<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended March 31, 2000
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
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<S> <C>
California 95-2575576
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (310) 417-5600
Commission file number: 0-7722
Securities registered pursuant to Section 12(g) of the Act:
Common Stock: Number of Shares of Common Stock outstanding as of May 1, 2000:
45,087,408 shares.
Debt Securities: Imperial Bank 8.5% Subordinated Capital Notes Due 2009. As of
March 31, 2000, $100,000,000 in principal amount of such Notes
was outstanding.
Capital Securities: 9.98% Series B Capital Securities of Imperial Capital Trust
I Due 2026. As of March 31, 2000, $75,000,000 in principal
amount was outstanding.
The Registrant 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 and has
been subject to such filing requirements for the past 90 days.
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INDEX Page
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Part I
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
Part II
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
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Page 1 of 25
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PART I. ITEM 1.
CONSOLIDATED BALANCE SHEETS
===============================================================================================================================
Imperial Bancorp and Subsidiaries March 31, December 31,
(Dollars in thousands) 2000 1999
===============================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 410,983 $ 307,770
Federal funds sold and securities purchased under resale agreements 1,485,000 1,555,000
Trading instruments 143,157 86,540
Securities available for sale, at fair value 911,904 1,040,285
Securities held to maturity (fair value of $3,702 and $3,744 for 2000 and 1999, respectively) 3,702 3,744
Loans held for sale (fair value of $81,334 and $83,613 for 2000 and 1999, respectively) 80,148 83,044
Loans:
Loans, net of unearned income and deferred loan fees 3,794,929 3,612,148
Less allowance for loan losses (78,528) (71,677)
- -------------------------------------------------------------------------------------------------------------------------------
Total net loans 3,716,401 3,540,471
- -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 46,003 41,245
Accrued interest receivable 42,447 33,565
Real estate and other assets owned, net 935 935
Deferred tax asset 26,366 26,092
Other assets 134,460 138,011
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $7,001,505 $6,856,702
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $3,196,396 $2,538,850
Savings 23,759 21,075
Money market 1,269,554 1,492,138
Time - under $100 117,062 154,597
Time - $100 and over 1,480,428 1,697,940
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 6,087,199 5,904,600
- -------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 15,809 15,883
Income taxes payable 3,471 -
Short-term borrowings 94,423 156,663
Long-term borrowings:
Notes and debentures 99,427 99,411
Other borrowed funds 3,590 4,125
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of subsidiary trust holding
solely junior subordinated deferrable interest debentures of the Company, net 73,444 73,430
Minority interest 33,502 35,528
Other liabilities 98,572 93,655
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,509,437 6,383,295
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 44,931,945
shares at March 31, 2000, and 44,903,937 shares at
December 31, 1999, issued and outstanding 399,008 312,677
Unearned employee stock ownership plan shares: 141,289 (2,923) (3,659)
Deferred stock compensation (35,930) (37,615)
Accumulated other comprehensive income, net of tax 5,519 9,998
Retained earnings 126,394 192,006
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 492,068 473,407
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,001,505 $6,856,702
===============================================================================================================================
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------------------------
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Page 2 of 25
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CONSOLIDATED STATEMENTS OF INCOME
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========================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended
March 31,
(Dollars in thousands, except per share data) 2000 1999
========================================================================================================================
<S> <C> <C>
Interest income:
Loans $ 90,591 $ 74,587
Trading instruments 1,698 889
Interest-bearing deposits 95 -
Securities available for sale 12,775 7,394
Securities held to maturity 66 72
Federal funds sold and securities purchased under resale agreements 11,125 4,055
Loans held for sale 1,462 435
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 117,812 87,432
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 33,746 21,768
Short-term borrowings 1,481 1,259
Long-term borrowings 3,933 1,578
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 39,160 24,605
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 78,652 62,827
Provision for loan losses 11,894 4,794
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 66,758 58,033
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,860 1,843
Trust fees - 2,215
Gain on origination and sale of loans 493 1,221
Gain from exercise of Official Payments Corp. stock options 915 -
Equity in net income of Imperial Credit Industries, Inc. - 2,240
Other service charges and fees 6,187 4,448
Merchant and credit card fees 3,694 2,236
International income and fees 3,928 2,800
Gain on securities available for sale 5,185 -
Gain on trading instruments 582 19
Gain on exercise of warrants and related sale of equity securities 9,699 4,228
Other income 2,022 738
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 34,565 21,988
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits 43,826 30,715
Net occupancy expense 2,844 2,695
Furniture and equipment 3,872 2,904
Data processing 2,547 2,526
Customer services 4,453 6,351
Professional and legal fees 2,795 2,843
Business development 5,337 1,385
Other expense 9,470 7,054
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 75,144 56,473
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in loss of consolidated subsidiary 3,930 18
Income before income taxes 30,109 23,566
Income tax provision 10,794 9,343
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 19,315 $ 14,223
========================================================================================================================
Basic earnings per share $ 0.43 $ 0.31
Diluted earnings per share 0.41 0.30
========================================================================================================================
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------
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Page 3 of 25
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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=================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended
March 31,
(Dollars in thousands) 2000 1999
=================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,315 $ 14,223
Adjustments for noncash charges (credits):
Depreciation and amortization (3,136) (1,648)
Provision for loan losses 11,894 4,794
Equity in net income of Imperial Credit Industries, Inc. - (2,240)
Gain on exercise of warrants and sale of equity securities (9,699) (3,952)
Gain resulting from exercise of OPAY stock options 915 -
Gain on sale of real estate and other assets owned - (1)
Loss (gain) on sale of premises and equipment 344 (3)
(Benefit) provision for deferred taxes (274) 6,110
Gain on securities available for sale (5,185) -
Net change in trading instruments (56,617) (24,054)
Net change in loans held for sale 2,660 3,579
Net change in accrued interest receivable/payable (8,956) (164)
Net change in income taxes receivable/payable 14,065 (748)
Net change in other assets/liabilities (926) (35,260)
Net change in minority interest (2,026) (18)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (37,626) (39,382)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity 42 38
Proceeds from maturities of securities available for sale 1,858,099 1,143,480
Proceeds from sale of securities available for sale 177,625 -
Purchase of securities available for sale (1,904,593) (1,123,627)
Proceeds from exercise of warrants and sale of equity securities 9,699 3,952
Net change in Federal funds sold and securities purchased under resale agreements 70,000 688,500
Net change in loans (180,721) (66,194)
Capital expenditures (8,673) (3,713)
Proceeds from sale of real estate and other assets owned - 413
Proceeds from sale of premises and equipment 281 25
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 21,759 642,874
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings, and money market accounts 437,646 185,700
Net change in time deposits (255,047) 71,255
Net change in short-term borrowings (62,240) (9,687)
Net proceeds from ESOP loan - 5,985
Net change in long-term borrowings (535) (19)
Repurchase of common stock for ESOP - (5,985)
Repurchase of common stock (2,109) -
Proceeds from exercise of employee stock options 1,384 166
Other (20) (18)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 119,079 247,397
- -----------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks 103,212 850,889
- -----------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year 307,770 355,317
- -----------------------------------------------------------------------------------------------------------------
Cash and due from bank, end of period $ 410,982 $ 1,206,206
=================================================================================================================
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------
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Page 4 of 25
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Imperial Bancorp and Subsidiaries Three months ended
March 31,
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 19,315 $ 14,223
Other comprehensive loss, net of tax:
Reclassification adjustments for gains included
in net income net of tax effect ($2,215) (2,970) -
Unrealized loss on securities available for sale,
net of tax effect of ($1,361) and ($1,608) (1,509) (2,217)
- ----------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 14,836 $ 12,006
================================================================================================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) 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 the 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 Balance Sheets, Consolidated Statements of
Income and Consolidated Statements of Cash Flows are presented in the same
format as that used in the Company's most recently filed Report on Form 10-K.
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries.
NOTE (2) STATEMENTS OF CASH FLOWS
The following information supplements the statements of cash flows:
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For the three months ended March 31, (Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 39,234 $ 23,178
Taxes paid - 3,153
Federal tax refund received 8,800 -
Significant noncash transactions:
Loans transferred to OREO - 132
Net change in accumulated other comprehensive income, net of tax 4,479 2,217
=====================================================================================================================
</TABLE>
NOTE (3) 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 months ended March 31, 2000 and 1999:
Page 5 of 25
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======================================================================================================================
For the three months ended March 31, 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 $19,315 44,803,200 $ 0.43 $14,223 45,236,399 $ 0.31
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,999,416 1,644,359
----------- ----------
Diluted EPS
Net income $19,315 46,802,616 $ 0.41 $14,223 46,880,759 $ 0.30
======================================================================================================================
</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 that were not included in the calculation of diluted
earnings per share for first quarter 2000 because their effect was antidilutive
totaled 9,384.
NOTE (4) OFFICIAL PAYMENTS CORPORATION
At March 31, 2000, the Company owned 12,000,000 shares, or 56.2% of total
outstanding shares, of Official Payments Corporation ("OPAY") (Nasdaq: OPAY)
common stock. OPAY's operating results are reported on a consolidated basis for
financial reporting purposes. OPAY reported an operating loss of $8.9 million
for the three months ended March 31, 2000. The Company's share of OPAY's
operating loss was $5.0 million. On an after-tax basis, the Company's net income
for first quarter 2000 includes a $2.7 million loss, or $0.6 a share, related to
its investment in OPAY. This loss is net of a $590,600 after-tax gain related to
the exercise of OPAY stock options.
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. Evan's' stock
option 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 $1.5 million has been cumulatively amortized through March 31,
2000. The initial determination of amounts, if any, that could potentially be
owed Evans cannot be determined until the first anniversary of his employment
agreement (August 2000). In the event that an obligation to fund the guarantee
is deemed probable, the amount of that estimated obligation over that previously
recorded in consolidation will be recorded as expense and prior amortization as
additional investment in OPAY, subject to a recoverability analysis.
NOTE (5) OPERATING SEGMENT RESULTS
Management of the Company, for purposes of assessing performance and allocating
resources, evalutates 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
Page 6 of 25
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Entertainment - traditional banking services to mid-sized entertainment and
independent film companies originated by direct relationships with
customers
Syndicated Finance - purchasing of nationally syndicated loans originated
on an indirect basis
SBA Division - traditional small business 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
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 escrow and title 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.
Special Markets 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 Segments - in this segment, the Company reports activities not
individually material including OPAY, the Merchant Card Division, and
subsidiaries of the holding company.
The segment information for the prior year has been restated to conform to the
current year's presentation, including approximating the impact of using full
absorption cost accounting in the prior year.
Page 7 of 25
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For the three month ended
March 31, 2000 Commercial Special Syndicated Other
(Dollars in thousands) Banking Markets Finance Segments Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 45,227 $ 13,052 $ 6,283 $ 14,090 $ 78,652
Provision for loan losses 10,109(1) 1,004 331 450 11,894
Noninterest income 6,883 16,328 628 10,726 34,565
Noninterest expense 29,915 10,357 1,713 29,229 71,214
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 12,086 18,019 4,867 (4,863) 30,109
Income taxes 4,284 6,388 1,726 (1,604) 10,794
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 7,802 $ 11,631 $ 3,141 $ (3,259) $ 19,315
- ----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 2,620,767 $ 377,377 $ 543,698 $ 419,604 $ 3,961,446
Average assets 2,742,428 394,933 548,785 2,720,933 6,407,079
Average deposits 1,565,980 1,182,167 15,164 2,729,032 5,492,343
============================================================================================================================
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For the three month ended
March 31, 1999 Commercial Special Syndicated Other
(Dollars in thousands) Banking Markets Finance Segments Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 40,992 $ 7,318 $ 5,747 $ 8,770 $ 62,827
Provision for loan losses 2,774 1,972 48 - 4,794
Noninterest income 3,226 4,468 652 13,642 21,988
Noninterest expense 25,627 6,806 1,536 22,486 56,455
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 15,817 3,008 4,815 (74) 23,566
Income taxes 6,004 1,458 1,910 (29) 9,343
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 9,813 $ 1,550 $ 2,905 $ (45) $ 14,223
- ----------------------------------------------------------------------------------------------------------------------------
Average net loans $ 2,316,039 $ 337,828 $ 602,160 $ 497,645 $ 3,753,672
Average assets 2,336,835 347,017 606,832 2,095,923 5,386,607
Average deposits 1,472,884 452,776 11,405 2,794,167 4,731,232
============================================================================================================================
</TABLE>
(1) $2 million of this provision relates to a nationally syndicated credit
administered in a regional office.
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 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.
Page 8 of 25
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FINANCIAL RESULTS
Net income increased 36% to $19.3 million, or $0.41 per share, for the three
months ended March 31, 2000, from $14.2 million, or $0.30 a share, for the
year-earlier quarter. The annualized return on average assets and average equity
increased to 1.21% and 16.08%, respectively, for first quarter 2000, from 1.07%
and 14.89%, respectively, for the year-earlier quarter. First quarter results
reflect growth in earning assets, net interest income and noninterest income,
principally from gains realized on warrants and sales of equity investments in
emerging growth companies and venture capital funds, from the year-earlier
quarter.
Net income includes certain amounts that management has historically viewed as
other than core income. Net income for first quarter 2000 includes a $2.7
million, or $0.06 a share, net after-tax loss comprised of the company's share
of Official Payment Corporation's ("OPAY") (Nasdaq: OPAY) first quarter
operating losses net of a gain related to the exercise of OPAY stock options.
OPAY is expected to report operating losses for the remainder of the year. Net
income for first quarter 1999 includes $1.3 million, or $0.02 per share,
representing the Company's equity in the net income of Imperial Credit
Industries, Inc. ("ICII") (Nasdaq: ICII). Earnings per share amounts are
reported on a diluted basis and reflect an 8% stock dividend paid on February
18, 2000.
First quarter results are summarized in the following tables:
<TABLE>
<CAPTION>
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Imperial Bancorp and Subsidiaries Three months ended
March 31,
-------------------------------------------------------------------
Change
(Dollars in thousands, except per share data) 2000 1999 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 117,812 $ 87,432 $ 30,380 34.7%
Interest expense 39,160 24,605 14,555 59.2
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 78,652 62,827 15,825 25.2
Provision for loan losses 11,894 4,794 7,100 148.1
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 66,758 58,033 8,725 15.0
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income 34,565 21,988 12,577 57.2
Noninterest expense:
Salaries and benefits 43,826 30,715 13,111 42.7
Other noninterest expense 31,318 25,758 5,560 21.6
- ----------------------------------------------------------------------------------------------------------------------
Total 75,144 56,473 18,671 33.1
- ----------------------------------------------------------------------------------------------------------------------
Minority interest in loss of consolidated subsidiary 3,930 18 3,912 N/A
Income before income taxes 30,109 23,566 6,543 27.8
Income tax provision 10,794 9,343 1,451 15.5
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 19,315 $ 14,223 $ 5,092 35.8%
======================================================================================================================
Core net income (1) $ 22,010 $ 12,968 $ 9,042 69.7%
Earnings per share:
Basic earnings per share $ 0.43 $ 0.31 $ 0.12 38.7%
Diluted earnings per share 0.41 0.30 0.11 36.7
Core earnings per share $ 0.47 $ 0.28 $ 0.19 67.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Core net income for 2000 excludes OPAY's operating losses and the gain
on the exercise of OPAY options.
Core net income for 1999 excludes OPAY's operating losses and equity
in the net income of ICII.
================================================================================
Page 9 of 25
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Key financial performance ratios for the three months ended March 31, 2000 and
1999, are provided in the following table:
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<CAPTION>
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Three months ended
March 31,
2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Performance ratios
Reported:
Return on average assets (annualized) 1.21% 1.07%
Return on average equity (annualized) 16.08 14.89
Return on average earning assets (annualized) 1.34 1.19
Net interest margin 5.38 5.24
Efficiency ratio 62.90 66.56
Average equity-to-average assets 7.54 7.19
Core:
Core return on average assets (annualized) 1.40 0.98
Core return on average equity (annualized) 18.32 13.53
Core net interest margin 5.37 5.24
Core efficiency ratio 57.93 68.17
Credit quality ratios
Nonaccrual loans to total loans 0.95 1.22
Nonaccrual and restructured loans to total loans 1.13 1.43
Allowance for credit losses to total loans 2.07 1.81
Net charge-offs as a percentage of total average loans (annualized) 0.50% 0.39%
==================================================================================================================
</TABLE>
INCOME STATEMENT ANALYSIS
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. Net
interest income increased to $78.7 million for the three months ended March 31,
2000, from $62.8 million for the year-earlier quarter. Net interest income for
the current quarter includes $1.1 million related to OPAY. The increase in net
interest income is due to growth in average earning assets, which increased 21%
to $5.9 billion for the quarter ended March 31, 2000, from $4.9 billion for the
year-earlier quarter. Average loans increased $218.2 million, or 6%, to $4.0
billion for the current quarter from $3.8 billion for first quarter 1999. Loans
comprised approximately 69% of average earnings assets for the current quarter
compared with approximately 79% for the year-earlier quarter. The remaining
increase in average earning assets from the prior year relates to increases in
trading instruments and investments. Deposit growth for first quarter 2000
exceeded loan funding requirements compared to the year earlier, resulting in a
decline in average loans as a percentage of average earning assets.
The following table provides information on average interest-earning assets and
interest-bearing liabilities and the yields thereon for the periods indicated:
Page 10 of 25
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<CAPTION>
============================================================================================================================
Three months ended March 31, 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) $ 4,035,455 $ 90,591 (3) 9.03% $ 3,817,300 $ 74,587 (3) 7.92%
Trading instruments 114,059 1,698 5.99 66,672 889 5.41
Interest-bearing deposits 5,188 95 7.36 - - -
Securities available for sale (4) 874,831 12,775 5.93 611,295 7,394 4.88
Securities held to maturity 3,718 66 7.14 3,874 72 7.54
Federal funds sold and securities
purchased under resale agreements 778,599 11,125 5.75 339,495 4,055 4.84
Loans held for sale 82,044 1,462 7.17 18,597 435 9.49
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,893,894 117,812 8.05% 4,857,233 87,432 7.30%
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (74,009) (63,628)
Cash 350,222 357,792
Other assets 236,972 235,210
----------- -----------
Total assets $ 6,407,079 $ 5,386,607
=========== ===========
Interest-bearing liabilities:
Savings $ 21,429 $ 94 1.76% $ 36,653 $ 151 1.67%
Money market 1,364,423 10,049 2.96 1,067,070 7,455 2.83%
Time-under $100,000 144,319 2,000 5.57 121,571 1,769 5.90
Time-$100,000 and over 1,563,864 21,603 5.56 1,055,980 12,393 4.76
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3,094,035 33,746 4.39 2,281,274 21,768 3.87
- ----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 107,116 1,481 5.56 105,978 1,259 4.82
Long-term borrowings 103,606 2,225 8.64 2,989 49 6.65
Capital securities 73,436 1,708 9.35 73,379 1,529 8.45
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,378,193 39,160 4.66% 2,463,620 24,605 4.05%
- ----------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,398,308 2,449,958
Other liabilities 147,465 85,630
Shareholders' equity 483,113 387,399
Total liabilities and
----------- -----------
shareholders' equity $ 6,407,079 $ 5,386,607
=========== ===========
Net interest income/Net interest margin $ 78,652 5.38% $ 62,827 5.24%
======== ====== ======== ======
====================================================================================================================================
</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 $7.0 million and $4.9
million for the three months ended March 31, 2000 and 1999, respectively.
(4) Average balance includes unrealized gains and losses and yield is
calculated upon amortized cost.
Page 11 of 25
<PAGE>
Net interest margin increased to 5.38% and 5.24% for the three months ended
March 31, 2000 and 1999, respectively. The increase in loan yields, due to
increases in the prime rate, more than offset the higher rates paid on
certificates of deposit. The asset-sensitive nature of the Company's balance
sheet (variable rate loan portfolio funded in large part by demand deposits and
fixed rate liabilities) enables the Company to benefit from increases in
short-term interest rates. The average yield on loans increased to 9.03% for the
three months ended March 31, 2000, from 7.92% for the year-earlier quarter. A
majority of the Company's variable rate loans are tied to the prime rate.
Certain loans, including entertainment loans and syndicated loans, are tied to
the London Interbank Offered Rate ("LIBOR"). The prime rate averaged 8.69% for
first quarter 2000 compared with 7.75% for the year-earlier quarter. Interest
income for the three months ended March 31, 2000 and 1999, was reduced by
approximately $525,000 and $441,000, respectively, due to interest reversals on
nonaccrual loans.
The average cost of funds increased to 4.66% for the three months ended March
31, 2000, from 4.05% for the year- earlier quarter, primarily due to higher
rates paid on time certificates of deposit. The average balance of time
certificates of deposit ("TCD") increased to $1.7 billion for first quarter 2000
from $1.2 billion a year ago. The growth is primarily due to a $291 million
increase in TCD balances generated by the Emerging Growth Division compared with
a year ago, and to a $284 million increase in brokered TCD balances.
Demand deposits continue to be a significant funding source for the Company.
Demand deposit balances averaged $2.4 billion for first quarter 2000 and 1999.
Average demand deposits comprised 44% of total average deposits for first
quarter 2000, a decrease from 52% of total average deposits for the year-earlier
quarter.
The balance of long-term borrowings increased for the current quarter compared
with a year earlier due to the issuance of $100 million of 8.5% Subordinated
Capital Notes by Imperial Bank during the second quarter of 1999.
Management expects continued increases in net interest income and net interest
margin for the remainder of 2000, assuming continued growth in loan balances and
increases in market interest rates. Actual results may vary if these assumptions
prove to be incorrect.
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 table sets forth information regarding changes in
interest income and interest expense for the three months ended March 31, 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 table is not presented
on a tax equivalent basis as the effects are not material.
Page 12 of 25
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
Three months ended March 31, 2000 over 1999
(Dollars in thousands) Volume Rate Rate/Volume Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 4,298 $ 10,484 $ 1,222 $ 16,004
Trading instruments 63,713 9,613 (72,517) 809
Interest-bearing deposit 95 - - 95
Securities available for sale 319,839 159,682 (474,140) 5,381
Securities held to maturity (293) (383) 670 (6)
Federal funds sold and securities
purchased under resale agreements 528,853 76,202 (597,985) 7,070
Loans held for sale 149,647 (10,724) (137,896) 1,027
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 1,066,152 244,874 (1,280,646) 30,380
- ------------------------------------------------------------------------------------------------------------------------
Savings (64) 9 (2) (57)
Money market 209,478 34,175 (241,059) 2,594
Time-under $100,000 33,377 (9,901) (23,245) 231
Time-$100,000 and over 601,030 209,070 (800,890) 9,210
- ------------------------------------------------------------------------------------------------------------------------
Total deposit 843,821 233,353 (1,065,196) 11,978
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,365 19,575 (20,718) 222
Long-term borrowings 166,323 1,478 (165,625) 2,176
Capital securities 120 16,491 (16,432) 179
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,011,629 270,897 (1,267,971) 14,555
- ------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 54,523 $ (26,023) $ (12,675) $ 15,825
========================================================================================================================
</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 $4.5 million and $6.4 million for the three months ended March
31, 2000 and 1999, respectively. The net interest margin would have decreased
to 5.07% and 4.71% for the same periods.
Noninterest Income:
Noninterest income increased 57% to $34.6 million for first quarter 2000, from
$22.0 million for first quarter 1999. The following table summarizes
noninterest income by category for the periods indicated:
Page 13 of 25
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
Three months ended
March 31,
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts $ 1,860 $ 1,843
Trust fees - 2,215
Gain on origination and sale of loans 493 1,221
Gain from exercise of Official Payments Corp. stock options 915 -
Equity in net income of Imperial Credit Industries, Inc. - 2,240
Other service charges and fees 6,187 4,448
Merchant and credit card fees 3,694 2,236
International income and fees 3,928 2,800
Gain on securities available for sale 5,185 -
Gain on trading instruments 582 19
Gain on exercise of warrants and related sale of equity securities 9,699 4,228
Other income 2,022 738
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 34,565 21,988
- -----------------------------------------------------------------------------------------------------------------------
Increases (decreases) to noninterest income:
Equity in the net income of ICII - (2,240)
Gain related to the exercise of Official Payments Corp. stock options (915) -
OPAY noninterest income (161) (289)
- -----------------------------------------------------------------------------------------------------------------------
Core noninterest income $ 33,489 $19,459
=======================================================================================================================
</TABLE>
The growth in noninterest income is largely due to increased gains realized on
sales of equity securities obtained through the exercise of warrants and on
sales of equity investments in emerging growth companies and venture capital
funds. Gains derived from these activities increased to $15.4 million for first
quarter 2000 from $4.2 million for the year-earlier quarter. For the three
months ended March 31, 2000 and 1999, these gains are reflected in the
noninterest income categories in the table below:
<TABLE>
<CAPTION>
=======================================================================================================================
Three months ended
March 31,
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gain on securities available for sale $ 5,710 $ -
Gain on exercise of warrants and related sale of equity securities 9,699 4,228
- -----------------------------------------------------------------------------------------------------------------------
Total $ 15,409 $ 4,228
=======================================================================================================================
</TABLE>
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 convenants or other collateral control
techniques employed by the Company to mitigate the risk of a loan becoming
nonaccrual. Likewise, collateral requirements on loans with warrants are similar
to lending arrangements where warrants are not obtained. As of April 19, 2000,
the last time the Company reported on unrealized warrant gains, the Company had
potential unrealized gains associated with warrants and equity positions of
$31.7 million. 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 growing core contributor to its
noninterest income stream.
The Company experienced growth in fee income related to merchant card
processing, sales of nonproprietary
Page 14 of 25
<PAGE>
mutual funds and international services from the year-earlier quarter. Other
income for first quarter 2000 includes a $700,000 nonrefundable fee received on
an option granted to a third party to buy the charter of Crown American Bank.
The option expires on July 31, 2000. The reduction in trust fee income compared
with the year-earlier quarter is due to the sale of the Company's trust business
in May 1999.
Noninterest Expense:
Noninterest expense before minority interest totaled $75.1 million for first
quarter 2000, an increase of 33% from $56.5 million for first quarter 1999.
Noninterest expense, including minority interest, increased 26% to $71.2 million
for first quarter 2000, from $56.5 million a year earlier. Noninterest expense
for the current year includes $5.1 million of salaries and benefits expense and
$1.3 million of other expenses related to OPAY, compared with $357,000 for the
year-earlier quarter.
The following table summarizes noninterest expense by category for the periods
indicated:
<TABLE>
<CAPTION>
======================================================================================================================
Three months ended
March 31,
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Salary and employee benefits $ 43,826 $ 30,715
Net occupancy expense 2,844 2,695
Furniture and equipment 3,872 2,904
Data processing 2,547 2,526
Customer services 4,453 6,351
Professional and legal fees 2,795 2,843
Business development 5,337 1,385
Other expense, including minority interest 5,540 7,036
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense including minority interest 71,214 56,455
- ----------------------------------------------------------------------------------------------------------------------
Increases (decreases) to noninterest expense:
OPAY salaries and benefits (5,069) (260)
OPAY other noninterest expense (1,303) (97)
- ----------------------------------------------------------------------------------------------------------------------
Core noninterest expense $ 64,842 $ 56,098
======================================================================================================================
</TABLE>
Exclusive of OPAY, compensation expense is higher than the prior year due to a
$5.0 million increase in incentive accruals tied to Company performance and
higher commissions associated with the sale of equity securities. Increases in
occupancy and business development expense compared with the prior quarter are
due to the growth of the Company's operations. Customer services expense
decreased to $4.5 million for the current quarter from $6.4 million a year
earlier due to a decline in title and escrow deposit balances.
Income Taxes:
The Company recorded income tax expense of $10.8 million and $9.3 million for
the three months ended March 31, 2000 and 1999, respectively.
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 will
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 deemed necessary. The formation of ISII
resulted in an estimated effective income tax rate of 35.9% for the current year
compared with 40.4% for the prior year.
Page 15 of 25
<PAGE>
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>
March 31, 2000
Industrial development bonds $ 3,702 $ - $ - $ 3,702
- ------------------------------------------------------------------------------------------------------------------------
Total $ 3,702 $ - $ - $ 3,702
========================================================================================================================
December 31, 1999
Industrial development bonds $ 3,744 $ - $ - $ 3,744
- ------------------------------------------------------------------------------------------------------------------------
Total $ 3,744 $ - $ - $ 3,744
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
Securities Available for Sale Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 2000
U.S. Treasury and federal agencies $ 765,867 - $ (5,882) $ 759,985
Mutual funds 39,134 - - 39,134
Other securities 97,330 15,455 - 112,785
- ------------------------------------------------------------------------------------------------------------------------
Total $ 902,331 $ 15,455 $ (5,882) $ 911,904
========================================================================================================================
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 $5.7 million and gross losses totaling $525,000,
respectively, were realized on sales of securities available for sale during the
three months ended March 31, 2000. The gains on sales of equity securities
available for sale arose from sales of equity securities obtained through the
exercise of warrants.
Loans held for sale
Loans held for sale totaled $80.1 million, $83.0 million and $14.7 million at
March 31, 2000, December 31, 1999, and March 31, 1999, respectively. The
increase in loans held for sale at March 31, 2000, compared with a year ago
reflects the reclassification of the loans of the Lewis Horwitz Organization
("LHO") to the held for sale category. These loans were reclassified 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.
Subsequent to quarter end, ICII purchased $30.8 million of LHO loans from
Imperial Bank. At May 5, 2000, the balance of LHO loans held for sale was $22.7
million. The balance of loans made to ICII by Imperial Bank to facilitate their
purchase of LHO loans was $8.2 million as of May 5, 2000. Management expects the
remaining loans to be either paid by the borrowers in the normal course of
business or purchased by ICII on or before December 29, 2000.
Page 16 of 25
<PAGE>
Loans
The following table provides a summary of loans by category for the periods
indicated:
<TABLE>
<CAPTION>
========================================================================================================================
(Dollars in thousands) March 31, 2000 December 31, 1999 March 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,107,232 81.88% $ 3,016,695 83.52% $ 3,027,969 86.15%
Loan secured by real estate:
Real estate term loans 98,110 2.59 100,012 2.77 140,138 3.99
Residential tract construction loans 550,779 14.51 457,337 12.66 312,041 8.88
Consumer loans 38,808 1.02 38,104 1.05 34,560 0.98
- ------------------------------------------------------------------------------------------------------------------------
Gross loans 3,794,929 100.00% 3,612,148 100.00% 3,514,708 100.00%
Less allowance for loan losses (78,528) (71,677) (63,732)
- ------------------------------------------------------------------------------------------------------------------------
Total loans $ 3,716,401 $ 3,540,471 $ 3,450,976
========================================================================================================================
</TABLE>
Total loans grew to $3.8 billion at March 31, 2000, an increase of approximately
5% from $3.6 billion at December 31, 1999, and an increase of 8% from March 31,
1999. For purposes of these comparisons, total loans at March 31, 2000, excludes
the LHO loans transferred to the held for sale category as discussed above. At
March 31, 1999, LHO loans included in commercial loans totaled $95.6 million.
The increase in average loan balances outstanding to $4.0 billion for the
current quarter from $3.8 billion for the year-earlier quarter was driven by
growth in loans to middle market and real estate services companies, net of a
decline in syndicated loans. The commercial loan portfolio remains broadly
diversified among many industries including manufacturing, entertainment, real
estate services, high technology, venture capital backed emerging growth
companies, retail trade and professional services. Management anticipates loan
growth in the 15% range for the remainder of the year.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned
Nonaccrual loans, which include loans 90 days or more past due, totaled $35.9
million, or 0.95% of total loans, at March 31, 2000, compared with $ 27.6
million, or 0.76% of total loans, at December 31, 1999, and $43.0 million, or
1.22% of total loans, at March 31, 1999. Nonaccrual loans at March 31, 2000
include an $8.8 million syndicated national credit to a worker's compensation
insurance company to finance an acquisition. An unsuccessful integration of this
acquisition resulted in substantial difficulty for the borrower. Management has
allocated a $7.4 million specific allowance to this credit. Although this is a
syndicated credit, the Company administers the loan in its Commercial Banking
Division due to a deposit relationship. The remaining nonaccrual loans at
quarter end consisted of commercial loans individually no greater than $3
million.
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 outpaced relationship-based loan
growth in 1998, the Company invested a portion of this liquidity in syndicated
national 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 emphasizing relationship-based loans and,
accordingly, does not plan on increasing its syndicated loan portfolio.
Loans totaling $20.0 million were placed on nonaccrual status during the first
quarter, partially offset by $5.4 million in charge-offs, $5.1 million in
payments and $1.2 million in loans returned 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. Management
expects that reported loan charge-offs for the second quarter of year 2000 will
significantly increase over that reported for the current quarter principally
due to the disposition of the substantially reserved nationally syndicated
credit discussed above and that it may also increase as a result of other
nationally syndicated credits that the agent banks have only recently informed
the company about the borrowers' expected difficulties in making future payments
of principal and interest. Increases in loan charge-offs will result in
increases in the provision for loan losses.
Page 17 of 25
<PAGE>
Restructured loans, loans that have had their original terms modified, totaled
$6.9 million, $4.1 million and $7.3 million at March 31, 2000, December 31,
1999, and March 31, 1999, respectively. The net increase in restructured loans
since December 31, 1999, is due to the addition of one $3.7 million commercial
loan net of $0.9 million in payments received on existing restructured loans.
All restructured loans were performing in accordance with their modified terms
as of March 31, 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, net of valuation allowances, totaled
$935,000, $935,000 and $2.0 million at March 31, 2000, December 31, 1999 and
March 31, 1999, respectively. There were no sales or additions to OREO during
the quarter ended March 31, 2000.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
<TABLE>
<CAPTION>
========================================================================================================================
Mar. 31, Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $ 35,408 $ 27,020 $ 31,630 $ 39,032 $ 31,348
Real estate 480 569 496 10,576 11,604
Consumer - - - - -
Loans held for sale at fair market value - - 10,909 - -
- ------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 35,888 27,589 43,035 49,608 42,952
========================================================================================================================
Restructured loans 6,914 4,081 4,640 5,704 7,287
========================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross 935 935 1,237 1,741 2,023
Less valuation allowance - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net 935 935 1,237 1,741 2,023
- ------------------------------------------------------------------------------------------------------------------------
Total $ 43,737 $ 32,605 $ 48,912 $ 57,053 $ 52,262
========================================================================================================================
</TABLE>
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.
The following table contains information for loans classified as impaired:
Page 18 of 25
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
Net
Carrying Specific Net
(Dollars in thousands) Value Allowance Balance
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 2000
Loans with specific allowances $ 40,071 $ (16,656) $ 23,415
Loans without specific allowances 11,917 - 11,917
- -----------------------------------------------------------------------------------------------------------------------
Total $ 51,988 $ (16,656) $ 35,332
=======================================================================================================================
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>
=======================================================================================================================
March 31, December 31,
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 16,100 $ 12,920
Past due - 248
Nonaccrual 35,888 27,589
- -----------------------------------------------------------------------------------------------------------------------
Total $ 51,988 $ 40,757
=======================================================================================================================
</TABLE>
Loans classified as impaired totaled $52.0 million at March 31, 2000, compared
with $40.8 million at December 31, 1999. During the first quarter, $23.9 million
of loans were newly classified as impaired. The additions to the impaired loans
were partially offset by $5.4 million in charge-offs, the receipt of $6.1
million in payments on impaired loans, and $1.2 million in loans removed from
impaired status. The Company's average recorded investment in impaired loans for
the first quarter was $37.9 million. Interest income collected on impaired loans
totaled approximately $365,000 in the first three months of 2000, compared with
$815,000 for the year-earlier quarter.
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 March 31, 2000 is adequate. Future additions to the
allowance will be subject to continuing evaluation of inherent risk in the loan
portfolio.
At March 31, 2000, the allowance for loan losses was $78.5 million, or 2.07% of
total loans, compared with $71.7 million, or 1.98% of total loans at December
31, 1999, and $63.7 million, or 1.81% of total loans, at March 31, 1999.
The allowance for loan losses represented 219% of nonaccrual loans at March 31,
2000, compared with 260% of nonaccrual loans at December 31, 1999, and 148% of
nonaccrual loans at March 31, 1999. The following table summarizes activity in
the allowance for loan losses:
Page 19 of 25
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Three months ended March 31, (Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 71,677 $ 62,649
=====================================================================================================
Loans charged off:
Commercial (5,390) (4,160)
Real estate - (21)
Consumer - -
- -----------------------------------------------------------------------------------------------------
Total charge-offs (5,390) (4,181)
- -----------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 314 405
Real estate 28 63
Consumer 5 2
- -----------------------------------------------------------------------------------------------------
Total recoveries 347 470
- -----------------------------------------------------------------------------------------------------
Net loans charged off (5,043) (3,711)
Provision for loan losses 11,894 4,794
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 78,528 $ 63,732
=====================================================================================================
Loans outstanding, end of period 3,794,929 3,514,708
- -----------------------------------------------------------------------------------------------------
Average loans outstanding 4,035,455 3,817,300
=====================================================================================================
Ratio of net charge-offs to average loans (annualized) 0.50% 0.39%
Ratio of allowance for loan losses to loans outstanding at March 31 2.07 1.81
Ratio of allowance for loan losses to nonaccrual loans 218.81 148.38
Ratio of provision for loan losses to net charge-offs 235.85 129.18
=====================================================================================================
</TABLE>
The provision for loan losses totaled $11.9 million and $4.8 million, for the
three months ended March 31, 2000 and 1999, respectively. Net charge-offs
increased to $5.0 million, or 0.50% of average loans on an annualized basis, for
first quarter 2000, from $3.7 million, or 0.39% of average loans on an
annualized basis, for the year-earlier quarter. The increase in the current
provision is attributable to a strengthening of the allowance based
upon a current assessment of the portfolio, the nationally syndicated credit
discussed above, and to growth in the Company's loan portfolio.
ASSET/LIABILITY MANAGEMENT
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 $6.1 billion at March 31, 2000, from $5.9 billion at
December 31, 1999, and $5.8 billion at March 31, 1999. Demand deposits increased
to $3.2 billion, or 53% of total deposits, at March 31, 2000, from $2.5 billion,
or 43% of total deposits at December 31, 1999, and decreased from $3.5 billion,
or 60% of total deposits, at March 31, 1999. The decrease in demand deposits at
current quarter-end compared with a year earlier is due to a $759 million
decline in deposit balances held by real estate services companies. This
decrease is attributed to a slow down in mortgage refinancing activity due to
higher interest rates. The decrease in real estate services deposits was
partially offset by a $259 million increase in demand deposit balances generated
by the Special Markets Division compared with a year ago. TCDs decreased to $1.6
billion at March 31, 2000, from $1.9 billion at December 31, 1999. The decrease
is due to the run-off of short-term TCDs added during fourth quarter 1999 to
increase liquidity in preparation for Year 2000. TCDs totaled $1.2 billion at
March 31, 1999. The increase in TCDs at March 31, 2000, compared with a year ago
is primarily due to a $263 million increase in balances generated by the
Special Markets Division.
Page 20 of 25
<PAGE>
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 and
occasionally the sale of securities held in its available for sale portfolio.
Short-term borrowings totaled $94.4 million, $156.7 million and $50.9 million at
March 31, 2000, December 31, 1999, and March 31, 1999. At December 31, 1999,
Imperial Bank held $150.0 million of short-term commercial paper that matured in
January 2000.
The Company has over the most recent period 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%. During the first
quarter of 2000, this ratio averaged 29%.
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 limit the change
in pretax net interest income assuming various interest rate scenarios. This is
accomplished by adjusting the repricing characteristics of the Company's assets
and liabilities as interest rates change. The Company's Asset Liability
Committee ("ALCO") chooses strategies in conformance with its policies to
achieve an appropriate trade off between interest rate sensitivity and the
volatility of pretax net interest income and net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
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 is favorably impacted during a
period of rising interest rates and adversely impacted during a period of
declining interest rates. The Company's net interest margin is sensitive to
sudden changes in interest rates. In addition, the Company's interest-earning
assets, primarily its loans, are generally tied to the prime rate, an index
which tends to react more slowly to changes in market rates than other money
market indices such as LIBOR. 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.
CAPITAL
At March 31, 2000, shareholders' equity increased to $492.1 million from $473.4
million at December 31, 1999, and $388.1 million at March 31, 1999. During the
three months ended March 31, 2000, shareholders' equity was reduced by $2.1
million due to common stock repurchases under the Company's Stock Repurchase
Program. The Company repurchased and retired 90,000 shares of its common stock
during first quarter 2000. At quarter end, 2,189,124 shares remain available for
repurchase under the Company's stock repurchase program. Shareholders' equity
increased by $1.8 million during the period representing the Company's share of
amortization of deferred stock compensation recorded by OPAY, and by $1.4
million for exercises of Imperial employee stock options. The tax benefit
associated with nonqualified options exercised, which is recorded as a component
of shareholders' equity, was $1.8 million for first quarter 2000.
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.
Page 21 of 25
<PAGE>
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 March 31, 2000, were 10.86% and
13.95% respectively, compared with 9.73% and 11.02%, respectively, at March 31,
1999.
Capital Ratios for Imperial Bancorp and Imperial Bank /(1)/
<TABLE>
<CAPTION>
=========================================================================================================================
March 31, 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 $ 756,318 13.95% $ 433,872 8.00% $ 542,340 10.00%
Bank 679,567 12.69% 428,413 8.00% 535,517 10.00%
Tier I Capital (to risk-weighted assets):
Company $ 588,966 10.86% $ 216,936 4.00% $ 325,404 6.00%
Bank 513,060 9.58% 214,207 4.00% 321,310 6.00%
Leverage (to average assets):
Company $ 588,966 9.24% $ 191,159 3.00% $ 318,598 5.00%
Bank $ 513,060 8.12% 189,666 3.00% 316,110 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 $5,423.4 million and
$5,355.2 million, respectively, at March 31, 2000. Risk-weighted assets for the
Company and the Bank were $4,684.6 million and $4,616.7 million at March 31,
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 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 8.45% at
March 31, 2000, compared with 8.45% at March 31, 1999, well in excess of minimum
regulatory requirements.
The Company has filed an application with the Federal Reserve to become a
Financial Holding Company ("FHC"). An FHC is a new type of financial services
company created by the Gramm, Leach, Bliley Act enacted in late 1999 that
expands the range of permissible activities that may be conducted by an FHC and
its affiliated companies. The Company expects its application to be approved
during the second quarter of 2000.
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 which 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
Page 22 of 25
<PAGE>
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. 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 need to replenish its
loan loss allowance resulting from increased charge-off and loan default
activity.
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
Glass-Steagal 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 Phoenix, Denver, Boston, Seattle, Austin and the
Mid-Atlantic. 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 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
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 earning 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 gains on sales of
equity securities.
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 typical 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.
Page 23 of 25
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities
In June 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. Implementation of SFAS No. 133 has been
postponed to fiscal periods beginning after June 15, 2000, and will be effective
for the Company on January 1, 2001. Early implementation is permitted under this
statement. The Company does not believe that the adoption of SFAS No. 133 will
have a material impact on its results of operations and financial position.
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
No events have transpired which would make response to this item
appropriate.
ITEM 3. Defaults upon Senior Securities
No events have transpired which would make response to this item
appropriate.
ITEM 4. Submission of Matters to a Vote of Security Holders
No events have transpired which would make response to this item
appropriate.
ITEM 5. Other Information
No events have transpired which would make response to this item
appropriate.
Page 24 of 25
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
10.1 Investment Advisory Agreement between
Imperial Special Investments, Inc. and Imperial
Asset Management, Inc.
10.2 Fund Accounting Agreement between Imperial
Special Investments, Inc. and Imperial Bank
27.1 Financial Data Schedule
</TABLE>
All other material referenced in this report which is required to be filed
as an exhibit hereto has previously been submitted.
(b) Reports filed on Form 8-K: None
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: May 15, 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 25 of 25
<PAGE>
Exhibit 10.1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of April 28, 2000 between the Imperial Special
Investments, Inc., a California corporation (hereinafter called the "Fund"), and
Imperial Asset Management, Inc., a California corporation registered under the
Investment Adviser's Act of 1940, with its principal office in Inglewood,
California (hereinafter called the "Investment Adviser").
WHEREAS, the Fund is registered as a closed-end, non-diversified,
management investment company under the Investment Company Act of 1940, as
amended ("1940 Act"); and
WHEREAS, the Fund desires to retain the Investment Adviser to furnish
certain investment advisory and related services described below in connection
with the management of the Fund, and the Investment Adviser represents that it
is willing and possesses the legal authority to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints the Investment Adviser to act
-----------
as investment adviser to the Fund for the period and on the terms set forth in
this Agreement. The Investment Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished the Investment Adviser
---------------------
with copies properly certified or authenticated of each of the following
documents:
(a) the Fund's Articles of Incorporation, dated April 24, 2000 and
filed with the Secretary of State of the State of California, and all amendments
thereto or restatements thereof (such Articles of Incorporation, as presently in
effect and as it shall from time to time be amended or restated, is herein
called the "Articles of Incorporation");
(b) the Fund's Bylaws and amendments thereto;
(c) resolutions of the Fund's Board of Directors authorizing the
appointment of the Investment Adviser and approving this Agreement;
(d) the Fund's original Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission on April
28, 2000 and all amendments thereto;
(e) the Fund's most recent Private Offering Memorandum (such Private
Offering Memorandum, as presently in effect, and all amendments and supplements
thereto are herein collectively called the "Private Offering Memorandum").
<PAGE>
The Fund will promptly furnish the Investment Adviser with copies of all
amendments of or supplements to the foregoing documents.
3. Management. Subject to the supervision of the Fund's Board of
----------
Directors, the Investment Adviser will provide or cause to be provided a
continuous investment program for the Fund, including investment research and
management with respect to all securities and investments and cash equivalents
in the Fund. The Investment Adviser will determine or cause to be determined
from time to time what securities and other investments will be purchased,
retained or sold by the Fund and will place or cause to be placed orders for
purchase and sale on behalf of the Fund.
The Investment Adviser will provide the services under this Agreement in
accordance with the Fund's investment objective, policies and restrictions as
stated in the Private Offering Memorandum, resolutions of the Fund's Board of
Directors, and any undertakings with regulatory authorities which are provided
by the Fund to the Investment Adviser. The Investment Adviser further agrees
that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will comply in all material respects with all applicable Rules
and Regulations of the Securities and Exchange Commission under the Investment
Company Act of 1940 and in addition will conduct its activities under this
Agreement in accordance with any applicable regulations pertaining to the
investment advisory activities of the Investment Adviser;
(c) will place or cause to be placed orders for the Fund either
directly with the issuer or with any broker or dealer and, in placing orders
with brokers and dealers, the Investment Adviser or any sub-investment adviser
employed by the Investment Adviser will attempt to obtain prompt execution of
orders in an effective manner at the most favorable price. Consistent with this
obligation, when the execution and price offered by two or more brokers or
dealers are comparable, the Investment Adviser or any sub-investment adviser
employed by the Investment Adviser may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide the Investment
Adviser or any such subinvestment adviser with research advice and other
services; and
(d) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund and prior, present,
or potential shareholders of the Fund learned by, or disclosed to, the
Investment Adviser in the course of its performance of its responsibilities and
duties under this Agreement, and will not use such records and information for
any purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where the
Investment Adviser may be exposed
-2-
<PAGE>
to civil, regulatory, or criminal sanctions for failure to comply when requested
to divulge such information by duly constituted authorities, or when so
requested by the Fund.
4. Use of Sub-Investment Adviser. The Investment Adviser may, subject to
-----------------------------
the approvals required under the 1940 Act, employ a sub-investment adviser to
assist the Investment Adviser in the performance of its duties under this
Agreement. Such use does not relieve the Investment Adviser of any duty or
liability it would otherwise have under this Agreement. Compensation of any
such sub-investment adviser for services provided and expenses assumed under any
agreement between the Investment Adviser and such sub-investment adviser
permitted under this paragraph is the sole responsibility of the Investment
Adviser.
5. Services Not Exclusive. The investment management services furnished
----------------------
by the Investment Adviser hereunder are not to be deemed exclusive. Except to
the extent necessary to perform the Investment Adviser's obligations under this
Agreement, nothing herein shall be deemed to limit or restrict the right of the
Investment Adviser, or any subsidiary or affiliate of the Investment Adviser, or
any employee of the Investment Adviser, to engage in any other business or to
devote time and attention to any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other person.
6. Books and Records. In compliance with the requirements of Rule 3la-3
-----------------
under the 1940 Act, the Investment Adviser hereby agrees that all records which
it maintains for the Fund are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records upon the Fund's request. The
Investment Adviser further agrees to preserve for the periods prescribed by Rule
3la-2 under the 1940 Act the records required to be maintained by Rule 3la-1
under the 1940 Act.
7. Expenses. During the term of this Agreement, the Investment Adviser
--------
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities (including brokerage
commissions or charges, if any) purchased for the Fund. The Fund will be
responsible for all of the Fund's expenses and liabilities.
8. Compensation. For the services provided and the expenses assumed
------------
pursuant to this Agreement, the Fund will pay the Investment Adviser and the
Investment Adviser will accept as full compensation therefor an annual fee paid
monthly on the first business day of each month equal to the lesser of (i)
$200,000 or (ii) such fee as may from time to time be agreed upon in writing by
the Fund and the Investment Adviser. If the fee payable to the Investment
Adviser pursuant to this paragraph begins to accrue after the beginning of any
month or if this Agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs.
-3-
<PAGE>
9. Limitation of Liability. The Investment Adviser shall not be liable
-----------------------
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty under the Investment Company Act of 1940 with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Investment
Adviser in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. In no case shall the Investment
Adviser be liable for actions taken or nonactions with respect to the
performance of services under this Agreement based upon specific information,
instructions, or requests given or made to the Investment Adviser by an officer
of the Fund thereunto duly authorized. Notwithstanding the foregoing, nothing
in this paragraph should be deemed to be a waiver or limitation of any rights
the Fund may have under the Federal securities laws.
10. Duration and Termination. This Agreement will become effective as of
------------------------
the date first written above, provided that it shall have been approved by vote
of a majority of the outstanding voting securities of the Fund, in accordance
with the requirements under the 1940 Act, and, unless sooner terminated as
provided herein, shall continue in effect until October 31, 2001. Thereafter,
if not terminated, this Agreement shall continue in effect for successive
periods of twelve months each ending on October 31 of each year, provided such
--------
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Fund's Board of Directors who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the vote of a majority of the Fund's Board of Directors or by the vote of a
majority of the outstanding voting securities of the Fund. Notwithstanding the
foregoing, this Agreement may be terminated at any time on sixty days' written
notice, without the payment of any penalty, by the Fund (by vote of the Fund's
Board of Directors or by vote of a majority of the outstanding voting securities
of the Fund) or by the Investment Adviser. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities", "interested persons" and
"assignment" shall have the same meaning of such terms in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
12. Legal Advice. The Investment Adviser shall notify the Fund at any
------------
time the Investment Adviser believes that it is in need of the advice of counsel
with regard to its responsibilities and duties pursuant to this Agreement; if
the Investment Adviser wishes to seek the advice of legal counsel to the Fund it
must first notify the Fund and seek its approval, which shall not be
unreasonably withheld, such advice to be at the expense of the Fund unless
relating to a matter involving the Investment Adviser's willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to the Investment
Adviser's responsibilities and duties hereunder
-4-
<PAGE>
and the Investment Adviser shall in no event be liable to the Fund or any
shareholder or beneficial owner of the Fund for any action reasonably taken
pursuant to such advice.
13. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
Any notice required or permitted to be given by either party to the other
shall be deemed sufficient if sent by registered or certified mail, postage
prepaid, addressed by the party giving notice to the other party at the last
address furnished by the other party to the party giving notice: if to the
Fund, at 9920 S. La Cienega Blvd., Suite 636, Inglewood, California 90301,
Attention: Controller Department; and if to the Investment Adviser, at 9920 S.
La Cienega Blvd., Suite 636, Inglewood, California 90301, Attention: Controller
Department.
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and shall be governed by the laws
of the State of California.
The names "Imperial Special Investments, Inc." and "Director of Imperial
Special Investments, Inc." refer respectively to the Fund created and the
Directors, as directors but not individually or personally, acting from time to
time under Articles of Incorporation dated as of April 24, 2000 to which
reference is hereby made and a copy of which is on file at the office of the
Secretary of the State of California and elsewhere as required by law, and to
any and all amendments thereto so filed or hereafter filed. The obligations of
"Imperial Special Investments, Inc." entered into in the name or on behalf
thereof by any of the Directors, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Directors, shareholders or representatives of the Fund personally, but bind only
the assets of the Fund, and all persons dealing with the Fund must look solely
to the assets of the Fund for the enforcement of any claims against the Fund.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Imperial Special Investments, Inc.
By: /s/ Richard M. Baker
________________________________________________
Title: SVP & General Counsel
Imperial Asset Management, Inc.
By: /s/ Richard M. Baker
________________________________________________
Title: SVP & General Counsel
-6-
<PAGE>
EXHIBIT 10.2
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 28th day of April, 2000, between IMPERIAL SPECIAL
INVESTMENTS, INC. (the "Fund"), a California corporation having its principal
place of business at 9920 S. La Cienega Blvd., Suite 636, Inglewood, California
90301, and IMPERIAL BANK ("Fund Accountant"), a California banking corporation
having its principal place of business at 9920 S. La Cienega Blvd., Suite 636,
Inglewood, California 90301.
WHEREAS, the Fund desires that Fund Accountant perform certain fund
accounting services for the Fund, all as now or hereafter may be established
from time to time; and
WHEREAS, Fund Accountant is willing to perform such services on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth, the parties agree as follows:
1. Services as Fund Accountant.
---------------------------
(a) Maintenance of Books and Records. Fund Accountant will keep and
---------------------------------
maintain the following books and records of the Fund pursuant to
Rule 31a-1 under the Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record in detail of
all purchases and sales of securities, all receipts and
disbursements of cash and all other debits and credits, as
required by subsection (b)(1) of the Rule;
(ii) General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense accounts,
including interest accrued and interest received, as
required by subsection (b)(2)(i) of the Rule;
(iii) Separate ledger accounts required by subsection (b)(2)(ii)
and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of
the Rule.
(b) Performance of Accounting Services. In addition to the
-----------------------------------
maintenance of the books and records specified above, Fund
Accountant shall perform the following accounting services for
the Fund:
(i) Calculate the net asset value per share utilizing prices
obtained from the sources described in subsection 1(b)(ii)
below;
(ii) Obtain security prices from independent pricing services,
or if such quotes are unavailable, then obtain such prices
from the Fund's
<PAGE>
investment adviser or its designee, as approved by the
Fund's Board of Directors;
(iii) Verify and reconcile with the Fund's custodian all daily
trade activity;
(iv) Compute, as appropriate, the Fund's net income and capital
gains, dividend payables, dividend factors, 7-day yields,
7-day effective yields, 30-day yields, and weighted
average portfolio maturity;
(v) Review the net asset value calculation and dividend factor
(if any) for the Fund prior to release to shareholders,
check and confirm the net asset values and dividend
factors for reasonableness and deviations;
(vi) Determine unrealized appreciation and depreciation on
securities held by the Fund;
(vii) Amortize premiums and accrete discounts on securities
purchased at a price other than face value, if requested
by the Fund;
(viii) Update fund accounting system to reflect rate changes, as
received from the Fund's investment adviser, on variable
interest rate instruments;
(ix) Post Fund transactions to appropriate categories;
(x) Accrue expenses of the Fund according to instructions
received from the Fund's Investment Adviser;
(xi) Determine the outstanding receivables and payables for all
(1) security trades, (2) Fund share transactions, and (3)
income and expense accounts;
(xii) Provide accounting reports in connection with the Fund's
regular annual audit and other audits and examinations by
regulatory agencies; and
(xiii) Provide such periodic reports as the parties shall agree
upon, as set forth in a separate schedule.
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(c) Special Reports and Services.
-----------------------------
(i) Fund Accountant may provide additional special reports
upon the request of the Fund's Investment Adviser, which
may result in an additional charge, the amount of which
shall be agreed upon between the parties.
(ii) Fund Accountant may provide such other similar services
with respect to the Fund as may be reasonably requested by
the Fund, which may result in an additional charge, the
amount of which shall be agreed upon between the parties.
(d) Additional Accounting Services. Fund Accountant shall also
-------------------------------
perform the following additional accounting services for the
Fund:
(i) Provide monthly a download (and hard copy thereof) of the
financial statements described below, upon request of the
Fund. The download will include the following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
(ii) Provide accounting information for the following:
(A) federal and state income tax returns and federal
excise tax returns;
(B) the Fund's semi-annual reports with the Securities
and Exchange Commission ("SEC") on Form N-SAR;
(C) the Fund's annual, semi-annual and quarterly (if any)
shareholder reports;
(D) registration statements on Form N-2 and other filings
relating to the registration of shares;
(E) the Investment Adviser's monitoring of the Fund's
status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as
amended;
(F) annual audit by the Fund's auditors; and
(G) examinations performed by the SEC.
2. Subcontracting.
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Fund Accountant may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder; provided,
however, that Fund Accountant shall not be relieved of any of its obligations
under this Agreement by the appointment of such
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subcontractor and provided further, that Fund Accountant shall be responsible,
to the extent provided in Section 7 hereof, for all acts of such subcontractor
as if such acts were its own.
3. Compensation.
------------
The Fund shall pay Fund Accountant for the services to be provided by Fund
Accountant under this Agreement in accordance with, and in the manner set forth
in, Schedule A hereto, as such Schedule may be amended from time to time.
4. Reimbursement of Expenses.
-------------------------
In addition to paying Fund Accountant the fees described in Section 3
hereof, the Fund agrees to reimburse Fund Accountant for its out-of-pocket
expenses in providing services hereunder, including without limitation the
following:
(a) All freight and other delivery and bonding charges incurred by Fund
Accountant in delivering materials to and from the Fund;
(b) All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by Fund Accountant in
communication with the Fund, the Fund's Investment Adviser or
custodian, dealers or others as required for Fund Accountant to
perform the services to be provided hereunder;
(c) The cost of obtaining security market quotes pursuant to Section
l(b)(ii) above;
(d) The cost of microfilm or microfiche of records or other materials; and
(e) Any expenses Fund Accountant shall incur at the written direction of
an officer of the Fund thereunto duly authorized.
5. Effective Date.
--------------
This Agreement shall become effective with respect to the Fund as of the
date first written above (or, if the Fund is not in existence on that date, on
the date the Fund commences operation) (the "Effective Date").
6. Term.
----
This Agreement shall continue in effect with respect to the Fund, unless
earlier terminated by either party hereto as provided hereunder, until April 28,
2002 and thereafter shall be renewed automatically for successive two-year terms
unless written notice not to renew is given by the non-renewing party to the
other party at least 60 days prior to the expiration of the then-current term;
provided, however, that after such termination for so long as Fund Accountant,
with the written consent of the Fund, in fact continues to perform any one or
more of the services contemplated by this Agreement or any schedule or exhibit
hereto, the provisions of this Agreement, including
4
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without limitation the provisions dealing with indemnification, shall continue
in full force and effect. Compensation due Fund Accountant and unpaid by the
Fund upon such termination shall be immediately due and payable upon and
notwithstanding such termination. Fund Accountant shall be entitled to collect
from the Fund, in addition to the compensation described under Section 3 hereof,
the amount of all of Fund Accountant's cash disbursements for services in
connection with Fund Accountant's activities in effecting such termination,
including without limitation, the delivery to the Fund and/or its designees of
the Fund's property, records, instruments and documents, or any copies thereof.
Subsequent to such termination, for a reasonable fee, Fund Accountant will
provide the Fund with reasonable access to any Fund documents or records
remaining in its possession.
7. Standard of Care; Reliance on Records and Instructions;
-------------------------------------------------------
Indemnification.
---------------
Fund Accountant shall use its best efforts to insure the accuracy of all
services performed under this Agreement, but shall not be liable to the Fund for
any action taken or omitted by Fund Accountant in the absence of bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties. The Fund agrees to indemnify and hold harmless Fund
Accountant, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to the Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to the
Fund given or made to Fund Accountant by a duly authorized representative of the
Fund; provided that this indemnification shall not apply to actions or omissions
of Fund Accountant in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, Fund Accountant shall give the Fund written
notice of and reasonable opportunity to defend against said claim in its own
name or in the name of Fund Accountant.
8. Record Retention and Confidentiality.
------------------------------------
Fund Accountant shall keep and maintain on behalf of the Fund all books and
records which the Fund and Fund Accountant is, or may be, required to keep and
maintain pursuant to any applicable statutes, rules and regulations, including
without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of
1940, as amended (the "1940 Act"), relating to the maintenance of books and
records in connection with the services to be provided hereunder. Fund
Accountant further agrees that all such books and records shall be the property
of the Fund and to make such books and records available for inspection by the
Fund or by the Securities and Exchange Commission at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Fund and its shareholders; except when requested to divulge such
information by duly-constituted authorities or court process.
5
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9. Uncontrollable Events.
---------------------
Fund Accountant assumes no responsibility hereunder, and shall not be
liable, for any damage, loss of data, delay or any other loss whatsoever caused
by events beyond its reasonable control.
10. Reports.
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Fund Accountant will furnish to the Fund and to its properly authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Fund in writing, such
reports and at such times as are prescribed pursuant to the terms and the
conditions of this Agreement to be provided or completed by Fund Accountant, or
as subsequently agreed upon by the parties pursuant to an amendment hereto. The
Fund agrees to examine each such report or copy promptly and will report or
cause to be reported any errors or discrepancies therein no later than three
business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within ten days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
report will for all purposes be accepted by and binding upon the Fund and any
other recipient, and, except as provided in Section 7 hereof, Fund Accountant
shall have no liability for errors or discrepancies therein and shall have no
further responsibility with respect to such report except to perform reasonable
corrections of such errors and discrepancies within a reasonable time after
requested to do so by the Fund.
11. Rights of Ownership.
-------------------
All computer programs and procedures developed to perform services required
to be provided by Fund Accountant under this Agreement are the property of Fund
Accountant. All records and other data except such computer programs and
procedures are the exclusive property of the Fund and all such other records and
data will be furnished to the Fund in appropriate form as soon as practicable
after termination of this Agreement for any reason.
12. Return of Records.
-----------------
Fund Accountant may at its option at any time, and shall promptly upon the
Fund's demand, turn over to the Fund and cease to retain Fund Accountant's
files, records and documents created and maintained by Fund Accountant pursuant
to this Agreement which are no longer needed by Fund Accountant in the
performance of its services or for its legal protection. If not so turned over
to the Fund, such documents and records will be retained by Fund Accountant for
six years from the year of creation. At the end of such six-year period, such
records and documents will be turned over to the Fund unless the Fund authorizes
in writing the destruction of such records and documents.
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13. Representations of the Fund.
---------------------------
The Fund certifies to Fund Accountant that: (1) as of the close of
business on the Effective Date, each Fund that is in existence as of the
Effective Date has authorized 10,000,000,000 shares, and (2) this Agreement has
been duly authorized by the Fund and, when executed and delivered by the Fund,
will constitute a legal, valid and binding obligation of the Fund, enforceable
against the Fund in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
14. Representations of Fund Accountant.
----------------------------------
Fund Accountant represents and warrants that: (1) the various procedures
and systems which Fund Accountant has implemented with regard to safeguarding
from loss or damage attributable to fire, theft, or any other cause the records,
and other data of the Fund and Fund Accountant's records, data, equipment
facilities and other property used in the performance of its obligations
hereunder are adequate and that it will make such changes therein from time to
time as are required for the secure performance of its obligations hereunder,
and (2) this Agreement has been duly authorized by Fund Accountant and, when
executed and delivered by Fund Accountant, will constitute a legal, valid and
binding obligation of Fund Accountant, enforceable against Fund Accountant in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting the rights and
remedies of creditors and secured parties.
15. Insurance.
---------
Fund Accountant shall notify the Fund should any of its insurance coverage
be canceled or reduced. Such notification shall include the date of change and
the reasons therefor. Fund Accountant shall notify the Fund of any material
claims against it with respect to services performed under this Agreement,
whether or not they may be covered by insurance, and shall notify the Fund from
time to time as may be appropriate of the total outstanding claims made by Fund
Accountant under its insurance coverage.
16. Information to be Furnished by the Fund.
---------------------------------------
The Fund has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the Fund and of any
amendments thereto, certified by the proper official of the state
in which such document has been filed.
(b) Copies of the following documents:
(i) The Fund's Bylaws and any amendments thereto; and
7
<PAGE>
(ii) Certified copies of resolutions of the Board of Directors
covering the approval of this Agreement, authorization of
a specified officer of the Fund to execute and deliver
this Agreement and authorization for specified officers of
the Fund to instruct Fund Accountant thereunder.
(c) A list of all the officers of the Fund, together with specimen
signatures of those officers who are authorized to instruct Fund
Accountant in all matters.
(d) Two copies of the Private Offering Memorandum ("Memorandum") for
the Fund.
17. Information Furnished by Fund Accountant.
----------------------------------------
(a) Fund Accountant has furnished to the Fund the following:
(i) Fund Accountant's Charter; and
(ii) Fund Accountant's Bylaws and any amendments thereto.
18. Amendments to Documents.
-----------------------
The Fund shall furnish Fund Accountant written copies of any amendments to,
or changes in, any of the items referred to in Section 17 hereof forthwith upon
such amendments or changes becoming effective. In addition, the Fund agrees
that no amendments will be made to the Memorandum of the Fund which might have
the effect of changing the procedures employed by Fund Accountant in providing
the services agreed to hereunder or which amendment might affect the duties of
Fund Accountant hereunder unless the Fund first obtains Fund Accountant's
approval of such amendments or changes.
19. Compliance with Law.
-------------------
Except for the obligations of Fund Accountant set forth in Section 8
hereof, the Fund assumes full responsibility for the preparation, contents and
distribution of the Memorandum of the Fund as to compliance with all applicable
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
the 1940 Act and any other laws, rules and regulations of governmental
authorities having jurisdiction. Fund Accountant shall have no obligation to
take cognizance of any laws relating to the sale of the Fund's shares. The Fund
represents and warrants that no shares of the Fund will be offered until the
Fund's registration statement under the 1940 Act has become effective.
20. Notices.
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Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such
notice, at the following address: 9920 S.
8
<PAGE>
La Cienega Blvd., Suite 636, Inglewood, California 90301, or at such other
address as such party may from time to time specify in writing to the other
party pursuant to this Section.
21. Headings.
--------
Paragraph headings in this Agreement are included for convenience only and
are not to be used to construe or interpret this Agreement.
22. Assignment.
----------
This Agreement and the rights and duties hereunder shall not be assignable
with respect to the Fund by either of the parties hereto except by the specific
written consent of the other party.
23. Governing Law.
-------------
This Agreement shall be governed by and provisions shall be construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
IMPERIAL SPECIAL INVESTMENTS, INC.
By:/s/ Richard M. Baker
----------------------
IMPERIAL BANK
By:/s/ Richard M. Baker
----------------------
9
<PAGE>
Dated: , 2000
FORM OF SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN
IMPERIAL SPECIAL INVESTMENTS, INC.
AND
IMPERIAL BANK
FEES
----
Imperial Bank shall be entitled to receive a fee from the Fund at the
annual rate of $800,000 plus Imperial Bank's reasonable out-of-pocket expenses
incurred in the performance of its services as provided in Section 4 of the Fund
Accounting Agreement to which this Schedule A is attached.
IMPERIAL SPECIAL INVESTMENTS, INC. IMPERIAL BANK
By: /s/ Richard M. Baker By: /s/ Richard M. Baker
--------------------- ---------------------
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 410,982
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,485,000
<TRADING-ASSETS> 143,157
<INVESTMENTS-HELD-FOR-SALE> 911,904
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<LOANS> 3,794,929
<ALLOWANCE> (78,528)
<TOTAL-ASSETS> 7,001,505
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0
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<NET-INCOME> 19,315
<EPS-BASIC> 0.43
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