-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRgNp4Ebct3OoblWldDps23Kd4j5Md1ZAGC4nsAurw6S4EMCXJRuFTR/Xd5PAgpi J0ZEOJ8sScMJohDPqBu3Gg== /in/edgar/work/0000944209-00-001739/0000944209-00-001739.txt : 20001115 0000944209-00-001739.hdr.sgml : 20001115 ACCESSION NUMBER: 0000944209-00-001739 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL BANCORP CENTRAL INDEX KEY: 0000049899 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 952575576 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08196 FILM NUMBER: 765053 BUSINESS ADDRESS: STREET 1: 9920 S LA CIENEGA BLVD CITY: INGLEWOOD STATE: CA ZIP: 90301 BUSINESS PHONE: 3104175600 MAIL ADDRESS: STREET 2: PO BOX 92991 CITY: LOS ANGELES STATE: CA ZIP: 90009 10-Q 1 0001.txt FORM 10-Q (PERIOD ENDED SEPTEMBER 30, 2000) As filed with the Securities and Exchange Commission on November 14, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 0-7722 IMPERIAL BANCORP (Exact name of registrant as specified in its charter) California 95-2575576 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 9920 South La Cienega Boulevard Inglewood, California 90301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Shares outstanding at November 8, 2000 Common stock, no par 44,373,855 This report contains a total of 38 pages. 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 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 34 Part II Other Information Item 1. Legal Proceedings 37 Item 2. Changes in Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 5. Other Information 37 Item 6. Exhibits and Reports on Form 8-K 37 Signatures 38
Page 1 of 38 PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
========================================================================================================================== September 30, December 31, 2000 1999 (Dollars in thousands) (Unaudited) ========================================================================================================================== ASSETS Cash and due from banks $ 439,980 $ 307,770 Federal funds sold and securities purchased under resale agreements 1,395,000 1,555,000 Trading instruments 101,427 86,540 Securities available for sale, at fair value 1,070,329 1,040,285 Securities held to maturity (fair value of $3,620 and $3,744 for 2000 and 1999, respectively) 3,620 3,744 Loans held for sale (fair value of $82,462 and $83,613 for 2000 and 1999, respectively) 79,789 83,044 Loans: Loans, net of unearned income and deferred loan fees 4,141,848 3,612,148 Less allowance for loan losses (90,088) (71,677) - -------------------------------------------------------------------------------------------------------------------------- Total net loans 4,051,760 3,540,471 - -------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 53,232 41,245 Accrued interest receivable 53,759 33,565 Real estate and other assets owned, net 826 935 Deferred tax asset 32,166 26,092 Other assets 160,066 138,011 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 7,441,954 $ 6,856,702 ========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 3,514,497 $ 2,538,850 Savings 19,401 21,075 Money market 1,135,499 1,492,138 Time - under $100 128,893 154,597 Time - $100 and over 1,727,915 1,697,940 - -------------------------------------------------------------------------------------------------------------------------- Total deposits 6,526,205 5,904,600 - -------------------------------------------------------------------------------------------------------------------------- Accrued interest payable 18,877 15,883 Income taxes payable 16,884 - Federal funds purchased and securities sold under repurchase agreements 9,538 55,139 Other short-term borrowings 43,460 101,524 Long-term borrowings: Notes and debentures 99,459 99,411 Other borrowed funds 8,247 4,125 Capital securities of subsidiary trust: Company-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures 63,677 73,430 Minority interest 31,356 35,528 Other liabilities 119,264 93,655 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 6,936,967 6,383,295 - -------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common Stock - no par, 50,000,000 shares authorized; 43,769,436 shares at September 30, 2000, and 44,903,937 shares at December 31, 1999, issued and outstanding 372,789 312,677 Unearned employee stock ownership plan shares: 429,065 (7,453) (3,659) Deferred stock compensation (30,351) (37,615) Accumulated other comprehensive income, net of tax (108) 9,998 Retained earnings 170,110 192,006 - -------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 504,987 473,407 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 7,441,954 $ 6,856,702 ==========================================================================================================================
Page 2 of 38 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
========================================================================================================================== Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 (Dollars in thousands, except per share data) (Unaudited) (Unaudited) (Unaudited) (Unaudited) ========================================================================================================================== Interest income: Loans $ 103,311 $ 83,134 $ 290,074 $ 235,287 Trading instruments 1,910 748 5,380 2,617 Interest-bearing deposits 63 - 250 - Securities available for sale 19,882 9,719 49,378 25,740 Securities held to maturity 69 70 202 214 Federal funds sold and securities purchased under resale agreements 5,690 3,944 23,480 12,369 Loans held for sale 1,369 1,532 3,845 2,569 - -------------------------------------------------------------------------------------------------------------------------- Total interest income 132,294 99,147 372,609 278,796 - -------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 38,149 26,108 103,115 70,275 Short-term borrowings 623 955 3,351 3,114 Long-term borrowings 3,995 3,660 12,241 8,663 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 42,767 30,723 118,707 82,052 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 89,527 68,424 253,902 196,744 Provision for loan losses 19,300 6,000 53,794 20,820 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 70,227 62,424 200,108 175,924 - -------------------------------------------------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts 2,452 1,857 6,417 5,636 Trust fees - 4 - 3,382 Gain on sale of loans 312 553 1,437 812 Gain from exercise of Official Payments Corp. stock options - - 922 - Equity in net income of Imperial Credit Industries, Inc. - - - 1,644 (Loss) gain on sale of Imperial Credit Industries, Inc. stock - (3,136) - 2,255 Other service charges and fees 6,384 5,953 19,036 16,897 Merchant and credit card fees 4,816 3,231 12,987 7,972 International income and fees 5,082 2,680 13,574 8,611 Gain (loss) on sales of securities available for sale 2,308 (112) 13,639 (58) Gain on sales of trading instruments 453 982 1,523 1,365 Gain on sale of the trust business - - 2,631 8,817 Gain on exercise of warrants and related sale of equity securities 12,616 2,173 22,831 9,555 Other income 5,224 2,586 18,975 8,473 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,647 16,771 113,972 75,361 - -------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salary and employee benefits 45,333 30,250 133,310 90,492 Net occupancy expense 3,235 2,656 9,037 7,944 Furniture and equipment 4,603 3,066 12,695 8,783 Data processing 3,010 2,778 8,355 8,179 Customer services 4,773 4,519 13,644 17,099 Professional and legal fees 3,691 2,604 9,617 11,185 Business development 2,239 1,563 12,905 5,116 Other expense 9,887 7,269 27,128 20,766 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 76,771 54,705 226,691 169,564 - -------------------------------------------------------------------------------------------------------------------------- Minority interest in loss of consolidated subsidiary 2,464 148 10,348 127 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 35,567 24,638 97,737 81,848 Income tax provision 12,350 9,786 34,706 32,962 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 23,217 $ 14,852 $ 63,031 $ 48,886 ========================================================================================================================== Basic earnings per share $ 0.53 $ 0.33 $ 1.41 $ 1.09 Diluted earnings per share 0.51 0.32 1.36 1.05 ==========================================================================================================================
See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------- Page 3 of 38 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
============================================================================================================================ Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 (Dollars in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited) - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 23,217 $ 14,852 $ 63,031 $ 48,886 Other comprehensive loss, net of tax: Reclassification adjustments for (gains) losses included in net income net of tax effect of ($298), ($5,909), $12 (411) - (8,144) 16 Unrealized loss on securities available for sale, net of tax effect of ($1,687), ($1,677), ($1,423), ($2,716) (2,325) (2,312) (1,962) (3,743) - ---------------------------------------------------------------------------------------------------------------------------- Total other comprehensive loss (2,736) (2,312) (10,106) (3,727) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 20,481 $ 12,540 $ 52,925 $ 45,159 ============================================================================================================================ See accompanying notes to consolidated financial statements. - ----------------------------------------------------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
============================================================================================================================ 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 2,587 - - - 2,587 Common stock repurchased (30,498) - - - (30,498) Tax benefit of employee stock option 2,971 - - - 2,971 Unearned ESOP shares and ESOP tax benefit (3,791) - - - (3,791) Deferred stock compensation - 7,264 - - 7,264 Other 142 - - - 142 Comprehensive income: Net income - - 63,031 - 63,031 Other comprehensive loss (10,106) (10,106) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) - - 63,031 (10,106) 52,925 - ---------------------------------------------------------------------------------------------------------------------------- Balance September 30, 2000 $ 365,336 $ (30,351) $ 170,110 $ (108) $ 504,987 ============================================================================================================================ See accompanying notes to consolidated financial statements. - ----------------------------------------------------------------------------------------------------------------------------
Page 4 of 38 IMPERIAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================================== Nine months ended September 30, 2000 1999 (Dollars in thousands) (Unaudited) (Unaudited) ===================================================================================================================== Cash flows from operating activities: Net income $ 63,031 $ 48,886 Adjustments for noncash charges (credits): Depreciation and amortization 10,779 9,494 Amortization of loan fees (19,586) (17,236) Provision for loan losses 53,794 20,820 Equity in net income of Imperial Credit Industries, Inc. - (1,644) Gain on sale of Imperial Credit Industries, Inc. stock - (2,255) Gain on exercise of warrants and sale of equity securities (22,831) (9,555) Gain on sale of the trust business (2,631) (8,817) Gain resulting from the exercise of OPAY stock options (922) - Other gains (2,039) (2,371) Benefit for deferred taxes (3,100) (24,489) Gain (loss) on securities available for sale (13,639) 58 Net change in trading instruments (14,887) 3,778 Net change in loans held for sale 4,692 (3,979) Net change in accrued interest receivable/payable (17,200) (3,691) Net change in income taxes receivable/payable 27,478 2,822 Net change in other assets/liabilities 2,445 (19,409) Net change in minority interest (4,172) (127) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 61,212 (7,715) - --------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from securities held to maturity 124 105 Proceeds from sales of securities available for sale 5,042,977 1,524,297 Proceeds from maturities of securities available for sale 228,755 1,431,765 Proceeds from sale of Imperial Credit Industries, Inc. stock - 61,010 Purchase of securities available for sale (5,299,627) (3,019,932) Proceeds from exercise of warrants and sale of equity securities 22,831 9,555 Proceeds from sale of the trust business 2,631 8,817 Net change in Federal funds sold and securities purchased under resale agreements 160,000 156,833 Net change in loans (545,497) (287,459) Capital expenditures (22,173) (10,492) Proceeds from sale of real estate and other assets owned 107 138 Proceeds from sale of premises and equipment 281 1,057 - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (409,591) (124,306) - --------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in demand deposits, savings, and money market accounts 617,334 (263,882) Net change in time deposits 4,271 351,013 Net change in Federal funds purchased and other short-term borrowings (103,665) 41,003 Net proceeds from issuance of subordinated capital notes - 98,364 Net proceeds from ESOP loan 6,000 5,985 Net change in long-term borrowings 372 (3,615) Redemption of capital securities (9,793) - Repurchase of common stock for ESOP (6,000) (5,985) Repurchase of common stock (30,498) (9,248) Proceeds from exercise of employee stock options 2,587 1,056 Other (19) (19) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 480,589 214,672 - --------------------------------------------------------------------------------------------------------------------- Net change in cash and due from banks 132,210 82,651 - --------------------------------------------------------------------------------------------------------------------- Cash and due from banks, beginning of year 307,770 355,317 - --------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of period $ 439,980 $ 437,968 =====================================================================================================================
See accompanying notes to consolidated financial statements. - ------------------------------------------------------------------------------- Page 5 of 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPERIAL BANCORP AND SUBSIDIARIES NOTE (1) ORGANIZATION Imperial Bancorp (the "Company") is a financial holding company that was incorporated in California in 1968. The Company's principal subsidiary, Imperial Bank (the "Bank"), is a California-chartered bank with headquarters in Inglewood, California. The Bank offers a wide range of financial products and services to corporate customers, entrepreneurs and professionals. The Bank operates 15 regional banking offices; 12 throughout California; and out-of-state offices in Arizona, Colorado and Washington. In addition, the Bank operates 16 loan production offices located throughout the United States. The Bank owns 56% of the outstanding common stock of Official Payments Corporation ("OPAY") (Nasdaq: OPAY). On October 31, 2000, Imperial Bancorp entered into a definitive agreement to be acquired by Comerica Inc. (NYSE: CMA). Comerica is a bank holding company headquartered in Detroit, Michigan with approximately $41 billion in assets. Comerica Bank-California, a subsidiary of Comerica Inc., has 31 offices in the state of California. The Agreement, which is subject to regulatory approvals and approval by Imperials' shareholders is expected to close in the first quarter of 2001. The transaction is expected to be accounted for as a pooling of interest. Pursuant to the Agreement, each share of Imperial stock will be converted into 0.46 of a share of Comerica stock. Based on Comerica's closing stock price of $60.31 on October 31, 2000, the value of the transaction is approximately $1.3 billion or 2.4 times Imperial's book value. NOTE (2) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations, changes in cash flows and comprehensive income in conformity with generally accepted accounting principles. However, these interim financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments were of a normal recurring nature. The Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries. Operating results for the three and nine months ended September 30, 2000, are not necessarily indicative of results that may be expected for the year ending December 31, 2000. The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to the Company's 1999 Consolidated Financial Statements to conform with the 2000 presentation. NOTE (3) STATEMENTS OF CASH FLOWS The following information supplements the statements of cash flows:
======================================================================================================================= For the nine months ended September 30, (Dollars in thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Interest paid $ 115,713 $ 79,554 Taxes paid 12,641 53,530 Federal tax refunds received 1,295 - Significant noncash transactions: Transfer of LHO loans to loans held for sale - 93,164 Reclassification of investment in ICII stock to securities available for sale - 34,370 Net change in accumulated other comprehensive income, net of tax 10,106 3,727 Loans transferred to OREO - 132 =======================================================================================================================
Page 6 of 38 NOTE (4) EARNINGS PER SHARE Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings. Unearned ESOP shares are not considered to be outstanding shares for purposes of determining the number of weighted average shares for the EPS calculation. Reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is presented in the following tables for the three and nine months ended September 30, 2000 and 1999:
==================================================================================== ================================== For the three months ended Sept 30, 2000 1999 ---------------------------------- ---------------------------------- Per Per (Dollars in thousands, except per share Share Share data) Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $23,217 44,075,680 $ 0.53 $14,852 44,793,119 $ 0.33 Effect of dilutive securities Incremental shares from outstanding common stock options 1,258,227 1,442,548 ------------- ------------- Diluted EPS Net income $23,217 45,333,907 $ 0.51 $14,852 46,235,667 $ 0.32 ======================================================================================================================= ==================================================================================== ================================== For the nine months ended Sept 30, 2000 1999 ---------------------------------- ---------------------------------- Per Per (Dollars in thousands, except per share Share Share data) Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------- Basic EPS Net income $63,031 44,611,427 $ 1.41 $48,886 45,049,661 $ 1.09 Effect of dilutive securities Incremental shares from outstanding common stock options 1,575,556 1,525,406 ------------- ------------- Diluted EPS Net income $63,031 46,186,983 $ 1.36 $48,886 46,575,067 $ 1.05 =======================================================================================================================
The number of shares used to compute basic and diluted income per share for 1999 have been adjusted to reflect an 8% stock dividend paid on February 18, 2000, to shareholders of record on February 4, 2000. Securities that could potentially dilute earnings per share in the future that were not included in the calculation of diluted earnings per share for the 2000 reporting periods because their effect was antidilutive totaled 562,603. NOTE (5) COMPREHENSIVE INCOME Comprehensive income consists of net income and net unrealized gains (losses) on securities available for sale and is presented in the Consolidated Statements of Comprehensive Income. Page 7 of 38 NOTE (6) OFFICIAL PAYMENTS CORPORATION At September 30, 2000, the Company owned 12,000,000 shares, or 56% of total outstanding shares, of Official Payments Corporation ("OPAY") common stock. OPAY's operating results are reported on a consolidated basis for financial reporting purposes. OPAY reported operating losses of $6.1 million and $24.0 million for the three- and nine-month periods ended September 30, 2000, respectively. The Company's share of OPAY's operating losses for these periods was $3.2 million and $12.4 million, respectively. On an after-tax basis, the Company's net income for third quarter 2000 includes a $2.0 million loss related to its investment in OPAY. The Company's net income for the nine months ended September 30, 2000, includes a $8.0 million loss related to its investment in OPAY. The book value of the Company's investment in OPAY is $3.39 per share or $40.7 million at September 30, 2000. During August 1999, OPAY and Imperial Bank entered into an employment agreement with Thomas R. Evans, OPAY's Chairman and Chief Executive Officer. The employment agreement provides for, among other items, Mr. Evans being granted options to purchase 1,325,460 shares of OPAY common stock at $1.33 per share. Imperial Bank guaranteed that the "value" --as defined in the agreement--of Mr. Evans' vested options would be $10,000,000 on or before the third anniversary of the date of the agreement or Imperial Bank would pay Mr. Evans an amount equal to the difference between $10,000,000 and the highest value of the vested options on or before the third anniversary. OPAY recorded Mr. Evans' stock options as unamortized stock compensation which is being amortized into income over three years. Imperial Bank consolidates its investment in OPAY and, accordingly, it records its ownership interest in OPAY's operating loss which includes the amortization expense of the Evans stock option guarantee. Approximately $2.5 million of the guaranteed amount has been cumulatively amortized through September 30, 2000. In the event that an obligation to fund the guarantee is deemed probable, the amount of the estimated obligation over that to be recorded in consolidation will be recorded as additional investment in OPAY, subject to a recoverability analysis. NOTE (7) OPERATING SEGMENT RESULTS Management of the Company, for purposes of assessing performance and allocating resources, evaluates these principal operating segments that both earn revenue and incur expenses: Commercial Banking - traditional banking services to mid-sized companies originated principally by direct relationships with customers Emerging Growth Division - venture banking for early-stage and emerging companies originated principally through relationships with venture capitalists Real Estate - traditional banking services to residential homebuilders originated by direct relationships with customers Entertainment - traditional banking services to mid-sized entertainment and independent film companies originated by direct relationships with customers Syndicated Finance - principally purchasing nationally syndicated loans originated on an indirect basis SBA Division - traditional small business ("SBA") lending originated principally by direct relationships with customers Imperial Creditcorp and Imperial Ventures - bridge loans and direct equity investments in early-stage and emerging companies and equity investments in venture capital funds, each originated principally through relationships with venture capitalists Merchant Banking - participations in loans originated on an indirect basis through other financial institutions. Page 8 of 38 For measuring segment profitability, the Company applies full absorption cost accounting and, accordingly, the costs of the following support units are allocated in full to the above operating segments: Treasury Management - the interest expense of the Company's public debt and brokered deposits is allocated to the operating segments based upon their funding requirements Financial Services Division - the interest and operating cost of this Division, which offers depository services to particular industries (including title and escrow companies, bankruptcy trustees, homeowners associations and property management companies) is allocated to the operating segments based upon their funding requirements Operations and Administrative - the majority of the operating and administrative costs are allocated based upon usage and the remainder is allocated based upon balance sheet determinants For reporting segment information, the Company aggregates segments with similar long-term financial performance and similar economic characteristics. The Company aggregates based upon similar customer origination processes: Commercial Banking Segment - in this aggregate segment, the Company reports on segments that originate business principally by direct relationships with customers. This segment includes Commercial Banking, Real Estate, Entertainment, and SBA. Emerging Growth Segment - in this aggregate segment, the Company reports on segments that originate business principally through relationships with venture capitalists. This segment includes the Emerging Growth Division, Imperial Creditcorp and Imperial Ventures. Syndicated Finance Segment - in this aggregate segment, the Company reports on segments that originate business on an indirect basis through other financial institutions, principally banks. This segment includes the Syndicated Finance Division and the Merchant Banking Group. Other Segment - in this aggregate segment, the Company reports activities not individually material including OPAY, the Merchant Card Division, Financial Services Division, Treasury Management Division and nonbank subsidiaries of the holding company. The segment information for the prior year has been restated to conform with the current year's presentation, including approximating the impact of using full absorption cost accounting in the prior year. Page 9 of 38
Operating Segment Results ================================================================================================================================== For the three months ended September 30, 2000 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 53,560 $ 13,130 $ 6,458 $ 16,379 $ 89,527 Provision for loan losses (807) 3,313 16,740 54 19,300 Noninterest income 7,954 18,505 355 12,833 39,647 Noninterest expense (1) 28,646 14,216 1,480 29,965 74,307 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 33,675 14,106 (11,407) (807) 35,567 Income taxes 11,938 5,001 (4,044) (545) 12,350 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 21,737 $ 9,105 $ (7,363) $ (262) $ 23,217 - ---------------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,835,291 $ 450,318 $ 486,225 $ 578,790 $ 4,350,624 Average nonaccrual loans 30,077 9,734 21,649 150 61,610 Average assets 2,914,084 488,181 512,169 2,654,259 6,568,693 Average deposits 1,621,445 1,030,133 17,089 3,002,248 5,670,915 - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes minority interest in OPAY's operating loss. (2) Excluding nonaccrual loans. ================================================================================================================================== ================================================================================================================================== For the three months ended September 30, 1999 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 48,382 $ 8,660 $ 6,142 $ 5,240 $ 68,424 Provision for loan losses 1,942 591 3,467 6,000 Noninterest income 7,485 3,716 511 5,059 16,771 Noninterest expense (1) 27,149 7,207 1,677 18,524 54,557 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 26,776 4,578 1,509 (8,225) 24,638 Income taxes 10,635 1,818 599 (3,266) 9,786 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 16,141 $ 2,760 $ 910 $ (4,959) $ 14,852 - ---------------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,553,436 $ 300,538 $ 594,321 $ 521,659 $ 3,969,954 Average nonaccrual loans 39,296 5,761 317 198 45,572 Average assets 2,624,592 314,940 598,928 2,166,014 5,704,474 Average deposits 1,572,966 689,815 3,771 2,650,785 4,917,337 - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes minority interest in OPAY's operating income. (2) Excluding nonaccrual loans. ==================================================================================================================================
Page 10 of 38
========================================================================================================================= For the nine months ended September 30, 2000 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 150,012 $ 39,819 $ 19,818 $ 44,253 $ 253,902 Provision for loan losses 22,143 (1) 8,748 21,947 956 53,794 Noninterest income 22,993 47,638 1,475 41,866 113,972 Noninterest expense (2) 88,739 34,551 4,928 88,125 216,343 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 62,123 44,158 (5,582) (2,962) 97,737 Income taxes 22,022 15,654 (1,979) (991) 34,706 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 40,101 $ 28,504 $ (3,603) $ (1,971) $ 63,031 - ------------------------------------------------------------------------------------------------------------------------- Average net loans (3) $ 2,737,697 $ 411,642 $ 522,743 $ 483,747 $ 4,155,829 Average nonaccrual loans 30,291 6,819 12,314 846 50,270 Average assets 2,811,846 441,973 539,850 2,656,259 6,449,928 Average deposits 1,591,327 1,073,949 16,340 2,857,780 5,539,396 - ------------------------------------------------------------------------------------------------------------------------- (1) $8.8 million of this provision relates to a nationally syndicated credit administered in a regional office. (2) Includes minority interest in OPAY's operating loss. (3) Excluding nonaccrual loans. ========================================================================================================================= ========================================================================================================================= For the nine months ended September 30, 1999 Commercial Emerging Syndicated (Dollars in thousands) Banking Growth Finance Other Total - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 132,149 $ 24,250 $ 18,070 $ 22,275 $ 196,744 Provision for loan losses 14,475 2,802 3,543 20,820 Noninterest income 16,488 12,266 1,600 45,007 75,361 Noninterest expense (1) 76,624 21,782 5,440 65,591 169,437 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 57,538 11,932 10,687 1,691 81,848 Income taxes 23,172 4,802 4,304 684 32,962 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 34,366 $ 7,130 $ 6,383 $ 1,007 $ 48,886 - ------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,414,100 $ 324,466 $ 600,359 $ 499,291 $ 3,838,216 Average nonaccrual loans 37,431 5,544 100 186 43,261 Average assets 2,477,051 338,641 604,761 2,139,236 5,559,689 Average deposits 1,499,722 554,706 6,931 2,762,319 4,823,678 - ------------------------------------------------------------------------------------------------------------------------- (1) Includes minority interest in OPAY's operating income. (2) Excluding nonaccrual loans. =========================================================================================================================
Page 11 of 38 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward- looking terminology including "may", "will", "intend", "should", "expect", "anticipate", "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in documents filed with the Securities and Exchange Commission. The following discussion presents information about the results of operations, financial condition, liquidity, and capital resources of Imperial Bancorp (the "Company") as of and for the three and nine months ended September 30, 2000. This information should be read in conjunction with the Company's 1999 Consolidated Financial Statements and notes thereto, and the accompanying quarterly unaudited Consolidated Financial Statements and notes thereto. GENERAL Imperial Bancorp is a diversified financial services company specializing in the delivery of a wide variety of financial products and services tailored to meet the financing and cash management needs of middle market companies, emerging growth companies, entrepreneurs and professionals. Through its bank and nonbank subsidiaries, the Company is uniquely positioned to provide customized products and superior customer service to its customers across a broad spectrum of industries. The Company's largest subsidiary, Imperial Bank, operates 15 regional banking offices; 12 throughout California and out-of-state offices in Arizona, Colorado and Washington. Additionally, the Bank operates 16 loan production offices located throughout the United States. The Company's business activities are conducted through three principal operating segments: Commercial Banking, Emerging Growth and Syndicated Finance. Several smaller businesses and the Company's 56% investment in Official Payments Corporation ("OPAY") (Nasdaq: OPAY) are grouped into a fourth segment. OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS Net income increased 56.3% to $23.2 million, or $0.51 per share, for the three months ended September 30, 2000, from $14.9 million, or $0.32 a share, for the year-earlier quarter. Growth in net interest income for the current quarter, driven by loan growth and increased income realized from warrants and equity investments more than offset increases in the loan loss provision and noninterest expense compared with the year-earlier quarter. Net income for third quarter 2000 includes a $2.0 million, or $0.05 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the quarter. Net income realized from warrants and equity investments increased 410% to $10.2 million after tax for the quarter ended September 30, 2000, from $2.0 million a year earlier. Net income for the year-earlier quarter includes a $1.8 million after-tax loss on the sale of Imperial Credit Industries, Inc. ("ICII") (Nasdaq: ICII) common stock. Earnings per share amounts are reported on a diluted basis and reflect an 8% stock dividend paid on February 18, 2000. The major components of net income and changes in these components are summarized in the following table for the quarters ended September 30, 2000 and 1999: Page 12 of 38
========================================================================================================================== Imperial Bancorp and Subsidiaries Three months ended September 30, ------------------------------------------------------------ Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent - -------------------------------------------------------------------------------------------------------------------------- Interest income $ 132,294 $ 99,147 $ 33,147 33.4% Interest expense 42,767 30,723 12,044 39.2 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 89,527 68,424 21,103 30.8 Provision for loan losses 19,300 6,000 13,300 221.7 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 70,227 62,424 7,803 12.5 - -------------------------------------------------------------------------------------------------------------------------- Noninterest income: Loss on sale of ICII stock - (3,136) 3,136 (100.0) Income from the realization of warrants and equity investments (1) 15,760 3,420 12,340 360.8 Other noninterest income 23,887 16,487 7,400 44.9 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,647 16,771 22,876 136.4 - -------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and benefits 45,333 30,250 15,083 49.9 Other noninterest expense 31,438 24,455 6,983 28.6 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 76,771 54,705 22,066 40.3 - -------------------------------------------------------------------------------------------------------------------------- Minority interest in loss of consolidated subsidiary 2,464 148 2,316 - Income before income taxes 35,567 24,638 10,929 44.4 Income tax provision 12,350 9,786 2,564 26.2 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 23,217 $ 14,852 $ 8,365 56.3% ========================================================================================================================== Net income excluding OPAY $ 25,256 $ 15,196 $ 10,060 66.2% Earnings per share: Basic earnings per share $ 0.53 $ 0.33 $ 0.20 60.6% Diluted earnings per share 0.51 0.32 0.19 59.4 Diluted earnings per share excluding OPAY $ 0.56 $ 0.33 $ 0.23 69.7% - -------------------------------------------------------------------------------------------------------------------------- (1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories: 2000 1999 ----------------------------- Gains on securities available for sale $ 2,384 $ 1,548 Gains on the exercise of warrants and sale of equity securities 12,616 2,173 Other noninterest income 760 (301) ----------------------------- Total $ 15,760 $ 3,420 ============================= ==========================================================================================================================
The annualized return on average assets and average equity increased to 1.41% and 18.07%, respectively, for third quarter 2000, from 1.03% and 14.22%, respectively, for the year-earlier quarter. Excluding OPAY, the annualized return on average assets increased to 1.55% for third quarter 2000 from 1.06% for the year-earlier quarter. Excluding OPAY, the annualized return on average equity increased to 21.37% for third quarter 2000 from 14.58% for the year- earlier quarter. Net income for the nine months ended September 30, 2000, increased 29% to $63.0 million, or $1.36 a share, from $48.9 million, or $1.05 a share, for the year- earlier period. Net income for the first nine months of 2000 includes a $8.0 million, or $0.18 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the period net of a gain related to the exercise of OPAY stock options. Net income for the nine months ended September 30, 2000 includes a $1.7 million after-tax gain on the sale of the trust business compared with a $5.1 million after-tax gain for the year-earlier period. In addition to the gains on the sale of businesses discussed above, after-tax income realized Page 13 of 38 on warrants and equity investments increased to $27.3 million for the nine months ended September 30, 2000, from $6.7 million for the year-earlier period. The major components of net income and changes in these components are summarized in the following table for the nine months ended September 30, 2000 and 1999:
=========================================================================================================================== Imperial Bancorp and Subsidiaries Nine months ended September 30, ------------------------------------------------------- Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent - --------------------------------------------------------------------------------------------------------------------------- Interest income $ 372,609 $ 278,796 $ 93,813 33.6% Interest expense 118,707 82,052 36,655 44.7 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 253,902 196,744 57,158 29.1 Provision for loan losses 53,794 20,820 32,974 158.4 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 200,108 175,924 24,184 13.7 - --------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sale of ICII stock - 2,255 (2,255) (100.0) Gain on sale of the trust business 2,631 8,817 (6,186) (70.2) Income from the realization of warrants and equity investments (1) 42,264 11,648 30,616 262.8 Other noninterest income 69,077 52,641 16,436 31.2 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest income 113,972 75,361 38,611 51.2 - --------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and benefits 133,310 90,492 42,818 47.3 Other noninterest expense 93,381 79,072 14,309 18.1 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 226,691 169,564 57,127 33.7 - --------------------------------------------------------------------------------------------------------------------------- Minority interest in loss of consolidated subsidiary 10,348 127 10,221 - Income before income taxes 97,737 81,848 15,889 19.4 Income tax provision 34,706 32,962 1,744 5.3 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 63,031 $ 48,886 $ 14,145 28.9% =========================================================================================================================== Net income excluding OPAY $ 71,045 $ 49,184 $ 21,861 44.4% Earnings per share: Basic earnings per share $ 1.41 $ 1.09 $ 0.32 29.4% Diluted earnings per share 1.36 1.05 0.31 29.5 Diluted earnings per share excluding OPAY $ 1.54 $ 1.06 $ 0.48 45.3% - --------------------------------------------------------------------------------------------------------------------------- (1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories: 2000 1999 -------------------------- Gains on securities available for sale $ 14,351 $ 1,548 Gains on the exercise of warrants and sale of equity securities 22,831 9,555 Other noninterest income 5,082 545 -------------------------- Total $ 42,264 $ 11,648 ========================== ===========================================================================================================================
The annualized return on average assets and average equity were 1.31% and 16.87%, respectively, for the nine months ended September 30, 2000, compared with 1.18% and 16.32%, respectively, for the year-earlier period. Excluding Page 14 of 38 OPAY, the annualized return on average assets increased to 1.49% for the first nine months of 2000 from 1.18% for the year-earlier period. Excluding OPAY, the annualized return on average equity increased to 20.83% for the first nine months of 2000 from 16.46% for the year-earlier period. Selected ratios for the three and nine months ended September 30, 2000 and 1999, are provided in the following table:
================================================================================================================== At or for the At or for the three months ended nine months ended September 30, September 30, 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Selected ratios Reported: Return on average assets (annualized) 1.41% 1.03% 1.31% 1.18% Return on average equity (annualized) 18.07 14.22 16.87 16.32 Return on average earning assets (annualized) 1.54 1.14 1.42 1.30 Net interest margin 5.93 5.23 5.74 5.23 Efficiency ratio 57.52 64.04 58.81 62.27 Average equity-to-average assets 7.78 7.27 7.74 7.20 Total risk-based capital 13.33 12.76 13.33 12.76 Tier 1 risk-based capital 10.35 9.54 10.35 9.54 Tier 1 leverage 9.04 8.50 9.04 8.50 Excluding OPAY: Return on average assets (annualized) 1.55 1.06 1.49 1.18 Return on average equity (annualized) 21.37 14.58 20.83 16.46 Net interest margin 5.90 5.24 5.74 5.23 Efficiency ratio 54.29 63.17 54.39 61.86 Asset quality ratios Nonaccrual loans to total loans 1.45 1.18 1.45 1.18 Nonaccrual and restructured loans to total loans 1.60 1.31 1.60 1.31 Allowance for credit losses to total loans 2.18 1.88 2.18 1.88 Net charge-offs as a percentage of total average loans (annualized) 0.87 0.34 1.12 0.37 ==================================================================================================================
Net Interest Income The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average earning assets. Due to the asset-sensitive nature of the Company's balance sheet, a variable rate loan portfolio funded in large part by demand deposits and fixed rate liabilities, the recent increases in the prime rate have favorably impacted net interest income and net interest margin. Net interest income increased to $89.5 million for the three months ended September 30, 2000, from $68.4 million for the year-earlier quarter. Net interest income for the current quarter includes $1.5 million related to OPAY. The increase in net interest income is due to growth in average earning assets, which increased 16% to $6.0 billion for the quarter ended September 30, 2000, from $5.2 billion for the year-earlier quarter. Average loans increased $411.1 million, or 10.2%, to $4.4 billion for the current quarter from $4.0 billion for third quarter 1999. Loans comprised approximately 74% of average earnings assets for the current quarter compared with approximately 78% for the year-earlier quarter. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. Average deposits grew 15% to $5.7 billion for third quarter 2000, from $4.9 billion for the year- earlier quarter. Deposit growth continues to exceed loan funding requirements. The resulting excess liquidity was invested in securities, leading to a decline in average loans as a percentage of average earning assets compared with the prior year. Page 15 of 38 The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the quarters ended September 30, 2000 and 1999:
================================================================================================================================== Three months ended Sept 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) - ---------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $ 4,436,456 $ 103,311 (3) 9.26% $ 4,025,351 $ 83,134 (3) 8.19% Trading instruments 112,844 1,910 6.73 55,484 748 5.35 Interest-bearing deposits 4,054 63 6.18 - - - Securities available for sale (4) 1,057,409 19,882 7.51 735,380 9,719 5.21 Securities held to maturity 3,637 69 7.55 3,807 70 7.29 Federal funds sold and securities purchased under resale agreement 343,435 5,690 6.59 302,103 3,944 5.18 Loans held for sale 56,717 1,369 9.60 60,274 1,532 10.08 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 6,014,552 132,294 8.76% 5,182,399 99,147 7.59% - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (80,939) (70,099) Cash 363,712 377,042 Other assets 271,368 215,132 ------------ ------------ Total assets $ 6,568,693 $ 5,704,474 ============ ============ Interest-bearing liabilities: Savings $ 26,683 $ 114 1.70% $ 23,719 $ 106 1.77% Money market 1,203,344 10,519 3.48 1,191,852 8,600 2.86 Time-under $100,000 115,077 1,843 6.37 161,461 2,098 5.16 Time-$100,000 and over 1,598,821 25,673 6.39 1,228,538 15,304 4.94 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,943,925 38,149 5.16 2,605,570 26,108 3.98 - ---------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 35,034 623 7.07 74,688 955 5.07 Long-term borrowings 106,285 2,391 8.95 105,568 2,100 7.89 Capital securities 63,670 1,604 10.02 73,406 1,560 8.43 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,148,914 42,767 5.40% 2,859,232 30,723 4.26% - ---------------------------------------------------------------------------------------------------------------------------------- Demand deposits 2,726,990 2,311,767 Other liabilities 181,705 119,030 Shareholders' equity 511,084 414,445 Total liabilities and ------------ ------------ shareholders' equity $ 6,568,693 $ 5,704,474 ============ ============ Net interest income/Net interest margin $ 89,527 5.93% $ 68,424 5.23% ========== ========== ========== ========== ==================================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $6.6 million and $6.2 million for the three months ended September 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost. Page 16 of 38 Net interest income increased to $253.9 million for the nine months ended September 30, 2000, from $196.7 million for the year-earlier period. Net interest income for the first nine months includes $3.2 million related to OPAY. The increase in net interest income was driven by the growth in average earning assets, which increased 18% to $5.9 billion for the first nine months of 2000 from $5.0 billion for the year-earlier period. Average loans grew $307.9 million, or approximately 8%, to $4.2 billion from $3.9 billion for the year- earlier period. Loans comprised approximately 71% of average earning assets for the first nine months of 2000 compared with 78% for the year-earlier period. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the nine months ended September 30, 2000 and 1999: Page 17 of 38
============================================================================================================================= Nine months ended Sept 30, 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) - ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $ 4,222,856 $ 290,074 (3) 9.18% $ 3,914,946 $ 235,287 (3) 8.04% Trading instruments 113,045 5,380 6.36 63,624 2,617 5.50 Interest-bearing deposits 5,560 250 6.01 - - - Securities available for sale (4) 996,657 49,378 6.66 673,382 25,740 5.08 Securities held to maturity 3,678 202 7.34 3,841 214 7.45 Federal funds sold and securities purchased under resale agreements 515,855 23,480 6.08 334,605 12,369 4.94 Loans held for sale 61,217 3,845 8.39 33,716 2,569 10.19 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 5,918,868 372,609 8.42% 5,024,114 278,796 7.42% - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (77,974) (67,185) Cash 355,689 368,586 Other assets 253,345 234,174 ----------- ----------- Total assets $ 6,449,928 $ 5,559,689 =========== =========== Interest-bearing liabilities: Savings $ 24,438 $ 319 1.74% $ 29,153 $ 399 1.83% Money market 1,272,750 30,270 3.18 1,119,576 23,771 2.84 Time-under $100,000 96,307 5,378 7.46 160,192 6,175 5.15 Time-$100,000 and over 1,539,576 67,148 5.83 1,103,305 39,930 4.84 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,933,071 103,115 4.70 2,412,226 70,275 3.90 - ----------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 72,614 3,351 6.16 85,211 3,114 4.89 Long-term borrowings 104,392 7,319 9.37 70,280 4,099 7.80 Capital securities 68,375 4,922 9.62 73,393 4,564 8.31 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,178,452 118,707 4.99% 2,641,110 82,052 4.15% - ----------------------------------------------------------------------------------------------------------------------------- Demand deposits 2,606,325 2,411,452 Other liabilities 166,212 106,704 Shareholders' equity 498,939 400,423 Total liabilities and ----------- ----------- shareholders' equity $ 6,449,928 $ 5,559,689 =========== =========== Net interest income/Net interest margin $ 253,902 5.74% $ 196,744 5.23% ========= ======== ========= ========= =============================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $20.1 million and $16.5 million for the nine months ended September 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost. Net interest margin increased to 5.93% and 5.74% for the three and nine months ended September 30, 2000, respectively, from 5.23% for the year-earlier periods. The increase in loan yields, due to increases in the prime rate, more than offset higher rates paid on deposits. Approximately 75% of the Company's variable rate loans are tied to the Page 18 of 38 prime rate. Certain loans, including entertainment loans and syndicated loans, are tied to the London Interbank Offered Rate ("LIBOR"). The average prime rate increased 128 basis points for the first nine months of 2000 to 9.15% from 7.87% for the year-earlier period. Management expects some contraction in the net interest margin for the fourth quarter 2000 due to increases in deposit rates. Interest income for the three months ended September 30, 2000 and 1999, was reduced by approximately $771,900 and $81,000, respectively, due to interest reversals on nonaccrual loans. Interest income for the nine months ended September 30, 2000 and 1999, was reduced by approximately $2.1 million and $503,800, respectively, due to interest reversals on nonaccrual loans. The average cost of interest-bearing deposits increased for the quarter and year-to-date compared with the year-earlier periods. The growth in average time certificate of deposit ("TCD") balances, for the three and nine months ended September 30, 2000, compared with the year earlier periods, occurred primarily in the Emerging Growth Division, and in brokered TCD balances raised in conjunction with the Company's overall funding plan. Demand deposits continue to be a significant funding source for the Company. Average demand deposits comprised 48% and 47% of total average deposits for the three and nine months ended September 30, 2000, compared with 47% and 50% of total average deposits for the year-earlier periods. The growth, in average demand deposits was generated by the Commercial Banking and Emerging Growth Divisions. The increase in average long-term borrowings for the nine months ended September 30, 2000, compared with the year-earlier period is due to the issuance of $100 million of 8.5% Subordinated Capital Notes by Imperial Bank in April 1999. Analysis of Changes in Net Interest Income Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following tables set forth information regarding changes in interest income and interest expense for the three and nine months ended September 30, 2000 and 1999. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). The change in interest due to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. Nonaccrual loans are included in average loans for these computations. The tables are not presented on a tax equivalent basis as the effects are not material. Page 19 of 38
================================================================================================================== Three months ended Sept 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total - ------------------------------------------------------------------------------------------------------------------ Loans, net $ 8,467 $ 10,831 $ 879 $ 20,177 Trading instruments 771 193 198 1,162 Interest-bearing deposits 63 - - 63 Securities available for sale 4,214 4,256 1,693 10,163 Securities held to maturity (3) 2 - (1) Federal funds sold and securities purchased under resale agreements 538 1,072 136 1,746 Loans held for sale (90) (73) - (163) - ------------------------------------------------------------------------------------------------------------------ Total interest income 13,960 16,281 2,906 33,147 - ------------------------------------------------------------------------------------------------------------------ Savings 13 (4) (1) 8 Money market 83 1,842 (6) 1,919 Time-under $100,000 (601) 494 (148) (255) Time-$100,000 and over 4,600 4,465 1,304 10,369 - ------------------------------------------------------------------------------------------------------------------ Total deposits 4,095 6,797 1,149 12,041 - ------------------------------------------------------------------------------------------------------------------ Short-term borrowings (506) 376 (202) (332) Long-term borrowings 14 281 (4) 291 Capital securities (206) 294 (44) 44 - ------------------------------------------------------------------------------------------------------------------ Total interest expense 3,397 7,748 899 12,044 - ------------------------------------------------------------------------------------------------------------------ Change in net interest income $ 10,563 $ 8,533 $ 2,007 $ 21,103 ==================================================================================================================
Page 20 of 38
======================================================================================================================= Nine months ended Sept 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total - ----------------------------------------------------------------------------------------------------------------------- Loans, net $ 18,522 $ 33,420 $ 2,845 $ 54,787 Trading instruments 2,035 409 319 2,763 Interest-bearing deposits 250 - - 250 Securities available for sale 12,292 7,969 3,377 23,638 Securities held to maturity (9) (3) - (12) Federal funds sold and securities purchased under resale agreements 6,706 2,850 1,555 11,111 Loans held for sale 2,097 (454) (367) 1,276 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 41,893 44,191 7,729 93,813 - ----------------------------------------------------------------------------------------------------------------------- Savings (62) (16) (2) (80) Money market 3,255 2,834 410 6,499 Time-under $100,000 (2,465) 2,765 (1,097) (797) Time-$100,000 and over 15,804 8,153 3,261 27,218 - ----------------------------------------------------------------------------------------------------------------------- Total deposits 16,532 13,736 2,572 32,840 - ----------------------------------------------------------------------------------------------------------------------- Short-term borrowings (461) 815 (117) 237 Long-term borrowings 1,991 825 404 3,220 Capital securities (312) 715 (45) 358 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 17,750 16,091 2,814 36,655 - ----------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 24,143 $ 28,100 $ 4,915 $ 57,158 =======================================================================================================================
In conformity with banking industry practice, payments for accounting, courier and other deposit-related services provided to the Company's real estate services customers are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $4.8 million and $13.6 million for the three and nine months ended September 30, 2000, respectively, and by $4.5 million and $17.1 million for the year earlier periods, respectively. The net interest margin would have decreased to 5.61% and 5.43% for the three and nine months ended September 30, 2000, respectively, and to 4.89% and 4.78% for the year-earlier periods. Provision for Loan Losses The provision for loan losses increased for third quarter 2000 to $19.3 million from $6.0 million for the year-earlier quarter. Net charge-offs for the quarter increased to $9.7 million, or 0.88% of average loans on an annualized basis, for third quarter 2000, from $3.4 million, or 0.34% of average loans on an annualized basis, for the year-earlier quarter. The provision for loan losses increased to $53.8 million for the nine months ended September 30, 2000, from $20.8 million for the year-earlier period. Year to date net charge-offs increased to $35.4 million, or 1.12% of average loans, from $10.7 million, or 0.37% of total average loans, for the year-earlier period. The increased provision for the current year is largely attributable to higher charge-offs recorded on a limited number of nationally syndicated loans. For the current quarter charge-offs decreased by 52%, to $9.7 million from $20.6 million in the previous quarter. Provision expense also declined to $19.3 million from $22.6 million in the previous quarter. Page 21 of 38 effect the amount of charge-offs recorded. If the Company decides to adopt the acquiring company's practice, loan charge-offs would be expected to increase in the fourth quarter and the allowance for loan losses would decrease (without a corresponding provision for loans losses as the estimated loss for such loans was previously reflected in the September 30, 2000 allowance for loan and lease losses). Noninterest Income: Noninterest income increased to $39.6 million for third quarter 2000, from $16.8 million for the year-earlier quarter. Income realized from warrants and investments in equity funds increased to $15.8 million for the quarter ended September 30, 2000, from $3.4 million for the year-earlier quarter. Noninterest income for third quarter 1999 includes a $3.1 million loss on the sale of ICII stock. Excluding warrant income and the ICII loss in the prior year quarter, noninterest income increased 45% for the third quarter of 2000, from the year earlier quarter, primarily due to increases in international fees, merchant card processing fees and commissions from sales of mutual funds (see the Other Segment discussions). Noninterest income increased 51% to $114.0 million for the first nine months of 2000, from $75.4 million for the year-earlier period. Noninterest income for the first nine months of 2000 includes a $2.6 million gain associated with last year's sale of the trust business. This gain represents a payment related to customer retention as provided for in the trust sale agreement. Noninterest income for the year-earlier period includes an $8.8 million gain on the sale of the trust business and a $2.5 million gain on the sale of a software license by a nonbank subsidiary. Income realized from warrants and equity investments increased to $42.3 million for the nine months ended September 30, 2000, from $11.6 million for the year-earlier period. Noninterest Expense: Noninterest expense before minority interest increased 40% for the quarter ended September 30, 2000, to $76.8 million from $54.7 million for the year-earlier quarter. Excluding OPAY, noninterest expense for the quarter increased 29% to $68.9 million from $53.6 million a year ago. For the first nine months of 2000, noninterest expense increased 28% to $216.3 million from $169.4 million for the year-earlier period. Excluding OPAY, year-to-date noninterest expense increased 17% to $195.5 million from $167.3 million for the year-earlier period. The increase in noninterest expense excluding OPAY is primarily due to higher salaries and benefits and occupancy expense associated with the overall growth in the Company's present activities as well as the addition of new business initiatives. The average number of full-time equivalent staff increased to 1,326 for the nine months ended September 30, 2000, from 1,254 for the year-earlier period. The increase in salaries also reflects increases in incentives tied to Company performance. Customer services expense declined for the quarter and year-to-date compared with the year earlier periods due to a decrease in average title and escrow deposit balances. Although noninterest expense has increased overall, the Company's efficiency ratio excluding OPAY was lower for both the quarter and year-to-date compared with a year ago due to proportionally higher growth in revenues. The efficiency ratio, excluding OPAY, decreased to 54.39% for the first nine months of 2000 from 61.86% for the year-earlier period. Income Taxes: The Company recorded income taxes of $12.4 million and $34.7 million for the three and nine months ended September 30, 2000, respectively. Income taxes were $9.8 million and $33.0 million for the three and nine months ended September 30, 1999. On April 24, 2000, the Company formed Imperial Special Investments, Inc. ("ISII"). ISII is a closed-end, non-diversified regulated investment company registered under the Investment Company Act of 1940. ISII's holdings consist of cash, investments and loans. The formation of ISII provides the Company with the capability to raise capital in a tax efficient manner for future business opportunities if desired. The formation and funding of ISII resulted in an estimated effective income tax rate of 35.5% for the first nine months of 2000 compared with 40.3% for the year-earlier period. In August 2000, the Commission completed an examination of ISII. The Company received the Commission's findings in a letter dated September 11, 2000. The Commission staff determined that ISII should not be eligible to be registered as an investment company due to the failure to meet certain statutory requirements of the Investment Company Act and requested that ISII voluntarily de-register. In its response to the Commission dated October 11, 2000, the Company stated that it disagrees with certain factual statements and conclusions of law contained Page 22 of 38 in the Commission's findings and sets forth the basis for its belief based on advice of counsel, which was included, that ISII was formed in compliance with regulatory requirements. The Company has declined the Commission's request to voluntarily de-register the fund and expects to receive further correspondence from the Commission. OPERATING SEGMENT RESULTS For reporting purposes, the Company aggregates its operating activities into four principal operating segments: Commercial Banking, Emerging Growth, Syndicated Finance and Other. See - "NOTE (7) Operating Segment Results." The following tables summarize the financial performance of these segments for the three and nine months ended September 30, 2000 and 1999: The Commercial Banking Segment
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 53,560 $ 48,382 $ 5,178 $ 150,012 $ 132,149 $ 17,863 Provision for loan losses (1) (807) 1,942 (2,749) 22,143 14,475 7,668 Noninterest income 7,954 7,485 469 22,993 16,488 6,505 Noninterest expense 28,646 27,149 1,497 88,739 76,624 12,115 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 33,675 26,776 6,899 62,123 57,538 4,585 Income taxes 11,938 10,635 1,303 22,022 23,172 (1,150) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 21,737 $ 16,141 $ 5,596 $ 40,101 $ 34,366 $ 5,735 - -------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,835,291 $ 2,553,436 $ 281,855 $ 2,737,697 $ 2,414,100 $ 323,597 Average nonaccrual (3) 30,077 39,296 (9,219) 30,291 37,431 (7,140) Average assets 2,914,084 2,624,592 289,492 2,811,846 2,477,051 334,795 Average deposits 1,621,445 1,572,966 48,479 1,591,327 1,499,722 91,605 - -------------------------------------------------------------------------------------------------------------------------- (1) Provision expense for the nine months ended September 30, 2000, includes $8.8 million related to a syndicated credit administered in a regional banking office. (2) Excluding nonaccrual loans. (3) Average nonaccrual loan balance includes $8.8 million related to a syndicated credit administered in a regional banking office until it was charged off in May 2000. ==========================================================================================================================
The Commercial Banking Segment consisting of the Company's middle market, residential construction, entertainment and small business lending ("SBA") operations accounted for the majority of the growth in average loans for the current quarter and year-to-date compared with the prior year. Most of the growth occurred in residential construction loans, which increased by $151 million, or 38%, for third quarter 2000 compared with the year-earlier quarter. Tract construction lending continues to grow despite higher mortgage rates due to continuing strength in the California real estate market coupled with the Company's focus on a select group of private homebuilders. The remaining loan growth occurred primarily in middle market lending. Approximately 80% of the commercial banking portfolio is prime based, resulting in higher interest income as prime rate increases. Loan growth has also led to higher loan fee income. Average deposits balances for the Commercial Banking Segment increased 3% and 6% for the three and nine months ended September 30, 2000, respectively, compared with the year-earlier periods. The decrease in loan loss provision for the current quarter compared with a year ago is the result of a $6.0 million loan loss recovery. The provision for the first nine months of 2000 includes $8.8 million associated with a nationally syndicated loan that was administered in a regional office due to a deposit relationship. This loan was charged off in the second quarter. The reduction in nonaccrual loan balances compared with the year-earlier period is due in part to the sale of film production loans from the Lewis Horwitz Organization to ICII in the fourth quarter of 1999. Page 23 of 38 Although service charge income was relatively flat compared with the prior year, noninterest income increased due to growth in other fees such as international fees, leasing fees and referral fees related to SBA lending. The Company continues to develop and introduce new cash management products, including internet-based products, that are expected to result in increased fee income. The Emerging Growth Segment (including Imperial Ventures, Inc. and Imperial Creditcorp)
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 13,130 $ 8,660 $ 4,470 $ 39,819 $ 24,250 $ 15,569 Provision for loan losses 3,313 591 2,722 8,748 2,802 5,946 Noninterest income 18,505 3,716 14,789 47,638 12,266 35,372 Noninterest expense 14,216 7,207 7,009 34,551 21,782 12,769 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 14,106 4,578 9,528 44,158 11,932 32,226 Income taxes 5,001 1,818 3,183 15,654 4,802 10,852 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 9,105 $ 2,760 $ 6,345 $ 28,504 $ 7,130 $ 21,374 - -------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 450,318 $ 300,538 $ 149,780 $ 411,642 $ 324,466 $ 87,176 Average nonaccrual loans 9,734 5,761 3,973 6,819 5,544 1,275 Average assets 488,181 314,940 173,241 441,973 338,641 103,332 Average deposits 1,030,133 689,815 340,318 1,073,949 554,706 519,243 - -------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ==========================================================================================================================
The Emerging Growth Segment ("EGD"), serving companies backed by venture capitalists, contributed 39% of consolidated net income for the three months ended September 30, 2000, up from 19% of consolidated net income for the year-earlier quarter. For the first nine months of 2000, EGD contributed 45% of consolidated net income compared with 15% for the year-earlier period. The growth in EGD's net income is largely due to increased noninterest income realized from warrants and equity investments in emerging growth companies and venture capital funds. Income derived from these activities increased to $15.8 million for third quarter 2000 from $3.4 million for the year-earlier quarter. On a year-to-date basis, income from warrants and equity investments increased to $42.3 million from $11.6 million for the year-earlier period. The Company obtains rights to acquire stock (in the form of warrants) from certain customers as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or collateral control techniques employed by the Company to mitigate the risk of a loan becoming uncollectible. Likewise, collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. As of October 23, 2000, the last time the Company reported on unrealized warrant gains, the Company had potential unrealized gains associated with warrants and equity positions of $8.7 million. The Company does not expect fourth quarter income from warrant activities to remain at levels reported for the first nine months of 2000. The amount of income realized by the Company from these equity rights in future periods may vary materially from that unrealized amount due to fluctuations in the market prices of the underlying common stock of these companies. The Company is restricted from liquidating a portion of these positions, although most of these restrictions will have expired by the end of the year. The Company views this income as a core contributor to its noninterest income. The increase in noninterest expense is primarily due to higher personnel and occupancy costs associated with opening new offices and adding staff to fuel future in the division. EGD experienced significant deposit growth in 2000 compared with the prior year. EGD's average deposit balances grew $340 million to $1.0 billion for third quarter 2000 from $690 million for the year-earlier quarter. On a year-to- Page 24 of 38 date basis, average deposits grew $519 million to $1.1 billion for the nine months ended September 30, 2000, from $555 million for the year-earlier period. The growth in deposits was distributed between noninterest-bearing and interest- bearing accounts with demand deposits averaging $287 million in the current quarter. Management has observed that venture capitalists are continuing to fund emerging growth companies across a broad spectrum of industries despite recent volatility in the Nasdaq. The Syndicated Finance Segment
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change - -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 6,458 $ 6,142 $ 316 $ 19,818 $ 18,070 $ 1,748 Provision for loan losses 16,740 3,467 13,273 21,947 3,543 18,404 Noninterest income 355 511 (156) 1,475 1,600 (125) Noninterest expense 1,480 1,677 (197) 4,928 5,440 (512) - -------------------------------------------------------------------------------------------------------------------------- Income before taxes (11,407) 1,509 (12,916) (5,582) 10,687 (16,269) Income taxes (4,044) 599 (4,643) (1,979) 4,304 (6,283) - -------------------------------------------------------------------------------------------------------------------------- Net income $ (7,363) $ 910 $ (8,273) $ (3,603) $ 6,383 $ (9,986) - -------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 486,225 $ 594,321 $(108,096) $ 522,743 $ 600,359 $ (77,616) Average nonaccrual loans 21,649 317 21,332 12,314 100 12,214 Average assets 512,169 598,928 (86,759) 539,850 604,761 (64,911) Average deposits 17,089 3,771 13,318 16,340 6,931 9,409 - -------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ==========================================================================================================================
The Syndicated Finance Segment includes the Syndicated Finance and Merchant Banking Divisions. Both divisions originate loans principally on an indirect basis through other financial institutions. The Company's recent adverse credit experience with a limited number of syndicated credits is consistent with banking industry experience. The nonaccrual loans total $31.2 million or 52% of the total nonaccrual loans as of September 30, 2000. Syndicated credits also accounted for the majority of the increase in gross charge-offs for the quarter, $10.6 million of consolidated gross charge-offs of $16.8 million. Year-to-date charge-offs for the Syndicated Finance Segment do not include $8.8 million related to a nationally syndicated credit administered in a regional banking office which is reflected in the Commercial Banking Segment. For the year, net charge-offs of syndicated credits comprised $23.9 million of total net charge- offs of $35.4 million. The increase in charge-offs led to the higher loan loss provisions for the quarter and year-to-date. Management believes that these loans have adequate loan loss allowances. The Company's primary focus has been to establish strong commercial banking relationships with borrowers that enhance its deposit base and generate fee income in addition to yielding interest income through credit products. When deposit growth from title and escrow customers began to outpace relationship- based loan growth in the mid 1990s, the Company began investing a portion of this liquidity in nationally syndicated credits to maximize net interest income. Recognizing that purchased loans provide no supplemental noninterest income and that these credits cannot be monitored as closely as companies with which the Company has a direct relationship, management is currently emphasizing relationship-based loans and, accordingly, does not plan on increasing its nonrelationship-based syndicated loan portfolio. Page 25 of 38 The following table provides a distribution of the Company's participations in nationally syndicated loans by industry: =========================================================== Distribution of Syndicated Finance Loan Portfolio September 30, 2000 ----------------------------------------------------------- Industry Percent ----------------------------------------------------------- Manufacturing 34% Service 26 Gaming 24 Retail and restaurants 9 Heath care and related 7 ----------------------------------------------------------- Total 100% ----------------------------------------------------------- The Other Segment
========================================================================================================================= For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 16,379 $ 5,240 $ 11,139 $ 44,253 $ 22,275 $ 21,978 Provision for loan losses 54 - 54 956 - 956 Noninterest income 12,833 5,059 7,774 41,866 45,007 (3,141) Noninterest expense 29,965 18,524 11,441 88,125 65,591 22,534 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes (807) (8,225) 7,418 (2,962) 1,691 (4,653) Income taxes (545) (3,266) 2,721 (991) 684 (1,675) - ------------------------------------------------------------------------------------------------------------------------- Net income $ (262) $ (4,959) $ 4,697 $ (1,971) $ 1,007 $ (2,978) - ------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 578,790 $ 521,659 $ 57,131 $ 483,747 $ 499,291 $ (15,544) Average nonaccrual loans 150 198 (48) 846 186 660 Average assets 2,654,259 2,166,014 488,245 2,656,259 2,139,236 517,023 Average deposits 3,002,248 2,650,785 351,463 2,857,780 2,762,319 95,461 - ------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. =========================================================================================================================
The Other Segment includes activities not individually material such as the Company's 56% ownership in OPAY, the Merchant Card Division and nonbank subsidiaries of the holding company. The balance sheet of the Other Segment reflects the loan and deposit balances of the Financial Services Division, and the investment balances of the Treasury Management Division. The income and costs associated with these balances are fully allocated to the other operating segments for measuring segment profitability. The decrease in noninterest income compared with the year-earlier periods is due to gains totaling $11.1 million on the sales of the trust business and ICII common stock reported for the nine months ended September 30, 1999. Merchant card fees and commissions on the sale of nonproprietary mutual funds by the Company's broker/dealer grew to $12.9 million and $9.5 million for the nine months ended September 30, 2000, respectively, from $7.8 million and $4.6 million for the year-earlier period, respectively. The average balance of customer funds directed to nonproprietary mutual funds increased to $2.7 billion for September 2000 from $2.3 billion a year ago. The Company's after-tax net income includes losses of $2.0 million and $8.0 million for the three and nine months ended September 30, 2000, respectively, related to its investment in OPAY. OPAY's operating results are reported on a consolidated basis. See - "NOTE (6) Official Payments Corporation." The following table summarizes the impact of the Company's investment in OPAY by income statement category: Page 26 of 38 OPAY
==================================================================================================================== Three months ended Nine months ended September 30, September 30, (Dollars in thousands, except per share amounts) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Net interest income $ 1,492 $ (96) $ 3,248 $ (110) Noninterest income 743 495 4,308 1,712 Salary and benefits 5,164 717 19,151 1,470 Other noninterest expense 2,688 422 12,064 765 Gain from exercise of OPAY stock options - - 922 - - -------------------------------------------------------------------------------------------------------------------- Net (loss) income before minority interest (5,617) (739) (22,737) (633) Minority interest in loss (income) 2,464 148 10,348 127 - -------------------------------------------------------------------------------------------------------------------- Net (loss) income before taxes (3,153) (591) (12,389) (506) Income tax (benefit) expense (1,113) (247) (4,375) (209) - -------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (2,040) $ (344) $ (8,014) $ (297) ==================================================================================================================== Impact on diluted earnings per share $ (0.05) $ (0.01) $ (0.18) $ (0.01) ====================================================================================================================
Salaries and benefits expense reported for the nine months ended September 30, 2000, include a $4 million one-time charge, before minority interest, related to the recent departure of OPAY's chief financial officer. OPAY is expected to report operating losses for the remainder of the year. BALANCE SHEET ANALYSIS Investment Securities The following tables provide comparative period-end balances of securities held to maturity and securities available for sale for the periods indicated:
================================================================================================================== Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ September 30, 2000 Industrial development bonds $ 3,620 $ - $ - $ 3,620 - ------------------------------------------------------------------------------------------------------------------ Total $ 3,620 $ - $ - $ 3,620 ================================================================================================================== December 31, 1999 Industrial development bonds $ 3,744 $ - $ - $ 3,744 - ------------------------------------------------------------------------------------------------------------------ Total $ 3,744 $ - $ - $ 3,744 ==================================================================================================================
Page 27 of 38
======================================================================================================================= Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- September 30, 2000 U.S. Treasury and federal agencies $ 935,037 $ - $ (4,514) $ 930,523 Commercial Paper 69,018 69,018 Mutual funds 29,027 - - 29,027 Other securities 36,904 4,857 - 41,761 - ----------------------------------------------------------------------------------------------------------------------- Total $ 1,069,986 $ 4,857 $ (4,514) $ 1,070,329 ======================================================================================================================= December 31, 1999 U.S. Treasury and federal agencies $ 678,462 $ - $ (4,322) $ 674,140 Commercial Paper 228,670 - - 228,670 Mutual funds 92,184 - - 92,184 Other securities 23,718 21,573 - 45,291 - ----------------------------------------------------------------------------------------------------------------------- Total $ 1,023,034 $ 21,573 $ (4,322) $ 1,040,285 =======================================================================================================================
Gross gains totaling $14.4 million and gross losses totaling $731,000 respectively, were realized on sales of securities available for sale during the nine months ended September 30, 2000.. Loans Held for Sale Loans held for sale at September 30, 2000, totaling $79.8 million, include the remaining $17.2 million balance of Lewis Horwitz Organization ("LHO") loans held for sale and $62.6 million of SBA loans held for sale. The LHO loans were reclassified to the held for sale category in October 1999, following finalization of an agreement to sell the loans to ICII at a fixed price (effectively the book value less the allocated allowance less the interest spread over the sale period as defined in the agreement), over a 15-month period. Loans made to ICII by Imperial Bank to facilitate their purchase of LHO loans totaling $7.8 million were paid off in September 2000 with proceeds of a new $10 million loan made to ICII. The new loan to ICII is secured by a commercial real estate property and has a maturity of less than one year. Management expects the remaining loans to be either paid off by the borrower in the normal course of business or purchased by ICII on or before December 29, 2000. Loans The following table provides a summary of loans by category for the periods indicated:
======================================================================================================================= (Dollars in thousands) September 30, 2000 December 31, 1999 September 30, 1999 Balance Percent Balance Percent Balance Percent - ----------------------------------------------------------------------------------------------------------------------- Commercial $ 3,424,854 82.69% $ 3,016,695 83.52% $ 3,091,962 84.75% Loan secured by real estate: Real estate term loans 101,200 2.44 100,012 2.77 109,367 3.00 Residential tract construction loans 573,594 13.85 457,337 12.66 411,473 11.28 Consumer loans 42,200 1.02 38,104 1.05 35,435 0.97 - ----------------------------------------------------------------------------------------------------------------------- Gross loans 4,141,848 100.00% 3,612,148 100.00% 3,648,237 100.00% Less allowance for loan losses (90,088) (71,677) (68,769) - ----------------------------------------------------------------------------------------------------------------------- Total loans $ 4,051,760 $ 3,540,471 $ 3,579,468 =======================================================================================================================
Total loans grew to $4.1 billion at September 30, 2000, an increase of approximately 14% from $3.6 billion at December 31, 1999, and an increase of 13% from September 30, 1999. Page 28 of 38 CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned Nonaccrual loans, which include loans 90 days or more past due, totaled $59.9 million, or 1.45% of total loans, at September 30, 2000, compared with $27.6 million, or 0.76% of total loans, at December 31, 1999, and $43.0 million, or 1.18% of total loans, at September 30, 1999. The increase in nonaccrual loans compared with year-end and a year ago is largely due to a limited number of loans in the Syndicated Finance Segment. See - "Operating Segment Results." The remaining nonaccrual loans at quarter end consisted of commercial loans individually no larger than $3.5 million. The following table provides information on nonaccrual loans, restructured loans and real estate and other assets owned for the periods indicated:
================================================================================================================= Sept. 30 June 30, March 31, Dec. 31, Sept. 30, (Dollars in thousands) 2000 2000 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 59,263 $ 55,683 $ 35,408 $ 27,020 $ 42,539 Real estate 480 461 480 569 496 Consumer 125 - - - - - ----------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 59,868 56,144 35,888 27,589 43,035 ================================================================================================================= Restructured loans 6,284 6,401 6,914 4,081 4,640 ================================================================================================================= Real estate and other assets owned: Real estate and other assets owned, gross 826 826 935 935 1,237 - ----------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net 826 826 935 935 1,237 - ----------------------------------------------------------------------------------------------------------------- Total $ 66,978 $ 63,371 $ 43,737 $ 32,605 $ 48,912 =================================================================================================================
The $32.3 million net increase in nonaccrual loans at September 30, 2000, compared with December 1999 reflects new loans totaling $127.0 million placed on nonaccrual status offset by $39.0 million in charge-offs, $40.7 million in payments (includes $10.7 million in insurance settlement proceeds) on nonaccrual loans and $15.0 million of nonaccrual loans returning to accrual status. The Company's focus on business customers generates a relatively large average loan size that contributes to the variability of its nonaccrual asset totals. Restructured loans, loans that have had their original terms modified, totaled $6.3 million, $4.1 million and $4.6 million at September 30, 2000, December 31, 1999, and September 30, 1999, respectively. All restructured loans were performing in accordance with their modified terms as of September 30, 2000. Real estate and other assets owned ("OREO") include properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the collateral, less the estimated costs of disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for loan losses as a charge-off. Any subsequent declines in the fair value of the property after the date of transfer are recorded through a provision for write-downs on OREO. OREO totaled $826,000, $935,000 and $1.2 million at September 30, 2000, December 31, 1999 and September 30, 1999, respectively. There were no valuation allowances on OREO for these reporting dates. All loans on nonaccrual status are considered to be impaired; however, not all impaired loans are on nonaccrual status. Impaired loans on accrual status must meet the criteria of all payments being current and the loan underwriting must support the debt service requirements. Factors that contribute to a performing loan being classified as impaired include substantial doubt about the ability of the borrower to make all principal and interest payments under the original terms of the loan, a below market interest rate, delinquent taxes and debts to other lenders that cannot be serviced from existing cash flow. Page 29 of 38 The following table contains information for loans classified as impaired:
========================================================================================================================= Net Carring Specific Net (Dollars in thousands) Value Allowance Balance - ------------------------------------------------------------------------------------------------------------------------- September 30, 2000 Loans with specific allowances $ 62,169 $ (28,693) $ 33,476 Loans without specific allowances 13,107 - 13,107 - ------------------------------------------------------------------------------------------------------------------------- Total $ 75,276 $ (28,693) $ 46,583 ========================================================================================================================= December 31, 1999 Loans with specific allowances $ 28,779 $ (10,160) $ 18,619 Loans without specific allowances 11,978 - 11,978 - ------------------------------------------------------------------------------------------------------------------------- Total $ 40,757 $ (10,160) $ 30,597 =========================================================================================================================
Impaired loans were classified as follows:
========================================================================================================================= September 30, December 31, (Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- Current $ 15,408 $ 12,920 Past due - 248 Nonaccrual 59,868 27,589 - ------------------------------------------------------------------------------------------------------------------------- Total $ 75,276 $ 40,757 =========================================================================================================================
Loans classified as impaired totaled $75.3 million at September 30, 2000, compared with $40.8 million at December 31, 1999. The $34.5 million net increase in impaired loans at September 30, 2000, compared with December 1999 reflects loans totaling $136.3 million newly classified as impaired offset by $39.0 million in charge-offs, $42.2 million in payments on impaired loans and $20.6 million of loans removed from impaired status. The Company's average recorded investment in impaired loans for the first nine months of 2000 was $57.2 million. Interest income collected on impaired loans totaled approximately $858,000 for the first nine months of 2000, compared with $1.7 million for the year-earlier period. Allowance and Provision for Loan Losses The allowance for loan losses is maintained at a level considered appropriate by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. The Company's Credit Review Department performs an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company utilizes a migration model, a technique that estimates the inherent loss in the portfolio by applying loss factors to grades of loans, to determine the level of the allowance and provision for loan losses. The migration model utilizes an average loss rate over a rolling twelve quarter base period and incorporates a standard deviation analysis to provide probabilities for loss experience. The loss factors used in the model are updated quarterly. The primary qualitative factors considered in the assessment of loss factors are: changes in local economic and business conditions, including the condition of specific market segments; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; the existence and effect of any concentrations within the portfolio and changes in the level of such concentrations; changes in the trend of delinquencies and in the volume and nature of adversely graded nonaccrual and impaired loans; and external factors such as competition and legal and regulatory requirements that could potentially impact the level of credit losses in the portfolio. Management believes that the allowance for loan losses at September 30, 2000 is adequate. Future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At September 30, 2000, the allowance for loan losses was $90.1 million, or 2.18% of total loans, compared with $71.7 million, or 1.98% of total loans at December 31, 1999, and $68.8 million, or 1.88% of total loans, at September 30, 1999. Page 30 of 38 The allowance for loan losses represented 150% of nonaccrual loans at September 30, 2000, compared with 260% of nonaccrual loans at December 31, 1999, and 160% of nonaccrual loans at September 30, 1999. The following table summarizes activity in the allowance for loan losses:
======================================================================================================================= Nine months ended September 30, (Dollars in thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Balance, beginning of period $ 71,677 $ 62,649 ======================================================================================================================= Loans charged off: Commercial (44,921) (12,420) Real estate - (295) Consumer (236) (69) - ----------------------------------------------------------------------------------------------------------------------- Total charge-offs (45,157) (12,784) - ----------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 9,747 2,011 Real estate 21 67 Consumer 6 6 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries 9,774 2,084 - ----------------------------------------------------------------------------------------------------------------------- Net loans charged off (35,383) (10,700) Provision for loan losses 53,794 20,820 Portfolio transfer - (4,000) - ----------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 90,088 $ 68,769 ======================================================================================================================= Loans outstanding, end of period 4,141,848 3,648,237 - ----------------------------------------------------------------------------------------------------------------------- Average loans outstanding 4,222,856 3,914,946 ======================================================================================================================= Ratio of net charge-offs to average loans (annualized) 1.12% 0.37% Ratio of allowance for loan losses to loans outstanding at Sept 30 2.18 1.88 Ratio of allowance for loan losses to nonaccrual loans at Sept 30 150.48 159.80 Ratio of provision for loan losses to net charge-offs 152.03 194.58 =======================================================================================================================
Asset Quality by Type of Operation The Company's exposure to credit quality varies by type of operation. Management considers the exposure to credit risk, potential returns and allocated financial capital in operating the Company. Management believes that it is not appropriate to use the aggregate credit quality statistics to understand the credit exposure of the Company's operations. The Company devotes capital to its principal subsidiary, Imperial Bank, to two operating subsidiaries of Bancorp and the Bank, Imperial Credit Corporation ("ICC") and Imperial Ventures, Inc., ("IVI"), respectively, as well as to the Company itself. The activities of ICC and IVI include loans to and investments in emerging companies. The underwriting standards for these activities differ from those used by the Bank and the expected returns and possible credit losses are each higher than what would be expected from application of the Bank's loan underwriting criteria. Based upon these circumstances, the Company limits the amount of capital allocated to the type of lending and investing undertaken by ICC and IVI. A portion of the Bank's nonaccrual loans are covered by government guarantees and, accordingly, management excludes such loans from its assessment of Bank credit quality. In addition, as discussed above in "Operating Segment Results," the Syndicated Loan Segment has specialized underwriting. As contrasted with the segment disclosure, the following supplemental analysis reflects material nationally syndicated credits managed in regional offices (primarily because of deposit relationships) in the syndicated loan results. Management's supplemental analysis of credit quality by business activity is provided in the tables below: Page 31 of 38
========================================================================================================================== For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated September 30, 2000 Loans (2) (3) Operations Total Bank ICC Total (Dollars in thousands) - -------------------------------------------------------------------------------------------------------------------------- Average loans and equity invest (1) $ 522,743 $ 97,616 $ 3,514,841 $ 4,135,200 $39,185 $ 4,174,385 Average nonaccrual loans 14,305 2,354 33,186 49,845 425 50,270 Nonaccrual loans at September 30 31,209 2,458 26,201 59,868 - 59,868 Average allocated capital 69,276 3,972 378,620 451,868 47,071 498,939 Net charge-offs 23,923 58 10,240 34,221 1,162 35,383 YTD warrant and equity - investment income - - 22,831 22,831 19,433 42,264 Avg nonaccrual loans/avg loans 2.66% 2.35% 0.94% 1.19% 1.07% 1.19% Net charge-offs as a percentage of total average loans (annualized) 5.95 0.08 0.39 1.09 7.37 1.12 - --------------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include an $8.8 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was charged-off in May 2000. (3) Approximately 75% of SBA balances are guaranteed by the U.S Government ================================================================================
=========================================================================================================================== For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated September 30, 1999 Loans (2) (3) Operations Total Bank ICC Total (Dollars in thousands) - --------------------------------------------------------------------------------------------------------------------------- Average loans and equity invest (1) $ 600,359 $ 34,080 $ 3,194,241 $ 3,828,680 $16,109 $ 3,844,789 Average nonaccrual loans 100 636 42,525 43,261 - 43,261 Nonaccrual loans at September 30 3,401 2,150 37,484 43,035 - 43,035 Average allocated capital 74,963 4,015 300,113 379,091 21,332 400,423 Net charge-offs (recoveries) 6,328 - 4,372 10,700 - 10,700 YTD warrant and equity - investment income - - 9,555 9,555 2,093 11,648 Avg nonaccrual loans/avg loans 0.02% 1.83% 1.31% 1.12% 0.00% 1.11% Net charge-offs as a percentage of total average loans (annualized) 1.41 - 0.18 0.37 - 0.37 - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include a $4.5 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was fully charged-off by June 30, 1999. (3) Approximately 75% of SBA balances are guaranteed by the U.S Government. ================================================================================ Management's observations from the above analyses are that (1) the current year's annualized charge-off rate for the All Other Bank Operations (representing approximately 84% of consolidated loans) is only 39 basis points, approximately one-third the aggregate rate of 112 basis points, (2) the highest charge-off rate is in the IVI/ICC subsidiaries and is acceptable to management because the warrant and investment gains of approximately $19 million substantially exceed the credit risk from this type of investing activity (approximately $1.2 million in charge-offs), (3) the increase in the annualized net charge-off rate for syndicated loans is reflective of the matters discussed above, and (4) the 1999 net-charge-off rate for the All Other Bank Operations was at an extremely low level (18 basis points) and the current year's rate (approximately 62 basis points without the $6.0 million commercial loan recovery) is more indicative of the bank's historical results. Page 32 of 38 CAPITAL RESOURCES At September 30, 2000, shareholders' equity increased to $505.0 million from $473.4 million at December 31, 1999, and $414.5 million at September 30, 1999. During the nine months ended September 30, 2000, shareholders' equity was reduced by $30.5 million, due to common stock repurchases under the Company's Stock Repurchase Program. The Company repurchased and retired 1.7 million shares of its common stock during the first nine months of 2000. At September 30, 2000, 579,324 shares remain available for repurchase under the Company's Stock Repurchase Program. The Company subsequently terminated its Stock Repurchase Program due to the anticipated acquisition by Comercia Inc. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiaries are financially sound. The Company and its bank subsidiaries are subject to risk-based capital regulations promulgated by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on- and off-balance sheet and place increased emphasis on common equity. Federal law requires each federal banking agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier I and total capital ratios meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well capitalized". Tier I capital basically consists of common shareholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Company's Tier I and total capital ratios at September 30, 2000, were 10.14% and 13.09% respectively, compared with 12.76% and 9.54%, respectively, at September 30, 1999.
Capital Ratios for Imperial Bancorp and Imperial Bank/(1)/ =============================================================================================================================== September 30, 2000 - ------------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized For Capital Adequacy Under Prompt Corrective (Dollars in thousands) Actual Purposes Action Provisions - ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets): Company $ 768,765 13.09% $ 469,973 8.00% $ 587,467 10.00% Bank 703,000 12.14 463,338 8.00 579,172 10.00 Tier I Capital (to risk-weighted assets): Company 595,668 10.14 234,987 4.00 352,480 6.00 Bank 530,942 9.17 231,669 4.00 347,503 6.00 Leverage (to average assets): Company 595,668 9.02 198,222 3.00 330,370 5.00 Bank 530,942 8.13 196,005 3.00 326,674 5.00 ===============================================================================================================================
(1) Includes common shareholders' equity (excluding unrealized gains on securities available for sale) less goodwill and other disallowed intangibles. Risk-weighted assets for the Company and Imperial Bank were $5,553.6 million and $5,479.8 million, respectively, at September 30, 2000. Risk-weighted assets for the Company and the Bank were $5,063.0 million and $4,996.5 million at September 30, 1999, respectively. In April 1999, Imperial Bank issued $100 million of 8.5% 10-year Subordinated Capital Notes. The notes qualify as Tier 2 capital under regulatory guidelines. In May 2000, the Company redeemed $10.0 million of its Capital Securities. These securities qualify as Tier 1 capital under regulatory guidelines. Page 33 of 38 In addition to the risk-weighted ratios, all banks are required to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3 percent. The ratio is defined as Tier I capital to average total assets for the most recent quarter. The Company's leverage ratio was 9.02% at September 30, 2000, compared with 8.50% at September 30, 1999, well in excess of minimum regulatory requirements. LIQUIDITY Liquidity management relates to the Company's ability to meet its cash requirements and is managed through its asset/ liability management process. The Company monitors its cash inflows and outflows associated with its lending and deposit activities and modifies its asset and liability positions as liquidity requirements change. The Company also relies on projections of loan and deposit growth in managing its liquidity position. The Company's primary source of liquidity is its deposit base. This source has historically provided a significant majority of the Company's liquidity needs. Total deposits grew to $6.5 billion at September 30, 2000, from $5.9 billion at December 31, 1999, and $5.7 billion at September 30, 1999. Demand deposits increased to $3.5 billion, or 54% of total deposits, at September 30, 2000, from $2.5 billion, or 43% of total deposits at December 31, 1999, and $2.9 billion, or 51% of total deposits, at September 30, 1999. See - "Operating Segment Results." The Company also uses other methods of meeting its liquidity requirements including short-term borrowings in the form of federal funds purchased, repurchase agreements, commercial paper, Treasury tax and loan notes ("TT & L") and occasionally the sale of securities held in its available for sale portfolio. Short-term borrowings decreased to $53.0 million at September 30, 2000, from $156.7 million at December 31, 1999, and $101.6 million at September 30, 1999. The large decrease in short-term borrowings compared with the earlier periods is due to a reduction in TT & L balances. Management made the decision to reduce the level of TT & L borrowings in order to use the collateral in connection with the formation of ISII. The Company has recently been in a position of having excess liquidity due primarily to strong demand deposit growth that surpassed loan funding requirements. The Company has a policy of maintaining net liquid assets to total deposits (the liquidity ratio) of at least 20%. The liquidity ratio averaged 26.5% for the first nine months of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Management The primary objective of the asset liability management process is to manage the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. In order to manage its interest rate sensitivity, the Company has adopted policies that attempt to protect pretax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates Page 34 of 38 change. The Company's Asset Liability Committee ("ALCO") chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pretax net interest income and net interest margin. Each month, the Company assesses its overall exposure to potential changes in interest rates and the impact such changes may have on net interest income and the net interest margin by simulating various interest rate scenarios over future time periods. Through the use of these simulations, the Company can approximate the impact these projected rate changes may have on its entire on- and off-balance sheet positions, on any particular segment of the balance sheet, and on overall profitability. The majority of the Company's loan portfolio is variable rate, therefore, net interest income will increase during a period of rising interest rates and decrease during a period of declining interest rates. The Company's net interest margin is sensitive to changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans, are generally tied to the prime rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR. The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's prime based assets and LIBOR correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate floors, caps and swaps. RISK FACTORS AFFECTING FUTURE RESULTS This report contains statements that may be considered forward-looking. Actual results could differ materially from the results indicated by these statements because of many factors that are beyond our ability to control or predict. The following is a list of primary risks facing the Company: Interest Rate Risk: The Company's profitability is primarily dependent on the net interest spread between its earning assets and the related funding sources. A large portion of its earning asset base relates to the prime interest rate. Future reductions in the prime interest rate could have material and adverse effects on the Company's profitability. A large portion of its funding sources are non-interest bearing and face the possibility of disintermediation either to a competing bank - creating a loss of market share and/or a need for replacement - - or disintermediation into an interest-bearing account - causing a significant reduction to net interest income. The Company employs financial derivatives to hedge interest rate risk, specifically a $2 billion floor in effect each quarter through September 2001. If the cost of the hedges increases, the Company would either have to pay the increased cost to maintain the hedge or find alternative methods to mitigate interest rate risk. Credit Risk: The Company generally faces risk from its borrower base in that they may fail to perform in accordance with the terms of their loans, especially the full repayment of loan principal. The Company has adopted underwriting standards in an effort to minimize these risks. The Company's profitability could be both materially and adversely effected should it experience increased loan defaults and charge-offs. Regulatory Risk: As a part of the banking industry, the Company is subject to extensive regulatory control and attention. Legislation such as the repeal of the Glass-Steagal Act in the recently adopted Gramm-Leach-Bliley Act have moved the banking industry and financial intermediaries to the forefront in terms of regulatory attention and concern. Limitations concerning client activity, liquidity requirements, capital requirements, transactions with affiliates, business focus, tax consequences, interstate banking and treatment of subsidiaries could have material and adverse impact on profitability. Local and National Economic Risk: The Company has broadened its lending focus with expansion into Austin, Boston, Dallas, Denver, Kirkland, New York, Phoenix, Raleigh-Durham and Reston. However, the vast majority of clients and business still come from California. Therefore, the Company faces some concentrated risks concerning future economic status for California along with the nation as a whole. A significant reduction in demand for the Company's products and increased credit losses could result from an economic slowdown either locally or nationally. Subsidiary Risk: The Company is a 56% owner of Official Payments Corporation ("OPAY"), a leading provider of electronic payment options to government entities. OPAY is in the early stages of operations and expects to incur losses Page 35 of 38 from operations in the future, of which the Company will record its proportionate interest. Currently, OPAY generates most of its revenues from processing income tax payments. Tax payments are seasonal in nature and produce inconsistent earnings streams. These inconsistent earnings will be reflected in the Company's financial statements and press releases. OPAY is extremely dependent on maintaining its relationship with the IRS to maintain future revenues. Loss of IRS processing would severely limit OPAY's ability to earn consistent future revenues and establish market share and name recognition. Warrants and Equity Investments Income Risk: In the past, the Company has been able to generate substantial income derived from the sale of stock, obtained by the Company through the exercise of warrants received from certain clients as provided in the loan terms. The Company has also realized income from equity investments in emerging growth companies and investments in venture capital funds. Many factors may influence the ability to collect future income from these sources such as equity market fluctuations, market acceptance for IPOs, the client's ability to establish and maintain a successful company and the unexercised expiration of the warrant agreements. The nature and timing of these factors could create situations that would greatly reduce warrant and equity investment income. Competitive Risk: The Company faces constant competition for loans, deposits and fee-based income from other national, regional and community commercial banks as well as other financial intermediaries such as, savings and loans, finance companies, brokerage firms, insurance companies and credit unions. A loss of market share in its deposit base would force the Company to turn to higher priced funding sources to support its balance sheet. These higher priced funding sources would significantly reduce net interest income. On the asset side, the Company also faces intense competition for its loan products. Legal Liability Risk: Claims and lawsuits against the Company arise throughout the normal course of operations. Currently, the Company believes that the liability, if any, relating to these actions will not have a material impact on the Company. However, future claims could have material and adverse impacts on profitability. Merger Risk: Imperial Bancorp has entered into an agreement to be acquired by Comerica, Inc. In connection with the agreement, certain risks and uncertainties include but are not limited to: . conditions precedent to the close of the merger agreement may not be satisfied; . the timing and completion of the merger and new operations may be delayed or prohibited; . the benefits anticipated to result from the merger may not be realized; and . uncertainty relating to the merger may cause the combined company to lose current or fail to gain new customer and employees. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. On September 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB No. 133." SFAS No. 138 addresses a limited number of issues causing implementation difficulties for numerous entities that are required to apply SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB statement No. 133, and Statement 138," continues to be effective for all fiscal quarters of all fiscal years beginning after June 30, 2000. Although management does not believe that adoption of SFAS No. 133 will have a material impact on its results of operations and financial position, management anticipates that the new pronouncement will have an impact on accounting for warrants received in lending transactions. Specifically, equity warrants will be accounted for as embedded derivatives and, accordingly, such warrants will in general be recognized as an asset at fair value at the time the related lock-up period expires. Page 36 of 38 SFAS No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In September 2000, the FASB issued SFAS No 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" as a replacement of SFAS 125 effective for disclosures in financial statements issued subsequent to December 15, 2000, and for transactions entered after March 31, 2001. Management does not expect adoption of SFAS 140 will have a material impact on the financial statements. PART II OTHER INFORMATION ITEM 1. Legal Proceedings Due to the nature of the businesses, the Company and its subsidiaries are subject to numerous legal actions, threatened or filed, arising in the normal course of business. Certain of the actions currently pending seek punitive damages, in addition to other relief. The Company is of the opinion that the eventual outcome of all currently pending legal proceedings will not be materially adverse to the Company. ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Index Exhibit Number Description 10.1 Special Compensation Agreement dated May 19, 2000, between Company, Imperial Bank and George L. Graziadio, Jr. 10.2 Special Compensation Agreement dated May 19, 2000, between Company, Imperial Bank and Norman P. Creighton 27.1 Financial Data Schedule All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) Form 8-K filed on November 02, 2000. Page 37 of 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. IMPERIAL BANCORP Dated: November 14, 2000 By: /s/ Dennis J. Lacey --------------------------------- Dennis J. Lacey Executive Vice President and Chief Financial Officer By: /s/ Paul E. Adkins --------------------------------- Paul E. Adkins Senior Vice President and Controller Page 38 of 38 EX-10.1 2 0002.txt SPECIAL COMPENSATION AGREEMENT - GEORGE GRAZIADIO, JR. SPECIAL COMPENSATION AGREEMENT THIS SPECIAL COMPENSATION AGREEMENT (the "Agreement") is made and entered into on May 19, 2000, by and among IMPERIAL BANCORP, a registered bank holding company ("Bancorp"), IMPERIAL BANK, a California banking corporation ("Bank") and GEORGE L. GRAZIADIO, JR., an individual (the "Executive"). (Bancorp and Bank shall be collectively referred to as "the Company"). RECITALS -------- A. The Executive is currently employed by Bancorp and Bank. B. This Agreement sets forth the Special Compensation (as defined in Section 3 below) which the Company agrees it will pay to the Executive upon a - --------- Change in Control (as defined in Section 1(b) below). ------------ C. The board of directors of both Bancorp and Bank, with the Executive specifically excluded from consideration of the matter, have approved the execution of this Agreement and the performance of the obligations hereunder. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed among the parties hereto as follows: 1. Definitions ----------- (a) Average Annual Compensation. The average Compensation (as defined --------------------------- in Section 1(d) below) paid by the Company to the Executive during the five (5) ----------- most recent calendar years ending prior to the Change in Control of the Company. (b) Change in Control. A Change in Control shall be deemed to have ----------------- occurred contemporaneously with the occurrence of the first of any one of the following events: (1) any consolidation or merger of Bank or Bancorp unless its voting securities outstanding immediately before the merger or consolidation would continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50 percent of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Bank or Bancorp; (3) the shareholders of Bank or Bancorp approve any plan or proposal for the liquidation or dissolution of Bank or Bancorp; (4) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder (collectively, the "Exchange Act")) becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of Bank's or Bancorp's issued and outstanding Common Stock (except as a result of an agreement to vote securities unless its ultimate purpose is to cause what would otherwise be Change in Control or to force one or more directors or members of senior management to be replaced, as reasonably determined by the Bancorp's board of directors); or (5) a majority of the members of Bank's or Bancorp's board of directors is replaced during any two-year period by directors whose appointment or election is not approved by two-thirds of the members of the board of directors at the start of such two-year period. (c) Code. The Internal Revenue Code of 1986, as amended. ---- (d) Compensation. The total taxable gross cash compensation payable ------------ to the Executive by Company, determined before tax withholding, Executive's contributions to benefit programs (such as Section 401(k) plan, cafeteria plan, or Executive Deferral Plan contributions), but not including distributions from any deferred compensation of other benefit plan, any equity compensation (such as stock option gains), or any taxable noncash benefits. (e) Date of Termination. The "Date of Termination" of employment ------------------- shall mean: (1) if this Agreement is terminated by the Company based on the Executive's Disability, 30 days after Notice of Termination is given to the Executive; provided, however, that the Executive shall not have returned to the -------- ------- performance of the Executive's duties on a full-time basis during such 30-day period; (2) if this Agreement is terminated based on the Executive's Retirement, the date on which the Notice of Termination is given; or (3) if this Agreement is terminated based on the Executive's Death, or for Other Reason, the effective date of such termination. (f) Death. Termination for "Death" shall mean termination of the ----- Executive's employment after the Executive has been declared legally dead pursuant to the applicable laws. (g) Disability. Termination for "Disability" shall mean termination ---------- of the Executive's employment because the Executive has been absent from his duties on a full time basis for six (6) months as a result of the Executive's incapacity due to physical or mental illness and, within 30 days of Notice of Termination, the Executive shall not have returned to full-time performance of the Executive's duties. 2 (h) Excise Tax. The tax imposed by Section 4999 of the Code and any ---------- applicable state excise tax provision. (i) Notice of Termination. A written notice which (1) indicates the --------------------- specific termination provisions in this Agreement relied upon, (2) sets forth in reasonable detail the facts and circumstances claimed to provide the basis for termination of the Executive's employment under the provisions so indicated (and also provides the resolution specified in Section 1(b) if the termination is for ------------ Cause), and (3) is delivered to (A) the Executive if the grounds for termination are Disability (when no legal custodian has been appointed for the Executive), Retirement or Cause, or (B) the Executive's legal custodian if the grounds for termination are Disability and a legal custodian has been appointed for the Executive. (j) Other Reason. Termination for "Other Reason" shall mean ------------ termination of the Executive's employment either voluntarily or involuntarily for any reason other than Death, Disability, Retirement, Cause or Good Reason. (k) Payment Date. The Date of Termination. ------------ (l) Retirement. Termination for "Retirement" shall mean termination ---------- of the Executive's employment by Bank (after Notice of Termination) or termination by the Executive, based on the Executive having reached age 70 or such other age as shall have been fixed in any arrangement established with the Executive's written consent. (m) Special Compensation. The term "Special Compensation" shall have -------------------- the meaning defined in Section 3 below. --------- 2. Term of Agreement. ----------------- This Agreement shall terminate upon the earliest of the following events: (a) ten years from the date hereof if a Change in Control has not occurred within such ten year period; (b) the Date of Termination of the Executive's employment by Bank based on Death, Disability, Retirement or Other Reason; or (c) the payment in full of all of the Company's obligations for Special Compensation as set forth in Section 3 below after a Change in Control. 3. Special Compensation Upon Change in Control. ------------------------------------------- (a) Special Compensation. Unless this Agreement has previously -------------------- terminated pursuant to Section 2 above, immediately upon a Change in Control, --------- the Company shall pay to the Executive, in addition to any compensation to which the Executive may otherwise be entitled, an amount equal to the lesser of: (1) ------ 2.99 times the Average Annual Compensation; or (2) the largest gross Special Compensation amount which, in the opinion of 3 the Company's independent auditors, will maximize the net payment to the Executive after consideration of all taxes including the Excise Tax. The Special Compensation shall be paid in a lump sum, in cash, on the Payment Date. All of the Special Compensation shall be paid by Bancorp and Bank based on the respective Average Annual Compensation paid by each. (b) Computation of Excise Tax. For purposes of determining ------------------------- whether any of the Special Compensation will be subject to the Excise Tax and the amount of such Excise Tax: (1) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person or entity whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered by the Executive within the meaning of Section 280G(b)(4) of the Code (except that, as to amounts that are reasonable compensation for services rendered before a Change in Control, the base amount allocated to such amount shall be taken into account to the extent prescribed by Section 280G of the Code). (2) The value of any non-cash benefits and any present value computations shall be determined by the Company's independent auditors in accordance with the principles of Section 28OG(d)(3) and (4) of the Code. (3) The determination of the amount of the Excise Tax pursuant to the foregoing provisions shall be made by the Company's independent auditors and such determination shall be binding on both the Company and the Executive. The expense of such determination shall be borne solely by the Company. (c) The Company's Withholding Obligation. Bank shall withhold ------------------------------------ the amount of federal and state income tax and, if applicable, the Excise Tax applicable to the Special Compensation payable to the Executive pursuant to the provisions of Section 3 hereof, in the amount established by Company's --------- independent auditors. (d) No Other Analogous Benefits Payable. Executive agrees that ----------------------------------- this Agreement sets forth the only arrangement pursuant to which Executive may receive any severance, similar benefit, or special payment following a Change in Control while this Agreement is in effect, and Executive waives any entitlement he may have to any such benefit or any other amount that would be a "parachute payment" with respect to such a Change in Control. 4. No Obligation to Mitigate Damages. --------------------------------- 4 (a) Executive shall not be required to mitigate damages for the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amounts of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The provisions in this Agreement and any payment provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time under any benefit plan, incentive plan, securities plan, employment agreement or other contract, plan or arrangement. 5. Successor to the Company. ------------------------ (a) The Company will require any successor or assign, whether direct or indirect, by purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of Bank or Bancorp to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. As used in this Agreement, Company shall mean the "Company" and any successor to its business and/or assets which executes and delivers the agreement provided in this Section 5 or which otherwise becomes bound by all the --------- terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, advisees and legatees. If the Executive should die while any amounts are still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is none, to the Executive's estate. 6. Arbitration. Any controversy or claim arising out of or relating to ----------- this Agreement, or the breach thereof, other than matters pertaining to injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions, and permanent injunctions, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the Judicial Arbitration and Mediation Service (JAMS), and judgment upon the award rendered by the arbitrator(s) shall be and may be entered in any court having jurisdiction thereof. The parties hereto hereby agree that the arbitrator(s) shall have jurisdiction to award punitive damages and the parties shall be permitted to conduct discovery in accordance with the provisions of Part 3, Title 9, Paragraphs 1280 et seq. of the California Code of Civil Procedure. ------ Such arbitration shall take place in Los Angeles County, California, unless otherwise agreed to in writing by the parties. 7. Miscellaneous. ------------- 5 (a) Notice. All notices, requests, demands, and other communications ------ provided for hereunder shall be in writing or by e-mail or facsimile transmission and shall be deemed to have been duly given (1) on the date of service if delivered in person or by e-mail or facsimile transmission (with the e-mail or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided that e-mailed or facsimile notices are also mailed by first class, certified or registered mail, postage prepaid); or (2) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed as follows or at such other address as the party affected may designate in a written notice to such other party in compliance with this section. If to the Company: Imperial Bancorp Attn: Richard Baker 9920 South La Cienega Blvd. Inglewood, California 90301 Telecopier No.: (310) 417-5695 E-mail: rmbaker@imperialbank.com If to the Executive: George L. Graziadio, Jr. P.O. Box 92991 Los Angeles, CA 90009 Telecopier No.: (310) 417-5999 E-mail: maadams@imperialbank.com (b) Waiver. No provisions of this Agreement may be modified, waived ------ or discharged unless such waiver, modification or discharge is pursuant to a written agreement signed by the Executive and the Company. No waiver by either party of any breach of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions. (c) Integration. No agreements or representations, oral or otherwise, ----------- express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement and the terms and conditions of all previous agreements between the parties concerning the subject matter hereof are hereby superseded. (d) Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of California. (e) Validity. The invalidity or unenforceability of any provisions of -------- this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (f) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6 (g) Legal Fees and Expenses. In the event that any party shall bring ----------------------- any arbitration, action to enforce arbitration or any other legal action or proceeding (collectively "action") arising out of or in connection with the performance, breach, interpretation, validity or enforceability of this Agreement, then the prevailing party in such action (as determined by the court, arbitrator(s) or other body having jurisdiction) shall be entitled to recover from the losing party, all reasonable costs and expenses of the action, including the fees of all arbitrators if the action has been arbitrated, reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such action, in such amounts as may be determined in the discretion of the court, arbitrator(s) or other body having jurisdiction. (h) Confidentiality. The Executive shall retain in confidence any and --------------- all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise properly disclosed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" "BANCORP" IMPERIAL BANCORP, a registered bank holding company ____________________________ By: ___________________________ George L. Graziadio, Jr. Richard M. Baker Senior Vice President "BANK" IMPERIAL BANK, a California banking corporation By: ___________________________ Daniel Mathis President and Chief Operating Officer 7 EX-10.2 3 0003.txt SPECIAL COMPENSATION AGREEMENT - NORMAN P. CREIGHTON Exhibit 10.2 SPECIAL COMPENSATION AGREEMENT THIS SPECIAL COMPENSATION AGREEMENT (the "Agreement") is made and entered into as of May 19, 2000, by and among IMPERIAL BANCORP, a registered bank holding company ("Bancorp"), IMPERIAL BANK, a California banking corporation ("Bank") and NORMAN P. CREIGHTON, an individual (the "Executive"). (Bancorp and Bank shall be collectively referred to as "the Company"). RECITALS -------- A. The Executive is currently employed by Bank. B. This Agreement sets forth the Special Compensation (as defined in Section 3 below) which the Company agrees it will pay to the Executive upon a - --------- Termination Following Change in Control (as defined in Section 1(P) below). ------------ C. The board of directors of both Bancorp and Bank, with the Executive specifically excluded from consideration of the matter, have approved the execution of this Agreement and the performance of the obligations hereunder. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed among the parties hereto as follows: 1. Definitions ----------- (a) Average Annual Compensation. The average Compensation (as defined --------------------------- in Section 1(e) below) paid by the Company to the Executive during the five (5) ------------ most recent calendar years ending prior to the Change in Control of the Company. (b) Cause. For purposes of this Agreement only, termination for ----- "Cause" shall mean: (1) termination of the Executive's employment on the basis of fraud, misappropriation or embezzlement on the part of the Executive; (2) termination because Executive is convicted of (or pleads nolo contendere to) a crime of dishonesty or breach of trust or crime leading to - ---- ---------- incarceration of more than 90 days (including, without limitation, embezzlement or theft against Company) or payment of a penalty or fine of not less than $10,000; or (3) termination after issuance of an Order by a regulatory agency, administrative tribunal or court pursuant to Section 8 of the Federal Deposit Insurance Act, Section 1913.5 of the California Financial Code or successor statutes. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until Bank delivers to the Executive a Notice of Termination (as defined in Section 1(k) below) and a copy of the resolution duly ------------ adopted by the affirmative vote of not less than three-quarters of the entire membership of Bank's board of directors at a meeting of the board called and held for the purpose of termination of the Executive for Cause (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the board), finding that in the good faith opinion of the board the Executive was guilty of or the subject of any of the items specified above, and specifying the particulars thereof in detail. (c) Change in Control. A Change in Control shall be ----------------- deemed to have occurred contemporaneously with the occurrence of the first of any of the following events: (1) any consolidation or merger of Bank or Bancorp unless its voting securities outstanding immediately before the merger or consolidation would continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50 percent of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Bank or Bancorp; (3) the shareholders of Bank or Bancorp approve any plan or proposal for the liquidation or dissolution of Bank or Bancorp; (4) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder (collectively, the "Exchange Act")) becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 25% or more of Bank's or Bancorp's issued and outstanding Common Stock (beneficial owners of 5% or more of Bank's or Bancorp's issued and outstanding Common Stock on the date of this Agreement shall not be considered persons for purposes of this section), except as a result of an agreement to vote securities unless its ultimate purpose is to cause what would otherwise be a Change in Control or to force one or more directors or member of senior management to be replaced, as reasonably determined by Bancorp's board of directors; or (5) a majority of the members of Bank's or Bancorp's board of directors is replaced during any two-year period by directors whose appointment or election is not approved by two-thirds of the members of the board of directors at the start of such two-year period. (d) Code. The Internal Revenue Code of 1986, as amended. ---- Page 2 of 10 (e) Compensation. The total taxable gross cash compensation ------------ payable to the Executive by Company, determined before tax withholding, Executive's contributions to benefit programs (such as Section 401(k) plan, cafeteria plan or Executive Deferral Plan contributions), but not including distributions from any deferred compensation or any other benefit plan, any equity compensation ( such as stock option gains), or any taxable non cash benefits. (f) Date of Termination. The "Date of Termination" of ------------------- employment shall mean: (1) if this Agreement is terminated by the Company based on the Executive's Disability, 30 days after Notice of Termination is given to the Executive; provided, however, that the Executive shall not have -------- ------- returned to the performance of the Executive's duties on a full-time basis during such 30-day period; (2) if this Agreement is terminated based on the Executive's Retirement, the date on which the Notice of Termination is given; (3) if this Agreement is terminated based on the Executive's Death, Good Reason or for Other Reason, the effective date of such termination; or (4) if this Agreement is terminated for Cause, the date Bank delivers the resolution of Bank adopted in accordance with Section ------- l(b) above. - ---- (g) Death. Termination for "Death" shall mean termination ----- of the Executive's employment after the Executive has been declared legally dead pursuant to the applicable laws. (h) Disability. Termination for "Disability" shall mean ---------- termination of the Executive's employment because the Executive has been absent from his duties on a full time basis for six (6) months as a result of the Executive's incapacity due to physical or mental illness and, within 30 days of Notice of Termination, the Executive shall not have returned to full-time performance of the Executive's duties. (i) Excise Tax. The tax imposed by Section 4999 of the ---------- Code and any applicable state excise tax provision. (j) Good Reason. Termination for "Good Reason" shall ----------- mean termination of employment by the Executive based on any of the following events occurring without the Executive's express written consent: (1) Bank's assignment to the Executive of duties inconsistent with the Executive's position, duties, responsibilities and status with Bank or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control, or Page 3 of 10 any removal of the Executive from or any failure to reelect the Executive to any such positions, except in connection with the termination of the Executive's employment for Death, Disability, Retirement or Cause or by the Executive other than for Good Reason; (2) After a Change in Control, a reduction by Bank in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement or Bank's failure to increase, within 12 months of the Executive's last increase in base salary, the Executive's base salary in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all executive officers of the Company effected in the preceding 12 months; (3) Any failure by the Company to continue in effect any material fringe benefit, plan or arrangement in which the Executive is participating at the time of a Change in Control (or any other plans providing the Executive with substantially similar benefits) (collectively the "Fringe Benefit Plans"), or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Fringe Benefit Plan or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change in Control; (4) Any failure by the Company to continue in effect any monetary incentive plan or arrangement in which the Executive is participating at the time of a Change in Control (or any other plans or arrangements providing the Executive with substantially similar benefits) (collectively the "Monetary Incentive Plan")) or the taking of any action by the Company which would adversely affect the Executive's participation in such Monetary Incentive Plans or reduce the Executive's benefits under the Monetary Incentive Plans expressed as a percentage of the Executive's base salary, by more than two percentage points in any fiscal year as compared to the immediately preceding fiscal year; (5) A relocation of the Company's principal executive offices to a location more than twenty (20) miles from the current location, or the Executive's relocation to any place other than the location at which the Executive performed executive duties prior to a Change in Control, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change of Control; (6) Any material reduction by Bank in the number of annual paid vacation days to which the Executive is entitled after a Change in Control; (7) Any material breach by the Company of any provision of this Agreement; Page 4 of 10 (8) Any failure by Bank or Bancorp to obtain the assumption of this Agreement by any successor or assign of the Company pursuant to Section 5 hereof; or --------- (9) Any purported termination of the Executive's employment (other than for Death) which is not effected pursuant to a Notice of Termination satisfying the requirements of Section l(k) below. ------------ (k) Notice of Termination. A written notice which (1) --------------------- indicates the specific termination provisions in this Agreement relied upon, (2) sets forth in reasonable detail the facts and circumstances claimed to provide the basis for termination of the Executive's employment under the provisions so indicated (and also provides the resolution specified in Section 1(b) if the ------------ termination is for Cause), and (3) is delivered to (A) the Executive if the grounds for termination are Disability (when no legal custodian has been appointed for the Executive), Retirement or Cause, or (B) the Executive's legal custodian if the grounds for termination are Disability and a legal custodian has been appointed for the Executive. (l) Other Reason. Termination for "Other Reason" shall ------------ mean termination of the Executive's employment either voluntarily or involuntarily for any reason other than Death, Disability, Retirement, Cause or Good Reason. (m) Payment Date. The Date of Termination. ------------ (n) Retirement. Termination for "Retirement" shall mean ---------- the Executive's voluntary retirement (other than for Good Reason). (o) Special Compensation. The term "Special Compensation" -------------------- shall have the meaning defined in Section 3 below. --------- (p) Termination Following Change in Control. If a Change --------------------------------------- in Control occurs while the Executive is still an employee of Bank, Termination Following Change in Control shall mean any termination of the Executive's employment with Bank within two years of the Change in Control unless such ------ termination is as a result of (i) the Executive's Death; (ii) the Executive's Disability; (iii) the Executive's Retirement; (iv) the Executive's termination by Bank for Cause; or (v) the Executive's decision to terminate employment for other Reason. 2. Term of Agreement. ----------------- This Agreement shall terminate upon the earliest of the following events: (a) ten years from the date hereof or, if later, two years after the date of Change in Control; Page 5 of 10 (b) the Date of Termination of the Executive's employment by Bank (i) prior to a Change in Control or (ii) after a Change in Control for Death, Disability, Retirement or Cause; (c) the Date of Termination of the Executive's employment by the Executive (i) prior to a Change in Control or (ii) after a Change in Control for Other Reason; or (d) the payment in full of all of the Company's obligations for Special compensation as set forth in Section 3 below after --------- Termination Following Change in Control. 3. Special Compensation Upon Termination Following Change in Control. ----------------------------------------------------------------- (a) Special Compensation. Unless this Agreement -------------------- has previously terminated pursuant to Section 2 above, immediately upon a --------- Termination Following Change in Control, the Company shall pay to the Executive, in addition to any compensation to which the Executive may otherwise be entitled, an amount equal to the lesser of: (1) 2.99 times the Average Annual ------ Compensation; or (2) the largest gross Special Compensation amount which, in the opinion of the Company's independent auditors, will maximize the net payment to the Executive after consideration of all taxes including the Excise Tax. The Special Compensation shall be paid in a lump sum, in cash, on the Payment Date. All of the Special Compensation shall be paid by Bank. (b) Computation of Excise Tax. For purposes of ------------------------- determining whether any of the Special Compensation will be subject to the Excise Tax and the amount of such Excise Tax: (1) Any other payments or benefits received or to be received by the Executive in connection with a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person or entity whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code and all "excess parachute payment" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered by the Executive within the meaning of Section 280G(b)(4) of the Code (except that, as to amounts that are reasonable compensation for services rendered before a Change in Control, the base amount allocated to such amount shall be taken into account to the extent prescribed by Section 280G of the Code). (2) The value of any non-cash benefits --- and any present value computations shall be determined by the Company's independent auditors in accordance with the principles of Section 28OG(d)(3) and (4) of the Code. Page 6 of 10 (3) The determination of the amount of the Excise Tax pursuant to the foregoing provisions shall be made by the Company's independent auditors and such determination shall be binding on both the Company and the Executive. The expense of such determination shall be borne solely by the Company. (c) The Company's Withholding Obligation. Bank ------------------------------------ shall withhold the amount of federal and state income tax and, if applicable, the Excise Tax applicable to the Special Compensation payable to the Executive pursuant to the provisions of Section 3 hereof, in the amount established by --------- Company's independent auditors. (D) No Other Analogous Benefits Payable. ----------------------------------- Executive agrees that this Agreement sets forth the only arrangement pursuant to which Executive may receive any severance, similar benefit, or special payment following a Change in Control while this Agreement is in effect, and Executive waives any entitlement he may have to any such benefit or any other amount that would be a "parachute payment" with respect to such a Change in Control. 4. No Obligation to Mitigate Damages. --------------------------------- (a) Executive shall not be required to mitigate damages for the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amounts of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The provisions in this Agreement and any payment provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time under any benefit plan, incentive plan, securities plan, employment agreement or other contract, plan or arrangement. 5. Successor to the Company. -- ------------------------ (a) The Company will require any successor or assign, whether direct or indirect, by purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of Bank or Bancorp to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. As used in this Agreement, Company shall mean the "Company" and any successor to its business and/or assets which executes and delivers the agreement provided in this Section 5 or which --------- otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. Page 7 of 10 (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, advisees and legatees. If the Executive should die while any amounts are still payable hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is none, to the Executive's estate. 6. Arbitration. Any controversy or claim arising out of or relating ----------- to this Agreement, or the breach thereof, other than matters pertaining to injunctive relief, including, without limitation, temporary restraining orders, preliminary injunctions, and permanent injunctions, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the Judicial Arbitration and Mediation Service, and judgment upon the award rendered by the arbitrator(s) shall be and may be entered in any court having jurisdiction thereof. The parties hereto hereby agree that the arbitrator(s) shall have jurisdiction to award punitive damages and the parties shall be permitted to conduct discovery in accordance with the provisions of Part 3, Title 9, Paragraphs 1280 et seq. of the California Code of Civil Procedure. Such ------ arbitration shall take place in Los Angeles, California, unless otherwise agreed to in writing by the parties. 7. Miscellaneous. -- ------------- (a) No Employment Contract. This Agreement shall not constitute ---------------------- a contract of employment between Company and Executive. (b) Notice. All notices, requests, demands, and other ------ communications provided for hereunder shall be in writing or by e-mail or facsimile transmission and shall be deemed to have been duly given (1) on the date of service if delivered in person or by e-mail or facsimile transmission (with the e-mail or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided that e-mailed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (2) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed as follows or at such other address as the party affected may designate in a written notice to such other party in compliance with this section. If to the Company: Imperial Bancorp Attn: Richard Baker 9920 South La Cienega Blvd. Inglewood, California 90301 Telecopier No.: (213) 417-5695 E-mail: rmbaker@imperialbank.com Page 8 of 10 If to the Executive: Norman P. Creighton P.O. Box 92991 Los Angeles, CA 90009 Telecopier No.: (213) 417-5874 E-Mail: norman.creighton@imperialbank.com (c) Waiver. No provisions of this Agreement may be ------ modified, waived or discharged unless such waiver, modification or discharge is pursuant to a written agreement signed by the Executive and the Company. No waiver by either party of any breach of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions. (d) Integration. No agreements or representations, oral or ----------- otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement and the terms and conditions of all previous agreements between the parties concerning the subject matter hereof are hereby superseded. (e) Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of California. (f) Validity. The invalidity or unenforceability of any -------- provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. (g) Counterparts. This Agreement may be executed in one or ------------ more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (h) Legal Fees and Expenses. In the event that any party ----------------------- shall bring any arbitration, action to enforce arbitration or any other legal action or proceeding (collectively "action") arising out of or in connection with the performance, breach, interpretation, validity or enforceability of this Agreement, then the prevailing party in such action (as determined by the court, arbitrator(s) or other body having jurisdiction) shall be entitled to recover from the losing party, all reasonable costs and expenses of the action, including the fees of all arbitrators if the action has been arbitrated, reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such action, in such amounts as may be determined in the discretion of the court, arbitrator(s) or other body having jurisdiction. (i) Confidentiality. The Executive shall retain in --------------- confidence any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise properly disclosed. Page 9 of 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EXECUTIVE" "BANCORP" IMPERIAL BANCORP, a registered bank holding company ____________________________ By: ___________________________ Norman P. Creighton Richard M. Baker Senior Vice President "BANK" IMPERIAL BANK, a state banking corporation By: ___________________________ Daniel Mathis President and COO Page 10 of 10 EX-27.1 4 0004.txt FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 439,980 0 1,395,000 101,427 1,070,329 3,620 3,620 4,141,848 (90,088) 7,441,954 6,526,205 52,998 186,381 171,383 0 0 334,985 170,002 7,441,954 290,074 55,210 27,325 372,609 103,115 118,707 253,902 53,794 13,639 226,691 97,737 97,737 0 0 63,031 1.41 1.36 5.74 59,868 0 6,284 0 71,677 45,157 9,774 90,088 90,088 0 0
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