10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 0-7722 IMPERIAL BANCORP (Exact name of registrant as specified in its charter) California 95-2575576 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 9920 South La Cienega Boulevard Inglewood, California 90301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Shares outstanding at August 7, 2000 Common stock, no par value 44,215,732 This report contains a total of 37 pages. IMPERIAL BANCORP FORM 10-Q TABLE OF CONTENTS
Part I Financial Information Page ---- Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Comprehensive Income and Shareholders' Equity 4 Consolidated Statements of Cash Flows 5 Notes to Interim Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 34 Part II Other Information Item 1. Legal Proceedings 36 Item 2. Changes in Securities and Use of Proceeds 36 Item 3. Defaults Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 36 Item 6. Exhibits and Reports on Form 8-K 36 Signatures 37
Page 1 of 37 PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2000 1999 (Dollars in thousands) (Unaudited) -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 498,376 $ 307,770 Federal funds sold and securities purchased under resale agreements 1,238,000 1,555,000 Trading instruments 139,703 86,540 Securities available for sale, at fair value 1,031,818 1,040,285 Securities held to maturity (fair value of $3,661 and $3,744 for 2000 and 1999, respectively) 3,661 3,744 Loans held for sale (fair value of $36,276 and $83,613 for 2000 and 1999, respectively) 35,493 83,044 Loans: Loans, net of unearned income and deferred loan fees 3,952,714 3,612,148 Less allowance for loan losses (80,535) (71,677) -------------------------------------------------------------------------------------------------------------------------- Total net loans 3,872,179 3,540,471 ========================================================================================================================== Premises and equipment, net 48,049 41,245 Accrued interest receivable 42,293 33,565 Real estate and other assets owned, net 826 935 Deferred tax asset 28,862 26,092 Other assets 146,904 138,011 -------------------------------------------------------------------------------------------------------------------------- Total assets $ 7,086,164 $ 6,856,702 ========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 3,418,445 $ 2,538,850 Savings 26,537 21,075 Money market 1,253,720 1,492,138 Time - under $100 96,316 154,597 Time - $100 and over 1,437,354 1,697,940 -------------------------------------------------------------------------------------------------------------------------- Total deposits 6,232,372 5,904,600 ========================================================================================================================== Accrued interest payable 13,625 15,883 Income taxes payable 3,823 - Short-term borrowings 14,448 156,663 Long-term borrowings: Notes and debentures 99,443 99,411 Other borrowed funds 3,086 4,125 Capital securities of subsidiary trust: Company-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures 63,664 73,430 Minority interest 32,687 35,528 Other liabilities 114,486 93,655 -------------------------------------------------------------------------------------------------------------------------- Total liabilities 6,577,634 6,383,295 ========================================================================================================================== Shareholders' equity: Common Stock - no par, 50,000,000 shares authorized; 44,661,220 shares at June 30, 2000, and 44,903,937 shares at December 31, 1999, issued and outstanding 393,770 312,677 Unearned employee stock ownership plan shares: 105,582 (2,188) (9,998) Deferred stock compensation (32,573) (37,615) Accumulated other comprehensive income, net of tax 2,628 9,998 Retained earnings 146,893 192,006 -------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 508,530 473,407 -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 7,086,164 $ 6,856,702 ==========================================================================================================================
See accompanying notes to consolidated financial statements. -------------------------------------------------------------------------------- Page 2 of 37 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
========================================================================================================================== Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 (Dollars in thousands, except per share data) (Unaudited) (Unaudited) (Unaudited) (Unaudited) ========================================================================================================================== Interest income: Loans $ 96,172 $ 77,568 $ 186,762 $ 152,155 Trading instruments 1,716 980 3,414 1,869 Interest-bearing deposits 148 - 243 - Securities available for sale 16,720 8,627 29,496 16,021 Securities held to maturity 67 71 133 143 Federal funds sold and securities purchased under resale 6,665 4,370 17,790 8,425 Loans held for sale 1,015 601 2,477 1,037 -------------------------------------------------------------------------------------------------------------------------- Total interest income 122,503 92,217 240,315 179,650 -------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 31,220 22,400 64,966 44,168 Short-term borrowings 1,247 894 2,728 2,158 Long-term borrowings 4,313 3,430 8,246 5,003 -------------------------------------------------------------------------------------------------------------------------- Total interest expense 36,780 26,724 75,940 51,329 -------------------------------------------------------------------------------------------------------------------------- Net interest income 85,723 65,493 164,375 128,321 Provision for loan losses 22,600 10,026 34,494 14,820 -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 63,123 55,467 129,881 113,501 -------------------------------------------------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts 2,105 1,936 3,965 3,779 Trust fees - 2,195 - 4,410 Gain on sale of loans 449 500 942 1,721 Gain from exercise of Official Payments Corp. stock options 7 - 922 - Equity in net income of Imperial Credit Industries, Inc. - (596) - 1,644 Gain on sale of Imperial Credit Industries, Inc. stock - 5,391 - 5,391 Other service charges and fees 6,648 5,034 12,835 9,483 Merchant and credit card fees 4,478 2,506 8,172 4,741 International income and fees 4,564 3,130 8,492 5,931 Gain on sales of securities available for sale 6,146 54 11,331 54 Gain on sales of trading instruments 487 365 1,069 384 Gain on sale of the trust business 2,631 8,817 2,631 8,817 Gain on exercise of warrants and related sale of equity securities 3,421 3,430 10,216 7,382 Other income 8,824 3,840 13,750 4,854 -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,760 36,602 74,325 58,591 ========================================================================================================================== Noninterest expense: Salary and employee benefits 44,151 29,527 87,977 60,243 Net occupancy expense 2,958 2,592 5,802 5,287 Furniture and equipment 4,220 2,814 8,092 5,718 Data processing 2,798 2,875 5,345 5,401 Customer services 4,417 6,228 8,870 12,579 Professional and legal fees 3,132 5,738 5,926 8,581 Business development 5,329 2,169 10,666 3,554 Other expense 7,772 6,443 17,242 13,496 -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 74,777 58,386 149,920 114,859 -------------------------------------------------------------------------------------------------------------------------- Minority interest in loss (income) of consolidated subsidiary 3,954 (39) 7,884 (21) -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 32,060 33,644 62,170 57,212 Income tax provision 11,561 13,833 22,356 23,177 -------------------------------------------------------------------------------------------------------------------------- Net income $ 20,499 $ 19,811 $ 39,814 $ 34,035 ========================================================================================================================== Basic earnings per share $ 0.46 $ 0.44 $ 0.89 $ 0.75 Diluted earnings per share 0.44 0.43 0.85 0.73 ==========================================================================================================================
See accompanying notes to consolidated financial statements. -------------------------------------------------------------------------------- Page 3 of 37 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
------------------------------------------------------------------------------------------------------------------------ Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 (Dollars in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------------------------------------------------------------------------------------------------------------------- Net income $ 20,499 $ 19,811 $ 39,814 $ 34,035 Other comprehensive loss, net of tax: Reclassification adjustments for gains included in net income net of tax effect of ($2,337), $12, ($5,611), $12 (3,221) 16 (7,733) 16 Unrealized loss (gain) on securities available for sale, net of tax effect of $263, $570, $239, ($1,038) 330 786 363 (1,431) ----------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (2,891) 802 (7,370) (1,415) ======================================================================================================================= Total comprehensive income $ 17,608 $ 20,613 $ 32,444 $ 32,620 -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -------------------------------------------------------------------------------- IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
----------------------------------------------------------------------------------------------------------------------- Accumulated Deferred Other Total Common Stock Retained Comprehensive Shareholders' (Dollars in thousands) (Unaudited) Stock Compensation Earnings Income Equity ======================================================================================================================= Balance December 31, 1999 $ 309,018 $ (37,615) $ 192,006 $ 9,998 $ 473,407 Common stock dividend 84,907 - (84,927) - (20) Common stock issued under option plan 1,921 - - - 1,921 Common stock repurchased (9,159) - - - (9,159) Tax benefit of employee stock option 2,772 - - - 2,772 Unearned ESOP shares and ESOP tax benefit 1,633 - - - 1,633 Deferred stock compensation - 5,042 - - 5,042 Other 490 - - - 490 Comprehensive income: Net income - - 39,814 - 39,814 Other comprehensive income (7,370) (7,370) -------------------------------------------------------------------------------------------------------------------------- Total comprehensive income - - 39,814 (7,370) 32,444 -------------------------------------------------------------------------------------------------------------------------- Balance June 30, 2000 $ 391,582 $ (32,573) $ 146,893 $ 2,628 $ 508,530 ==========================================================================================================================
See accompanying notes to consolidated financial statements. -------------------------------------------------------------------------------- Page 4 of 37 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================================================ Six months ended June 30, 2000 1999 (Dollars in thousands) (Unaudited) (Unaudited) ============================================================================================================================ Cash flows from operating activities: Net income $ 39,814 $ 34,035 Adjustments for noncash charges (credits): Depreciation and amortization 6,654 6,119 Amortization of loan fees (13,220) (10,444) Provision for loan losses 34,494 14,820 Equity in net income of Imperial Credit Industries, Inc. - (1,644) Gain on sale of Imperial Credit Industries, Inc. stock - (5,391) Gain on exercise of warrants and sale of equity securities (10,216) (7,382) Gain on sale of the trust business (2,631) (8,817) Gain resulting from the exercise of OPAY stock options (922) - Other gains (1,544) (152) Benefit for deferred taxes (2,770) (9,467) Gain on securities available for sale (11,331) (54) Net change in trading instruments (53,163) (625) Net change in loans held for sale 51,045 (275) Net change in accrued interest receivable/payable (10,986) 702 Net change in income taxes receivable/payable 14,417 18,064 Net change in other assets/liabilities 12,823 (28,760) Net change in minority interest (2,841) 21 ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 49,623 750 ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from securities held to maturity 83 67 Proceeds from sales of securities available for sale 3,954,903 1,265,116 Proceeds from maturities of securities available for sale 203,032 593,825 Proceeds from sale of Imperial Credit Industries, Inc. stock - 29,460 Purchase of securities available for sale (4,145,909) (1,894,064) Proceeds from exercise of warrants and sale of equity securities 10,216 7,382 Proceeds from sale of the trust business 2,631 8,817 Net change in Federal funds sold and securities purchased under resale agreements 317,000 (85,000) Net change in loans (355,534) (154,553) Capital expenditures (13,310) (7,204) Proceeds from sale of real estate and other assets owned 107 829 Proceeds from sale of premises and equipment 281 138 ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (26,500) (235,187) ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in demand deposits, savings, and money market accounts 646,639 60,481 Net change in time deposits (318,867) 98,361 Net change in short-term borrowings (142,215) 110,130 Net proceeds from issuance of subordinated capital notes - 98,364 Net proceeds from ESOP loan - 5,985 Net change in long-term borrowings (1,023) 286 Redemption of capital securities (9,793) Repurchase of common stock for ESOP - (5,235) Repurchase of common stock 1,921 (3,116) Proceeds from exercise of employee stock options (9,159) 450 Other (20) (18) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 167,483 365,688 ---------------------------------------------------------------------------------------------------------------------------- Net change in cash and due from banks 190,606 131,251 ---------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, beginning of year 307,770 355,317 ---------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of period $ 498,376 $ 486,568 ============================================================================================================================ See accompanying notes to consolidated financial statements. ----------------------------------------------------------------------------------------------------------------------------
Page 5 of 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES NOTE (1) ORGANIZATION Imperial Bancorp (the "Company") is a financial holding company that was incorporated in California in 1968. The Company's principal subsidiary, Imperial Bank (the "Bank"), is a California-chartered bank with headquarters in Inglewood, California. The Bank offers a wide range of financial products and services to corporate customers, entrepreneurs and professionals. The Bank operates 15 regional banking offices; 12 throughout California; and out-of-state offices in Arizona, Colorado and Washington. In addition, the Bank operates 13 loan production offices located in major technology centers across the country. The Bank owns 56% of the outstanding common stock of Official Payments Corporation ("OPAY") (Nasdaq: OPAY). NOTE (2) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations, changes in cash flows and comprehensive income in conformity with generally accepted accounting principles. However, these interim financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments were of a normal recurring nature. The Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries. Operating results for the three and six months ended June 30, 2000, are not necessarily indicative of results that may be expected for the year ending December 31, 2000. The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to the Company's 1999 Consolidated Financial Statements to conform with the 2000 presentation. NOTE (3) STATEMENTS OF CASH FLOWS The following information supplements the statements of cash flows:
======================================================================================================================= For the six months ended June 30, (Dollars in thousands) 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Interest paid $78,198 $48,830 Taxes paid 12,626 13,492 Federal tax refunds received 9,358 - Significant noncash transactions: Reclassification of investment in ICII stock to securities available for sale - 34,370 Loans to facilitate the sale of LHO loans to ICII 2,552 - Loans transferred to OREO - 132 =======================================================================================================================
NOTE (4) EARNINGS PER SHARE Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings. Unearned ESOP shares are not considered to be outstanding shares for purposes of determining the number of weighted average shares for the EPS calculation. Reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is presented in the following tables for the three and six months ended June 30, 2000 and 1999: Page 6 of 37
=================================================================================================================== For the three months ended June 30, 2000 1999 ---------------------------------------------------------------- Per Per (Dollars in thousands, except per share Share Share data) Income Shares Amount Income Shares Amount ------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $20,499 44,955,402 $ 0.46 $19,811 45,119,463 $ 0.44 Effect of dilutive securities Incremental shares from outstanding common stock options 1,469,024 1,489,311 ------------ ------------ Diluted EPS Net income $20,499 46,424,426 $ 0.44 $19,811 46,608,774 $ 0.43 =================================================================================================================== =================================================================================================================== For the six months ended June 30, 2000 1999 ---------------------------------------------------------------- Per Per (Dollars in thousands, except per share Share Share data) Income Shares Amount Income Shares Amount ------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $39,814 44,879,301 $ 0.89 $34,035 45,177,931 $ 0.75 Effect of dilutive securities Incremental shares from outstanding common stock options 1,734,220 1,566,835 ----------- ----------- Diluted EPS Net income $39,814 46,613,521 $ 0.85 $34,035 46,744,766 $ 0.73 ===================================================================================================================
The number of shares used to compute basic and diluted income per share for 1999 have been adjusted to reflect an 8% stock dividend paid on February 18, 2000, to shareholders of record on February 4, 2000. Securities that could potentially dilute earnings per share in the future that were not included in the calculation of diluted earnings per share for the 2000 reporting periods because their effect was antidilutive totaled 562,603. NOTE (5) COMPREHENSIVE INCOME Comprehensive income consists of net income and net unrealized gains (losses) on securities available for sale and is presented in the Consolidated Statements of Comprehensive Income. NOTE (6) OFFICIAL PAYMENTS CORPORATION At June 30, 2000, the Company owned 12,000,000 shares, or 56% of total outstanding shares, of OPAY's common stock. OPAY's operating results are reported on a consolidated basis for financial reporting purposes. OPAY reported operating losses of $9.1 million and $18.1 million for the three- and six-month periods ended June 30, 2000, respectively. The Company's share of OPAY's operating losses for these periods was $5.1 million and $10.2 million, respectively. On an after-tax basis, the Company's net income for second quarter 2000 includes a $3.3 million loss related to its investment in OPAY. The Company's net income for the six months ended June 30, 2000, includes a $6.0 million loss related to its investment in OPAY. The year-to-date loss is net of a $595,200 after-tax gain recorded by the Company related to the exercise of OPAY stock options. Thebook value of the Company's investment in OPAY is $3.51 per share or $42.1 million at June 30, 2000. Page 7 of 37 During August 1999, OPAY and Imperial Bank entered into an employment agreement with Thomas R. Evans, OPAY's Chairman and Chief Executive Officer. The employment agreement provides for, among other items, Mr. Evans being granted options to purchase 1,325,460 shares of OPAY common stock at $1.33 per share. Imperial Bank guaranteed that the "value" --as defined in the agreement--of Mr. Evans' vested options would be $10,000,000 on or before the third anniversary of the date of the agreement or Imperial Bank would pay Mr. Evans an amount equal to the difference between $10,000,000 and the highest value of the vested options on or before the third anniversary. OPAY recorded Mr. Evans' stock options as unamortized stock compensation which is being amortized into income over three years. Imperial Bank consolidates its investment in OPAY and, accordingly, it records its ownership interest in OPAY's operating loss which includes the amortization expense of the Evans stock option guarantee. Approximately $2.0 million of the guaranteed amount has been cumulatively amortized through June 30, 2000. In the event that an obligation to fund the guarantee is deemed probable, the amount of the estimated obligation over that to be recorded in consolidation will be recorded as additional investment in OPAY, subject to a recoverability analysis. NOTE (7) OPERATING SEGMENT RESULTS Management of the Company, for purposes of assessing performance and allocating resources, evaluates these principal operating segments that both earn revenue and incur expenses: Commercial Banking - traditional banking services to mid-sized companies originated principally by direct relationships with customers Emerging Growth Division - venture banking for early-stage and emerging companies originated principally through relationships with venture capitalists Real Estate - traditional banking services to residential homebuilders originated by direct relationships with customers Entertainment - traditional banking services to mid-sized entertainment and independent film companies originated by direct relationships with customers Syndicated Finance - principally purchasing nationally syndicated loans originated on an indirect basis SBA Division - traditional small business ("SBA") lending originated principally by direct relationships with customers Imperial Creditcorp and Imperial Ventures - bridge loans and direct equity investments in early-stage and emerging companies and equity investments in venture capital funds, each originated principally through relationships with venture capitalists Merchant Banking - participations in loans originated on an indirect basis For measuring segment profitability, the Company applies full absorption cost accounting and, accordingly, the costs of the following support units are allocated in full to the above operating segments: Treasury Management - the interest expense of the Company's public debt and brokered deposits is allocated to the operating segments based upon their funding requirements Financial Services Division - the interest and operating cost of this Division, which offers depository services to particular industries (including title and escrow companies, bankruptcy trustees, homeowners associations and property management companies) is allocated to the operating segments based upon their funding requirements Operations and Administrative - the majority of the operating and administrative costs are allocated based upon usage and the remainder is allocated based upon balance sheet determinants Page 8 of 37 For reporting segment information, the Company aggregates segments with similar long-term financial performance and similar economic characteristics. The Company aggregates based upon similar customer origination processes: Commercial Banking Segment - in this aggregate segment, the Company reports on segments that originate business principally by direct relationships with customers. This segment includes Commercial Banking, Real Estate, Entertainment, and SBA. Emerging Growth Segment - in this aggregate segment, the Company reports on segments that originate business principally through relationships with venture capitalists. This segment includes the Emerging Growth Division, Imperial Creditcorp and Imperial Ventures. Syndicated Finance Segment - in this aggregate segment, the Company reports on segments that originate business on an indirect basis through other financial institutions, principally banks. This segment includes the Syndicated Finance Division and the Merchant Banking Group. Other Segment - in this aggregate segment, the Company reports activities not individually material including OPAY, the Merchant Card Division, Financial Services, Treasury Management and nonbank subsidiaries of the holding company. The segment information for the prior year has been restated to conform with the current year's presentation, including approximating the impact of using full absorption cost accounting in the prior year. Operating Segment Results
----------------------------------------------------------------------------------------------------------------------- For the three months ended June 30, 2000 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 51,305 $ 13,668 $ 7,077 $ 13,673 $ 85,723 Provision for loan losses 12,842 (1) 4,430 4,876 452 22,600 Noninterest income 8,078 12,806 492 18,384 39,760 Noninterest expense (2) 30,144 9,966 1,731 28,982 70,823 ----------------------------------------------------------------------------------------------------------------------- Income before taxes 16,397 12,078 962 2,623 32,060 Income taxes 5,813 4,281 341 1,126 11,561 ----------------------------------------------------------------------------------------------------------------------- Net income $ 10,584 $ 7,797 $ 621 $ 1,497 $ 20,499 ----------------------------------------------------------------------------------------------------------------------- Average net loans (3) $ 2,705,151 $ 411,081 $ 542,346 $ 452,576 $ 4,111,154 Average nonaccrual loans 30,920 6,915 11,261 1,042 50,138 Average assets 2,779,029 442,806 558,540 2,590,219 6,370,594 Average deposits 1,586,556 1,009,548 16,767 2,841,643 5,454,514 ----------------------------------------------------------------------------------------------------------------------- (1) $6.8 million of this provision relates to a nationally syndicated credit administered in a regional office. (2) Includes minority interest in OPAY's operating loss. (3) Excluding nonaccrual loans. -----------------------------------------------------------------------------------------------------------------------
Page 9 of 37 Operating Segment Results --------------------------------------------------------------------------------
For the three months ended June 30, 1999 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 42,773 $ 8,272 $ 6,181 $ 8,267 $ 65,493 Provision for loan losses 9,479 423 124 - 10,026 Noninterest income 5,778 4,082 437 26,305 36,602 Noninterest expense (1) 27,436 6,605 1,547 22,837 58,425 ----------------------------------------------------------------------------------------------------------------------- Income before taxes 11,636 5,326 4,947 11,735 33,644 Income taxes 4,784 2,190 2,034 4,825 13,833 ----------------------------------------------------------------------------------------------------------------------- Net income $ 6,852 $ 3,136 $ 2,913 $ 6,910 $ 19,811 ----------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,408,174 $ 341,439 $ 605,579 $ 454,417 $ 3,809,609 Average nonaccrual loans 41,161 4,806 - 219 46,186 Average assets 2,469,725 353,967 608,522 2,131,878 5,564,092 Average deposits 1,453,315 521,527 5,619 2,840,482 4,820,943 ----------------------------------------------------------------------------------------------------------------------- (1) Includes minority interest in OPAY's operating income. (2) Excluding nonaccrual loans. ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- For the six months ended June 30, 2000 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 96,452 $ 26,689 $ 13,360 $ 27,874 $ 164,375 Provision for loan losses 22,950 (1) 5,435 5,207 902 34,494 Noninterest income 15,039 29,134 1,120 29,032 74,325 Noninterest expense (2) 60,093 20,335 3,448 58,160 142,036 ----------------------------------------------------------------------------------------------------------------------- Income before taxes 28,448 30,053 5,825 (2,156) 62,170 Income taxes 10,084 10,654 2,065 (447) 22,356 ----------------------------------------------------------------------------------------------------------------------- Net income $ 18,364 $ 19,399 $ 3,760 $ (1,709) $ 39,814 ----------------------------------------------------------------------------------------------------------------------- Average net loans (3) $ 2,688,832 $ 392,302 $ 540,974 $ 435,518 $ 4,057,627 Average nonaccrual loans 30,460 5,362 7,647 1,069 44,538 Average assets 2,760,727 418,870 553,662 2,656,281 6,389,540 Average deposits 1,576,599 1,095,857 15,966 2,784,775 5,473,197 ----------------------------------------------------------------------------------------------------------------------- (1) $8.8 million of this provision relates to a nationally syndicated credit administered in a regional office. (2) Includes minority interest in OPAY's operating loss. (3) Excluding nonaccrual loans. -----------------------------------------------------------------------------------------------------------------------
Page 10 of 37 Operating Segment Results --------------------------------------------------------------------------------
For the six months ended June 30, 1999 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 83,767 $ 15,590 $ 11,928 $ 17,036 $ 128,321 Provision for loan losses 12,308 2,388 124 - 14,820 Noninterest income 9,003 8,550 1,090 39,948 58,591 Noninterest expense (1) 55,103 13,481 3,072 43,224 114,880 ----------------------------------------------------------------------------------------------------------------------- Income before taxes 25,359 8,271 9,822 13,760 57,212 Income taxes 10,273 3,351 3,979 5,574 23,177 ----------------------------------------------------------------------------------------------------------------------- Net income $ 15,086 $ 4,920 $ 5,843 $ 8,186 $ 34,035 ----------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,351,580 $ 337,467 $ 605,198 $ 477,195 $ 3,771,440 Average nonaccrual loans 36,569 5,435 - 82 42,086 Average assets 2,403,280 350,492 607,677 2,115,921 5,477,370 Average deposits 1,463,100 487,151 8,512 2,817,516 4,776,279 ----------------------------------------------------------------------------------------------------------------------- (1) Includes minority interest in OPAY's operating income. (2) Excluding nonaccrual loans. -----------------------------------------------------------------------------------------------------------------------
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology including "may", "will", "intend", "should", "expect", "anticipate", "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in documents filed with the Securities and Exchange Commission. The following discussion presents information about the results of operations, financial condition, liquidity, and capital resources of Imperial Bancorp (the "Company") as of and for the three and six months ended June 30, 2000. This information should be read in conjunction with the Company's 1999 Consolidated Financial Statements and notes thereto, and the accompanying quarterly unaudited Consolidated Financial Statements and notes thereto. GENERAL Imperial Bancorp is a diversified financial services company specializing in the delivery of a wide variety of financial products and services tailored to meet the financing and cash management needs of middle market companies, emerging growth companies, entrepreneurs and professionals. Through its bank and nonbank subsidiaries, the Company is uniquely positioned to provide customized products and superior customer service to its customers across a broad spectrum of industries. The Company's largest subsidiary, Imperial Bank, operates 15 regional banking offices; 12 throughout California; and out-of-state offices in Arizona, Colorado and Washington. Additionally, the Bank operates 13 loan production offices located in major technology centers across the country. The Company's business activities are conducted through three principal operating segments: Commercial Banking, Emerging Growth and Syndicated Finance. Several smaller businesses and the Company's 56% investment in Official Payments Corporation ("OPAY") (Nasdaq: OPAY) are grouped into a fourth segment. Page 11 of 37 OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS Net income increased 3% to $20.5 million, or $0.44 per share, for the three months ended June 30, 2000, from $19.8 million, or $0.43 a share, for the year-earlier quarter. Growth in net interest income for the current quarter, driven by loan growth, and increased income realized from warrants and equity investments more than offset increases in the loan loss provision and noninterest expense compared with the year-earlier quarter. Net income for second quarter 2000 includes a $3.3 million, or $0.7 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the quarter. Net income realized from warrants and equity investments increased 121% to $7.2 million after tax for the quarter ended June 30, 2000, from $2.3 million a year earlier. Net income for second quarter 2000 includes a $1.7 million after-tax gain on the sale of the trust business compared with a $5.1 million after-tax gain for the year-earlier quarter. The gain recorded in the current quarter represents a payment related to customer retention as provided for in the trust sale agreement. Net income for the year-earlier quarter includes a $3.1 million after-tax gain on the sale of Imperial Credit Industries, Inc. ("ICII") (Nasdaq: ICII) common stock. Earnings per share amounts are reported on a diluted basis and reflect an 8% stock dividend paid on February 18, 2000. The major components of net income and changes in these components are summarized in the following table for the quarters ended June 30, 2000 and 1999: Page 12 of 37
=============================================================================================================================== Imperial Bancorp and Subsidiaries Three months ended June 30, ------------------------------------------------------ Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent ------------------------------------------------------------------------------------------------------------------------------- Interest income $ 122,503 $ 92,217 $ 30,286 32.8% Interest expense 36,780 26,724 10,056 37.6 ------------------------------------------------------------------------------------------------------------------------------- Net interest income 85,723 65,493 20,230 30.9 Provision for loan losses 22,600 10,026 12,574 125.4 ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 63,123 55,467 7,656 13.8 ------------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sale of ICII stock - 5,391 (5,391) (100.0) Gain on sale of the trust business 2,631 8,817 (6,186) (70.2) Income from the realization of warrants and equity investments (1) 11,095 4,000 7,095 177.4 Other noninterest income 26,034 18,394 7,640 41.5 ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,760 36,602 3,158 8.6 ------------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and benefits 44,151 29,527 14,624 49.5 Other noninterest expense 30,626 28,859 1,767 6.1 ------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 74,777 58,386 16,391 28.1 ------------------------------------------------------------------------------------------------------------------------------- Minority interest in loss (income) of consolidated subsidiary 3,954 (39) 3,993 - Income before income taxes 32,060 33,644 (1,584) (4.7) Income tax provision 11,561 13,833 (2,272) (16.4) ------------------------------------------------------------------------------------------------------------------------------- Net income $ 20,499 $ 19,811 $ 688 3.5% =============================================================================================================================== Net income excluding OPAY $ 23,779 $ 19,722 $ 4,057 20.6% Earnings per share: Basic earnings per share $ 0.46 $ 0.44 $ 0.02 4.6% Diluted earnings per share 0.44 0.43 0.01 2.3 Diluted earnings per share excluding OPAY $ 0.51 $ 0.42 $ 0.09 21.4% -------------------------------------------------------------------------------------------------------------------------------
(1)Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories:
2000 1999 ------------------------ Gains on securities available for sale $ 6,257 $ - Gains on the exercise of warrants and sale of equity securities 3,421 3,430 Other noninterest income 1,417 570 ------------------------ Total $ 11,095 $ 4,000 ======================== ===============================================================================================================================
The annualized return on average assets and average equity decreased to 1.29% and 16.41%, respectively, for second quarter 2000, from 1.43% and 19.91%, respectively, for the year-earlier quarter. Excluding OPAY, the annualized return on average assets increased to 1.52% for second quarter 2000 from 1.42% for the year-earlier quarter. Excluding OPAY, the annualized return on average equity increased to 20.84% for second quarter 2000 from 19.86% for the year-earlier quarter. Net income for the six months ended June 30, 2000, increased 17% to $39.8 million, or $0.85 a share, from $34.0 million, or $0.73 a share, for the year-earlier period. Net income for the first six months of 2000 includes a $6.0 million, or $0.13 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the period Page 13 of 37 net of a gain related to the exercise of OPAY stock options. In addition to the gains on the sale of businesses discussed above, after-tax income realized on warrants and equity investments tripled to $26.5 million for the six months ended June 30, 2000, from $8.2 million for the year-earlier period. The major components of net income and changes in these components are summarized in the following table for the six months ended June 30, 2000 and 1999:
======================================================================================================================== Imperial Bancorp and Subsidiaries Six months ended June 30, ------------------------------------------------------- Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent ------------------------------------------------------------------------------------------------------------------------ Interest income $ 240,315 $ 179,650 $ 60,665 33.8% Interest expense 75,940 51,329 24,611 47.9 ------------------------------------------------------------------------------------------------------------------------ Net interest income 164,375 128,321 36,054 28.1 Provision for loan losses 34,494 14,820 19,674 132.8 ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 129,881 113,501 16,380 14.4 ------------------------------------------------------------------------------------------------------------------------ Noninterest income: Gain on sale of ICII stock - 5,391 (5,391) (100.0) Gain on sale of the trust business 2,631 8,817 (6,186) (70.2) Income from the realization of warrants and equity investments (1) 26,504 8,228 18,276 222.1 Other noninterest income 45,190 36,155 9,035 25.0 ------------------------------------------------------------------------------------------------------------------------ Total noninterest income 74,325 58,591 15,734 26.9 ------------------------------------------------------------------------------------------------------------------------ Noninterest expense: Salaries and benefits 87,977 60,243 27,734 46.0 Other noninterest expense 61,943 54,616 7,327 13.4 ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 149,920 114,859 35,061 30.5 ------------------------------------------------------------------------------------------------------------------------ Minority interest in loss (income) of consolidated subsidiary 7,884 (21) 7,905 100.0 Income before income taxes 62,170 57,212 4,958 8.7 Income tax provision 22,356 23,177 (821) (3.5) ------------------------------------------------------------------------------------------------------------------------ Net income $ 39,814 $ 34,035 $ 5,779 17.0% ======================================================================================================================== Net income excluding OPAY $ 45,789 $ 33,988 $ 11,801 34.7% Earnings per share: Basic earnings per share $ 0.89 $ 0.75 $ 0.14 18.7% Diluted earnings per share Diluted earnings per share excluding OPAY $ 0.98 $ 0.73 $ 0.25 34.2% ------------------------------------------------------------------------------------------------------------------------
(1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories:
2000 1999 ------------------------ Gains on securities available for sale $ 11,967 $ - Gains on the exercise of warrants and sale of equity securities 10,216 7,382 Other noninterest income 4,321 846 ------------------------ Total $ 26,504 $ 8,228 ======================== ========================================================================================================================
The annualized return on average assets and average equity were 1.25% and 16.25%, respectively, for the six months ended June 30, 2000, compared with 1.25% and 17.45%, respectively, for the year-earlier period. Excluding OPAY, the Page 14 of 37 annualized return on average assets increased to 1.46% for the first half of 2000 from 1.25% for the year-earlier period. Excluding OPAY, the annualized return on average equity increased to 20.54% for the first half of 2000 from 17.46% for the year-earlier period. Selected ratios for the three and six months ended June 30, 2000 and 1999, are provided in the following table:
====================================================================================================================== At or for the At or for the three months ended six months ended June 30, June 30, 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Selected ratios Reported: Return on average assets (annualized) 1.29% 1.43% 1.25% 1.25% Return on average equity (annualized) 16.41 19.91 16.25 17.45 Return on average earning assets (annualized) 1.41 1.58 1.36 1.39 Net interest margin 5.90 5.21 5.64 5.23 Efficiency ratio 56.44 57.23 59.50 61.46 Average equity-to-average assets 7.89 7.17 7.71 7.18 Total risk-based capital 13.80 12.96 13.80 12.96 Tier 1 risk-based capital 10.75 9.64 10.75 9.64 Tier 1 leverage 9.31 8.50 9.31 8.50 Excluding OPAY: Return on average assets (annualized) 1.52 1.42 1.46 1.25 Return on average equity (annualized) 20.84 19.86 20.54 17.46 Net interest margin 5.94 5.21 5.65 5.23 Efficiency ratio 50.82 56.99 54.23 61.14 Asset quality ratios Nonaccrual loans to total loans 1.42 1.38 1.42 1.38 Nonaccrual and restructured loans to total loans 1.58 1.53 1.58 1.53 Allowance for credit losses to total loans 2.04 1.95 2.04 1.95 Net charge-offs as a percentage of total average loans (annualized) 1.97 0.37 1.25 0.38 ======================================================================================================================
Net Interest Income The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average earning assets. Due to the asset-sensitive nature of the Company's balance sheet, a variable rate loan portfolio funded in large part by demand deposits and fixed rate liabilities, the recent increases in the prime rate have favorably impacted net interest income and net interest margin. Net interest income increased to $85.7 million for the three months ended June 30, 2000, from $65.5 million for the year-earlier quarter. Net interest income for the current quarter includes $628,000 related to OPAY. The increase in net interest income is due to growth in average earning assets, which increased 16% to $5.8 billion for the quarter ended June 30, 2000, from $5.0 billion for the year-earlier quarter. Average loans increased $293.5 million, or 7.5%, to $4.2 billion for the current quarter from $3.9 billion for second quarter 1999. Loans comprised approximately 72% of average earnings assets for the current quarter compared with approximately 77% for the year-earlier quarter. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. Average deposits grew 13% to $5.5 billion for second quarter 2000, from $4.8 billion for the year-earlier quarter. Deposit growth continues to exceed loan funding requirements. The resulting excess liquidity was invested in securities, leading to a decline in average loans as a percentage of average earning assets compared with the prior year. Page 15 of 37 The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the quarters ended June 30, 2000 and 1999:
===================================================================================================================== Three months ended June 30, 2000 1999 --------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) --------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $ 4,195,294 $ 96,172 (3) 9.22% $ 3,901,754 $ 77,568 (3) 7.97% Trading instruments 112,235 1,716 6.15 68,840 980 5.71 Interest-bearing deposits 5,055 148 11.78 - - - Securities available for sale (4) 1,057,064 16,720 6.40 679,306 8,627 5.06 Securities held to maturity 3,679 67 7.32 3,844 71 7.41 Federal funds sold and securities purchased under resale agreements 427,425 6,665 6.27 362,627 4,370 4.83 Loans held for sale 44,940 1,015 9.08 21,798 601 11.06 --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 5,845,692 122,503 8.44% 5,038,169 92,217 7.34% ===================================================================================================================== Allowance for loan losses (78,942) (67,757) Cash 353,045 369,577 Other assets 250,799 224,103 ----------- ----------- Total assets $ 6,370,594 $ 5,564,092 =========== =========== Interest-bearing liabilities: Savings $ 25,178 $ 111 1.77% $ 27,229 $ 142 2.09% Money market 1,251,258 9,702 3.12 1,098,435 7,716 2.82 Time-under $100,000 71,876 1,536 8.60 162,397 2,342 5.78 Time-$100,000 and over 1,412,832 19,871 5.66 1,058,209 12,200 4.62 --------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,761,144 31,220 4.55 2,346,270 22,400 3.83 ===================================================================================================================== Short-term borrowings 76,102 1,247 6.59 75,313 894 4.76 Long-term borrowings 103,264 2,703 10.53 101,155 1,954 7.75 Capital securities 68,070 1,610 9.51 73,393 1,476 8.07 --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,008,580 36,780 4.92% 2,596,131 26,724 4.13% ===================================================================================================================== Demand deposits 2,693,370 2,474,673 Other liabilities 166,157 94,160 Shareholders' equity 502,487 399,128 Total liabilities and ----------- ----------- shareholders' equity $ 6,370,594 $ 5,564,092 =========== =========== Net interest income/Net interest margin $ 85,723 5.90% $ 65,493 5.21% ======== ===== ======== ===== =====================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $6.6 million and $5.4 million for the three months ended June 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost. Page 16 of 37 Net interest income increased to $164.4 million for the six months ended June 30, 2000, from $128.3 million for the year-earlier period. Net interest income for the first six months includes $1.8 million related to OPAY. The increase in net interest income was driven by the growth in average earning assets which increased 19% to $5.9 billion for the first half of 2000 from $4.9 billion for the year-earlier period. Average loans grew $256.1 million, or approximately 7%, to $4.1 billion from $3.9 billion for the year-earlier period. Loans comprised approximately 70% of average earning assets for the first half of 2000 compared with 78% for the year-earlier period. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the six months ended June 30, 2000 and 1999: Page 17 of 37
=========================================================================================================== Six months ended June 30, 2000 1999 ----------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) ----------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $4,115,148 $ 186,762 (3) 9.13% $3,859,024 $ 152,155 (3) 7.95% Trading instruments 113,147 3,414 6.07 67,762 1,869 5.56 Interest-bearing deposits 5,122 243 9.54 - - - Securities available for sale (4) 965,948 29,496 6.19 645,488 16,021 4.98 Securities held to maturity 3,699 133 7.23 3,859 143 7.47 Federal funds sold and securities purchased under resale agreements 603,012 17,790 5.93 351,125 8,425 4.84 Loans held for sale 63,492 2,477 7.85 20,206 1,037 10.35 ----------------------------------------------------------------------------------------------------------- Total interest-earning assets 5,869,568 240,315 8.24% 4,947,464 179,650 7.32% ----------------------------------------------------------------------------------------------------------- Allowance for loan losses (76,475) (65,704) Cash 351,633 363,697 Other assets 244,814 231,913 ------------ ------------ Total assets $6,389,540 $5,477,370 ============ ============ Interest-bearing liabilities: Savings $ 23,303 $ 205 1.77% $ 31,915 $ 294 1.86% Money market 1,307,841 19,751 3.04 1,082,839 15,171 2.83 Time-under $100,000 108,868 3,536 6.53 159,535 4,111 5.20 Time-$100,000 and over 1,487,577 41,474 5.61 1,039,662 24,592 4.77 ------------------------------------------------------------------------------------------------- --------- Total interest-bearing deposits 2,927,589 64,966 4.46 2,313,951 44,168 3.85 ----------------------------------------------------------------------------------------------------------- Short-term borrowings 91,609 2,728 5.99 90,561 2,158 4.81 Long-term borrowings 103,435 4,928 9.58 52,344 1,998 7.70 Capital securities 70,753 3,318 9.43 73,386 3,005 8.26 ----------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,193,386 75,940 4.78% 2,530,242 51,329 4.09% ----------------------------------------------------------------------------------------------------------- Demand deposits 2,545,608 2,462,328 Other liabilities 157,746 91,504 Shareholders' equity 492,800 393,296 Total liabilities and ------------ ------------ shareholders' equity $6,389,540 $5,477,370 ============ ============ Net interest income/Net interest margin $ 164,375 5.64% $ 128,321 5.23% =========== ========== =========== ========== =========================================================================================================== (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 $13.6 million and $10.3 million for the six months ended June 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost.
Page 18 of 37 Net interest margin increased to 5.90% and 5.64% for the three and six months ended June 30, 2000, respectively, from 5.21% and 5.23% for the year-earlier periods. The increase in loan yields, due to increases in the prime rate, more than offset higher rates paid on deposits. Approximately 77% 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 average prime rate increased 122 basis points for the first half of 2000 to 8.97% from 7.75% for the year-earlier period. Management expects a net interest margin comparable to that reported for second quarter 2000 for the remainder of the year unless market interest rates increase. Interest income for the three months ended June 30, 2000 and 1999, was reduced by approximately $789,100 and $271,300, respectively, due to interest reversals on nonaccrual loans. Interest income for the six months ended June 30, 2000 and 1999, was reduced by approximately $1.3 million and $712,200, respectively, due to interest reversals on nonaccrual loans. The average cost of interest-bearing deposits increased for the quarter and year-to-date compared with the year-earlier periods, but at a lower rate than short-term market rates in general. The growth in average time certificate of deposit ("TCD") balances for the three and six months ended June 30, 2000, compared with the year earlier periods occurred primarily in the Emerging Growth Division, which increased $239 million for the year, and in brokered TCD balances raised in conjunction with the Company's overall funding plan. Demand deposits continue to be a significant funding source for the Company. Average demand deposits comprised 49% and 47% of total average deposits for the three and six months ended June 30, 2000, compared with 51% and 52% of total average deposits for the year-earlier periods. The growth in average demand deposits was generated by the Commercial Banking and Emerging Growth Divisions. The increase in average long-term borrowings for the six months ended June 30, 2000, compared with the year-earlier period is due to the issuance of $100 million of 8.5% Subordinated Capital Notes by Imperial Bank in April 1999. Analysis of Changes in Net Interest Income Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following tables set forth information regarding changes in interest income and interest expense for the three and six months ended June 30, 2000 and 1999. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). The change in interest due to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. Nonaccrual loans are included in average loans for these computations. The tables are not presented on a tax equivalent basis as the effects are not material. Page 19 0f 37
=================================================================================================================== Three months ended June 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total ------------------------------------------------------------------------------------------------------------------- Loans, net $ 5,820 $ 12,087 $ 697 $ 18,604 Trading instruments 616 75 45 736 Interest-bearing deposits 148 - - 148 Securities available for sale 4,751 2,263 1,079 8,093 Securities held to maturity (3) (1) (0) (4) Federal funds sold and securities purchased under resale agreements 779 1,296 220 2,295 Loans held for sale 636 (107) (115) 414 ------------------------------------------------------------------------------------------------------------------- Total interest income 12,747 15,613 1,926 30,286 ------------------------------------------------------------------------------------------------------------------- Savings (11) (21) 1 (31) Money market 1,071 822 93 1,986 Time-under $100,000 (1,302) 1,135 (639) (806) Time-$100,000 and over 4,077 2,717 877 7,671 ------------------------------------------------------------------------------------------------------------------- Total deposits 3,835 4,653 332 8,820 ------------------------------------------------------------------------------------------------------------------- Short-term borrowings 9 343 1 353 Long-term borrowings 41 699 9 749 Capital securities (107) 264 (23) 134 ------------------------------------------------------------------------------------------------------------------- Total interest expense 3,778 5,959 319 10,056 ------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 8,969 $ 9,654 $ 1,607 $ 20,230 ===================================================================================================================
Page 20 of 37
======================================================================================================================= Six months ended June 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total ----------------------------------------------------------------------------------------------------------------------- Loans, net $ 10,127 $ 22,560 $ 1,920 $ 34,607 Trading instruments 1,255 170 120 1,545 Interest-bearing deposits 243 - - 243 Securities available for sale 7,929 3,891 1,655 13,475 Securities held to maturity (5) (5) 0 (10) Federal funds sold and securities purchased under resale agreements 6,061 1,910 1,394 9,365 Loans held for sale 2,228 (252) (536) 1,440 ----------------------------------------------------------------------------------------------------------------------- Total interest income 27,838 28,274 4,553 60,665 ----------------------------------------------------------------------------------------------------------------------- Savings (80) (14) 5 (89) Money market 3,161 1,140 279 4,580 Time-under $100,000 (1,309) 1,059 (325) (575) Time-$100,000 and over 10,624 4,326 1,932 16,882 ----------------------------------------------------------------------------------------------------------------------- Total deposits 12,396 6,511 1,891 20,798 ----------------------------------------------------------------------------------------------------------------------- Short-term borrowings 25 533 12 570 Long-term borrowings 1,956 490 484 2,930 Capital securities (108) 428 (7) 313 ----------------------------------------------------------------------------------------------------------------------- Total interest expense 14,269 7,962 2,380 24,611 ----------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 13,569 $ 20,312 $ 2,173 $ 36,054 =======================================================================================================================
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 $4.4 million and $8.9 million for the three and six months ended June 30, 2000, respectively, and by $6.2 million and $12.6 million for the year earlier periods, respectively. The net interest margin would have decreased to 5.60% and 5.33% for the three and six months ended June 30, 2000, respectively, and to 4.71% for the year-earlier periods. Provision for Loan Losses As projected in the Company's Quarterly Report on Form 10-Q filed for the three months ended March 31, 2000, the provision for loan losses increased for second quarter 2000 to $22.6 million from $10.0 million for the year-earlier quarter. Net charge-offs for the quarter increased to $20.6 million, or 1.97% of average loans on an annualized basis, for second quarter 2000, from $3.6 million, or 0.37% of average loans on an annualized basis, for the year-earlier quarter. The provision for loan losses increased to $34.5 million for the six months ended June 30, 2000, from $14.8 million for the year-earlier period. Net charge-offs for the period increased to $25.6 million, or 1.25% of average loans, from $7.3 million, or 0.38% of total average loans, for the year-earlier period. The increased provision for the current year is largely attributable to higher charge-offs recorded on a limited number of nationally syndicated loans. Management expects the level of net charge-offs and resulting provisions for loan losses for the remainder of the year to decline from the level experienced in the second quarter. Page 21 of 37 Noninterest Income: Noninterest income increased approximately 9% to $39.8 million for second quarter 2000, from $36.6 million for the year-earlier quarter. Noninterest income for the current quarter includes a $2.6 million gain associated with last year's sale of the trust business. This gain offset the reduction in trust fee income compared with the year-earlier quarter resulting from the sale of this business. Noninterest income for second quarter 1999 includes a $5.4 million gain on the sale of ICII stock and an $8.8 million gain on the sale of the trust business. Noninterest income increased 27% to $74.3 million for the first six months of 2000, from $58.6 million for the year-earlier period. In addition to the second quarter items discussed above, noninterest income for the first half of 2000 reflects an $18.3 million increase in income realized from warrants and investments in equity funds. Noninterest Expense: Noninterest expense before minority interest increased 28% for the quarter ended June 30, 2000, to $74.8 million from $58.4 million for the year-earlier quarter. Excluding OPAY, noninterest expense for the quarter increased 7% to $61.7 million from $57.7 million a year ago. For the first half of 2000, noninterest expense increased 31% to $149.9 million from $114.9 million for the year-earlier period. Excluding OPAY, year-to-date noninterest expense increased 11% to $126.6 million from $113.8 million for the year-earlier period. The increase in noninterest expense excluding OPAY is primarily due to higher salaries and benefits and occupancy expense associated with the overall growth in the Company's present activities as well as the addition of new business initiatives. The average number of full-time equivalent staff increased to 1,303 for the six months ended June 30, 2000, from 1,271 for the year-earlier period. The increase in salaries also reflects increases in incentives tied to Company performance. Customer services expense declined for the quarter and year-to-date compared with the year earlier periods due to a decrease in average title and escrow deposit balances. Although noninterest expense has increased overall, the Company's efficiency ratio excluding OPAY declined for both the quarter and year-to-date compared with a year ago. The efficiency ratio, excluding OPAY, decreased to 54.23% for the first half of 2000 from 61.14% for the year-earlier period. Income Taxes: The Company recorded income taxes of $11.6 million and $22.4 million for the three and six months ended June 30, 2000, respectively. Income taxes were $13.8 million and $23.2 million for the three and six months ended June 30, 1999. On April 24, 2000, the Company formed Imperial Special Investments, Inc. ("ISII"). ISII is a closed-end, non-diversified regulated investment company registered under the Investment Company Act of 1940. ISII's holdings consist of cash, investments and loans. The formation of ISII provides the Company with the capability to raise capital in a tax efficient manner for future business opportunities if desired. The formation of ISII resulted in an estimated effective income tax rate of 36% for the first six months of 2000 compared with 40.5% for the year-earlier period. OPERATING SEGMENT RESULTS For reporting purposes, the Company aggregates its operating activities into four principal operating segments: Commercial Banking, Emerging Growth, Syndicated Finance and Other. See - "NOTE (7) Operating Segment Results." The following tables summarize the financial performance of these segments for the three and six months ended June 30, 2000 and 1999: Page 22 of 37 The Commercial Banking Segment
--------------------------------------------------------------------------------------------------------------------------------- For the three months For the six months ended June 30, ended June 30, (Dollars in thousands) 2000 1999 Change % 2000 1999 Change % --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 51,305 $ 42,773 $ 8,532 19.9% $ 96,452 $ 83,767 $ 12,685 15.1% Provision for loan losses (1) 12,842 9,479 3,363 35.5 22,950 12,308 10,642 86.5 Noninterest income 8,078 5,778 2,300 39.8 15,039 9,003 6,036 67.0 Noninterest expense 30,144 27,436 2,708 9.9 60,093 55,103 4,990 9.1 --------------------------------------------------------------------------------------------------------------------------------- Income before taxes 16,397 11,636 4,761 40.9 28,448 25,359 3,089 12.2 Income taxes 5,813 4,784 1,029 21.5 10,084 10,273 (189) (1.8) --------------------------------------------------------------------------------------------------------------------------------- Net income $ 10,584 $ 6,852 $ 3,732 54.5% $ 18,364 $ 15,086 $ 3,278 0.2 --------------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,705,151 $2,408,174 $ 296,977 12.3% $2,688,832 $2,351,580 $ 337,252 14.3% Average nonaccrual (3) 30,920 41,161 (10,241) (24.9) 30,460 36,569 (6,109) (16.7) Average assets 2,779,029 2,469,725 309,304 12.5 2,760,727 2,403,280 357,447 14.9 Average deposits 1,586,556 1,453,315 133,241 9.2 1,576,599 1,463,100 113,499 7.8 ---------------------------------------------------------------------------------------------------------------------------------
(1) Provision expense for the three months months ended June 30, 2000, includes $6.8 million related to a syndicated credit administered in a regional banking office. Provision expense for the six months ended June 30, 2000, includes $8.8 million related to this credit. (2) Excluding nonaccrual loans. (3) Average nonaccrual loan balance includes $8.8 million related to a syndicated credit administered in a regional banking office until it was charged off in May 2000. -------------------------------------------------------------------------------- The Commercial Banking Segment consisting of the Company's middle market, residential tract construction, entertainment and small business lending ("SBA") operations accounted for the majority of the growth in average loans for the current quarter and year-to-date compared with the prior year. Most of the growth occurred in tract construction loans which increased by $170 million, or 52%, for second quarter 2000 compared with the year-earlier quarter. Tract construction lending continues to grow despite higher mortgage rates due to continuing strength in the California real estate market coupled with the Company's focus on a select group of private homebuilders. The remaining loan growth occurred primarily in middle market lending. Approximately 90% of the commercial banking portfolio is prime based, resulting in higher interest income as prime rate increases. Loan growth has also led to higher loan fee income. Average deposits balances for the Commercial Banking Segment increased 9% and 8% for the three and six months ended June 30, 2000, respectively, compared with the year-earlier periods. The increase in loan loss provision for the current quarter and year-to-date compared with a year ago is the result of higher charge-offs. The charge-offs are not concentrated in any one industry. The provision for the first half of 2000 includes $8.8 million associated with a nationally syndicated loan that was administered in a regional office due to a deposit relationship. This loan was charged off in the second quarter. The reduction in nonaccrual loan balances compared with the year-earlier period is due in part to the sale of film production loans from the Lewis Horwitz Organization to ICII in the fourth quarter of 1999. Although service charge income was relatively flat compared with the prior year, noninterest income increased due to growth in other fees such as international fees, leasing fees and referral fees related to SBA lending. The Company continues to develop and introduce new cash management products, including internet-based products, that are expected to result in increased fee income. Page 23 of 37 The Emerging Growth Segment (including IVI and ICC)
--------------------------------------------------------------------------------------------------------------------------------- For the three months For the six months ended June 30, ended June 30, (Dollars in thousands) 2000 1999 Change % 2000 1999 Change % --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 13,668 $ 8,272 $ 5,396 65.2% $ 26,689 $ 15,590 $ 11,099 71.2% Provision for loan losses 4,430 423 4,007 947.3 5,435 2,388 3,047 127.6 Noninterest income 12,806 4,082 8,724 213.7 29,134 8,550 20,584 240.7 Noninterest expense 9,966 6,605 3,361 50.9 20,335 13,481 6,854 50.8 --------------------------------------------------------------------------------------------------------------------------------- Income before taxes 12,078 5,326 6,752 126.8 30,053 8,271 21,782 263.4 Income taxes 4,281 2,190 2,091 95.5 10,654 3,351 7,303 217.9 --------------------------------------------------------------------------------------------------------------------------------- Net income $ 7,797 $ 3,136 $ 4,661 148.6% $ 19,399 $ 4,920 $ 14,479 294.3% --------------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 411,081 $341,439 $69,642 20.4% $ 392,302 $337,467 $ 54,835 16.2% Average nonaccrual loans 6,915 4,806 2,109 43.9 5,362 5,435 (73) (1.3) Average assets 442,806 353,967 88,839 25.1 418,870 350,492 68,378 19.5 Average deposits 1,009,548 521,527 488,021 93.6 1,095,857 487,151 608,706 125.0 --------------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ---------------------------------------------------------------------------------------------------------------------------------
The Emerging Growth Segment ("EGD"), serving companies backed by venture capitalists, contributed 38% of consolidated net income for the three months ended June 30, 2000, up from 16% of consolidated net income for the year-earlier quarter. For the first half of 2000, EGD contributed 49% of consolidated net income compared with 14% for the year-earlier period. The growth in EGD's net income is largely due to increased income realized from warrants and equity investments in emerging growth companies and venture capital funds. Income derived from these activities increased to $11.1 million for second quarter 2000 from $4.0 for the year-earlier quarter. On a year-to-date basis, income from warrants and equity investments increased to $26.5 million from $8.2 million for the year-earlier period. The Company obtains rights to acquire stock (in the form of warrants) from certain customers as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or collateral control techniques employed by the Company to mitigate the risk of a loan becoming uncollectible. Likewise, collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. As of July 25, 2000, the last time the Company reported on unrealized warrant gains, the Company had potential unrealized gains associated with warrants and equity positions of $29.8 million. The Company expects to realize income from these activities for third quarter 2000 in an amount not less than that reported for second quarter. 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. EGD has experienced significant deposit growth in 2000 compared with the prior year. EGD's average deposit balances grew $488 million to $1.0 billion for second quarter 2000 from $522 million for the year-earlier quarter. On a year-to-date basis, average deposits grew $609 million to $1.1 billion for the six months ended June 30, 2000, from $487 million for the year-earlier period. The growth in deposits was distributed between noninterest-bearing and interest-bearing accounts. Management has observed that venture capitalists are continuing to fund emerging growth companies across a broad spectrum of industries despite recent volatility in the Nasdaq. Page 24 of 37 The Syndicated Finance Segment
----------------------------------------------------------------------------------------------------------------------------------- For the three months For the six months ended June 30, ended June 30, (Dollars in thousands) 2000 1999 Change % 2000 1999 Change % ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 7,077 $ 6,181 $ 896 14.5% $ 13,360 $ 11,928 $ 1,432 12.0% Provision for loan losses 4,876 124 4,752 - 5,207 124 5,083 - Noninterest income 492 437 55 12.6 1,120 1,090 30 2.8 Noninterest expense 1,731 1,547 184 11.9 3,448 3,072 376 12.2 ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 962 4,947 (3,985) (80.6) 5,825 9,822 (3,997) (40.7) Income taxes 341 2,034 (1,693) (83.2) 2,065 3,979 (1,914) (48.1) ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 621 $ 2,913 $ (2,292) -78.7% $ 3,760 $ 5,843 $ (2,083) (35.6)% ---------------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 542,346 $ 605,579 $ (63,233) -10.4% $ 540,974 $605,198 $(64,224) (10.6)% Average nonaccrual loans 11,261 - 11,261 100.0 7,647 - 7,647 100.0 Average assets 558,540 608,522 (49,982) (8.2) 553,662 607,677 (54,015) (8.9) Average deposits 16,767 5,619 11,148 198.4 15,966 8,512 7,454 87.6 ---------------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. -----------------------------------------------------------------------------------------------------------------------------------
The Syndicated Finance Segment includes the Syndicated Finance and Merchant Banking Divisions. Both divisions originate loans principally on an indirect basis through other financial institutions. The Company's recent adverse credit experience with a limited number of syndicated credits is consistent with banking industry experience. These loans accounted for $13.5 million of the $20.3 million increase in total nonaccrual loans compared with March 31, 2000. Syndicated credits also accounted for the majority of the increase in net charge-offs for the quarter, $13.3 million of total net charge-offs of $20.6 million. Second quarter and year-to-date charge-offs for the Syndicated Finance Segment include $8.8 million related to a nationally syndicated credit administered in a regional banking office due to a deposit relationship. For the year, net charge-offs of syndicated credits comprised $13.3 million of total net charge-offs of $25.6 million. The increase in charge-offs led to the higher loan loss provisions for the quarter and year-to-date. Management believes that these loans are adequately reserved. The Company's primary focus has been to establish strong commercial banking relationships with borrowers that enhance its deposit base and generate fee income in addition to yielding interest income through credit products. When deposit growth from title and escrow customers began to outpace relationship- based loan growth in the mid 1990's, the Company began investing a portion of this liquidity in nationally syndicated credits to maximize net interest income. Recognizing that purchased loans provide no supplemental noninterest income and that these credits cannot be monitored as closely as companies with which the Company has a direct relationship, management is currently emphasizing relationship-based loans and, accordingly, does not plan on increasing its nonrelationship-based syndicated loan portfolio. Page 25 of 37 The Syndicated Finance portfolio is well diversified by industry as illustrated in the following table: ---------------------------------------------------------------- Distribution of Syndicated Finance Loan Portfolio June 30, 2000 ---------------------------------------------------------------- Industry Percent ---------------------------------------------------------------- Manufacturing 34% Service 28 Gaming 15 Retail and restaurants 15 Heath care and related 8 ---------------------------------------------------------------- Total 100% ---------------------------------------------------------------- The Other Segment
---------------------------------------------------------------------------------------------------------------------------------- For the three months For the six months ended June 30, ended June 30, (Dollars in thousands) 2000 1999 Change % 2000 1999 Change % ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 13,673 $ 8,267 $ 5,406 65.4% $ 27,874 $ 17,036 $ 10,838 63.6% Provision for loan losses 452 - 452 100.0 902 - 902 100.0 Noninterest income 18,384 26,305 (7,921) (30.1) 29,032 39,948 (10,916) (27.3) Noninterest expense 28,982 22,837 6,145 26.9 58,160 43,224 14,936 34.6 ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 2,623 11,735 (9,112) - (2,156) 13,760 (15,916) (115.7) Income taxes 1,126 4,825 (3,699) - (447) 5,574 (6,022) (108.0) ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,497 $ 6,910 $ (5,413) - $ (1,709) $ 8,186 $ (9,894) -120.9% ---------------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 452,576 $ 454,417 $ (1,841) -0.4% $ 435,518 $ 477,195 $ (41,677) -8.7% Average nonaccrual loans 1,042 219 823 375.8 1,069 82 987 - Average assets 2,590,219 2,131,878 458,341 21.5 2,656,281 2,115,921 539,528 25.5 Average deposits 2,841,643 2,840,482 1,161 0.0 2,784,775 2,817,516 (32,741) (1.2) ---------------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ----------------------------------------------------------------------------------------------------------------------------------
The Other Segment includes activities not individually material such as the Company's 56% ownership in OPAY, the Merchant Card Division and nonbank subsidiaries of the holding company. The balance sheet of the Other Segment reflects the loan and deposit balances of the Financial Services Division, and the investment balances of the Treasury Management Division. The income and costs associated with these balances are fully allocated to the other operating segments for measuring segment profitability. The decrease in noninterest income compared with the year-earlier periods is due to gains totaling $14.2 million on the sales of the trust business and ICII common stock reported for the six months ended June 30, 1999. Merchant card fees and commissions on the sale of nonproprietary mutual funds by the Company's broker/dealer grew to $8.2 million and $6.1 million for the six months ended June 30, 2000, respectively, from $4.7 million and $2.7 million for the year-earlier period, respectively. The average balance of customer funds directed to nonproprietary mutual funds increased to $2.6 billion for June 2000 from $2.3 billion a year ago. The Company's after-tax net income includes losses of $3.3 million and $6.0 million for the three and six months ended June 30, 2000, respectively, related to its investment in OPAY. OPAY's operating results are reported on a consolidated basis. See - "NOTE (6) Official Payments Corporation." The following table summarizes the impact of the Company's investment in OPAY by income statement category: Page 26 of 37 OPAY
================================================================================================================================= Three months ended Six months ended June 30, June 30, (Dollars in thousands, except per share amounts) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 628 $ (9) $ 1,756 $ (14) Noninterest income 3,405 928 3,565 1,216 Salary and benefits 8,919 493 13,987 753 Other noninterest expense 4,143 230 9,376 343 Gain from exercise of OPAY stock options 7 - 922 - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income before minority interest (9,022) 196 (17,120) 106 Minority interest in loss (income) 3,954 (39) 7,884 (21) --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income before taxes (5,068) 157 (9,236) 85 Income tax (benefit) expense (1,788) 68 (3,262) 38 --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (3,280) $ 89 $ (5,974) $ 47 ================================================================================================================================= Impact on diluted earnings per share $ (0.07) $ - $ (0.13) $ - =================================================================================================================================
Salaries and benefits expense reported for second quarter 2000 include a $4 million one-time charge, before minority interest, related to the recent departure of OPAY's chief financial officer. OPAY is expected to report operating losses for the remainder of the year. BALANCE SHEET ANALYSIS Investment Securities The following tables provide comparative period-end balances of securities held to maturity and securities available for sale for the periods indicated:
------------------------------------------------------------------------------------------------------------------------ Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------ June 30, 2000 Industrial development bonds $ 3,661 $ - $ - $ 3,661 ------------------------------------------------------------------------------------------------------------------------ Total $ 3,661 $ - $ - $ 3,661 ======================================================================================================================== December 31, 1999 Industrial development bonds $ 3,744 $ - $ - $ 3,744 ------------------------------------------------------------------------------------------------------------------------ Total $ 3,744 $ - $ - $ 3,744 ========================================================================================================================
Page 27 of 37
======================================================================================================================== Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------ June 30, 2000 U.S. Treasury and federal agencies $ 879,799 $ - $ (5,892) $ 873,907 Commercial Paper 68,571 68,571 Mutual funds 43,703 - - 43,703 Other securities 34,451 11,186 - 45,637 ------------------------------------------------------------------------------------------------------------------------ Total $1,026,524 $ 11,186 $ (5,892) $1,031,818 ======================================================================================================================== 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 ========================================================================================================================
Gross gains totaling $12.0 million and gross losses totaling $636,000, respectively, were realized on sales of securities available for sale during the six months ended June 30, 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 at June 30, 2000, totaling $35.5 million, include the remaining $19.0 million balance of Lewis Horwitz Organization ("LHO") loans held for sale and $16.5 million of SBA loans held for sale. The LHO loans were reclassified to the held for sale category in October 1999 following finalization of an agreement to sell the loans to ICII at a fixed price (effectively the book value less the allocated allowance less the interest spread over the sale period as defined in the agreement) over a 15-month period. The balance of loans made to ICII by Imperial Bank to facilitate their purchase of LHO loans was $8.1 million as of June 30, 2000. Management expects the remaining loans to be either paid off by the borrower in the normal course of business or purchased by ICII on or before December 29, 2000. The loan to ICII is performing in accordance with the terms of the loan agreement. Loans The following table provides a summary of loans by category for the periods indicated:
======================================================================================================================== (Dollars in thousands) June 30, 2000 December 31, 1999 June 30, 1999 ------------------------------------------------------------------------------------------------------------------------ Balance Percent Balance Percent Balance Percent Commercial $ 3,297,452 83.42% $ 3,016,695 83.52% $ 3,066,214 85.05% Loan secured by real estate: Real estate term loans 85,823 2.17 100,012 2.77 124,308 3.45 Residential tract construction loans 530,869 13.43 457,337 12.66 377,067 10.46 Consumer loans 38,570 0.98 38,104 1.05 37,545 1.04 ------------------------------------------------------------------------------------------------------------------------ Gross loans 3,952,714 100.00% 3,612,148 100.00% 3,605,134 100.00% Less allowance for loan losses (80,535) (71,677) (70,200) ------------------------------------------------------------------------------------------------------------------------ Total loans $ 3,872,179 $ 3,540,471 $ 3,534,934 ========================================================================================================================
Total loans grew to $4.0 billion at June 30, 2000, an increase of approximately 9% from $3.6 billion at December 31, 1999, and an increase of 10% from June 30, 1999. Management anticipates loan growth in the 3-4% range for the remainder of the year. CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned Nonaccrual loans, which include loans 90 days or more past due, totaled $56.1 million, or 1.42% of total loans, at June 30, 2000, compared with $27.6 million, or 0.76% of total loans, at December 31, 1999, and $49.6 million, or 1.38% of Page 28 of 37 total loans, at June 30, 1999. The increase in nonaccrual loans compared with year-end and a year ago is largely due to a limited number of loans in the Syndicated Finance Segment. See - "Operating Segment Results." The remaining nonaccrual loans at quarter end consisted of commercial loans individually no larger than $3.5 million. The following table provides information on nonaccrual loans, restructured loans and real estate and other assets owned for the periods indicated:
----------------------------------------------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, (Dollars in thousands) 2000 2000 1999 1999 1999 ----------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 55,683 $ 35,408 $ 27,020 $ 31,630 $ 39,032 Real estate 461 480 569 496 10,576 Loans held for sale at fair market value - - - 10,909 - ----------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 56,144 35,888 27,589 43,035 49,608 ======================================================================================================================= Restructured loans 6,401 6,914 4,081 4,640 5,704 ======================================================================================================================= Real estate and other assets owned: Real estate and other assets owned, gross 826 935 935 1,237 1,741 ----------------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net 826 935 935 1,237 1,741 ----------------------------------------------------------------------------------------------------------------------- Total $ 63,371 $ 43,737 $ 32,605 $ 48,912 $ 57,053 =======================================================================================================================
The $28.6 million net increase in nonaccrual loans at June 30, 2000, compared with December 1999 reflects new loans totaling $83.1 million placed on nonaccrual status offset by $24.7 million in charge-offs, $19.3 million in payments on nonaccrual loans and $10.5 million of nonaccrual loans returning to accrual status. The Company's focus on business customers generates a relatively large average loan size that contributes to the variability of its nonaccrual asset totals. Restructured loans, loans that have had their original terms modified, totaled $6.4 million, $4.1 million and $5.7 million at June 30, 2000, December 31, 1999, and June 30, 1999, respectively. All restructured loans were performing in accordance with their modified terms as of June 30, 2000. Real estate and other assets owned ("OREO") include properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the collateral, less the estimated costs of disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for loan losses as a charge-off. Any subsequent declines in the fair value of the property after the date of transfer are recorded through a provision for write-downs on OREO. OREO totaled $826,000, $935,000 and $1.7 million at June 30, 2000, December 31, 1999 and June 30, 1999, respectively. There were no valuation allowances on OREO for these reporting dates. Two properties were sold during the six months ended June 30, 2000. A loss of $2,600 was recorded on these sales. All loans on nonaccrual status are considered to be impaired; however, not all impaired loans are on nonaccrual status. Impaired loans on accrual status must meet the criteria of all payments being current and the loan underwriting must support the debt service requirements. Factors that contribute to a performing loan being classified as impaired include substantial doubt about the ability of the borrower to make all principal and interest payments under the original terms of the loan, a below market interest rate, delinquent taxes and debts to other lenders that cannot be serviced from existing cash flow. Page 29 of 37 The following table contains information for loans classified as impaired:
==================================================================================================== Net Carrying Specific Net (Dollars in thousands) Value Allowance Balance ---------------------------------------------------------------------------------------------------- June 30, 2000 Loans with specific allowances $ 49,507 $ (18,804) $ 30,703 Loans without specific allowances 19,182 - 19,182 ---------------------------------------------------------------------------------------------------- Total $ 68,689 $ (18,804) $ 49,885 ==================================================================================================== 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 ====================================================================================================
Impaired loans were classified as follows:
==================================================================================================== June 30, December 31, (Dollars in thousands) 2000 1999 ---------------------------------------------------------------------------------------------------- Current $ 10,701 $ 12,920 Past due 1,844 248 Nonaccrual 56,144 27,589 ---------------------------------------------------------------------------------------------------- Total $ 68,689 $ 40,757 ====================================================================================================
Loans classified as impaired totaled $68.7 million at June 30, 2000, compared with $40.8 million at December 31, 1999. The $27.9 million net increase in impaired loans at June 30, 2000, compared with December 1999 reflects loans totaling $83.1 million newly classified as impaired offset by $24.7 million in charge-offs, $20.9 million in payments on impaired loans and $9.6 million of loans removed from impaired status. The Company's average recorded investment in impaired loans for the first six months of 2000 was $51.3 million. Interest income collected on impaired loans totaled approximately $620,000 for the first half of 2000, compared with $1.3 million for the year-earlier period. Allowance and Provision for Loan Losses The allowance for loan losses is maintained at a level considered appropriate by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. The Company's Credit Review Department performs an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company utilizes a migration model, a technique that estimates the inherent loss in the portfolio by applying loss factors to grades of loans, to determine the level of the allowance and provision for loan losses. The migration model utilizes an average loss rate over a rolling twelve quarter base period and incorporates a standard deviation analysis to provide probabilities for loss experience. The loss factors used in the model are updated quarterly. The primary qualitative factors considered in the assessment of loss factors are: changes in local economic and business conditions, including the condition of specific market segments; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; the existence and effect of any concentrations within the portfolio and changes in the level of such concentrations; changes in the trend of delinquencies and in the volume and nature of adversely graded nonaccrual and impaired loans; and external factors such as competition and legal and regulatory requirements that could potentially impact the level of credit losses in the portfolio. Management believes that the allowance for loan losses at June 30, 2000, is adequate. Future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At June 30, 2000, the allowance for loan losses was $80.5 million, or 2.04% of total loans, compared with $71.7 million, or 1.98% of total loans at December 31, 1999, and $70.2 million, or 1.95% of total loans, at June 30, 1999. Page 30 of 37 The allowance for loan losses represented 143% of nonaccrual loans at June 30, 2000, compared with 260% of nonaccrual loans at December 31, 1999, and 142% of nonaccrual loans at June 30, 1999. The following table summarizes activity in the allowance for loan losses:
====================================================================================================================== Six months ended June 30, (Dollars in thousands) 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Balance, beginning of period $ 71,677 $ 62,649 ---------------------------------------------------------------------------------------------------------------------- Loans charged off: Commercial (28,100) (8,159) Real estate - (195) Consumer (237) (9) ---------------------------------------------------------------------------------------------------------------------- Total charge-offs (28,337) (8,363) ---------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 2,674 1,022 Real estate 21 67 Consumer 6 5 ---------------------------------------------------------------------------------------------------------------------- Total recoveries 2,701 1,094 ---------------------------------------------------------------------------------------------------------------------- Net loans charged off (25,636) (7,269) Provision for loan losses 34,494 14,820 ---------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 80,535 $ 70,200 ====================================================================================================================== Loans outstanding, end of period 3,952,714 3,605,134 ---------------------------------------------------------------------------------------------------------------------- Average loans outstanding 4,115,148 3,859,024 ====================================================================================================================== Ratio of net charge-offs to average loans (annualized) 1.25% 0.38% Ratio of allowance for loan losses to loans outstanding at June 30 2.04 1.95 Ratio of allowance for loan losses to nonaccrual loans at June 30 143.44 141.51 Ratio of provision for loan losses to net charge-offs 134.55 203.88 ======================================================================================================================
Asset Quality by Type of Operation The Company's exposure to credit quality varies by type of operation. Management considers the exposure to credit risk, potential returns and allocated financial capital in operating the Company. Management believes that it is not appropriate to use the aggregate credit quality statistics to understand the credit exposure of the Company's operations. The Company devotes capital to its principal subsidiary, Imperial Bank, to two operating subsidiaries of Bancorp and the Bank, Imperial Credit Corporation ("ICC") and Imperial Ventures, Inc., ("IVI"), respectively, as well as to the Company itself. The activities of ICC and IVI include loans to and investments in emerging companies. The underwriting standards for these activities differ from those used by the Bank and the expected returns and possible credit losses are each higher than what would be expected from application of the Bank's loan underwriting criteria. Based upon these circumstances, the Company limits the amount of capital allocated to the type of lending and investing undertaken by ICC and IVI. A portion of the Bank's nonaccrual loans are covered by government guarantees and, accordingly, management excludes such loans from its assessment of Bank credit quality. In addition, as discussed above in "Operating Segment Results," the Syndicated Loan Segment has specialized underwriting. As contrasted with the segment disclosure, the following supplemental analysis reflects material nationally syndicated credits managed in regional offices (primarily because of deposit relationships) in the syndicated loan results. Management's supplemental analysis of credit quality by business activity is provided in the tables below: Page 31 of 37
--------------------------------------------------------------------------------------------------------------------- For the six months ended Syndicated SBA Loans All Other Bank IVI and Consolidated June 30, 2000 Segment (2) (3) Operations Total Bank ICC Total --------------------------------------------------------------------------------------------------------------------- Average loans and equity investments (1) $ 540,989 $ 84,430 $ 3,467,843 $ 4,093,262 $40,840 $ 4,134,102 Average nonaccrual loans 10,596 2,296 31,619 44,511 27 44,538 Nonaccrual loans at June 30 23,984 1,664 26,196 51,844 4,300 56,144 Average allocated capital - - - 446,290 46,510 492,800 Net charge-offs 13,317 25 11,594 24,936 700 25,636 YTD warrant and equity investment income - - 10,216 10,216 16,288 26,504 Avg nonaccrual loans/avg loans 1.92% 2.65% 0.90% 1.07% 0.12% 1.07% Net charge-offs as a percentage of total average loans (annualized) 4.86 0.06 0.66 1.21 6.11 1.23 ---------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include an $8.8 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was charged-off in May 2000. (3) Approximately 75% of SBA balances are backed by a U.S. Government guarantee. --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------- For the six months ended Syndicated SBA Loans All Other Bank IVI and Consolidated June 30, 1999 Segment (2) (3) Operations Total Bank ICC Total --------------------------------------------------------------------------------------------------------------------- Average loans and equity investments (1) $ 603,377 $ 19,709 $ 3,192,742 $ 3,815,828 $21,316 $ 3,837,144 Average nonaccrual loans 3,559 195 38,305 42,059 27 42,086 Nonaccrual loans at June 30 - 1,072 48,536 49,608 - 49,608 Average allocated capital - - - 372,416 20,880 393,296 Net charge-offs (recoveries) 4,500 (35) 2,804 7,269 - 7,269 YTD warrant and equity investment income - - 7,382 7,382 846 8,228 Avg nonaccrual loans/avg loans 0.59% 0.98% 1.18% 1.09% 0.18% 1.08% Net charge-offs as a percentage of total average loan (annualized) 1.50 (0.35) 0.17 0.38 - 0.38 ---------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include a $4.5 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was fully charged-off by June 30, 1999. (3) Approximately 75% of SBA balances are backed by a U.S. Government guarantee. -------------------------------------------------------------------------------- Management's observations from the above analyses are that (1) the current year's annualized charge-off rate for the All Other Bank Operations (representing approximately 84% of consolidated loans) is only 66 basis points, approximately one-half the aggregate rate of 123 basis points, (2) the highest charge-off rate is in the IVI/ICC subsidiaries and is acceptable to management because the warrant and investment gains of approximately $16 million substantially exceed the credit risk from this type of investing activity (approximately $700,000 in charge-offs), (3) the increase in the annualized net charge-off rate for syndicated loans is reflective of the matters discussed above, and (4) the 1999 net-charge-off rate for the All Other Bank Operations was at an extremely low level (17 basis points) and the current year's rate (approximately 66 basis points) is more indicative of the bank's historical results. CAPITAL RESOURCES AND REGULATORY MATTERS At June 30, 2000, shareholders' equity increased to $508.5 million from $473.4 million at December 31, 1999, and $406.6 million at June 30, 1999. During the six months ended June 30, 2000, shareholders' equity was reduced by $9.2 million due to common stock repurchases under the Company's Stock Repurchase Program. The Company repurchased and retired 488,300 shares of its common stock during the first half of 2000. At June 30, 2000, 1,700,824 shares remain available for repurchase under the Company's Stock Repurchase Program. Page 32 of 37 Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiaries are financially sound. The Company and its bank subsidiaries are subject to risk-based capital regulations promulgated by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on- and off-balance sheet and place increased emphasis on common equity. Federal law requires each federal banking agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier I and total capital ratios meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well capitalized". Tier I capital basically consists of common shareholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Company's Tier I and total capital ratios at June 30, 2000, were 10.75% and 13.80% respectively, compared with 9.64% and 12.96%, respectively, at June 30, 1999. Capital Ratios for Imperial Bancorp and Imperial Bank/(1)/
------------------------------------------------------------------------------------------------------------------------- June 30, 2000 ------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized For Capital Adequacy Under Prompt Corrective (Dollars in thousands) Actual Purposes Action Provisions ------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets): Company $766,240 13.80% $ 444,286 8.00% $ 555,358 10.00% Bank 689,947 12.59 438,385 8.00 547,982 10.00 Tier I Capital (to risk-weighted assets): Company 597,240 10.75 222,143 4.00 333,215 6.00 Bank 521,864 9.52 219,193 4.00 328,789 6.00 Leverage (to average assets): Company 597,240 9.31 192,408 3.00 320,681 5.00 Bank 521,864 8.24 190,072 3.00 316,786 5.00 -------------------------------------------------------------------------------------------------------------------------
/(1)/ Includes common shareholders' equity (excluding unrealized gains on securities available for sale) less goodwill and other disallowed intangibles. Risk-weighted assets for the Company and Imperial Bank were $5,553.6 million and $5,479.8 million, respectively, at June 30, 2000. Risk-weighted assets for the Company and the Bank were $4,911.9 million and $4,841.9 million at June 30, 1999, respectively. In April 1999, Imperial Bank issued $100 million of 8.5% 10-year Subordinated Capital Notes. The notes qualify as Tier 2 capital under regulatory guidelines. In May 2000, the Company redeemed $10.0 million of its Capital Securities. These securities qualify as Tier 1 capital under regulatory guidelines. In addition to the risk-weighted ratios, all banks are required to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3 percent. The ratio is defined as Tier I capital to average total assets for the most recent quarter. The Company's leverage ratio was 9.31% at June 30, 2000, compared with 8.50% at June 30, 1999, well in excess of minimum regulatory requirements. The Company's declaration filed with the Federal Reserve to become a Financial Holding Company ("FHC") became effective on May 12, 2000. A 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, primarily in the areas of insurance and investment banking, that may be conducted by an FHC and its affiliated companies. The Company plans to selectively pursue opportunities in the investment banking area. Page 33 of 37 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 $6.2 billion at June 30, 2000, from $5.9 billion at December 31, 1999, and $5.7 billion at June 30, 1999. Demand deposits increased to $3.4 billion, or 55% of total deposits, at June 30, 2000, from $2.5 billion, or 43% of total deposits at December 31, 1999, and $3.3 billion, or 58% of total deposits, at June 30, 1999. See - "Operating Segment Results." The Company also uses other methods of meeting its liquidity requirements including short-term borrowings in the form of federal funds purchased, repurchase agreements, commercial paper, Treasury tax and loan notes ("TT & L") and occasionally the sale of securities held in its available for sale portfolio. Short-term borrowings decreased to $14.4 million at June 30, 2000, from $156.7 million at December 31, 1999, and $170.7 million at June 30, 1999. The large decrease in short-term borrowings compared with the earlier periods is due to a reduction in TT & L balances. Management made the decision to reduce the level of TT & L borrowings in order to use the collateral in connection with the formation of ISII. The Company has recently been in a position of having excess liquidity due primarily to strong demand deposit growth that surpassed loan funding requirements. The Company has a policy of maintaining net liquid assets to total deposits (the liquidity ratio) of at least 20%. The liquidity ratio averaged 28% for the first half of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Management The primary objective of the asset liability management process is to manage the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. In order to manage its interest rate sensitivity, the Company has adopted policies that attempt to protect pretax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates change. The Company's Asset Liability Committee ("ALCO") chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pretax net interest income and net interest margin. Each month, the Company assesses its overall exposure to potential changes in interest rates and the impact such changes may have on net interest income and the net interest margin by simulating various interest rate scenarios over future time periods. Through the use of these simulations, the Company can approximate the impact these projected rate changes may have on its entire on- and off-balance sheet positions, on any particular segment of the balance sheet, and on overall profitability. The majority of the Company's loan portfolio is variable rate, therefore, net interest income will increase during a period of rising interest rates and decrease during a period of declining interest rates. The Company's net interest margin is sensitive to changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans, are generally tied to the prime rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR. The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's prime based assets and LIBOR correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate floors, caps and swaps. RISK FACTORS AFFECTING FUTURE RESULTS This report contains statements that may be considered forward-looking. Actual results could differ materially from the results indicated by these statements because of many factors that are beyond our ability to control or predict. The following is a list of primary risks facing the Company: Page 34 of 37 Interest Rate Risk: The Company's profitability is primarily dependent on the net interest spread between its earning assets and the related funding sources. A large portion of its earning asset base relates to the prime interest rate. Future reductions in the prime interest rate could have material and adverse effects on the Company's profitability. A large portion of its funding sources are non-interest bearing and face the possibility of disintermediation either to a competing bank - creating a loss of market share and/or a need for replacement - or disintermediation into an interest-bearing account - causing a significant reduction to net interest income. The Company employs financial derivatives to hedge interest rate risk, specifically a $2 billion floor in effect each quarter through September 2001. If the cost of the hedges increases, the Company would either have to pay the increased cost to maintain the hedge or find alternative methods to mitigate interest rate risk. Credit Risk: The Company generally faces risk from its borrower base in that they may fail to perform in accordance with the terms of their loans, especially the full repayment of loan principal. The Company has adopted underwriting standards in an effort to minimize these risks. The Company's profitability could be both materially and adversely effected should it experience increased loan defaults and charge-offs. Regulatory Risk: As a part of the banking industry, the Company is subject to extensive regulatory control and attention. Legislation such as the repeal of the Glass-Steagal Act in the recently adopted Gramm-Leach-Bliley Act have moved the banking industry and financial intermediaries to the forefront in terms of regulatory attention and concern. Limitations concerning client activity, liquidity requirements, capital requirements, transactions with affiliates, business focus, tax consequences, interstate banking and treatment of subsidiaries could have material and adverse impact on profitability. Local and National Economic Risk: The Company has broadened its lending focus with expansion into Austin, Boston, Dallas, Denver, Kirkland, New York, Phoenix, Raleigh-Durham and Reston. However, the vast majority of clients and business still come from California. Therefore, the Company faces some concentrated risks concerning future economic status for California along with the nation as a whole. A significant reduction in demand for the Company's products and increased credit losses could result from an economic slowdown either locally or nationally. Subsidiary Risk: The Company is a 56% owner of Official Payments Corporation ("OPAY"), a leading provider of electronic payment options to government entities. OPAY is in the early stages of operations and expects to incur losses from operations in the future, of which the Company will record its proportionate interest. Currently, OPAY generates most of its revenues from processing income tax payments. Tax payments are seasonal in nature and produce inconsistent earnings streams. These inconsistent earnings will be reflected in the Company's financial statements and press releases. OPAY is extremely dependent on maintaining its relationship with the IRS to maintain future revenues. Loss of IRS processing would severely limit OPAY's ability to earn consistent future revenues and establish market share and name recognition. Warrants and Equity Investments Income Risk: In the past, the Company has been able to generate substantial income derived from the sale of stock, obtained by the Company through the exercise of warrants received from certain clients as provided in the loan terms. The Company has also realized income from equity investments in emerging growth companies and investments in venture capital funds. Many factors may influence the ability to collect future income from these sources such as equity market fluctuations, market acceptance for IPOs, the client's ability to establish and maintain a successful company and the unexercised expiration of the warrant agreements. The nature and timing of these factors could create situations that would greatly reduce 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. Page 35 of 37 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. 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. On June 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB No. 133." SFAS No. 138 addresses a limited number of issues causing implementation difficulties for numerous entities that are required to apply SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB statement No. 133, and Statement 138," continues to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management is evaluationg the impact of the adoption of SFAS No. 133 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 and Use of Proceeds None ITEM 3. Defaults upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Index
Exhibit Number Description 10.1 Amended Employment Agreement between U.S. Audiotex Corporation, Imperial Bank and Thomas R. Evans 27.1 Financial Data Schedule
Page 36 of 37 All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) No reports have been filed on Form 8-K for the quarter ended June 30, 2000. 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: August 14, 2000 By:/s/ Dennis J. Lacey ----------------------- Dennis J. Lacey Executive Vice President and Chief Financial Officer By:/s/ Paul E. Adkins ----------------------- Paul E. Adkins Senior Vice President and Controller Page 37 of 37