
approval by Imperials' shareholders is expected to close in the first quarter
of 2001. The transaction is expected to be accounted for as a pooling of
interest.
Pursuant to the Agreement, each share of Imperial stock will be converted into
0.46 of a share of Comerica stock. Based on Comerica's closing stock price of
$60.31 on October 31, 2000, the value of the transaction is approximately $1.3
billion or 2.4 times Imperial's book value.
NOTE (2) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all footnotes as would be necessary for a fair presentation of financial
position, results of operations, changes in cash flows and comprehensive income
in conformity with generally accepted accounting principles. However, these
interim financial statements reflect all normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. All such adjustments were of a normal
recurring nature. The Consolidated Financial Statements include the accounts of
the Company and its wholly and majority-owned subsidiaries. Operating results
for the three and nine months ended September 30, 2000, are not necessarily
indicative of results that may be expected for the year ending December 31,
2000. The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 1999.
Certain reclassifications have been made to the Company's 1999 Consolidated
Financial Statements to conform with the 2000 presentation.
NOTE (3) STATEMENTS OF CASH FLOWS
The following information supplements the statements of cash flows:
<TABLE>
<CAPTION>
=======================================================================================================================
For the nine months ended September 30, (Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 115,713 $ 79,554
Taxes paid 12,641 53,530
Federal tax refunds received 1,295 -
Significant noncash transactions:
Transfer of LHO loans to loans held for sale - 93,164
Reclassification of investment in ICII stock to securities available for sale - 34,370
Net change in accumulated other comprehensive income, net of tax 10,106 3,727
Loans transferred to OREO - 132
=======================================================================================================================
</TABLE>
Page 6 of 38
<PAGE>
NOTE (4) EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted from issuance of common stock that then shared in earnings. Unearned
ESOP shares are not considered to be outstanding shares for purposes of
determining the number of weighted average shares for the EPS calculation.
Reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is presented in the
following tables for the three and nine months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
==================================================================================== ==================================
For the three months ended Sept 30, 2000 1999
---------------------------------- ----------------------------------
Per Per
(Dollars in thousands, except per share Share Share
data) Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $23,217 44,075,680 $ 0.53 $14,852 44,793,119 $ 0.33
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,258,227 1,442,548
------------- -------------
Diluted EPS
Net income $23,217 45,333,907 $ 0.51 $14,852 46,235,667 $ 0.32
=======================================================================================================================
<CAPTION>
==================================================================================== ==================================
For the nine months ended Sept 30, 2000 1999
---------------------------------- ----------------------------------
Per Per
(Dollars in thousands, except per share Share Share
data) Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $63,031 44,611,427 $ 1.41 $48,886 45,049,661 $ 1.09
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,575,556 1,525,406
------------- -------------
Diluted EPS
Net income $63,031 46,186,983 $ 1.36 $48,886 46,575,067 $ 1.05
=======================================================================================================================
</TABLE>
The number of shares used to compute basic and diluted income per share for 1999
have been adjusted to reflect an 8% stock dividend paid on February 18, 2000, to
shareholders of record on February 4, 2000. Securities that could potentially
dilute earnings per share in the future that were not included in the
calculation of diluted earnings per share for the 2000 reporting periods because
their effect was antidilutive totaled 562,603.
NOTE (5) COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized gains (losses) on
securities available for sale and is presented in the Consolidated Statements of
Comprehensive Income.
Page 7 of 38
<PAGE>
NOTE (6) OFFICIAL PAYMENTS CORPORATION
At September 30, 2000, the Company owned 12,000,000 shares, or 56% of total
outstanding shares, of Official Payments Corporation ("OPAY") common stock.
OPAY's operating results are reported on a consolidated basis for financial
reporting purposes. OPAY reported operating losses of $6.1 million and $24.0
million for the three- and nine-month periods ended September 30, 2000,
respectively. The Company's share of OPAY's operating losses for these periods
was $3.2 million and $12.4 million, respectively. On an after-tax basis, the
Company's net income for third quarter 2000 includes a $2.0 million loss related
to its investment in OPAY. The Company's net income for the nine months ended
September 30, 2000, includes a $8.0 million loss related to its investment in
OPAY. The book value of the Company's investment in OPAY is $3.39 per share or
$40.7 million at September 30, 2000.
During August 1999, OPAY and Imperial Bank entered into an employment agreement
with Thomas R. Evans, OPAY's Chairman and Chief Executive Officer. The
employment agreement provides for, among other items, Mr. Evans being granted
options to purchase 1,325,460 shares of OPAY common stock at $1.33 per share.
Imperial Bank guaranteed that the "value" --as defined in the agreement--of Mr.
Evans' vested options would be $10,000,000 on or before the third anniversary of
the date of the agreement or Imperial Bank would pay Mr. Evans an amount equal
to the difference between $10,000,000 and the highest value of the vested
options on or before the third anniversary. OPAY recorded Mr. Evans' stock
options as unamortized stock compensation which is being amortized into income
over three years. Imperial Bank consolidates its investment in OPAY and,
accordingly, it records its ownership interest in OPAY's operating loss which
includes the amortization expense of the Evans stock option guarantee.
Approximately $2.5 million of the guaranteed amount has been cumulatively
amortized through September 30, 2000. In the event that an obligation to fund
the guarantee is deemed probable, the amount of the estimated obligation over
that to be recorded in consolidation will be recorded as additional investment
in OPAY, subject to a recoverability analysis.
NOTE (7) OPERATING SEGMENT RESULTS
Management of the Company, for purposes of assessing performance and allocating
resources, evaluates these principal operating segments that both earn revenue
and incur expenses:
Commercial Banking - traditional banking services to mid-sized companies
originated principally by direct relationships with customers
Emerging Growth Division - venture banking for early-stage and emerging
companies originated principally through relationships with venture
capitalists
Real Estate - traditional banking services to residential homebuilders
originated by direct relationships with customers
Entertainment - traditional banking services to mid-sized entertainment and
independent film companies originated by direct relationships with
customers
Syndicated Finance - principally purchasing nationally syndicated loans
originated on an indirect basis
SBA Division - traditional small business ("SBA") lending originated
principally by direct relationships with customers
Imperial Creditcorp and Imperial Ventures - bridge loans and direct equity
investments in early-stage and emerging companies and equity investments in
venture capital funds, each originated principally through relationships
with venture capitalists
Merchant Banking - participations in loans originated on an indirect basis
through other financial institutions.
Page 8 of 38
<PAGE>
For measuring segment profitability, the Company applies full absorption cost
accounting and, accordingly, the costs of the following support units are
allocated in full to the above operating segments:
Treasury Management - the interest expense of the Company's public debt and
brokered deposits is allocated to the operating segments based upon their
funding requirements
Financial Services Division - the interest and operating cost of this
Division, which offers depository services to particular industries
(including title and escrow companies, bankruptcy trustees, homeowners
associations and property management companies) is allocated to the
operating segments based upon their funding requirements
Operations and Administrative - the majority of the operating and
administrative costs are allocated based upon usage and the remainder is
allocated based upon balance sheet determinants
For reporting segment information, the Company aggregates segments with similar
long-term financial performance and similar economic characteristics. The
Company aggregates based upon similar customer origination processes:
Commercial Banking Segment - in this aggregate segment, the Company reports
on segments that originate business principally by direct relationships
with customers. This segment includes Commercial Banking, Real Estate,
Entertainment, and SBA.
Emerging Growth Segment - in this aggregate segment, the Company reports on
segments that originate business principally through relationships with
venture capitalists. This segment includes the Emerging Growth Division,
Imperial Creditcorp and Imperial Ventures.
Syndicated Finance Segment - in this aggregate segment, the Company reports
on segments that originate business on an indirect basis through other
financial institutions, principally banks. This segment includes the
Syndicated Finance Division and the Merchant Banking Group.
Other Segment - in this aggregate segment, the Company reports activities
not individually material including OPAY, the Merchant Card Division,
Financial Services Division, Treasury Management Division and nonbank
subsidiaries of the holding company.
The segment information for the prior year has been restated to conform with the
current year's presentation, including approximating the impact of using full
absorption cost accounting in the prior year.
Page 9 of 38
<PAGE>
<TABLE>
<CAPTION>
Operating Segment Results
==================================================================================================================================
For the three months ended
September 30, 2000 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 53,560 $ 13,130 $ 6,458 $ 16,379 $ 89,527
Provision for loan losses (807) 3,313 16,740 54 19,300
Noninterest income 7,954 18,505 355 12,833 39,647
Noninterest expense (1) 28,646 14,216 1,480 29,965 74,307
----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 33,675 14,106 (11,407) (807) 35,567
Income taxes 11,938 5,001 (4,044) (545) 12,350
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 21,737 $ 9,105 $ (7,363) $ (262) $ 23,217
----------------------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,835,291 $ 450,318 $ 486,225 $ 578,790 $ 4,350,624
Average nonaccrual loans 30,077 9,734 21,649 150 61,610
Average assets 2,914,084 488,181 512,169 2,654,259 6,568,693
Average deposits 1,621,445 1,030,133 17,089 3,002,248 5,670,915
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes minority interest in OPAY's operating loss.
(2) Excluding nonaccrual loans.
==================================================================================================================================
<CAPTION>
==================================================================================================================================
For the three months ended
September 30, 1999 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 48,382 $ 8,660 $ 6,142 $ 5,240 $ 68,424
Provision for loan losses 1,942 591 3,467 6,000
Noninterest income 7,485 3,716 511 5,059 16,771
Noninterest expense (1) 27,149 7,207 1,677 18,524 54,557
----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 26,776 4,578 1,509 (8,225) 24,638
Income taxes 10,635 1,818 599 (3,266) 9,786
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 16,141 $ 2,760 $ 910 $ (4,959) $ 14,852
----------------------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,553,436 $ 300,538 $ 594,321 $ 521,659 $ 3,969,954
Average nonaccrual loans 39,296 5,761 317 198 45,572
Average assets 2,624,592 314,940 598,928 2,166,014 5,704,474
Average deposits 1,572,966 689,815 3,771 2,650,785 4,917,337
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes minority interest in OPAY's operating income.
(2) Excluding nonaccrual loans.
==================================================================================================================================
</TABLE>
Page 10 of 38
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================================
For the nine months ended
September 30, 2000 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 150,012 $ 39,819 $ 19,818 $ 44,253 $ 253,902
Provision for loan losses 22,143 (1) 8,748 21,947 956 53,794
Noninterest income 22,993 47,638 1,475 41,866 113,972
Noninterest expense (2) 88,739 34,551 4,928 88,125 216,343
-------------------------------------------------------------------------------------------------------------------------
Income before taxes 62,123 44,158 (5,582) (2,962) 97,737
Income taxes 22,022 15,654 (1,979) (991) 34,706
-------------------------------------------------------------------------------------------------------------------------
Net income $ 40,101 $ 28,504 $ (3,603) $ (1,971) $ 63,031
-------------------------------------------------------------------------------------------------------------------------
Average net loans (3) $ 2,737,697 $ 411,642 $ 522,743 $ 483,747 $ 4,155,829
Average nonaccrual loans 30,291 6,819 12,314 846 50,270
Average assets 2,811,846 441,973 539,850 2,656,259 6,449,928
Average deposits 1,591,327 1,073,949 16,340 2,857,780 5,539,396
-------------------------------------------------------------------------------------------------------------------------
(1) $8.8 million of this provision relates to a nationally syndicated credit administered in a regional
office.
(2) Includes minority interest in OPAY's operating loss.
(3) Excluding nonaccrual loans.
=========================================================================================================================
<CAPTION>
=========================================================================================================================
For the nine months ended
September 30, 1999 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 132,149 $ 24,250 $ 18,070 $ 22,275 $ 196,744
Provision for loan losses 14,475 2,802 3,543 20,820
Noninterest income 16,488 12,266 1,600 45,007 75,361
Noninterest expense (1) 76,624 21,782 5,440 65,591 169,437
-------------------------------------------------------------------------------------------------------------------------
Income before taxes 57,538 11,932 10,687 1,691 81,848
Income taxes 23,172 4,802 4,304 684 32,962
-------------------------------------------------------------------------------------------------------------------------
Net income $ 34,366 $ 7,130 $ 6,383 $ 1,007 $ 48,886
-------------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,414,100 $ 324,466 $ 600,359 $ 499,291 $ 3,838,216
Average nonaccrual loans 37,431 5,544 100 186 43,261
Average assets 2,477,051 338,641 604,761 2,139,236 5,559,689
Average deposits 1,499,722 554,706 6,931 2,762,319 4,823,678
-------------------------------------------------------------------------------------------------------------------------
(1) Includes minority interest in OPAY's operating income.
(2) Excluding nonaccrual loans.
=========================================================================================================================
</TABLE>
Page 11 of 38
<PAGE>
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Except for the historical information contained herein, the following discussion
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of forward-
looking terminology including "may", "will", "intend", "should", "expect",
"anticipate", "estimate" or "continue" or the negatives thereof or other
comparable terminology. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of various
factors, including those set forth in documents filed with the Securities and
Exchange Commission.
The following discussion presents information about the results of operations,
financial condition, liquidity, and capital resources of Imperial Bancorp (the
"Company") as of and for the three and nine months ended September 30, 2000.
This information should be read in conjunction with the Company's 1999
Consolidated Financial Statements and notes thereto, and the accompanying
quarterly unaudited Consolidated Financial Statements and notes thereto.
GENERAL
Imperial Bancorp is a diversified financial services company specializing in the
delivery of a wide variety of financial products and services tailored to meet
the financing and cash management needs of middle market companies, emerging
growth companies, entrepreneurs and professionals. Through its bank and nonbank
subsidiaries, the Company is uniquely positioned to provide customized products
and superior customer service to its customers across a broad spectrum of
industries. The Company's largest subsidiary, Imperial Bank, operates 15
regional banking offices; 12 throughout California and out-of-state offices in
Arizona, Colorado and Washington. Additionally, the Bank operates 16 loan
production offices located throughout the United States. The Company's business
activities are conducted through three principal operating segments: Commercial
Banking, Emerging Growth and Syndicated Finance. Several smaller businesses and
the Company's 56% investment in Official Payments Corporation ("OPAY") (Nasdaq:
OPAY) are grouped into a fourth segment.
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Net income increased 56.3% to $23.2 million, or $0.51 per share, for the three
months ended September 30, 2000, from $14.9 million, or $0.32 a share, for the
year-earlier quarter. Growth in net interest income for the current quarter,
driven by loan growth and increased income realized from warrants and equity
investments more than offset increases in the loan loss provision and
noninterest expense compared with the year-earlier quarter. Net income for third
quarter 2000 includes a $2.0 million, or $0.05 a share, after-tax operating loss
representing the Company's share of OPAY's operating losses for the quarter. Net
income realized from warrants and equity investments increased 410% to $10.2
million after tax for the quarter ended September 30, 2000, from $2.0 million a
year earlier. Net income for the year-earlier quarter includes a $1.8 million
after-tax loss on the sale of Imperial Credit Industries, Inc. ("ICII") (Nasdaq:
ICII) common stock.
Earnings per share amounts are reported on a diluted basis and reflect an 8%
stock dividend paid on February 18, 2000.
The major components of net income and changes in these components are
summarized in the following table for the quarters ended September 30, 2000 and
1999:
Page 12 of 38
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended
September 30,
------------------------------------------------------------
Change
(Dollars in thousands, except per share data) 2000 1999 Amount Percent
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 132,294 $ 99,147 $ 33,147 33.4%
Interest expense 42,767 30,723 12,044 39.2
--------------------------------------------------------------------------------------------------------------------------
Net interest income 89,527 68,424 21,103 30.8
Provision for loan losses 19,300 6,000 13,300 221.7
--------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 70,227 62,424 7,803 12.5
--------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Loss on sale of ICII stock - (3,136) 3,136 (100.0)
Income from the realization of warrants and equity
investments (1) 15,760 3,420 12,340 360.8
Other noninterest income 23,887 16,487 7,400 44.9
--------------------------------------------------------------------------------------------------------------------------
Total noninterest income 39,647 16,771 22,876 136.4
--------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 45,333 30,250 15,083 49.9
Other noninterest expense 31,438 24,455 6,983 28.6
--------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 76,771 54,705 22,066 40.3
--------------------------------------------------------------------------------------------------------------------------
Minority interest in loss of consolidated subsidiary 2,464 148 2,316 -
Income before income taxes 35,567 24,638 10,929 44.4
Income tax provision 12,350 9,786 2,564 26.2
--------------------------------------------------------------------------------------------------------------------------
Net income $ 23,217 $ 14,852 $ 8,365 56.3%
==========================================================================================================================
Net income excluding OPAY $ 25,256 $ 15,196 $ 10,060 66.2%
Earnings per share:
Basic earnings per share $ 0.53 $ 0.33 $ 0.20 60.6%
Diluted earnings per share 0.51 0.32 0.19 59.4
Diluted earnings per share excluding OPAY $ 0.56 $ 0.33 $ 0.23 69.7%
--------------------------------------------------------------------------------------------------------------------------
(1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following
categories:
2000 1999
-----------------------------
Gains on securities available for sale $ 2,384 $ 1,548
Gains on the exercise of warrants and sale of
equity securities 12,616 2,173
Other noninterest income 760 (301)
-----------------------------
Total $ 15,760 $ 3,420
=============================
==========================================================================================================================
</TABLE>
The annualized return on average assets and average equity increased to 1.41%
and 18.07%, respectively, for third quarter 2000, from 1.03% and 14.22%,
respectively, for the year-earlier quarter. Excluding OPAY, the annualized
return on average assets increased to 1.55% for third quarter 2000 from 1.06%
for the year-earlier quarter. Excluding OPAY, the annualized return on average
equity increased to 21.37% for third quarter 2000 from 14.58% for the year-
earlier quarter.
Net income for the nine months ended September 30, 2000, increased 29% to $63.0
million, or $1.36 a share, from $48.9 million, or $1.05 a share, for the year-
earlier period. Net income for the first nine months of 2000 includes a $8.0
million, or $0.18 a share, after-tax operating loss representing the Company's
share of OPAY's operating losses for the period net of a gain related to the
exercise of OPAY stock options. Net income for the nine months ended September
30, 2000 includes a $1.7 million after-tax gain on the sale of the trust
business compared with a $5.1 million after-tax gain for the year-earlier
period. In addition to the gains on the sale of businesses discussed above,
after-tax income realized
Page 13 of 38
<PAGE>
on warrants and equity investments increased to $27.3 million for the nine
months ended September 30, 2000, from $6.7 million for the year-earlier period.
The major components of net income and changes in these components are
summarized in the following table for the nine months ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
===========================================================================================================================
Imperial Bancorp and Subsidiaries Nine months ended
September 30,
-------------------------------------------------------
Change
(Dollars in thousands, except per share data) 2000 1999 Amount Percent
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 372,609 $ 278,796 $ 93,813 33.6%
Interest expense 118,707 82,052 36,655 44.7
---------------------------------------------------------------------------------------------------------------------------
Net interest income 253,902 196,744 57,158 29.1
Provision for loan losses 53,794 20,820 32,974 158.4
---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 200,108 175,924 24,184 13.7
---------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of ICII stock - 2,255 (2,255) (100.0)
Gain on sale of the trust business 2,631 8,817 (6,186) (70.2)
Income from the realization of warrants and equity
investments (1) 42,264 11,648 30,616 262.8
Other noninterest income 69,077 52,641 16,436 31.2
---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 113,972 75,361 38,611 51.2
---------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 133,310 90,492 42,818 47.3
Other noninterest expense 93,381 79,072 14,309 18.1
---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 226,691 169,564 57,127 33.7
---------------------------------------------------------------------------------------------------------------------------
Minority interest in loss of consolidated subsidiary 10,348 127 10,221 -
Income before income taxes 97,737 81,848 15,889 19.4
Income tax provision 34,706 32,962 1,744 5.3
---------------------------------------------------------------------------------------------------------------------------
Net income $ 63,031 $ 48,886 $ 14,145 28.9%
===========================================================================================================================
Net income excluding OPAY $ 71,045 $ 49,184 $ 21,861 44.4%
Earnings per share:
Basic earnings per share $ 1.41 $ 1.09 $ 0.32 29.4%
Diluted earnings per share 1.36 1.05 0.31 29.5
Diluted earnings per share excluding OPAY $ 1.54 $ 1.06 $ 0.48 45.3%
---------------------------------------------------------------------------------------------------------------------------
(1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the
following categories:
2000 1999
--------------------------
Gains on securities available for sale $ 14,351 $ 1,548
Gains on the exercise of warrants and sale of
equity securities 22,831 9,555
Other noninterest income 5,082 545
--------------------------
Total $ 42,264 $ 11,648
==========================
===========================================================================================================================
</TABLE>
The annualized return on average assets and average equity were 1.31% and
16.87%, respectively, for the nine months ended September 30, 2000, compared
with 1.18% and 16.32%, respectively, for the year-earlier period. Excluding
Page 14 of 38
<PAGE>
OPAY, the annualized return on average assets increased to 1.49% for the first
nine months of 2000 from 1.18% for the year-earlier period. Excluding OPAY, the
annualized return on average equity increased to 20.83% for the first nine
months of 2000 from 16.46% for the year-earlier period.
Selected ratios for the three and nine months ended September 30, 2000 and 1999,
are provided in the following table:
<TABLE>
<CAPTION>
==================================================================================================================
At or for the At or for the
three months ended nine months ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Selected ratios
Reported:
Return on average assets (annualized) 1.41% 1.03% 1.31% 1.18%
Return on average equity (annualized) 18.07 14.22 16.87 16.32
Return on average earning assets (annualized) 1.54 1.14 1.42 1.30
Net interest margin 5.93 5.23 5.74 5.23
Efficiency ratio 57.52 64.04 58.81 62.27
Average equity-to-average assets 7.78 7.27 7.74 7.20
Total risk-based capital 13.33 12.76 13.33 12.76
Tier 1 risk-based capital 10.35 9.54 10.35 9.54
Tier 1 leverage 9.04 8.50 9.04 8.50
Excluding OPAY:
Return on average assets (annualized) 1.55 1.06 1.49 1.18
Return on average equity (annualized) 21.37 14.58 20.83 16.46
Net interest margin 5.90 5.24 5.74 5.23
Efficiency ratio 54.29 63.17 54.39 61.86
Asset quality ratios
Nonaccrual loans to total loans 1.45 1.18 1.45 1.18
Nonaccrual and restructured loans to total loans 1.60 1.31 1.60 1.31
Allowance for credit losses to total loans 2.18 1.88 2.18 1.88
Net charge-offs as a percentage of total average loans
(annualized) 0.87 0.34 1.12 0.37
==================================================================================================================
</TABLE>
Net Interest Income
The Company's operating results depend primarily on net interest income. Net
interest income is the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities. Net interest margin is
net interest income expressed as a percentage of average earning assets. Due to
the asset-sensitive nature of the Company's balance sheet, a variable rate loan
portfolio funded in large part by demand deposits and fixed rate liabilities,
the recent increases in the prime rate have favorably impacted net interest
income and net interest margin.
Net interest income increased to $89.5 million for the three months ended
September 30, 2000, from $68.4 million for the year-earlier quarter. Net
interest income for the current quarter includes $1.5 million related to OPAY.
The increase in net interest income is due to growth in average earning assets,
which increased 16% to $6.0 billion for the quarter ended September 30, 2000,
from $5.2 billion for the year-earlier quarter. Average loans increased $411.1
million, or 10.2%, to $4.4 billion for the current quarter from $4.0 billion for
third quarter 1999. Loans comprised approximately 74% of average earnings assets
for the current quarter compared with approximately 78% for the year-earlier
quarter. The remaining increase in average earning assets from the prior year is
due to increases in trading instruments and investments. Average deposits grew
15% to $5.7 billion for third quarter 2000, from $4.9 billion for the year-
earlier quarter. Deposit growth continues to exceed loan funding requirements.
The resulting excess liquidity was invested in securities, leading to a decline
in average loans as a percentage of average earning assets compared with the
prior year.
Page 15 of 38
<PAGE>
The following table provides information on average interest-earning assets and
interest-bearing liabilities and the yields thereon for the quarters ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
==================================================================================================================================
Three months ended Sept 30, 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 4,436,456 $ 103,311 (3) 9.26% $ 4,025,351 $ 83,134 (3) 8.19%
Trading instruments 112,844 1,910 6.73 55,484 748 5.35
Interest-bearing deposits 4,054 63 6.18 - - -
Securities available for sale (4) 1,057,409 19,882 7.51 735,380 9,719 5.21
Securities held to maturity 3,637 69 7.55 3,807 70 7.29
Federal funds sold and securities
purchased under resale agreement 343,435 5,690 6.59 302,103 3,944 5.18
Loans held for sale 56,717 1,369 9.60 60,274 1,532 10.08
----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,014,552 132,294 8.76% 5,182,399 99,147 7.59%
----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (80,939) (70,099)
Cash 363,712 377,042
Other assets 271,368 215,132
------------ ------------
Total assets $ 6,568,693 $ 5,704,474
============ ============
Interest-bearing liabilities:
Savings $ 26,683 $ 114 1.70% $ 23,719 $ 106 1.77%
Money market 1,203,344 10,519 3.48 1,191,852 8,600 2.86
Time-under $100,000 115,077 1,843 6.37 161,461 2,098 5.16
Time-$100,000 and over 1,598,821 25,673 6.39 1,228,538 15,304 4.94
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,943,925 38,149 5.16 2,605,570 26,108 3.98
----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 35,034 623 7.07 74,688 955 5.07
Long-term borrowings 106,285 2,391 8.95 105,568 2,100 7.89
Capital securities 63,670 1,604 10.02 73,406 1,560 8.43
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,148,914 42,767 5.40% 2,859,232 30,723 4.26%
----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,726,990 2,311,767
Other liabilities 181,705 119,030
Shareholders' equity 511,084 414,445
Total liabilities and
------------ ------------
shareholders' equity $ 6,568,693 $ 5,704,474
============ ============
Net interest income/Net interest margin $ 89,527 5.93% $ 68,424 5.23%
========== ========== ========== ==========
==================================================================================================================================
</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects of
doing so would not be material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $6.6 million and $6.2
million for the three months ended September 30, 2000 and 1999,
respectively.
(4) Average balance includes unrealized gains and losses and yield is
calculated based upon amortized cost.
Page 16 of 38
<PAGE>
Net interest income increased to $253.9 million for the nine months ended
September 30, 2000, from $196.7 million for the year-earlier period. Net
interest income for the first nine months includes $3.2 million related to OPAY.
The increase in net interest income was driven by the growth in average earning
assets, which increased 18% to $5.9 billion for the first nine months of 2000
from $5.0 billion for the year-earlier period. Average loans grew $307.9
million, or approximately 8%, to $4.2 billion from $3.9 billion for the year-
earlier period. Loans comprised approximately 71% of average earning assets for
the first nine months of 2000 compared with 78% for the year-earlier period. The
remaining increase in average earning assets from the prior year is due to
increases in trading instruments and investments.
The following table provides information on average interest-earning assets and
interest-bearing liabilities and the yields thereon for the nine months ended
September 30, 2000 and 1999:
Page 17 of 38
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
Nine months ended Sept 30, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 4,222,856 $ 290,074 (3) 9.18% $ 3,914,946 $ 235,287 (3) 8.04%
Trading instruments 113,045 5,380 6.36 63,624 2,617 5.50
Interest-bearing deposits 5,560 250 6.01 - - -
Securities available for sale (4) 996,657 49,378 6.66 673,382 25,740 5.08
Securities held to maturity 3,678 202 7.34 3,841 214 7.45
Federal funds sold and securities
purchased under resale agreements 515,855 23,480 6.08 334,605 12,369 4.94
Loans held for sale 61,217 3,845 8.39 33,716 2,569 10.19
-----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,918,868 372,609 8.42% 5,024,114 278,796 7.42%
-----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (77,974) (67,185)
Cash 355,689 368,586
Other assets 253,345 234,174
----------- -----------
Total assets $ 6,449,928 $ 5,559,689
=========== ===========
Interest-bearing liabilities:
Savings $ 24,438 $ 319 1.74% $ 29,153 $ 399 1.83%
Money market 1,272,750 30,270 3.18 1,119,576 23,771 2.84
Time-under $100,000 96,307 5,378 7.46 160,192 6,175 5.15
Time-$100,000 and over 1,539,576 67,148 5.83 1,103,305 39,930 4.84
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,933,071 103,115 4.70 2,412,226 70,275 3.90
-----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 72,614 3,351 6.16 85,211 3,114 4.89
Long-term borrowings 104,392 7,319 9.37 70,280 4,099 7.80
Capital securities 68,375 4,922 9.62 73,393 4,564 8.31
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,178,452 118,707 4.99% 2,641,110 82,052 4.15%
-----------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,606,325 2,411,452
Other liabilities 166,212 106,704
Shareholders' equity 498,939 400,423
Total liabilities and
----------- -----------
shareholders' equity $ 6,449,928 $ 5,559,689
=========== ===========
Net interest income/Net interest margin $ 253,902 5.74% $ 196,744 5.23%
========= ======== ========= =========
=============================================================================================================================
</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects of
doing so would not be material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $20.1 million and $16.5
million for the nine months ended September 30, 2000 and 1999,
respectively.
(4) Average balance includes unrealized gains and losses and yield is
calculated based upon amortized cost.
Net interest margin increased to 5.93% and 5.74% for the three and nine months
ended September 30, 2000, respectively, from 5.23% for the year-earlier periods.
The increase in loan yields, due to increases in the prime rate, more than
offset higher rates paid on deposits. Approximately 75% of the Company's
variable rate loans are tied to the
Page 18 of 38
<PAGE>
prime rate. Certain loans, including entertainment loans and syndicated loans,
are tied to the London Interbank Offered Rate ("LIBOR"). The average prime rate
increased 128 basis points for the first nine months of 2000 to 9.15% from 7.87%
for the year-earlier period. Management expects some contraction in the net
interest margin for the fourth quarter 2000 due to increases in deposit rates.
Interest income for the three months ended September 30, 2000 and 1999, was
reduced by approximately $771,900 and $81,000, respectively, due to interest
reversals on nonaccrual loans. Interest income for the nine months ended
September 30, 2000 and 1999, was reduced by approximately $2.1 million and
$503,800, respectively, due to interest reversals on nonaccrual loans.
The average cost of interest-bearing deposits increased for the quarter and
year-to-date compared with the year-earlier periods. The growth in average time
certificate of deposit ("TCD") balances, for the three and nine months ended
September 30, 2000, compared with the year earlier periods, occurred primarily
in the Emerging Growth Division, and in brokered TCD balances raised in
conjunction with the Company's overall funding plan.
Demand deposits continue to be a significant funding source for the Company.
Average demand deposits comprised 48% and 47% of total average deposits for the
three and nine months ended September 30, 2000, compared with 47% and 50% of
total average deposits for the year-earlier periods. The growth, in average
demand deposits was generated by the Commercial Banking and Emerging Growth
Divisions.
The increase in average long-term borrowings for the nine months ended September
30, 2000, compared with the year-earlier period is due to the issuance of $100
million of 8.5% Subordinated Capital Notes by Imperial Bank in April 1999.
Analysis of Changes in Net Interest Income
Changes in the Company's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following tables set forth information regarding changes in
interest income and interest expense for the three and nine months ended
September 30, 2000 and 1999. The total change is segmented into the change
attributable to variations in volume (changes in volume multiplied by old rate)
and the change attributable to variations in interest rates (changes in rates
multiplied by old volume). The change in interest due to both rate and volume
(changes in rate multiplied by changes in volume) is classified as rate/volume.
Nonaccrual loans are included in average loans for these computations. The
tables are not presented on a tax equivalent basis as the effects are not
material.
Page 19 of 38
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
Three months ended Sept 30, 2000 over 1999
(Dollars in thousands) Volume Rate Rate/Volume Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net $ 8,467 $ 10,831 $ 879 $ 20,177
Trading instruments 771 193 198 1,162
Interest-bearing deposits 63 - - 63
Securities available for sale 4,214 4,256 1,693 10,163
Securities held to maturity (3) 2 - (1)
Federal funds sold and securities
purchased under resale agreements 538 1,072 136 1,746
Loans held for sale (90) (73) - (163)
------------------------------------------------------------------------------------------------------------------
Total interest income 13,960 16,281 2,906 33,147
------------------------------------------------------------------------------------------------------------------
Savings 13 (4) (1) 8
Money market 83 1,842 (6) 1,919
Time-under $100,000 (601) 494 (148) (255)
Time-$100,000 and over 4,600 4,465 1,304 10,369
------------------------------------------------------------------------------------------------------------------
Total deposits 4,095 6,797 1,149 12,041
------------------------------------------------------------------------------------------------------------------
Short-term borrowings (506) 376 (202) (332)
Long-term borrowings 14 281 (4) 291
Capital securities (206) 294 (44) 44
------------------------------------------------------------------------------------------------------------------
Total interest expense 3,397 7,748 899 12,044
------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 10,563 $ 8,533 $ 2,007 $ 21,103
==================================================================================================================
</TABLE>
Page 20 of 38
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
Nine months ended Sept 30, 2000 over 1999
(Dollars in thousands) Volume Rate Rate/Volume Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net $ 18,522 $ 33,420 $ 2,845 $ 54,787
Trading instruments 2,035 409 319 2,763
Interest-bearing deposits 250 - - 250
Securities available for sale 12,292 7,969 3,377 23,638
Securities held to maturity (9) (3) - (12)
Federal funds sold and securities
purchased under resale agreements 6,706 2,850 1,555 11,111
Loans held for sale 2,097 (454) (367) 1,276
-----------------------------------------------------------------------------------------------------------------------
Total interest income 41,893 44,191 7,729 93,813
-----------------------------------------------------------------------------------------------------------------------
Savings (62) (16) (2) (80)
Money market 3,255 2,834 410 6,499
Time-under $100,000 (2,465) 2,765 (1,097) (797)
Time-$100,000 and over 15,804 8,153 3,261 27,218
-----------------------------------------------------------------------------------------------------------------------
Total deposits 16,532 13,736 2,572 32,840
-----------------------------------------------------------------------------------------------------------------------
Short-term borrowings (461) 815 (117) 237
Long-term borrowings 1,991 825 404 3,220
Capital securities (312) 715 (45) 358
-----------------------------------------------------------------------------------------------------------------------
Total interest expense 17,750 16,091 2,814 36,655
-----------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 24,143 $ 28,100 $ 4,915 $ 57,158
=======================================================================================================================
</TABLE>
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the Company's reported net interest income and noninterest expense would have
been reduced by $4.8 million and $13.6 million for the three and nine months
ended September 30, 2000, respectively, and by $4.5 million and $17.1 million
for the year earlier periods, respectively. The net interest margin would have
decreased to 5.61% and 5.43% for the three and nine months ended September 30,
2000, respectively, and to 4.89% and 4.78% for the year-earlier periods.
Provision for Loan Losses
The provision for loan losses increased for third quarter 2000 to $19.3 million
from $6.0 million for the year-earlier quarter. Net charge-offs for the quarter
increased to $9.7 million, or 0.88% of average loans on an annualized basis, for
third quarter 2000, from $3.4 million, or 0.34% of average loans on an
annualized basis, for the year-earlier quarter. The provision for loan losses
increased to $53.8 million for the nine months ended September 30, 2000, from
$20.8 million for the year-earlier period. Year to date net charge-offs
increased to $35.4 million, or 1.12% of average loans, from $10.7 million, or
0.37% of total average loans, for the year-earlier period. The increased
provision for the current year is largely attributable to higher charge-offs
recorded on a limited number of nationally syndicated loans. For the current
quarter charge-offs decreased by 52%, to $9.7 million from $20.6 million in the
previous quarter. Provision expense also declined to $19.3 million from $22.6
million in the previous quarter.
Page 21 of 38
<PAGE>
effect the amount of charge-offs recorded. If the Company decides to adopt the
acquiring company's practice, loan charge-offs would be expected to increase in
the fourth quarter and the allowance for loan losses would decrease (without a
corresponding provision for loans losses as the estimated loss for such loans
was previously reflected in the September 30, 2000 allowance for loan and lease
losses).
Noninterest Income:
Noninterest income increased to $39.6 million for third quarter 2000, from $16.8
million for the year-earlier quarter. Income realized from warrants and
investments in equity funds increased to $15.8 million for the quarter ended
September 30, 2000, from $3.4 million for the year-earlier quarter. Noninterest
income for third quarter 1999 includes a $3.1 million loss on the sale of ICII
stock. Excluding warrant income and the ICII loss in the prior year quarter,
noninterest income increased 45% for the third quarter of 2000, from the year
earlier quarter, primarily due to increases in international fees, merchant card
processing fees and commissions from sales of mutual funds (see the Other
Segment discussions). Noninterest income increased 51% to $114.0 million for the
first nine months of 2000, from $75.4 million for the year-earlier period.
Noninterest income for the first nine months of 2000 includes a $2.6 million
gain associated with last year's sale of the trust business. This gain
represents a payment related to customer retention as provided for in the trust
sale agreement. Noninterest income for the year-earlier period includes an $8.8
million gain on the sale of the trust business and a $2.5 million gain on the
sale of a software license by a nonbank subsidiary. Income realized from
warrants and equity investments increased to $42.3 million for the nine months
ended September 30, 2000, from $11.6 million for the year-earlier period.
Noninterest Expense:
Noninterest expense before minority interest increased 40% for the quarter ended
September 30, 2000, to $76.8 million from $54.7 million for the year-earlier
quarter. Excluding OPAY, noninterest expense for the quarter increased 29% to
$68.9 million from $53.6 million a year ago. For the first nine months of 2000,
noninterest expense increased 28% to $216.3 million from $169.4 million for the
year-earlier period. Excluding OPAY, year-to-date noninterest expense increased
17% to $195.5 million from $167.3 million for the year-earlier period. The
increase in noninterest expense excluding OPAY is primarily due to higher
salaries and benefits and occupancy expense associated with the overall growth
in the Company's present activities as well as the addition of new business
initiatives. The average number of full-time equivalent staff increased to 1,326
for the nine months ended September 30, 2000, from 1,254 for the year-earlier
period. The increase in salaries also reflects increases in incentives tied to
Company performance. Customer services expense declined for the quarter and
year-to-date compared with the year earlier periods due to a decrease in average
title and escrow deposit balances. Although noninterest expense has increased
overall, the Company's efficiency ratio excluding OPAY was lower for both the
quarter and year-to-date compared with a year ago due to proportionally higher
growth in revenues. The efficiency ratio, excluding OPAY, decreased to 54.39%
for the first nine months of 2000 from 61.86% for the year-earlier period.
Income Taxes:
The Company recorded income taxes of $12.4 million and $34.7 million for the
three and nine months ended September 30, 2000, respectively. Income taxes were
$9.8 million and $33.0 million for the three and nine months ended September 30,
1999.
On April 24, 2000, the Company formed Imperial Special Investments, Inc.
("ISII"). ISII is a closed-end, non-diversified regulated investment company
registered under the Investment Company Act of 1940. ISII's holdings consist of
cash, investments and loans. The formation of ISII provides the Company with the
capability to raise capital in a tax efficient manner for future business
opportunities if desired. The formation and funding of ISII resulted in an
estimated effective income tax rate of 35.5% for the first nine months of 2000
compared with 40.3% for the year-earlier period.
In August 2000, the Commission completed an examination of ISII. The Company
received the Commission's findings in a letter dated September 11, 2000. The
Commission staff determined that ISII should not be eligible to be registered as
an investment company due to the failure to meet certain statutory requirements
of the Investment Company Act and requested that ISII voluntarily de-register.
In its response to the Commission dated October 11, 2000, the Company stated
that it disagrees with certain factual statements and conclusions of law
contained
Page 22 of 38
<PAGE>
in the Commission's findings and sets forth the basis for its belief based on
advice of counsel, which was included, that ISII was formed in compliance with
regulatory requirements. The Company has declined the Commission's request to
voluntarily de-register the fund and expects to receive further correspondence
from the Commission.
OPERATING SEGMENT RESULTS
For reporting purposes, the Company aggregates its operating activities into
four principal operating segments: Commercial Banking, Emerging Growth,
Syndicated Finance and Other. See - "NOTE (7) Operating Segment Results." The
following tables summarize the financial performance of these segments for the
three and nine months ended September 30, 2000 and 1999:
The Commercial Banking Segment
<TABLE>
<CAPTION>
==========================================================================================================================
For the three months For the nine months
ended September 30, ended September 30,
(Dollars in thousands) 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 53,560 $ 48,382 $ 5,178 $ 150,012 $ 132,149 $ 17,863
Provision for loan losses (1) (807) 1,942 (2,749) 22,143 14,475 7,668
Noninterest income 7,954 7,485 469 22,993 16,488 6,505
Noninterest expense 28,646 27,149 1,497 88,739 76,624 12,115
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 33,675 26,776 6,899 62,123 57,538 4,585
Income taxes 11,938 10,635 1,303 22,022 23,172 (1,150)
--------------------------------------------------------------------------------------------------------------------------
Net income $ 21,737 $ 16,141 $ 5,596 $ 40,101 $ 34,366 $ 5,735
--------------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,835,291 $ 2,553,436 $ 281,855 $ 2,737,697 $ 2,414,100 $ 323,597
Average nonaccrual (3) 30,077 39,296 (9,219) 30,291 37,431 (7,140)
Average assets 2,914,084 2,624,592 289,492 2,811,846 2,477,051 334,795
Average deposits 1,621,445 1,572,966 48,479 1,591,327 1,499,722 91,605
--------------------------------------------------------------------------------------------------------------------------
(1) Provision expense for the nine months ended September 30, 2000, includes $8.8 million related to
a syndicated credit administered in a regional banking office.
(2) Excluding nonaccrual loans.
(3) Average nonaccrual loan balance includes $8.8 million related to a syndicated credit administered in a
regional banking office until it was charged off in May 2000.
==========================================================================================================================
</TABLE>
The Commercial Banking Segment consisting of the Company's middle market,
residential construction, entertainment and small business lending ("SBA")
operations accounted for the majority of the growth in average loans for the
current quarter and year-to-date compared with the prior year. Most of the
growth occurred in residential construction loans, which increased by $151
million, or 38%, for third quarter 2000 compared with the year-earlier quarter.
Tract construction lending continues to grow despite higher mortgage rates due
to continuing strength in the California real estate market coupled with the
Company's focus on a select group of private homebuilders. The remaining loan
growth occurred primarily in middle market lending. Approximately 80% of the
commercial banking portfolio is prime based, resulting in higher interest income
as prime rate increases. Loan growth has also led to higher loan fee income.
Average deposits balances for the Commercial Banking Segment increased 3% and 6%
for the three and nine months ended September 30, 2000, respectively, compared
with the year-earlier periods.
The decrease in loan loss provision for the current quarter compared with a year
ago is the result of a $6.0 million loan loss recovery. The provision for the
first nine months of 2000 includes $8.8 million associated with a nationally
syndicated loan that was administered in a regional office due to a deposit
relationship. This loan was charged off in the second quarter. The reduction in
nonaccrual loan balances compared with the year-earlier period is due in part to
the sale of film production loans from the Lewis Horwitz Organization to ICII in
the fourth quarter of 1999.
Page 23 of 38
<PAGE>
Although service charge income was relatively flat compared with the prior year,
noninterest income increased due to growth in other fees such as international
fees, leasing fees and referral fees related to SBA lending. The Company
continues to develop and introduce new cash management products, including
internet-based products, that are expected to result in increased fee income.
The Emerging Growth Segment (including Imperial Ventures, Inc. and Imperial
Creditcorp)
<TABLE>
<CAPTION>
==========================================================================================================================
For the three months For the nine months
ended September 30, ended September 30,
(Dollars in thousands) 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 13,130 $ 8,660 $ 4,470 $ 39,819 $ 24,250 $ 15,569
Provision for loan losses 3,313 591 2,722 8,748 2,802 5,946
Noninterest income 18,505 3,716 14,789 47,638 12,266 35,372
Noninterest expense 14,216 7,207 7,009 34,551 21,782 12,769
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 14,106 4,578 9,528 44,158 11,932 32,226
Income taxes 5,001 1,818 3,183 15,654 4,802 10,852
--------------------------------------------------------------------------------------------------------------------------
Net income $ 9,105 $ 2,760 $ 6,345 $ 28,504 $ 7,130 $ 21,374
--------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 450,318 $ 300,538 $ 149,780 $ 411,642 $ 324,466 $ 87,176
Average nonaccrual loans 9,734 5,761 3,973 6,819 5,544 1,275
Average assets 488,181 314,940 173,241 441,973 338,641 103,332
Average deposits 1,030,133 689,815 340,318 1,073,949 554,706 519,243
--------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
==========================================================================================================================
</TABLE>
The Emerging Growth Segment ("EGD"), serving companies backed by venture
capitalists, contributed 39% of consolidated net income for the three months
ended September 30, 2000, up from 19% of consolidated net income for the
year-earlier quarter. For the first nine months of 2000, EGD contributed 45% of
consolidated net income compared with 15% for the year-earlier period. The
growth in EGD's net income is largely due to increased noninterest income
realized from warrants and equity investments in emerging growth companies and
venture capital funds. Income derived from these activities increased to $15.8
million for third quarter 2000 from $3.4 million for the year-earlier quarter.
On a year-to-date basis, income from warrants and equity investments increased
to $42.3 million from $11.6 million for the year-earlier period.
The Company obtains rights to acquire stock (in the form of warrants) from
certain customers as part of negotiated credit facilities. The receipt of
warrants does not change the loan covenants or collateral control techniques
employed by the Company to mitigate the risk of a loan becoming uncollectible.
Likewise, collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. As of October 23, 2000, the last
time the Company reported on unrealized warrant gains, the Company had potential
unrealized gains associated with warrants and equity positions of $8.7 million.
The Company does not expect fourth quarter income from warrant activities to
remain at levels reported for the first nine months of 2000. The amount of
income realized by the Company from these equity rights in future periods may
vary materially from that unrealized amount due to fluctuations in the market
prices of the underlying common stock of these companies. The Company is
restricted from liquidating a portion of these positions, although most of these
restrictions will have expired by the end of the year. The Company views this
income as a core contributor to its noninterest income.
The increase in noninterest expense is primarily due to higher personnel and
occupancy costs associated with opening new offices and adding staff to fuel
future in the division.
EGD experienced significant deposit growth in 2000 compared with the prior year.
EGD's average deposit balances grew $340 million to $1.0 billion for third
quarter 2000 from $690 million for the year-earlier quarter. On a year-to-
Page 24 of 38
<PAGE>
date basis, average deposits grew $519 million to $1.1 billion for the nine
months ended September 30, 2000, from $555 million for the year-earlier period.
The growth in deposits was distributed between noninterest-bearing and interest-
bearing accounts with demand deposits averaging $287 million in the current
quarter. Management has observed that venture capitalists are continuing to fund
emerging growth companies across a broad spectrum of industries despite recent
volatility in the Nasdaq.
The Syndicated Finance Segment
<TABLE>
<CAPTION>
==========================================================================================================================
For the three months For the nine months
ended September 30, ended September 30,
(Dollars in thousands) 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 6,458 $ 6,142 $ 316 $ 19,818 $ 18,070 $ 1,748
Provision for loan losses 16,740 3,467 13,273 21,947 3,543 18,404
Noninterest income 355 511 (156) 1,475 1,600 (125)
Noninterest expense 1,480 1,677 (197) 4,928 5,440 (512)
--------------------------------------------------------------------------------------------------------------------------
Income before taxes (11,407) 1,509 (12,916) (5,582) 10,687 (16,269)
Income taxes (4,044) 599 (4,643) (1,979) 4,304 (6,283)
--------------------------------------------------------------------------------------------------------------------------
Net income $ (7,363) $ 910 $ (8,273) $ (3,603) $ 6,383 $ (9,986)
--------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 486,225 $ 594,321 $(108,096) $ 522,743 $ 600,359 $ (77,616)
Average nonaccrual loans 21,649 317 21,332 12,314 100 12,214
Average assets 512,169 598,928 (86,759) 539,850 604,761 (64,911)
Average deposits 17,089 3,771 13,318 16,340 6,931 9,409
--------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
==========================================================================================================================
</TABLE>
The Syndicated Finance Segment includes the Syndicated Finance and Merchant
Banking Divisions. Both divisions originate loans principally on an indirect
basis through other financial institutions. The Company's recent adverse credit
experience with a limited number of syndicated credits is consistent with
banking industry experience. The nonaccrual loans total $31.2 million or 52% of
the total nonaccrual loans as of September 30, 2000. Syndicated credits also
accounted for the majority of the increase in gross charge-offs for the quarter,
$10.6 million of consolidated gross charge-offs of $16.8 million. Year-to-date
charge-offs for the Syndicated Finance Segment do not include $8.8 million
related to a nationally syndicated credit administered in a regional banking
office which is reflected in the Commercial Banking Segment. For the year, net
charge-offs of syndicated credits comprised $23.9 million of total net charge-
offs of $35.4 million. The increase in charge-offs led to the higher loan loss
provisions for the quarter and year-to-date. Management believes that these
loans have adequate loan loss allowances.
The Company's primary focus has been to establish strong commercial banking
relationships with borrowers that enhance its deposit base and generate fee
income in addition to yielding interest income through credit products. When
deposit growth from title and escrow customers began to outpace relationship-
based loan growth in the mid 1990s, the Company began investing a portion of
this liquidity in nationally syndicated credits to maximize net interest income.
Recognizing that purchased loans provide no supplemental noninterest income and
that these credits cannot be monitored as closely as companies with which the
Company has a direct relationship, management is currently emphasizing
relationship-based loans and, accordingly, does not plan on increasing its
nonrelationship-based syndicated loan portfolio.
Page 25 of 38
<PAGE>
The following table provides a distribution of the Company's participations in
nationally syndicated loans by industry:
===========================================================
Distribution of Syndicated Finance Loan Portfolio
September 30, 2000
-----------------------------------------------------------
Industry Percent
-----------------------------------------------------------
Manufacturing 34%
Service 26
Gaming 24
Retail and restaurants 9
Heath care and related 7
-----------------------------------------------------------
Total 100%
-----------------------------------------------------------
The Other Segment
<TABLE>
<CAPTION>
=========================================================================================================================
For the three months For the nine months
ended September 30, ended September 30,
(Dollars in thousands) 2000 1999 Change 2000 1999 Change
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 16,379 $ 5,240 $ 11,139 $ 44,253 $ 22,275 $ 21,978
Provision for loan losses 54 - 54 956 - 956
Noninterest income 12,833 5,059 7,774 41,866 45,007 (3,141)
Noninterest expense 29,965 18,524 11,441 88,125 65,591 22,534
-------------------------------------------------------------------------------------------------------------------------
Income before taxes (807) (8,225) 7,418 (2,962) 1,691 (4,653)
Income taxes (545) (3,266) 2,721 (991) 684 (1,675)
-------------------------------------------------------------------------------------------------------------------------
Net income $ (262) $ (4,959) $ 4,697 $ (1,971) $ 1,007 $ (2,978)
-------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 578,790 $ 521,659 $ 57,131 $ 483,747 $ 499,291 $ (15,544)
Average nonaccrual loans 150 198 (48) 846 186 660
Average assets 2,654,259 2,166,014 488,245 2,656,259 2,139,236 517,023
Average deposits 3,002,248 2,650,785 351,463 2,857,780 2,762,319 95,461
-------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
=========================================================================================================================
</TABLE>
The Other Segment includes activities not individually material such as the
Company's 56% ownership in OPAY, the Merchant Card Division and nonbank
subsidiaries of the holding company. The balance sheet of the Other Segment
reflects the loan and deposit balances of the Financial Services Division, and
the investment balances of the Treasury Management Division. The income and
costs associated with these balances are fully allocated to the other operating
segments for measuring segment profitability.
The decrease in noninterest income compared with the year-earlier periods is due
to gains totaling $11.1 million on the sales of the trust business and ICII
common stock reported for the nine months ended September 30, 1999. Merchant
card fees and commissions on the sale of nonproprietary mutual funds by the
Company's broker/dealer grew to $12.9 million and $9.5 million for the nine
months ended September 30, 2000, respectively, from $7.8 million and $4.6
million for the year-earlier period, respectively. The average balance of
customer funds directed to nonproprietary mutual funds increased to $2.7 billion
for September 2000 from $2.3 billion a year ago.
The Company's after-tax net income includes losses of $2.0 million and $8.0
million for the three and nine months ended September 30, 2000, respectively,
related to its investment in OPAY. OPAY's operating results are reported on a
consolidated basis. See - "NOTE (6) Official Payments Corporation." The
following table summarizes the impact of the Company's investment in OPAY by
income statement category:
Page 26 of 38
<PAGE>
OPAY
<TABLE>
<CAPTION>
====================================================================================================================
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 1,492 $ (96) $ 3,248 $ (110)
Noninterest income 743 495 4,308 1,712
Salary and benefits 5,164 717 19,151 1,470
Other noninterest expense 2,688 422 12,064 765
Gain from exercise of OPAY stock options - - 922 -
--------------------------------------------------------------------------------------------------------------------
Net (loss) income before minority interest (5,617) (739) (22,737) (633)
Minority interest in loss (income) 2,464 148 10,348 127
--------------------------------------------------------------------------------------------------------------------
Net (loss) income before taxes (3,153) (591) (12,389) (506)
Income tax (benefit) expense (1,113) (247) (4,375) (209)
--------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,040) $ (344) $ (8,014) $ (297)
====================================================================================================================
Impact on diluted earnings per share $ (0.05) $ (0.01) $ (0.18) $ (0.01)
====================================================================================================================
</TABLE>
Salaries and benefits expense reported for the nine months ended September 30,
2000, include a $4 million one-time charge, before minority interest, related to
the recent departure of OPAY's chief financial officer. OPAY is expected to
report operating losses for the remainder of the year.
BALANCE SHEET ANALYSIS
Investment Securities
The following tables provide comparative period-end balances of securities held
to maturity and securities available for sale for the periods indicated:
<TABLE>
<CAPTION>
==================================================================================================================
Securities Held to Maturity Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 2000
Industrial development bonds $ 3,620 $ - $ - $ 3,620
------------------------------------------------------------------------------------------------------------------
Total $ 3,620 $ - $ - $ 3,620
==================================================================================================================
December 31, 1999
Industrial development bonds $ 3,744 $ - $ - $ 3,744
------------------------------------------------------------------------------------------------------------------
Total $ 3,744 $ - $ - $ 3,744
==================================================================================================================
</TABLE>
Page 27 of 38
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
Securities Available for Sale Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 2000
U.S. Treasury and federal agencies $ 935,037 $ - $ (4,514) $ 930,523
Commercial Paper 69,018 69,018
Mutual funds 29,027 - - 29,027
Other securities 36,904 4,857 - 41,761
-----------------------------------------------------------------------------------------------------------------------
Total $ 1,069,986 $ 4,857 $ (4,514) $ 1,070,329
=======================================================================================================================
December 31, 1999
U.S. Treasury and federal agencies $ 678,462 $ - $ (4,322) $ 674,140
Commercial Paper 228,670 - - 228,670
Mutual funds 92,184 - - 92,184
Other securities 23,718 21,573 - 45,291
-----------------------------------------------------------------------------------------------------------------------
Total $ 1,023,034 $ 21,573 $ (4,322) $ 1,040,285
=======================================================================================================================
</TABLE>
Gross gains totaling $14.4 million and gross losses totaling $731,000
respectively, were realized on sales of securities available for sale during the
nine months ended September 30, 2000..
Loans Held for Sale
Loans held for sale at September 30, 2000, totaling $79.8 million, include the
remaining $17.2 million balance of Lewis Horwitz Organization ("LHO") loans held
for sale and $62.6 million of SBA loans held for sale. The LHO loans were
reclassified to the held for sale category in October 1999, following
finalization of an agreement to sell the loans to ICII at a fixed price
(effectively the book value less the allocated allowance less the interest
spread over the sale period as defined in the agreement), over a 15-month
period. Loans made to ICII by Imperial Bank to facilitate their purchase of LHO
loans totaling $7.8 million were paid off in September 2000 with proceeds of a
new $10 million loan made to ICII. The new loan to ICII is secured by a
commercial real estate property and has a maturity of less than one year.
Management expects the remaining loans to be either paid off by the borrower in
the normal course of business or purchased by ICII on or before December 29,
2000.
Loans
The following table provides a summary of loans by category for the periods
indicated:
<TABLE>
<CAPTION>
=======================================================================================================================
(Dollars in thousands) September 30, 2000 December 31, 1999 September 30, 1999
Balance Percent Balance Percent Balance Percent
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,424,854 82.69% $ 3,016,695 83.52% $ 3,091,962 84.75%
Loan secured by real estate:
Real estate term loans 101,200 2.44 100,012 2.77 109,367 3.00
Residential tract construction loans 573,594 13.85 457,337 12.66 411,473 11.28
Consumer loans 42,200 1.02 38,104 1.05 35,435 0.97
-----------------------------------------------------------------------------------------------------------------------
Gross loans 4,141,848 100.00% 3,612,148 100.00% 3,648,237 100.00%
Less allowance for loan losses (90,088) (71,677) (68,769)
-----------------------------------------------------------------------------------------------------------------------
Total loans $ 4,051,760 $ 3,540,471 $ 3,579,468
=======================================================================================================================
</TABLE>
Total loans grew to $4.1 billion at September 30, 2000, an increase of
approximately 14% from $3.6 billion at December 31, 1999, and an increase of 13%
from September 30, 1999.
Page 28 of 38
<PAGE>
CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES
Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned
Nonaccrual loans, which include loans 90 days or more past due, totaled $59.9
million, or 1.45% of total loans, at September 30, 2000, compared with $27.6
million, or 0.76% of total loans, at December 31, 1999, and $43.0 million, or
1.18% of total loans, at September 30, 1999. The increase in nonaccrual loans
compared with year-end and a year ago is largely due to a limited number of
loans in the Syndicated Finance Segment. See - "Operating Segment Results." The
remaining nonaccrual loans at quarter end consisted of commercial loans
individually no larger than $3.5 million.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
<TABLE>
<CAPTION>
=================================================================================================================
Sept. 30 June 30, March 31, Dec. 31, Sept. 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 59,263 $ 55,683 $ 35,408 $ 27,020 $ 42,539
Real estate 480 461 480 569 496
Consumer 125 - - - -
-----------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 59,868 56,144 35,888 27,589 43,035
=================================================================================================================
Restructured loans 6,284 6,401 6,914 4,081 4,640
=================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross 826 826 935 935 1,237
-----------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net 826 826 935 935 1,237
-----------------------------------------------------------------------------------------------------------------
Total $ 66,978 $ 63,371 $ 43,737 $ 32,605 $ 48,912
=================================================================================================================
</TABLE>
The $32.3 million net increase in nonaccrual loans at September 30, 2000,
compared with December 1999 reflects new loans totaling $127.0 million placed on
nonaccrual status offset by $39.0 million in charge-offs, $40.7 million in
payments (includes $10.7 million in insurance settlement proceeds) on
nonaccrual loans and $15.0 million of nonaccrual loans returning to accrual
status. The Company's focus on business customers generates a relatively large
average loan size that contributes to the variability of its nonaccrual asset
totals.
Restructured loans, loans that have had their original terms modified, totaled
$6.3 million, $4.1 million and $4.6 million at September 30, 2000, December 31,
1999, and September 30, 1999, respectively. All restructured loans were
performing in accordance with their modified terms as of September 30, 2000.
Real estate and other assets owned ("OREO") include properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the collateral, less the estimated costs of disposal,
and the loan balance at the time of transfer to OREO is reflected in the
allowance for loan losses as a charge-off. Any subsequent declines in the fair
value of the property after the date of transfer are recorded through a
provision for write-downs on OREO. OREO totaled $826,000, $935,000 and $1.2
million at September 30, 2000, December 31, 1999 and September 30, 1999,
respectively. There were no valuation allowances on OREO for these reporting
dates.
All loans on nonaccrual status are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the criteria of all payments being current and the loan underwriting must
support the debt service requirements. Factors that contribute to a performing
loan being classified as impaired include substantial doubt about the ability of
the borrower to make all principal and interest payments under the original
terms of the loan, a below market interest rate, delinquent taxes and debts to
other lenders that cannot be serviced from existing cash flow.
Page 29 of 38
<PAGE>
The following table contains information for loans classified as impaired:
<TABLE>
<CAPTION>
=========================================================================================================================
Net
Carring Specific Net
(Dollars in thousands) Value Allowance Balance
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 2000
Loans with specific allowances $ 62,169 $ (28,693) $ 33,476
Loans without specific allowances 13,107 - 13,107
-------------------------------------------------------------------------------------------------------------------------
Total $ 75,276 $ (28,693) $ 46,583
=========================================================================================================================
December 31, 1999
Loans with specific allowances $ 28,779 $ (10,160) $ 18,619
Loans without specific allowances 11,978 - 11,978
-------------------------------------------------------------------------------------------------------------------------
Total $ 40,757 $ (10,160) $ 30,597
=========================================================================================================================
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
=========================================================================================================================
September 30, December 31,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 15,408 $ 12,920
Past due - 248
Nonaccrual 59,868 27,589
-------------------------------------------------------------------------------------------------------------------------
Total $ 75,276 $ 40,757
=========================================================================================================================
</TABLE>
Loans classified as impaired totaled $75.3 million at September 30, 2000,
compared with $40.8 million at December 31, 1999. The $34.5 million net increase
in impaired loans at September 30, 2000, compared with December 1999 reflects
loans totaling $136.3 million newly classified as impaired offset by $39.0
million in charge-offs, $42.2 million in payments on impaired loans and $20.6
million of loans removed from impaired status. The Company's average recorded
investment in impaired loans for the first nine months of 2000 was $57.2
million. Interest income collected on impaired loans totaled approximately
$858,000 for the first nine months of 2000, compared with $1.7 million for the
year-earlier period.
Allowance and Provision for Loan Losses
The allowance for loan losses is maintained at a level considered appropriate by
management to be adequate to absorb estimated known and inherent risks in the
existing portfolio. The Company's Credit Review Department performs an ongoing
assessment of the risks inherent in the loan portfolio. The allowance for loan
losses is increased by the provision for loan losses which is charged against
current period operating results, and is decreased by the amount of net
charge-offs during the period. The Company utilizes a migration model, a
technique that estimates the inherent loss in the portfolio by applying loss
factors to grades of loans, to determine the level of the allowance and
provision for loan losses. The migration model utilizes an average loss rate
over a rolling twelve quarter base period and incorporates a standard deviation
analysis to provide probabilities for loss experience. The loss factors used in
the model are updated quarterly. The primary qualitative factors considered in
the assessment of loss factors are: changes in local economic and business
conditions, including the condition of specific market segments; changes in
lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices; the existence and effect of any
concentrations within the portfolio and changes in the level of such
concentrations; changes in the trend of delinquencies and in the volume and
nature of adversely graded nonaccrual and impaired loans; and external factors
such as competition and legal and regulatory requirements that could potentially
impact the level of credit losses in the portfolio. Management believes that the
allowance for loan losses at September 30, 2000 is adequate. Future additions
to the allowance will be subject to continuing evaluation of inherent risk in
the loan portfolio.
At September 30, 2000, the allowance for loan losses was $90.1 million, or 2.18%
of total loans, compared with $71.7 million, or 1.98% of total loans at December
31, 1999, and $68.8 million, or 1.88% of total loans, at September 30, 1999.
Page 30 of 38
<PAGE>
The allowance for loan losses represented 150% of nonaccrual loans at September
30, 2000, compared with 260% of nonaccrual loans at December 31, 1999, and 160%
of nonaccrual loans at September 30, 1999. The following table summarizes
activity in the allowance for loan losses:
<TABLE>
<CAPTION>
=======================================================================================================================
Nine months ended September 30, (Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 71,677 $ 62,649
=======================================================================================================================
Loans charged off:
Commercial (44,921) (12,420)
Real estate - (295)
Consumer (236) (69)
-----------------------------------------------------------------------------------------------------------------------
Total charge-offs (45,157) (12,784)
-----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 9,747 2,011
Real estate 21 67
Consumer 6 6
-----------------------------------------------------------------------------------------------------------------------
Total recoveries 9,774 2,084
-----------------------------------------------------------------------------------------------------------------------
Net loans charged off (35,383) (10,700)
Provision for loan losses 53,794 20,820
Portfolio transfer - (4,000)
-----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 90,088 $ 68,769
=======================================================================================================================
Loans outstanding, end of period 4,141,848 3,648,237
-----------------------------------------------------------------------------------------------------------------------
Average loans outstanding 4,222,856 3,914,946
=======================================================================================================================
Ratio of net charge-offs to average loans (annualized) 1.12% 0.37%
Ratio of allowance for loan losses to loans outstanding at Sept 30 2.18 1.88
Ratio of allowance for loan losses to nonaccrual loans at Sept 30 150.48 159.80
Ratio of provision for loan losses to net charge-offs 152.03 194.58
=======================================================================================================================
</TABLE>
Asset Quality by Type of Operation
The Company's exposure to credit quality varies by type of operation. Management
considers the exposure to credit risk, potential returns and allocated financial
capital in operating the Company. Management believes that it is not appropriate
to use the aggregate credit quality statistics to understand the credit exposure
of the Company's operations.
The Company devotes capital to its principal subsidiary, Imperial Bank, to two
operating subsidiaries of Bancorp and the Bank, Imperial Credit Corporation
("ICC") and Imperial Ventures, Inc., ("IVI"), respectively, as well as to the
Company itself. The activities of ICC and IVI include loans to and investments
in emerging companies. The underwriting standards for these activities differ
from those used by the Bank and the expected returns and possible credit losses
are each higher than what would be expected from application of the Bank's loan
underwriting criteria. Based upon these circumstances, the Company limits the
amount of capital allocated to the type of lending and investing undertaken by
ICC and IVI.
A portion of the Bank's nonaccrual loans are covered by government guarantees
and, accordingly, management excludes such loans from its assessment of Bank
credit quality. In addition, as discussed above in "Operating Segment Results,"
the Syndicated Loan Segment has specialized underwriting.
As contrasted with the segment disclosure, the following supplemental analysis
reflects material nationally syndicated credits managed in regional offices
(primarily because of deposit relationships) in the syndicated loan results.
Management's supplemental analysis of credit quality by business activity is
provided in the tables below:
Page 31 of 38
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated
September 30, 2000 Loans (2) (3) Operations Total Bank ICC Total
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average loans and equity invest (1) $ 522,743 $ 97,616 $ 3,514,841 $ 4,135,200 $39,185 $ 4,174,385
Average nonaccrual loans 14,305 2,354 33,186 49,845 425 50,270
Nonaccrual loans at September 30 31,209 2,458 26,201 59,868 - 59,868
Average allocated capital 69,276 3,972 378,620 451,868 47,071 498,939
Net charge-offs 23,923 58 10,240 34,221 1,162 35,383
YTD warrant and equity -
investment income - - 22,831 22,831 19,433 42,264
Avg nonaccrual loans/avg loans 2.66% 2.35% 0.94% 1.19% 1.07% 1.19%
Net charge-offs as a percentage
of total average loans (annualized) 5.95 0.08 0.39 1.09 7.37 1.12
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes average loans and loans held for sale excluding nonaccrual loans,
and equity investments.
(2) Average nonaccrual loans and net charge-offs include an $8.8 million
syndicated loan managed in a commercial banking office due to a deposit
relationship. This loan was charged-off in May 2000.
(3) Approximately 75% of SBA balances are guaranteed by the U.S Government
================================================================================
<TABLE>
<CAPTION>
===========================================================================================================================
For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated
September 30, 1999 Loans (2) (3) Operations Total Bank ICC Total
(Dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average loans and equity invest (1) $ 600,359 $ 34,080 $ 3,194,241 $ 3,828,680 $16,109 $ 3,844,789
Average nonaccrual loans 100 636 42,525 43,261 - 43,261
Nonaccrual loans at September 30 3,401 2,150 37,484 43,035 - 43,035
Average allocated capital 74,963 4,015 300,113 379,091 21,332 400,423
Net charge-offs (recoveries) 6,328 - 4,372 10,700 - 10,700
YTD warrant and equity -
investment income - - 9,555 9,555 2,093 11,648
Avg nonaccrual loans/avg loans 0.02% 1.83% 1.31% 1.12% 0.00% 1.11%
Net charge-offs as a percentage
of total average loans (annualized) 1.41 - 0.18 0.37 - 0.37
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes average loans and loans held for sale excluding nonaccrual loans,
and equity investments.
(2) Average nonaccrual loans and net charge-offs include a $4.5 million
syndicated loan managed in a commercial banking office due to a deposit
relationship. This loan was fully charged-off by June 30, 1999.
(3) Approximately 75% of SBA balances are guaranteed by the U.S Government.
================================================================================
Management's observations from the above analyses are that (1) the current
year's annualized charge-off rate for the All Other Bank Operations
(representing approximately 84% of consolidated loans) is only 39 basis points,
approximately one-third the aggregate rate of 112 basis points, (2) the highest
charge-off rate is in the IVI/ICC subsidiaries and is acceptable to management
because the warrant and investment gains of approximately $19 million
substantially exceed the credit risk from this type of investing activity
(approximately $1.2 million in charge-offs), (3) the increase in the annualized
net charge-off rate for syndicated loans is reflective of the matters discussed
above, and (4) the 1999 net-charge-off rate for the All Other Bank Operations
was at an extremely low level (18 basis points) and the current year's rate
(approximately 62 basis points without the $6.0 million commercial loan
recovery) is more indicative of the bank's historical results.
Page 32 of 38
<PAGE>
CAPITAL RESOURCES
At September 30, 2000, shareholders' equity increased to $505.0 million from
$473.4 million at December 31, 1999, and $414.5 million at September 30, 1999.
During the nine months ended September 30, 2000, shareholders' equity was
reduced by $30.5 million, due to common stock repurchases under the Company's
Stock Repurchase Program. The Company repurchased and retired 1.7 million shares
of its common stock during the first nine months of 2000. At September 30, 2000,
579,324 shares remain available for repurchase under the Company's Stock
Repurchase Program. The Company subsequently terminated its Stock Repurchase
Program due to the anticipated acquisition by Comercia Inc.
Management is committed to maintaining capital at a level sufficient to assure
shareholders, customers and regulators that the Company and its bank
subsidiaries are financially sound. The Company and its bank subsidiaries are
subject to risk-based capital regulations promulgated by the federal banking
regulators. These guidelines are used to evaluate capital adequacy and are based
on an institution's asset risk profile and off-balance sheet exposures. The
risk-based capital guidelines assign risk weightings to assets both on- and
off-balance sheet and place increased emphasis on common equity. Federal law
requires each federal banking agency to take prompt corrective action to resolve
problems of insured depository institutions including, but not limited to, those
that fall below one or more prescribed capital ratios.
According to the regulations, institutions whose Tier I and total capital ratios
meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well
capitalized". Tier I capital basically consists of common shareholders' equity
and noncumulative perpetual preferred stock and minority interest of
consolidated subsidiaries minus intangible assets. Based on the guidelines, the
Company's Tier I and total capital ratios at September 30, 2000, were 10.14% and
13.09% respectively, compared with 12.76% and 9.54%, respectively, at September
30, 1999.
<TABLE>
<CAPTION>
Capital Ratios for Imperial Bancorp and Imperial Bank/(1)/
===============================================================================================================================
September 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars in thousands) Actual Purposes Action Provisions
-------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets):
Company $ 768,765 13.09% $ 469,973 8.00% $ 587,467 10.00%
Bank 703,000 12.14 463,338 8.00 579,172 10.00
Tier I Capital (to risk-weighted assets):
Company 595,668 10.14 234,987 4.00 352,480 6.00
Bank 530,942 9.17 231,669 4.00 347,503 6.00
Leverage (to average assets):
Company 595,668 9.02 198,222 3.00 330,370 5.00
Bank 530,942 8.13 196,005 3.00 326,674 5.00
===============================================================================================================================
</TABLE>
(1) Includes common shareholders' equity (excluding unrealized gains on
securities available for sale) less goodwill and other disallowed
intangibles.
Risk-weighted assets for the Company and Imperial Bank were $5,553.6 million and
$5,479.8 million, respectively, at September 30, 2000. Risk-weighted assets for
the Company and the Bank were $5,063.0 million and $4,996.5 million at September
30, 1999, respectively.
In April 1999, Imperial Bank issued $100 million of 8.5% 10-year Subordinated
Capital Notes. The notes qualify as Tier 2 capital under regulatory guidelines.
In May 2000, the Company redeemed $10.0 million of its Capital Securities. These
securities qualify as Tier 1 capital under regulatory guidelines.
Page 33 of 38
<PAGE>
In addition to the risk-weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3 percent. The ratio is defined as Tier I capital to average total
assets for the most recent quarter. The Company's leverage ratio was 9.02% at
September 30, 2000, compared with 8.50% at September 30, 1999, well in excess of
minimum regulatory requirements.
LIQUIDITY
Liquidity management relates to the Company's ability to meet its cash
requirements and is managed through its asset/ liability management process. The
Company monitors its cash inflows and outflows associated with its lending and
deposit activities and modifies its asset and liability positions as liquidity
requirements change. The Company also relies on projections of loan and deposit
growth in managing its liquidity position.
The Company's primary source of liquidity is its deposit base. This source has
historically provided a significant majority of the Company's liquidity needs.
Total deposits grew to $6.5 billion at September 30, 2000, from $5.9 billion at
December 31, 1999, and $5.7 billion at September 30, 1999. Demand deposits
increased to $3.5 billion, or 54% of total deposits, at September 30, 2000, from
$2.5 billion, or 43% of total deposits at December 31, 1999, and $2.9 billion,
or 51% of total deposits, at September 30, 1999. See - "Operating Segment
Results."
The Company also uses other methods of meeting its liquidity requirements
including short-term borrowings in the form of federal funds purchased,
repurchase agreements, commercial paper, Treasury tax and loan notes ("TT & L")
and occasionally the sale of securities held in its available for sale
portfolio. Short-term borrowings decreased to $53.0 million at September 30,
2000, from $156.7 million at December 31, 1999, and $101.6 million at September
30, 1999. The large decrease in short-term borrowings compared with the earlier
periods is due to a reduction in TT & L balances. Management made the decision
to reduce the level of TT & L borrowings in order to use the collateral in
connection with the formation of ISII.
The Company has recently been in a position of having excess liquidity due
primarily to strong demand deposit growth that surpassed loan funding
requirements. The Company has a policy of maintaining net liquid assets to total
deposits (the liquidity ratio) of at least 20%. The liquidity ratio averaged
26.5% for the first nine months of 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity Management
The primary objective of the asset liability management process is to manage the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies that attempt to protect pretax net
interest income assuming various interest rate scenarios. This is accomplished
by adjusting the repricing characteristics of the Company's assets and
liabilities as interest rates
Page 34 of 38
<PAGE>
change. The Company's Asset Liability Committee ("ALCO") chooses strategies in
conformance with its policies to achieve an appropriate trade off between
interest rate sensitivity and the volatility of pretax net interest income and
net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
the net interest margin by simulating various interest rate scenarios over
future time periods. Through the use of these simulations, the Company can
approximate the impact these projected rate changes may have on its entire on-
and off-balance sheet positions, on any particular segment of the balance sheet,
and on overall profitability. The majority of the Company's loan portfolio is
variable rate, therefore, net interest income will increase during a period of
rising interest rates and decrease during a period of declining interest rates.
The Company's net interest margin is sensitive to changes in interest rates. In
addition, the Company's interest-earning assets, primarily its loans, are
generally tied to the prime rate, an index which tends to react more slowly to
changes in market rates than other money market indices such as LIBOR. The rates
paid for the Company's interest-bearing liabilities, however, do correlate with
LIBOR. This mismatch creates a spread relationship risk between the Company's
prime based assets and LIBOR correlated liabilities. The Company has developed
strategies to protect both net interest income and net interest margin from
significant movements in interest rates. These strategies involve purchasing
interest rate floors, caps and swaps.
RISK FACTORS AFFECTING FUTURE RESULTS
This report contains statements that may be considered forward-looking. Actual
results could differ materially from the results indicated by these statements
because of many factors that are beyond our ability to control or predict. The
following is a list of primary risks facing the Company:
Interest Rate Risk: The Company's profitability is primarily dependent on the
net interest spread between its earning assets and the related funding sources.
A large portion of its earning asset base relates to the prime interest rate.
Future reductions in the prime interest rate could have material and adverse
effects on the Company's profitability. A large portion of its funding sources
are non-interest bearing and face the possibility of disintermediation either to
a competing bank - creating a loss of market share and/or a need for replacement
- or disintermediation into an interest-bearing account - causing a significant
reduction to net interest income. The Company employs financial derivatives to
hedge interest rate risk, specifically a $2 billion floor in effect each quarter
through September 2001. If the cost of the hedges increases, the Company would
either have to pay the increased cost to maintain the hedge or find alternative
methods to mitigate interest rate risk.
Credit Risk: The Company generally faces risk from its borrower base in that
they may fail to perform in accordance with the terms of their loans, especially
the full repayment of loan principal. The Company has adopted underwriting
standards in an effort to minimize these risks. The Company's profitability
could be both materially and adversely effected should it experience increased
loan defaults and charge-offs.
Regulatory Risk: As a part of the banking industry, the Company is subject to
extensive regulatory control and attention. Legislation such as the repeal of
the Glass-Steagal Act in the recently adopted Gramm-Leach-Bliley Act have moved
the banking industry and financial intermediaries to the forefront in terms of
regulatory attention and concern. Limitations concerning client activity,
liquidity requirements, capital requirements, transactions with affiliates,
business focus, tax consequences, interstate banking and treatment of
subsidiaries could have material and adverse impact on profitability.
Local and National Economic Risk: The Company has broadened its lending focus
with expansion into Austin, Boston, Dallas, Denver, Kirkland, New York, Phoenix,
Raleigh-Durham and Reston. However, the vast majority of clients and business
still come from California. Therefore, the Company faces some concentrated risks
concerning future economic status for California along with the nation as a
whole. A significant reduction in demand for the Company's products and
increased credit losses could result from an economic slowdown either locally or
nationally.
Subsidiary Risk: The Company is a 56% owner of Official Payments Corporation
("OPAY"), a leading provider of electronic payment options to government
entities. OPAY is in the early stages of operations and expects to incur losses
Page 35 of 38
<PAGE>
from operations in the future, of which the Company will record its
proportionate interest. Currently, OPAY generates most of its revenues from
processing income tax payments. Tax payments are seasonal in nature and produce
inconsistent earnings streams. These inconsistent earnings will be reflected in
the Company's financial statements and press releases. OPAY is extremely
dependent on maintaining its relationship with the IRS to maintain future
revenues. Loss of IRS processing would severely limit OPAY's ability to earn
consistent future revenues and establish market share and name recognition.
Warrants and Equity Investments Income Risk: In the past, the Company has been
able to generate substantial income derived from the sale of stock, obtained by
the Company through the exercise of warrants received from certain clients as
provided in the loan terms. The Company has also realized income from equity
investments in emerging growth companies and investments in venture capital
funds. Many factors may influence the ability to collect future income from
these sources such as equity market fluctuations, market acceptance for IPOs,
the client's ability to establish and maintain a successful company and the
unexercised expiration of the warrant agreements. The nature and timing of these
factors could create situations that would greatly reduce warrant and equity
investment income.
Competitive Risk: The Company faces constant competition for loans, deposits and
fee-based income from other national, regional and community commercial banks as
well as other financial intermediaries such as, savings and loans, finance
companies, brokerage firms, insurance companies and credit unions. A loss of
market share in its deposit base would force the Company to turn to higher
priced funding sources to support its balance sheet. These higher priced funding
sources would significantly reduce net interest income. On the asset side, the
Company also faces intense competition for its loan products.
Legal Liability Risk: Claims and lawsuits against the Company arise throughout
the normal course of operations. Currently, the Company believes that the
liability, if any, relating to these actions will not have a material impact on
the Company. However, future claims could have material and adverse impacts on
profitability.
Merger Risk: Imperial Bancorp has entered into an agreement to be acquired by
Comerica, Inc. In connection with the agreement, certain risks and
uncertainties include but are not limited to:
. conditions precedent to the close of the merger agreement may not be
satisfied;
. the timing and completion of the merger and new operations may be delayed or
prohibited;
. the benefits anticipated to result from the merger may not be realized; and
. uncertainty relating to the merger may cause the combined company to lose
current or fail to gain new customer and employees.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge.
On September 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB No.
133." SFAS No. 138 addresses a limited number of issues causing implementation
difficulties for numerous entities that are required to apply SFAS No. 133. SFAS
No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB statement No. 133, and Statement 138," continues to be
effective for all fiscal quarters of all fiscal years beginning after June 30,
2000.
Although management does not believe that adoption of SFAS No. 133 will have a
material impact on its results of operations and financial position, management
anticipates that the new pronouncement will have an impact on accounting for
warrants received in lending transactions. Specifically, equity warrants will be
accounted for as embedded derivatives and, accordingly, such warrants will in
general be recognized as an asset at fair value at the time the related lock-up
period expires.
Page 36 of 38
<PAGE>
SFAS No. 140 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities In September 2000, the FASB issued SFAS No 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" as a replacement of SFAS 125 effective for disclosures in
financial statements issued subsequent to December 15, 2000, and for
transactions entered after March 31, 2001. Management does not expect adoption
of SFAS 140 will have a material impact on the financial statements.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Due to the nature of the businesses, the Company and its subsidiaries
are subject to numerous legal actions, threatened or filed, arising in
the normal course of business. Certain of the actions currently
pending seek punitive damages, in addition to other relief. The
Company is of the opinion that the eventual outcome of all currently
pending legal proceedings will not be materially adverse to the
Company.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
Exhibit Number Description
10.1 Special Compensation Agreement dated May 19,
2000, between Company, Imperial Bank and George
L. Graziadio, Jr.
10.2 Special Compensation Agreement dated May 19,
2000, between Company, Imperial Bank and Norman
P. Creighton
27.1 Financial Data Schedule
All other material referenced in this report which is required to be filed as
an exhibit hereto has previously been submitted.
(b) Form 8-K filed on November 02, 2000.
Page 37 of 38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
IMPERIAL BANCORP
Dated: November 14, 2000 By: /s/ Dennis J. Lacey
---------------------------------
Dennis J. Lacey
Executive Vice President and
Chief Financial Officer
By: /s/ Paul E. Adkins
---------------------------------
Paul E. Adkins
Senior Vice President and
Controller
Page 38 of 38
