UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-7722
IMPERIAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-2575576
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9920 South La Cienega Boulevard
Inglewood, California 90301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 417-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding at August 7, 2000
Common stock, no par value 44,215,732
This report contains a total of 37 pages.
IMPERIAL BANCORP
FORM 10-Q
TABLE OF CONTENTS
Part I Financial Information
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income and Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Part II Other Information
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Page 1 of 37
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 498,376 $ 307,770
Federal funds sold and securities purchased under resale agreements 1,238,000 1,555,000
Trading instruments 139,703 86,540
Securities available for sale, at fair value 1,031,818 1,040,285
Securities held to maturity (fair value of $3,661 and $3,744 for 2000 and 1999, respectively) 3,661 3,744
Loans held for sale (fair value of $36,276 and $83,613 for 2000 and 1999, respectively) 35,493 83,044
Loans:
Loans, net of unearned income and deferred loan fees 3,952,714 3,612,148
Less allowance for loan losses (80,535) (71,677)
- --------------------------------------------------------------------------------------------------------------------------
Total net loans 3,872,179 3,540,471
==========================================================================================================================
Premises and equipment, net 48,049 41,245
Accrued interest receivable 42,293 33,565
Real estate and other assets owned, net 826 935
Deferred tax asset 28,862 26,092
Other assets 146,904 138,011
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,086,164 $ 6,856,702
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 3,418,445 $ 2,538,850
Savings 26,537 21,075
Money market 1,253,720 1,492,138
Time - under $100 96,316 154,597
Time - $100 and over 1,437,354 1,697,940
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 6,232,372 5,904,600
==========================================================================================================================
Accrued interest payable 13,625 15,883
Income taxes payable 3,823 -
Short-term borrowings 14,448 156,663
Long-term borrowings:
Notes and debentures 99,443 99,411
Other borrowed funds 3,086 4,125
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated deferrable interest debentures 63,664 73,430
Minority interest 32,687 35,528
Other liabilities 114,486 93,655
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,577,634 6,383,295
==========================================================================================================================
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 44,661,220
shares at June 30, 2000, and 44,903,937 shares at
December 31, 1999, issued and outstanding 393,770 312,677
Unearned employee stock ownership plan shares: 105,582 (2,188) (9,998)
Deferred stock compensation (32,573) (37,615)
Accumulated other comprehensive income, net of tax 2,628 9,998
Retained earnings 146,893 192,006
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 508,530 473,407
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,086,164 $ 6,856,702
==========================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Page 2 of 37
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
==========================================================================================================================
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
(Dollars in thousands, except per share data) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
==========================================================================================================================
Interest income:
Loans $ 96,172 $ 77,568 $ 186,762 $ 152,155
Trading instruments 1,716 980 3,414 1,869
Interest-bearing deposits 148 - 243 -
Securities available for sale 16,720 8,627 29,496 16,021
Securities held to maturity 67 71 133 143
Federal funds sold and securities purchased under resale 6,665 4,370 17,790 8,425
Loans held for sale 1,015 601 2,477 1,037
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 122,503 92,217 240,315 179,650
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 31,220 22,400 64,966 44,168
Short-term borrowings 1,247 894 2,728 2,158
Long-term borrowings 4,313 3,430 8,246 5,003
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 36,780 26,724 75,940 51,329
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 85,723 65,493 164,375 128,321
Provision for loan losses 22,600 10,026 34,494 14,820
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 63,123 55,467 129,881 113,501
- --------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 2,105 1,936 3,965 3,779
Trust fees - 2,195 - 4,410
Gain on sale of loans 449 500 942 1,721
Gain from exercise of Official Payments Corp. stock options 7 - 922 -
Equity in net income of Imperial Credit Industries, Inc. - (596) - 1,644
Gain on sale of Imperial Credit Industries, Inc. stock - 5,391 - 5,391
Other service charges and fees 6,648 5,034 12,835 9,483
Merchant and credit card fees 4,478 2,506 8,172 4,741
International income and fees 4,564 3,130 8,492 5,931
Gain on sales of securities available for sale 6,146 54 11,331 54
Gain on sales of trading instruments 487 365 1,069 384
Gain on sale of the trust business 2,631 8,817 2,631 8,817
Gain on exercise of warrants and related sale of equity
securities 3,421 3,430 10,216 7,382
Other income 8,824 3,840 13,750 4,854
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 39,760 36,602 74,325 58,591
==========================================================================================================================
Noninterest expense:
Salary and employee benefits 44,151 29,527 87,977 60,243
Net occupancy expense 2,958 2,592 5,802 5,287
Furniture and equipment 4,220 2,814 8,092 5,718
Data processing 2,798 2,875 5,345 5,401
Customer services 4,417 6,228 8,870 12,579
Professional and legal fees 3,132 5,738 5,926 8,581
Business development 5,329 2,169 10,666 3,554
Other expense 7,772 6,443 17,242 13,496
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 74,777 58,386 149,920 114,859
- --------------------------------------------------------------------------------------------------------------------------
Minority interest in loss (income) of consolidated subsidiary 3,954 (39) 7,884 (21)
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 32,060 33,644 62,170 57,212
Income tax provision 11,561 13,833 22,356 23,177
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 20,499 $ 19,811 $ 39,814 $ 34,035
==========================================================================================================================
Basic earnings per share $ 0.46 $ 0.44 $ 0.89 $ 0.75
Diluted earnings per share 0.44 0.43 0.85 0.73
==========================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Page 3 of 37
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
(Dollars in thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 20,499 $ 19,811 $ 39,814 $ 34,035
Other comprehensive loss, net of tax:
Reclassification adjustments for gains included
in net income net of tax effect of ($2,337), $12,
($5,611), $12 (3,221) 16 (7,733) 16
Unrealized loss (gain) on securities available for sale,
net of tax effect of $263, $570, $239, ($1,038) 330 786 363 (1,431)
- -----------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (2,891) 802 (7,370) (1,415)
=======================================================================================================================
Total comprehensive income $ 17,608 $ 20,613 $ 32,444 $ 32,620
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
Deferred Other Total
Common Stock Retained Comprehensive Shareholders'
(Dollars in thousands) (Unaudited) Stock Compensation Earnings Income Equity
=======================================================================================================================
Balance December 31, 1999 $ 309,018 $ (37,615) $ 192,006 $ 9,998 $ 473,407
Common stock dividend 84,907 - (84,927) - (20)
Common stock issued under option plan 1,921 - - - 1,921
Common stock repurchased (9,159) - - - (9,159)
Tax benefit of employee stock option 2,772 - - - 2,772
Unearned ESOP shares and ESOP tax benefit 1,633 - - - 1,633
Deferred stock compensation - 5,042 - - 5,042
Other 490 - - - 490
Comprehensive income:
Net income - - 39,814 - 39,814
Other comprehensive income (7,370) (7,370)
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - 39,814 (7,370) 32,444
- --------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 $ 391,582 $ (32,573) $ 146,893 $ 2,628 $ 508,530
==========================================================================================================================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
Page 4 of 37
IMPERIAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================================================
Six months ended June 30,
2000 1999
(Dollars in thousands) (Unaudited) (Unaudited)
============================================================================================================================
Cash flows from operating activities:
Net income $ 39,814 $ 34,035
Adjustments for noncash charges (credits):
Depreciation and amortization 6,654 6,119
Amortization of loan fees (13,220) (10,444)
Provision for loan losses 34,494 14,820
Equity in net income of Imperial Credit Industries, Inc. - (1,644)
Gain on sale of Imperial Credit Industries, Inc. stock - (5,391)
Gain on exercise of warrants and sale of equity securities (10,216) (7,382)
Gain on sale of the trust business (2,631) (8,817)
Gain resulting from the exercise of OPAY stock options (922) -
Other gains (1,544) (152)
Benefit for deferred taxes (2,770) (9,467)
Gain on securities available for sale (11,331) (54)
Net change in trading instruments (53,163) (625)
Net change in loans held for sale 51,045 (275)
Net change in accrued interest receivable/payable (10,986) 702
Net change in income taxes receivable/payable 14,417 18,064
Net change in other assets/liabilities 12,823 (28,760)
Net change in minority interest (2,841) 21
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49,623 750
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity 83 67
Proceeds from sales of securities available for sale 3,954,903 1,265,116
Proceeds from maturities of securities available for sale 203,032 593,825
Proceeds from sale of Imperial Credit Industries, Inc. stock - 29,460
Purchase of securities available for sale (4,145,909) (1,894,064)
Proceeds from exercise of warrants and sale of equity securities 10,216 7,382
Proceeds from sale of the trust business 2,631 8,817
Net change in Federal funds sold and securities purchased under resale agreements 317,000 (85,000)
Net change in loans (355,534) (154,553)
Capital expenditures (13,310) (7,204)
Proceeds from sale of real estate and other assets owned 107 829
Proceeds from sale of premises and equipment 281 138
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,500) (235,187)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings, and money market accounts 646,639 60,481
Net change in time deposits (318,867) 98,361
Net change in short-term borrowings (142,215) 110,130
Net proceeds from issuance of subordinated capital notes - 98,364
Net proceeds from ESOP loan - 5,985
Net change in long-term borrowings (1,023) 286
Redemption of capital securities (9,793)
Repurchase of common stock for ESOP - (5,235)
Repurchase of common stock 1,921 (3,116)
Proceeds from exercise of employee stock options (9,159) 450
Other (20) (18)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 167,483 365,688
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks 190,606 131,251
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year 307,770 355,317
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 498,376 $ 486,568
============================================================================================================================
See accompanying notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------------
Page 5 of 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) ORGANIZATION
Imperial Bancorp (the "Company") is a financial holding company that was
incorporated in California in 1968. The Company's principal subsidiary, Imperial
Bank (the "Bank"), is a California-chartered bank with headquarters in
Inglewood, California. The Bank offers a wide range of financial products and
services to corporate customers, entrepreneurs and professionals. The Bank
operates 15 regional banking offices; 12 throughout California; and out-of-state
offices in Arizona, Colorado and Washington. In addition, the Bank operates 13
loan production offices located in major technology centers across the country.
The Bank owns 56% of the outstanding common stock of Official Payments
Corporation ("OPAY") (Nasdaq: OPAY).
NOTE (2) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all footnotes as would be necessary for a fair presentation of financial
position, results of operations, changes in cash flows and comprehensive income
in conformity with generally accepted accounting principles. However, these
interim financial statements reflect all normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. All such adjustments were of a normal
recurring nature. The Consolidated Financial Statements include the accounts of
the Company and its wholly and majority-owned subsidiaries. Operating results
for the three and six months ended June 30, 2000, are not necessarily indicative
of results that may be expected for the year ending December 31, 2000. The
accompanying Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and related notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 1999.
Certain reclassifications have been made to the Company's 1999 Consolidated
Financial Statements to conform with the 2000 presentation.
NOTE (3) STATEMENTS OF CASH FLOWS
The following information supplements the statements of cash flows:
=======================================================================================================================
For the six months ended June 30, (Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Interest paid $78,198 $48,830
Taxes paid 12,626 13,492
Federal tax refunds received 9,358 -
Significant noncash transactions:
Reclassification of investment in ICII stock to securities available for sale - 34,370
Loans to facilitate the sale of LHO loans to ICII 2,552 -
Loans transferred to OREO - 132
=======================================================================================================================
NOTE (4) EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted from issuance of common stock that then shared in earnings. Unearned
ESOP shares are not considered to be outstanding shares for purposes of
determining the number of weighted average shares for the EPS calculation.
Reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is presented in the
following tables for the three and six months ended June 30, 2000 and 1999:
Page 6 of 37
===================================================================================================================
For the three months ended June 30, 2000 1999
----------------------------------------------------------------
Per Per
(Dollars in thousands, except per share Share Share
data) Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
Basic EPS
Net income $20,499 44,955,402 $ 0.46 $19,811 45,119,463 $ 0.44
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,469,024 1,489,311
------------ ------------
Diluted EPS
Net income $20,499 46,424,426 $ 0.44 $19,811 46,608,774 $ 0.43
===================================================================================================================
===================================================================================================================
For the six months ended June 30, 2000 1999
----------------------------------------------------------------
Per Per
(Dollars in thousands, except per share Share Share
data) Income Shares Amount Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
Basic EPS
Net income $39,814 44,879,301 $ 0.89 $34,035 45,177,931 $ 0.75
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,734,220 1,566,835
----------- -----------
Diluted EPS
Net income $39,814 46,613,521 $ 0.85 $34,035 46,744,766 $ 0.73
===================================================================================================================
The number of shares used to compute basic and diluted income per share for 1999
have been adjusted to reflect an 8% stock dividend paid on February 18, 2000, to
shareholders of record on February 4, 2000. Securities that could potentially
dilute earnings per share in the future that were not included in the
calculation of diluted earnings per share for the 2000 reporting periods because
their effect was antidilutive totaled 562,603.
NOTE (5) COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized gains (losses) on
securities available for sale and is presented in the Consolidated Statements of
Comprehensive Income.
NOTE (6) OFFICIAL PAYMENTS CORPORATION
At June 30, 2000, the Company owned 12,000,000 shares, or 56% of total
outstanding shares, of OPAY's common stock. OPAY's operating results are
reported on a consolidated basis for financial reporting purposes. OPAY reported
operating losses of $9.1 million and $18.1 million for the three- and six-month
periods ended June 30, 2000, respectively. The Company's share of OPAY's
operating losses for these periods was $5.1 million and $10.2 million,
respectively. On an after-tax basis, the Company's net income for second quarter
2000 includes a $3.3 million loss related to its investment in OPAY. The
Company's net income for the six months ended June 30, 2000, includes a $6.0
million loss related to its investment in OPAY. The year-to-date loss is net of
a $595,200 after-tax gain recorded by the Company related to the exercise of
OPAY stock options. Thebook value of the Company's investment in OPAY is $3.51
per share or $42.1 million at June 30, 2000.
Page 7 of 37
During August 1999, OPAY and Imperial Bank entered into an employment agreement
with Thomas R. Evans, OPAY's Chairman and Chief Executive Officer. The
employment agreement provides for, among other items, Mr. Evans being granted
options to purchase 1,325,460 shares of OPAY common stock at $1.33 per share.
Imperial Bank guaranteed that the "value" --as defined in the agreement--of Mr.
Evans' vested options would be $10,000,000 on or before the third anniversary of
the date of the agreement or Imperial Bank would pay Mr. Evans an amount equal
to the difference between $10,000,000 and the highest value of the vested
options on or before the third anniversary. OPAY recorded Mr. Evans' stock
options as unamortized stock compensation which is being amortized into income
over three years. Imperial Bank consolidates its investment in OPAY and,
accordingly, it records its ownership interest in OPAY's operating loss which
includes the amortization expense of the Evans stock option guarantee.
Approximately $2.0 million of the guaranteed amount has been cumulatively
amortized through June 30, 2000. In the event that an obligation to fund the
guarantee is deemed probable, the amount of the estimated obligation over that
to be recorded in consolidation will be recorded as additional investment in
OPAY, subject to a recoverability analysis.
NOTE (7) OPERATING SEGMENT RESULTS
Management of the Company, for purposes of assessing performance and allocating
resources, evaluates these principal operating segments that both earn revenue
and incur expenses:
Commercial Banking - traditional banking services to mid-sized companies
originated principally by direct relationships with customers
Emerging Growth Division - venture banking for early-stage and emerging
companies originated principally through relationships with venture
capitalists
Real Estate - traditional banking services to residential homebuilders
originated by direct relationships with customers
Entertainment - traditional banking services to mid-sized entertainment and
independent film companies originated by direct relationships with
customers
Syndicated Finance - principally purchasing nationally syndicated loans
originated on an indirect basis
SBA Division - traditional small business ("SBA") lending originated
principally by direct relationships with customers
Imperial Creditcorp and Imperial Ventures - bridge loans and direct equity
investments in early-stage and emerging companies and equity investments in
venture capital funds, each originated principally through relationships
with venture capitalists
Merchant Banking - participations in loans originated on an indirect basis
For measuring segment profitability, the Company applies full absorption cost
accounting and, accordingly, the costs of the following support units are
allocated in full to the above operating segments:
Treasury Management - the interest expense of the Company's public debt and
brokered deposits is allocated to the operating segments based upon their
funding requirements
Financial Services Division - the interest and operating cost of this
Division, which offers depository services to particular industries
(including title and escrow companies, bankruptcy trustees, homeowners
associations and property management companies) is allocated to the
operating segments based upon their funding requirements
Operations and Administrative - the majority of the operating and
administrative costs are allocated based upon usage and the remainder is
allocated based upon balance sheet determinants
Page 8 of 37
For reporting segment information, the Company aggregates segments with
similar long-term financial performance and similar economic
characteristics. The Company aggregates based upon similar customer
origination processes:
Commercial Banking Segment - in this aggregate segment, the Company reports
on segments that originate business principally by direct relationships
with customers. This segment includes Commercial Banking, Real Estate,
Entertainment, and SBA.
Emerging Growth Segment - in this aggregate segment, the Company reports on
segments that originate business principally through relationships with
venture capitalists. This segment includes the Emerging Growth Division,
Imperial Creditcorp and Imperial Ventures.
Syndicated Finance Segment - in this aggregate segment, the Company reports
on segments that originate business on an indirect basis through other
financial institutions, principally banks. This segment includes the
Syndicated Finance Division and the Merchant Banking Group.
Other Segment - in this aggregate segment, the Company reports activities
not individually material including OPAY, the Merchant Card Division,
Financial Services, Treasury Management and nonbank subsidiaries of the
holding company.
The segment information for the prior year has been restated to conform with the
current year's presentation, including approximating the impact of using full
absorption cost accounting in the prior year.
Operating Segment Results
- -----------------------------------------------------------------------------------------------------------------------
For the three months ended
June 30, 2000 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 51,305 $ 13,668 $ 7,077 $ 13,673 $ 85,723
Provision for loan losses 12,842 (1) 4,430 4,876 452 22,600
Noninterest income 8,078 12,806 492 18,384 39,760
Noninterest expense (2) 30,144 9,966 1,731 28,982 70,823
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 16,397 12,078 962 2,623 32,060
Income taxes 5,813 4,281 341 1,126 11,561
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 10,584 $ 7,797 $ 621 $ 1,497 $ 20,499
- -----------------------------------------------------------------------------------------------------------------------
Average net loans (3) $ 2,705,151 $ 411,081 $ 542,346 $ 452,576 $ 4,111,154
Average nonaccrual loans 30,920 6,915 11,261 1,042 50,138
Average assets 2,779,029 442,806 558,540 2,590,219 6,370,594
Average deposits 1,586,556 1,009,548 16,767 2,841,643 5,454,514
- -----------------------------------------------------------------------------------------------------------------------
(1) $6.8 million of this provision relates to a nationally syndicated credit administered in a regional office.
(2) Includes minority interest in OPAY's operating loss.
(3) Excluding nonaccrual loans.
- -----------------------------------------------------------------------------------------------------------------------
Page 9 of 37
Operating Segment Results
- --------------------------------------------------------------------------------
For the three months ended
June 30, 1999 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 42,773 $ 8,272 $ 6,181 $ 8,267 $ 65,493
Provision for loan losses 9,479 423 124 - 10,026
Noninterest income 5,778 4,082 437 26,305 36,602
Noninterest expense (1) 27,436 6,605 1,547 22,837 58,425
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 11,636 5,326 4,947 11,735 33,644
Income taxes 4,784 2,190 2,034 4,825 13,833
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 6,852 $ 3,136 $ 2,913 $ 6,910 $ 19,811
- -----------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,408,174 $ 341,439 $ 605,579 $ 454,417 $ 3,809,609
Average nonaccrual loans 41,161 4,806 - 219 46,186
Average assets 2,469,725 353,967 608,522 2,131,878 5,564,092
Average deposits 1,453,315 521,527 5,619 2,840,482 4,820,943
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes minority interest in OPAY's operating income.
(2) Excluding nonaccrual loans.
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
For the six months ended
June 30, 2000 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 96,452 $ 26,689 $ 13,360 $ 27,874 $ 164,375
Provision for loan losses 22,950 (1) 5,435 5,207 902 34,494
Noninterest income 15,039 29,134 1,120 29,032 74,325
Noninterest expense (2) 60,093 20,335 3,448 58,160 142,036
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 28,448 30,053 5,825 (2,156) 62,170
Income taxes 10,084 10,654 2,065 (447) 22,356
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 18,364 $ 19,399 $ 3,760 $ (1,709) $ 39,814
- -----------------------------------------------------------------------------------------------------------------------
Average net loans (3) $ 2,688,832 $ 392,302 $ 540,974 $ 435,518 $ 4,057,627
Average nonaccrual loans 30,460 5,362 7,647 1,069 44,538
Average assets 2,760,727 418,870 553,662 2,656,281 6,389,540
Average deposits 1,576,599 1,095,857 15,966 2,784,775 5,473,197
- -----------------------------------------------------------------------------------------------------------------------
(1) $8.8 million of this provision relates to a nationally syndicated credit administered in a regional office.
(2) Includes minority interest in OPAY's operating loss.
(3) Excluding nonaccrual loans.
- -----------------------------------------------------------------------------------------------------------------------
Page 10 of 37
Operating Segment Results
- --------------------------------------------------------------------------------
For the six months ended
June 30, 1999 Commercial Emerging Syndicated
(Dollars in thousands) Banking Growth Finance Other Total
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 83,767 $ 15,590 $ 11,928 $ 17,036 $ 128,321
Provision for loan losses 12,308 2,388 124 - 14,820
Noninterest income 9,003 8,550 1,090 39,948 58,591
Noninterest expense (1) 55,103 13,481 3,072 43,224 114,880
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 25,359 8,271 9,822 13,760 57,212
Income taxes 10,273 3,351 3,979 5,574 23,177
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 15,086 $ 4,920 $ 5,843 $ 8,186 $ 34,035
- -----------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,351,580 $ 337,467 $ 605,198 $ 477,195 $ 3,771,440
Average nonaccrual loans 36,569 5,435 - 82 42,086
Average assets 2,403,280 350,492 607,677 2,115,921 5,477,370
Average deposits 1,463,100 487,151 8,512 2,817,516 4,776,279
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes minority interest in OPAY's operating income.
(2) Excluding nonaccrual loans.
- -----------------------------------------------------------------------------------------------------------------------
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
Except for the historical information contained herein, the following discussion
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology including "may", "will", "intend", "should",
"expect", "anticipate", "estimate" or "continue" or the negatives thereof or
other comparable terminology. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a result
of various factors, including those set forth in documents filed with the
Securities and Exchange Commission.
The following discussion presents information about the results of operations,
financial condition, liquidity, and capital resources of Imperial Bancorp (the
"Company") as of and for the three and six months ended June 30, 2000. This
information should be read in conjunction with the Company's 1999 Consolidated
Financial Statements and notes thereto, and the accompanying quarterly unaudited
Consolidated Financial Statements and notes thereto.
GENERAL
Imperial Bancorp is a diversified financial services company specializing in the
delivery of a wide variety of financial products and services tailored to meet
the financing and cash management needs of middle market companies, emerging
growth companies, entrepreneurs and professionals. Through its bank and nonbank
subsidiaries, the Company is uniquely positioned to provide customized products
and superior customer service to its customers across a broad spectrum of
industries. The Company's largest subsidiary, Imperial Bank, operates 15
regional banking offices; 12 throughout California; and out-of-state offices in
Arizona, Colorado and Washington. Additionally, the Bank operates 13 loan
production offices located in major technology centers across the country. The
Company's business activities are conducted through three principal operating
segments: Commercial Banking, Emerging Growth and Syndicated Finance. Several
smaller businesses and the Company's 56% investment in Official Payments
Corporation ("OPAY") (Nasdaq: OPAY) are grouped into a fourth segment.
Page 11 of 37
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Net income increased 3% to $20.5 million, or $0.44 per share, for the three
months ended June 30, 2000, from $19.8 million, or $0.43 a share, for the
year-earlier quarter. Growth in net interest income for the current quarter,
driven by loan growth, and increased income realized from warrants and equity
investments more than offset increases in the loan loss provision and
noninterest expense compared with the year-earlier quarter. Net income for
second quarter 2000 includes a $3.3 million, or $0.7 a share, after-tax
operating loss representing the Company's share of OPAY's operating losses for
the quarter. Net income realized from warrants and equity investments increased
121% to $7.2 million after tax for the quarter ended June 30, 2000, from $2.3
million a year earlier. Net income for second quarter 2000 includes a $1.7
million after-tax gain on the sale of the trust business compared with a $5.1
million after-tax gain for the year-earlier quarter. The gain recorded in the
current quarter represents a payment related to customer retention as provided
for in the trust sale agreement. Net income for the year-earlier quarter
includes a $3.1 million after-tax gain on the sale of Imperial Credit
Industries, Inc. ("ICII") (Nasdaq: ICII) common stock.
Earnings per share amounts are reported on a diluted basis and reflect an 8%
stock dividend paid on February 18, 2000.
The major components of net income and changes in these components are
summarized in the following table for the quarters ended June 30, 2000 and 1999:
Page 12 of 37
===============================================================================================================================
Imperial Bancorp and Subsidiaries Three months ended
June 30,
------------------------------------------------------
Change
(Dollars in thousands, except per share data) 2000 1999 Amount Percent
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $ 122,503 $ 92,217 $ 30,286 32.8%
Interest expense 36,780 26,724 10,056 37.6
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 85,723 65,493 20,230 30.9
Provision for loan losses 22,600 10,026 12,574 125.4
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 63,123 55,467 7,656 13.8
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of ICII stock - 5,391 (5,391) (100.0)
Gain on sale of the trust business 2,631 8,817 (6,186) (70.2)
Income from the realization of warrants and equity
investments (1) 11,095 4,000 7,095 177.4
Other noninterest income 26,034 18,394 7,640 41.5
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 39,760 36,602 3,158 8.6
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 44,151 29,527 14,624 49.5
Other noninterest expense 30,626 28,859 1,767 6.1
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 74,777 58,386 16,391 28.1
- -------------------------------------------------------------------------------------------------------------------------------
Minority interest in loss (income) of consolidated subsidiary 3,954 (39) 3,993 -
Income before income taxes 32,060 33,644 (1,584) (4.7)
Income tax provision 11,561 13,833 (2,272) (16.4)
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 20,499 $ 19,811 $ 688 3.5%
===============================================================================================================================
Net income excluding OPAY $ 23,779 $ 19,722 $ 4,057 20.6%
Earnings per share:
Basic earnings per share $ 0.46 $ 0.44 $ 0.02 4.6%
Diluted earnings per share 0.44 0.43 0.01 2.3
Diluted earnings per share excluding OPAY $ 0.51 $ 0.42 $ 0.09 21.4%
- -------------------------------------------------------------------------------------------------------------------------------
(1)Income realized on warrants and equity investments is reported in the
Consolidated Statements of Income in the following categories:
2000 1999
------------------------
Gains on securities available for sale $ 6,257 $ -
Gains on the exercise of warrants and sale of
equity securities 3,421 3,430
Other noninterest income 1,417 570
------------------------
Total $ 11,095 $ 4,000
========================
===============================================================================================================================
The annualized return on average assets and average equity decreased to 1.29%
and 16.41%, respectively, for second quarter 2000, from 1.43% and 19.91%,
respectively, for the year-earlier quarter. Excluding OPAY, the annualized
return on average assets increased to 1.52% for second quarter 2000 from 1.42%
for the year-earlier quarter. Excluding OPAY, the annualized return on average
equity increased to 20.84% for second quarter 2000 from 19.86% for the
year-earlier quarter.
Net income for the six months ended June 30, 2000, increased 17% to $39.8
million, or $0.85 a share, from $34.0 million, or $0.73 a share, for the
year-earlier period. Net income for the first six months of 2000 includes a $6.0
million, or $0.13 a share, after-tax operating loss representing the Company's
share of OPAY's operating losses for the period
Page 13 of 37
net of a gain related to the exercise of OPAY stock options. In addition to the
gains on the sale of businesses discussed above, after-tax income realized on
warrants and equity investments tripled to $26.5 million for the six months
ended June 30, 2000, from $8.2 million for the year-earlier period.
The major components of net income and changes in these components are
summarized in the following table for the six months ended June 30, 2000 and
1999:
========================================================================================================================
Imperial Bancorp and Subsidiaries Six months ended
June 30,
-------------------------------------------------------
Change
(Dollars in thousands, except per share data) 2000 1999 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 240,315 $ 179,650 $ 60,665 33.8%
Interest expense 75,940 51,329 24,611 47.9
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 164,375 128,321 36,054 28.1
Provision for loan losses 34,494 14,820 19,674 132.8
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 129,881 113,501 16,380 14.4
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of ICII stock - 5,391 (5,391) (100.0)
Gain on sale of the trust business 2,631 8,817 (6,186) (70.2)
Income from the realization of warrants and equity
investments (1) 26,504 8,228 18,276 222.1
Other noninterest income 45,190 36,155 9,035 25.0
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 74,325 58,591 15,734 26.9
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and benefits 87,977 60,243 27,734 46.0
Other noninterest expense 61,943 54,616 7,327 13.4
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 149,920 114,859 35,061 30.5
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in loss (income) of consolidated subsidiary 7,884 (21) 7,905 100.0
Income before income taxes 62,170 57,212 4,958 8.7
Income tax provision 22,356 23,177 (821) (3.5)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 39,814 $ 34,035 $ 5,779 17.0%
========================================================================================================================
Net income excluding OPAY $ 45,789 $ 33,988 $ 11,801 34.7%
Earnings per share:
Basic earnings per share $ 0.89 $ 0.75 $ 0.14 18.7%
Diluted earnings per share
Diluted earnings per share excluding OPAY $ 0.98 $ 0.73 $ 0.25 34.2%
- ------------------------------------------------------------------------------------------------------------------------
(1) Income realized on warrants and equity investments is reported in the
Consolidated Statements of Income in the following categories:
2000 1999
------------------------
Gains on securities available for sale $ 11,967 $ -
Gains on the exercise of warrants and sale of
equity securities 10,216 7,382
Other noninterest income 4,321 846
------------------------
Total $ 26,504 $ 8,228
========================
========================================================================================================================
The annualized return on average assets and average equity were 1.25% and
16.25%, respectively, for the six months ended June 30, 2000, compared with
1.25% and 17.45%, respectively, for the year-earlier period. Excluding OPAY, the
Page 14 of 37
annualized return on average assets increased to 1.46% for the first half of
2000 from 1.25% for the year-earlier period. Excluding OPAY, the annualized
return on average equity increased to 20.54% for the first half of 2000 from
17.46% for the year-earlier period.
Selected ratios for the three and six months ended June 30, 2000 and 1999, are
provided in the following table:
======================================================================================================================
At or for the At or for the
three months ended six months ended
June 30, June 30,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Selected ratios
Reported:
Return on average assets (annualized) 1.29% 1.43% 1.25% 1.25%
Return on average equity (annualized) 16.41 19.91 16.25 17.45
Return on average earning assets (annualized) 1.41 1.58 1.36 1.39
Net interest margin 5.90 5.21 5.64 5.23
Efficiency ratio 56.44 57.23 59.50 61.46
Average equity-to-average assets 7.89 7.17 7.71 7.18
Total risk-based capital 13.80 12.96 13.80 12.96
Tier 1 risk-based capital 10.75 9.64 10.75 9.64
Tier 1 leverage 9.31 8.50 9.31 8.50
Excluding OPAY:
Return on average assets (annualized) 1.52 1.42 1.46 1.25
Return on average equity (annualized) 20.84 19.86 20.54 17.46
Net interest margin 5.94 5.21 5.65 5.23
Efficiency ratio 50.82 56.99 54.23 61.14
Asset quality ratios
Nonaccrual loans to total loans 1.42 1.38 1.42 1.38
Nonaccrual and restructured loans to total loans 1.58 1.53 1.58 1.53
Allowance for credit losses to total loans 2.04 1.95 2.04 1.95
Net charge-offs as a percentage of total average loans
(annualized) 1.97 0.37 1.25 0.38
======================================================================================================================
Net Interest Income
The Company's operating results depend primarily on net interest income. Net
interest income is the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities. Net interest margin is
net interest income expressed as a percentage of average earning assets. Due to
the asset-sensitive nature of the Company's balance sheet, a variable rate loan
portfolio funded in large part by demand deposits and fixed rate liabilities,
the recent increases in the prime rate have favorably impacted net interest
income and net interest margin.
Net interest income increased to $85.7 million for the three months ended June
30, 2000, from $65.5 million for the year-earlier quarter. Net interest income
for the current quarter includes $628,000 related to OPAY. The increase in net
interest income is due to growth in average earning assets, which increased 16%
to $5.8 billion for the quarter ended June 30, 2000, from $5.0 billion for the
year-earlier quarter. Average loans increased $293.5 million, or 7.5%, to $4.2
billion for the current quarter from $3.9 billion for second quarter 1999. Loans
comprised approximately 72% of average earnings assets for the current quarter
compared with approximately 77% for the year-earlier quarter. The remaining
increase in average earning assets from the prior year is due to increases in
trading instruments and investments. Average deposits grew 13% to $5.5 billion
for second quarter 2000, from $4.8 billion for the year-earlier quarter. Deposit
growth continues to exceed loan funding requirements. The resulting excess
liquidity was invested in securities, leading to a decline in average loans as a
percentage of average earning assets compared with the prior year.
Page 15 of 37
The following table provides information on average interest-earning assets and
interest-bearing liabilities and the yields thereon for the quarters ended June
30, 2000 and 1999:
=====================================================================================================================
Three months ended June 30, 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- ---------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 4,195,294 $ 96,172 (3) 9.22% $ 3,901,754 $ 77,568 (3) 7.97%
Trading instruments 112,235 1,716 6.15 68,840 980 5.71
Interest-bearing deposits 5,055 148 11.78 - - -
Securities available for sale (4) 1,057,064 16,720 6.40 679,306 8,627 5.06
Securities held to maturity 3,679 67 7.32 3,844 71 7.41
Federal funds sold and securities
purchased under resale agreements 427,425 6,665 6.27 362,627 4,370 4.83
Loans held for sale 44,940 1,015 9.08 21,798 601 11.06
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,845,692 122,503 8.44% 5,038,169 92,217 7.34%
=====================================================================================================================
Allowance for loan losses (78,942) (67,757)
Cash 353,045 369,577
Other assets 250,799 224,103
----------- -----------
Total assets $ 6,370,594 $ 5,564,092
=========== ===========
Interest-bearing liabilities:
Savings $ 25,178 $ 111 1.77% $ 27,229 $ 142 2.09%
Money market 1,251,258 9,702 3.12 1,098,435 7,716 2.82
Time-under $100,000 71,876 1,536 8.60 162,397 2,342 5.78
Time-$100,000 and over 1,412,832 19,871 5.66 1,058,209 12,200 4.62
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,761,144 31,220 4.55 2,346,270 22,400 3.83
=====================================================================================================================
Short-term borrowings 76,102 1,247 6.59 75,313 894 4.76
Long-term borrowings 103,264 2,703 10.53 101,155 1,954 7.75
Capital securities 68,070 1,610 9.51 73,393 1,476 8.07
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,008,580 36,780 4.92% 2,596,131 26,724 4.13%
=====================================================================================================================
Demand deposits 2,693,370 2,474,673
Other liabilities 166,157 94,160
Shareholders' equity 502,487 399,128
Total liabilities and
----------- -----------
shareholders' equity $ 6,370,594 $ 5,564,092
=========== ===========
Net interest income/Net interest margin $ 85,723 5.90% $ 65,493 5.21%
======== ===== ======== =====
=====================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of
doing so would not be material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $6.6 million and $5.4
million for the three months ended June 30, 2000 and 1999, respectively.
(4) Average balance includes unrealized gains and losses and yield is
calculated based upon amortized cost.
Page 16 of 37
Net interest income increased to $164.4 million for the six months ended June
30, 2000, from $128.3 million for the year-earlier period. Net interest income
for the first six months includes $1.8 million related to OPAY. The increase in
net interest income was driven by the growth in average earning assets which
increased 19% to $5.9 billion for the first half of 2000 from $4.9 billion for
the year-earlier period. Average loans grew $256.1 million, or approximately 7%,
to $4.1 billion from $3.9 billion for the year-earlier period. Loans comprised
approximately 70% of average earning assets for the first half of 2000 compared
with 78% for the year-earlier period. The remaining increase in average earning
assets from the prior year is due to increases in trading instruments and
investments.
The following table provides information on average interest-earning assets and
interest-bearing liabilities and the yields thereon for the six months ended
June 30, 2000 and 1999:
Page 17 of 37
===========================================================================================================
Six months ended June 30, 2000 1999
- -----------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- -----------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $4,115,148 $ 186,762 (3) 9.13% $3,859,024 $ 152,155 (3) 7.95%
Trading instruments 113,147 3,414 6.07 67,762 1,869 5.56
Interest-bearing deposits 5,122 243 9.54 - - -
Securities available for
sale (4) 965,948 29,496 6.19 645,488 16,021 4.98
Securities held to maturity 3,699 133 7.23 3,859 143 7.47
Federal funds sold and
securities purchased under
resale agreements 603,012 17,790 5.93 351,125 8,425 4.84
Loans held for sale 63,492 2,477 7.85 20,206 1,037 10.35
- -----------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,869,568 240,315 8.24% 4,947,464 179,650 7.32%
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses (76,475) (65,704)
Cash 351,633 363,697
Other assets 244,814 231,913
------------ ------------
Total assets $6,389,540 $5,477,370
============ ============
Interest-bearing liabilities:
Savings $ 23,303 $ 205 1.77% $ 31,915 $ 294 1.86%
Money market 1,307,841 19,751 3.04 1,082,839 15,171 2.83
Time-under $100,000 108,868 3,536 6.53 159,535 4,111 5.20
Time-$100,000 and over 1,487,577 41,474 5.61 1,039,662 24,592 4.77
- ------------------------------------------------------------------------------------------------- ---------
Total interest-bearing
deposits 2,927,589 64,966 4.46 2,313,951 44,168 3.85
- -----------------------------------------------------------------------------------------------------------
Short-term borrowings 91,609 2,728 5.99 90,561 2,158 4.81
Long-term borrowings 103,435 4,928 9.58 52,344 1,998 7.70
Capital securities 70,753 3,318 9.43 73,386 3,005 8.26
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,193,386 75,940 4.78% 2,530,242 51,329 4.09%
- -----------------------------------------------------------------------------------------------------------
Demand deposits 2,545,608 2,462,328
Other liabilities 157,746 91,504
Shareholders' equity 492,800 393,296
Total liabilities and
------------ ------------
shareholders' equity $6,389,540 $5,477,370
============ ============
Net interest income/Net
interest margin $ 164,375 5.64% $ 128,321 5.23%
=========== ========== =========== ==========
===========================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $13.6 million and $10.3 million for the six months ended
June 30, 2000 and 1999, respectively.
(4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost.
Page 18 of 37
Net interest margin increased to 5.90% and 5.64% for the three and six months
ended June 30, 2000, respectively, from 5.21% and 5.23% for the year-earlier
periods. The increase in loan yields, due to increases in the prime rate, more
than offset higher rates paid on deposits. Approximately 77% of the Company's
variable rate loans are tied to the prime rate. Certain loans, including
entertainment loans and syndicated loans, are tied to the London Interbank
Offered Rate ("LIBOR"). The average prime rate increased 122 basis points for
the first half of 2000 to 8.97% from 7.75% for the year-earlier period.
Management expects a net interest margin comparable to that reported for second
quarter 2000 for the remainder of the year unless market interest rates
increase. Interest income for the three months ended June 30, 2000 and 1999, was
reduced by approximately $789,100 and $271,300, respectively, due to interest
reversals on nonaccrual loans. Interest income for the six months ended June 30,
2000 and 1999, was reduced by approximately $1.3 million and $712,200,
respectively, due to interest reversals on nonaccrual loans.
The average cost of interest-bearing deposits increased for the quarter and
year-to-date compared with the year-earlier periods, but at a lower rate than
short-term market rates in general. The growth in average time certificate of
deposit ("TCD") balances for the three and six months ended June 30, 2000,
compared with the year earlier periods occurred primarily in the Emerging Growth
Division, which increased $239 million for the year, and in brokered TCD
balances raised in conjunction with the Company's overall funding plan.
Demand deposits continue to be a significant funding source for the Company.
Average demand deposits comprised 49% and 47% of total average deposits for the
three and six months ended June 30, 2000, compared with 51% and 52% of total
average deposits for the year-earlier periods. The growth in average demand
deposits was generated by the Commercial Banking and Emerging Growth Divisions.
The increase in average long-term borrowings for the six months ended June 30,
2000, compared with the year-earlier period is due to the issuance of $100
million of 8.5% Subordinated Capital Notes by Imperial Bank in April 1999.
Analysis of Changes in Net Interest Income
Changes in the Company's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following tables set forth information regarding changes in
interest income and interest expense for the three and six months ended June 30,
2000 and 1999. The total change is segmented into the change attributable to
variations in volume (changes in volume multiplied by old rate) and the change
attributable to variations in interest rates (changes in rates multiplied by old
volume). The change in interest due to both rate and volume (changes in rate
multiplied by changes in volume) is classified as rate/volume. Nonaccrual loans
are included in average loans for these computations. The tables are not
presented on a tax equivalent basis as the effects are not material.
Page 19 0f 37
===================================================================================================================
Three months ended June 30, 2000 over 1999
(Dollars in thousands) Volume Rate Rate/Volume Total
- -------------------------------------------------------------------------------------------------------------------
Loans, net $ 5,820 $ 12,087 $ 697 $ 18,604
Trading instruments 616 75 45 736
Interest-bearing deposits 148 - - 148
Securities available for sale 4,751 2,263 1,079 8,093
Securities held to maturity (3) (1) (0) (4)
Federal funds sold and securities
purchased under resale agreements 779 1,296 220 2,295
Loans held for sale 636 (107) (115) 414
- -------------------------------------------------------------------------------------------------------------------
Total interest income 12,747 15,613 1,926 30,286
- -------------------------------------------------------------------------------------------------------------------
Savings (11) (21) 1 (31)
Money market 1,071 822 93 1,986
Time-under $100,000 (1,302) 1,135 (639) (806)
Time-$100,000 and over 4,077 2,717 877 7,671
- -------------------------------------------------------------------------------------------------------------------
Total deposits 3,835 4,653 332 8,820
- -------------------------------------------------------------------------------------------------------------------
Short-term borrowings 9 343 1 353
Long-term borrowings 41 699 9 749
Capital securities (107) 264 (23) 134
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 3,778 5,959 319 10,056
- -------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 8,969 $ 9,654 $ 1,607 $ 20,230
===================================================================================================================
Page 20 of 37
=======================================================================================================================
Six months ended June 30, 2000 over 1999
(Dollars in thousands) Volume Rate Rate/Volume Total
- -----------------------------------------------------------------------------------------------------------------------
Loans, net $ 10,127 $ 22,560 $ 1,920 $ 34,607
Trading instruments 1,255 170 120 1,545
Interest-bearing deposits 243 - - 243
Securities available for sale 7,929 3,891 1,655 13,475
Securities held to maturity (5) (5) 0 (10)
Federal funds sold and securities
purchased under resale agreements 6,061 1,910 1,394 9,365
Loans held for sale 2,228 (252) (536) 1,440
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 27,838 28,274 4,553 60,665
- -----------------------------------------------------------------------------------------------------------------------
Savings (80) (14) 5 (89)
Money market 3,161 1,140 279 4,580
Time-under $100,000 (1,309) 1,059 (325) (575)
Time-$100,000 and over 10,624 4,326 1,932 16,882
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 12,396 6,511 1,891 20,798
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 25 533 12 570
Long-term borrowings 1,956 490 484 2,930
Capital securities (108) 428 (7) 313
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 14,269 7,962 2,380 24,611
- -----------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 13,569 $ 20,312 $ 2,173 $ 36,054
=======================================================================================================================
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the Company's reported net interest income and noninterest expense would have
been reduced by $4.4 million and $8.9 million for the three and six months ended
June 30, 2000, respectively, and by $6.2 million and $12.6 million for the year
earlier periods, respectively. The net interest margin would have decreased to
5.60% and 5.33% for the three and six months ended June 30, 2000, respectively,
and to 4.71% for the year-earlier periods.
Provision for Loan Losses
As projected in the Company's Quarterly Report on Form 10-Q filed for the three
months ended March 31, 2000, the provision for loan losses increased for second
quarter 2000 to $22.6 million from $10.0 million for the year-earlier quarter.
Net charge-offs for the quarter increased to $20.6 million, or 1.97% of average
loans on an annualized basis, for second quarter 2000, from $3.6 million, or
0.37% of average loans on an annualized basis, for the year-earlier quarter. The
provision for loan losses increased to $34.5 million for the six months ended
June 30, 2000, from $14.8 million for the year-earlier period. Net charge-offs
for the period increased to $25.6 million, or 1.25% of average loans, from $7.3
million, or 0.38% of total average loans, for the year-earlier period. The
increased provision for the current year is largely attributable to higher
charge-offs recorded on a limited number of nationally syndicated loans.
Management expects the level of net charge-offs and resulting provisions for
loan losses for the remainder of the year to decline from the level experienced
in the second quarter.
Page 21 of 37
Noninterest Income:
Noninterest income increased approximately 9% to $39.8 million for second
quarter 2000, from $36.6 million for the year-earlier quarter. Noninterest
income for the current quarter includes a $2.6 million gain associated with last
year's sale of the trust business. This gain offset the reduction in trust fee
income compared with the year-earlier quarter resulting from the sale of this
business. Noninterest income for second quarter 1999 includes a $5.4 million
gain on the sale of ICII stock and an $8.8 million gain on the sale of the trust
business. Noninterest income increased 27% to $74.3 million for the first six
months of 2000, from $58.6 million for the year-earlier period. In addition to
the second quarter items discussed above, noninterest income for the first half
of 2000 reflects an $18.3 million increase in income realized from warrants and
investments in equity funds.
Noninterest Expense:
Noninterest expense before minority interest increased 28% for the quarter ended
June 30, 2000, to $74.8 million from $58.4 million for the year-earlier quarter.
Excluding OPAY, noninterest expense for the quarter increased 7% to $61.7
million from $57.7 million a year ago. For the first half of 2000, noninterest
expense increased 31% to $149.9 million from $114.9 million for the year-earlier
period. Excluding OPAY, year-to-date noninterest expense increased 11% to $126.6
million from $113.8 million for the year-earlier period. The increase in
noninterest expense excluding OPAY is primarily due to higher salaries and
benefits and occupancy expense associated with the overall growth in the
Company's present activities as well as the addition of new business
initiatives. The average number of full-time equivalent staff increased to 1,303
for the six months ended June 30, 2000, from 1,271 for the year-earlier period.
The increase in salaries also reflects increases in incentives tied to Company
performance. Customer services expense declined for the quarter and year-to-date
compared with the year earlier periods due to a decrease in average title and
escrow deposit balances. Although noninterest expense has increased overall, the
Company's efficiency ratio excluding OPAY declined for both the quarter and
year-to-date compared with a year ago. The efficiency ratio, excluding OPAY,
decreased to 54.23% for the first half of 2000 from 61.14% for the year-earlier
period.
Income Taxes:
The Company recorded income taxes of $11.6 million and $22.4 million for the
three and six months ended June 30, 2000, respectively. Income taxes were $13.8
million and $23.2 million for the three and six months ended June 30, 1999.
On April 24, 2000, the Company formed Imperial Special Investments, Inc.
("ISII"). ISII is a closed-end, non-diversified regulated investment company
registered under the Investment Company Act of 1940. ISII's holdings consist of
cash, investments and loans. The formation of ISII provides the Company with the
capability to raise capital in a tax efficient manner for future business
opportunities if desired. The formation of ISII resulted in an estimated
effective income tax rate of 36% for the first six months of 2000 compared with
40.5% for the year-earlier period.
OPERATING SEGMENT RESULTS
For reporting purposes, the Company aggregates its operating activities into
four principal operating segments: Commercial Banking, Emerging Growth,
Syndicated Finance and Other. See - "NOTE (7) Operating Segment Results." The
following tables summarize the financial performance of these segments for the
three and six months ended June 30, 2000 and 1999:
Page 22 of 37
The Commercial Banking Segment
- ---------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
(Dollars in thousands) 2000 1999 Change % 2000 1999 Change %
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 51,305 $ 42,773 $ 8,532 19.9% $ 96,452 $ 83,767 $ 12,685 15.1%
Provision for loan losses (1) 12,842 9,479 3,363 35.5 22,950 12,308 10,642 86.5
Noninterest income 8,078 5,778 2,300 39.8 15,039 9,003 6,036 67.0
Noninterest expense 30,144 27,436 2,708 9.9 60,093 55,103 4,990 9.1
- ---------------------------------------------------------------------------------------------------------------------------------
Income before taxes 16,397 11,636 4,761 40.9 28,448 25,359 3,089 12.2
Income taxes 5,813 4,784 1,029 21.5 10,084 10,273 (189) (1.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,584 $ 6,852 $ 3,732 54.5% $ 18,364 $ 15,086 $ 3,278 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Average net loans (2) $ 2,705,151 $2,408,174 $ 296,977 12.3% $2,688,832 $2,351,580 $ 337,252 14.3%
Average nonaccrual (3) 30,920 41,161 (10,241) (24.9) 30,460 36,569 (6,109) (16.7)
Average assets 2,779,029 2,469,725 309,304 12.5 2,760,727 2,403,280 357,447 14.9
Average deposits 1,586,556 1,453,315 133,241 9.2 1,576,599 1,463,100 113,499 7.8
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Provision expense for the three months months ended June 30, 2000, includes
$6.8 million related to a syndicated credit administered in a regional
banking office. Provision expense for the six months ended June 30, 2000,
includes $8.8 million related to this credit.
(2) Excluding nonaccrual loans.
(3) Average nonaccrual loan balance includes $8.8 million related to a
syndicated credit administered in a regional banking office until it was
charged off in May 2000.
- --------------------------------------------------------------------------------
The Commercial Banking Segment consisting of the Company's middle market,
residential tract construction, entertainment and small business lending ("SBA")
operations accounted for the majority of the growth in average loans for the
current quarter and year-to-date compared with the prior year. Most of the
growth occurred in tract construction loans which increased by $170 million, or
52%, for second quarter 2000 compared with the year-earlier quarter. Tract
construction lending continues to grow despite higher mortgage rates due to
continuing strength in the California real estate market coupled with the
Company's focus on a select group of private homebuilders. The remaining loan
growth occurred primarily in middle market lending. Approximately 90% of the
commercial banking portfolio is prime based, resulting in higher interest income
as prime rate increases. Loan growth has also led to higher loan fee income.
Average deposits balances for the Commercial Banking Segment increased 9% and 8%
for the three and six months ended June 30, 2000, respectively, compared with
the year-earlier periods.
The increase in loan loss provision for the current quarter and year-to-date
compared with a year ago is the result of higher charge-offs. The charge-offs
are not concentrated in any one industry. The provision for the first half of
2000 includes $8.8 million associated with a nationally syndicated loan that was
administered in a regional office due to a deposit relationship. This loan was
charged off in the second quarter. The reduction in nonaccrual loan balances
compared with the year-earlier period is due in part to the sale of film
production loans from the Lewis Horwitz Organization to ICII in the fourth
quarter of 1999.
Although service charge income was relatively flat compared with the prior year,
noninterest income increased due to growth in other fees such as international
fees, leasing fees and referral fees related to SBA lending. The Company
continues to develop and introduce new cash management products, including
internet-based products, that are expected to result in increased fee income.
Page 23 of 37
The Emerging Growth Segment (including IVI and ICC)
- ---------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
(Dollars in thousands) 2000 1999 Change % 2000 1999 Change %
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 13,668 $ 8,272 $ 5,396 65.2% $ 26,689 $ 15,590 $ 11,099 71.2%
Provision for loan losses 4,430 423 4,007 947.3 5,435 2,388 3,047 127.6
Noninterest income 12,806 4,082 8,724 213.7 29,134 8,550 20,584 240.7
Noninterest expense 9,966 6,605 3,361 50.9 20,335 13,481 6,854 50.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income before taxes 12,078 5,326 6,752 126.8 30,053 8,271 21,782 263.4
Income taxes 4,281 2,190 2,091 95.5 10,654 3,351 7,303 217.9
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,797 $ 3,136 $ 4,661 148.6% $ 19,399 $ 4,920 $ 14,479 294.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 411,081 $341,439 $69,642 20.4% $ 392,302 $337,467 $ 54,835 16.2%
Average nonaccrual loans 6,915 4,806 2,109 43.9 5,362 5,435 (73) (1.3)
Average assets 442,806 353,967 88,839 25.1 418,870 350,492 68,378 19.5
Average deposits 1,009,548 521,527 488,021 93.6 1,095,857 487,151 608,706 125.0
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
- ---------------------------------------------------------------------------------------------------------------------------------
The Emerging Growth Segment ("EGD"), serving companies backed by venture
capitalists, contributed 38% of consolidated net income for the three months
ended June 30, 2000, up from 16% of consolidated net income for the year-earlier
quarter. For the first half of 2000, EGD contributed 49% of consolidated net
income compared with 14% for the year-earlier period. The growth in EGD's net
income is largely due to increased income realized from warrants and equity
investments in emerging growth companies and venture capital funds. Income
derived from these activities increased to $11.1 million for second quarter 2000
from $4.0 for the year-earlier quarter. On a year-to-date basis, income from
warrants and equity investments increased to $26.5 million from $8.2 million for
the year-earlier period.
The Company obtains rights to acquire stock (in the form of warrants) from
certain customers as part of negotiated credit facilities. The receipt of
warrants does not change the loan covenants or collateral control techniques
employed by the Company to mitigate the risk of a loan becoming uncollectible.
Likewise, collateral requirements on loans with warrants are similar to lending
arrangements where warrants are not obtained. As of July 25, 2000, the last time
the Company reported on unrealized warrant gains, the Company had potential
unrealized gains associated with warrants and equity positions of $29.8 million.
The Company expects to realize income from these activities for third quarter
2000 in an amount not less than that reported for second quarter. The amount of
income realized by the Company from these equity rights in future periods may
vary materially from that unrealized amount due to fluctuations in the market
prices of the underlying common stock of these companies. The Company is
restricted from liquidating a portion of these positions, although most of these
restrictions will have expired by the end of the year. The Company views this
income as a growing core contributor to its noninterest income.
EGD has experienced significant deposit growth in 2000 compared with the prior
year. EGD's average deposit balances grew $488 million to $1.0 billion for
second quarter 2000 from $522 million for the year-earlier quarter. On a
year-to-date basis, average deposits grew $609 million to $1.1 billion for the
six months ended June 30, 2000, from $487 million for the year-earlier period.
The growth in deposits was distributed between noninterest-bearing and
interest-bearing accounts. Management has observed that venture capitalists are
continuing to fund emerging growth companies across a broad spectrum of
industries despite recent volatility in the Nasdaq.
Page 24 of 37
The Syndicated Finance Segment
- -----------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
(Dollars in thousands) 2000 1999 Change % 2000 1999 Change %
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,077 $ 6,181 $ 896 14.5% $ 13,360 $ 11,928 $ 1,432 12.0%
Provision for loan losses 4,876 124 4,752 - 5,207 124 5,083 -
Noninterest income 492 437 55 12.6 1,120 1,090 30 2.8
Noninterest expense 1,731 1,547 184 11.9 3,448 3,072 376 12.2
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 962 4,947 (3,985) (80.6) 5,825 9,822 (3,997) (40.7)
Income taxes 341 2,034 (1,693) (83.2) 2,065 3,979 (1,914) (48.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 621 $ 2,913 $ (2,292) -78.7% $ 3,760 $ 5,843 $ (2,083) (35.6)%
- ----------------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 542,346 $ 605,579 $ (63,233) -10.4% $ 540,974 $605,198 $(64,224) (10.6)%
Average nonaccrual loans 11,261 - 11,261 100.0 7,647 - 7,647 100.0
Average assets 558,540 608,522 (49,982) (8.2) 553,662 607,677 (54,015) (8.9)
Average deposits 16,767 5,619 11,148 198.4 15,966 8,512 7,454 87.6
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
- -----------------------------------------------------------------------------------------------------------------------------------
The Syndicated Finance Segment includes the Syndicated Finance and Merchant
Banking Divisions. Both divisions originate loans principally on an indirect
basis through other financial institutions. The Company's recent adverse credit
experience with a limited number of syndicated credits is consistent with
banking industry experience. These loans accounted for $13.5 million of the
$20.3 million increase in total nonaccrual loans compared with March 31, 2000.
Syndicated credits also accounted for the majority of the increase in net
charge-offs for the quarter, $13.3 million of total net charge-offs of $20.6
million. Second quarter and year-to-date charge-offs for the Syndicated Finance
Segment include $8.8 million related to a nationally syndicated credit
administered in a regional banking office due to a deposit relationship. For the
year, net charge-offs of syndicated credits comprised $13.3 million of total net
charge-offs of $25.6 million. The increase in charge-offs led to the higher loan
loss provisions for the quarter and year-to-date. Management believes that these
loans are adequately reserved.
The Company's primary focus has been to establish strong commercial banking
relationships with borrowers that enhance its deposit base and generate fee
income in addition to yielding interest income through credit products. When
deposit growth from title and escrow customers began to outpace relationship-
based loan growth in the mid 1990's, the Company began investing a portion of
this liquidity in nationally syndicated credits to maximize net interest income.
Recognizing that purchased loans provide no supplemental noninterest income and
that these credits cannot be monitored as closely as companies with which the
Company has a direct relationship, management is currently emphasizing
relationship-based loans and, accordingly, does not plan on increasing its
nonrelationship-based syndicated loan portfolio.
Page 25 of 37
The Syndicated Finance portfolio is well diversified by industry as illustrated
in the following table:
----------------------------------------------------------------
Distribution of Syndicated Finance Loan Portfolio
June 30, 2000
----------------------------------------------------------------
Industry Percent
----------------------------------------------------------------
Manufacturing 34%
Service 28
Gaming 15
Retail and restaurants 15
Heath care and related 8
----------------------------------------------------------------
Total 100%
----------------------------------------------------------------
The Other Segment
- ----------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
(Dollars in thousands) 2000 1999 Change % 2000 1999 Change %
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 13,673 $ 8,267 $ 5,406 65.4% $ 27,874 $ 17,036 $ 10,838 63.6%
Provision for loan losses 452 - 452 100.0 902 - 902 100.0
Noninterest income 18,384 26,305 (7,921) (30.1) 29,032 39,948 (10,916) (27.3)
Noninterest expense 28,982 22,837 6,145 26.9 58,160 43,224 14,936 34.6
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 2,623 11,735 (9,112) - (2,156) 13,760 (15,916) (115.7)
Income taxes 1,126 4,825 (3,699) - (447) 5,574 (6,022) (108.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,497 $ 6,910 $ (5,413) - $ (1,709) $ 8,186 $ (9,894) -120.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Average net loans (1) $ 452,576 $ 454,417 $ (1,841) -0.4% $ 435,518 $ 477,195 $ (41,677) -8.7%
Average nonaccrual loans 1,042 219 823 375.8 1,069 82 987 -
Average assets 2,590,219 2,131,878 458,341 21.5 2,656,281 2,115,921 539,528 25.5
Average deposits 2,841,643 2,840,482 1,161 0.0 2,784,775 2,817,516 (32,741) (1.2)
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Excluding nonaccrual loans.
- ----------------------------------------------------------------------------------------------------------------------------------
The Other Segment includes activities not individually material such as the
Company's 56% ownership in OPAY, the Merchant Card Division and nonbank
subsidiaries of the holding company. The balance sheet of the Other Segment
reflects the loan and deposit balances of the Financial Services Division, and
the investment balances of the Treasury Management Division. The income and
costs associated with these balances are fully allocated to the other operating
segments for measuring segment profitability.
The decrease in noninterest income compared with the year-earlier periods is due
to gains totaling $14.2 million on the sales of the trust business and ICII
common stock reported for the six months ended June 30, 1999. Merchant card fees
and commissions on the sale of nonproprietary mutual funds by the Company's
broker/dealer grew to $8.2 million and $6.1 million for the six months ended
June 30, 2000, respectively, from $4.7 million and $2.7 million for the
year-earlier period, respectively. The average balance of customer funds
directed to nonproprietary mutual funds increased to $2.6 billion for June 2000
from $2.3 billion a year ago.
The Company's after-tax net income includes losses of $3.3 million and $6.0
million for the three and six months ended June 30, 2000, respectively, related
to its investment in OPAY. OPAY's operating results are reported on a
consolidated basis. See - "NOTE (6) Official Payments Corporation." The
following table summarizes the impact of the Company's investment in OPAY by
income statement category:
Page 26 of 37
OPAY
=================================================================================================================================
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 628 $ (9) $ 1,756 $ (14)
Noninterest income 3,405 928 3,565 1,216
Salary and benefits 8,919 493 13,987 753
Other noninterest expense 4,143 230 9,376 343
Gain from exercise of OPAY stock options 7 - 922 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income before minority interest (9,022) 196 (17,120) 106
Minority interest in loss (income) 3,954 (39) 7,884 (21)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income before taxes (5,068) 157 (9,236) 85
Income tax (benefit) expense (1,788) 68 (3,262) 38
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (3,280) $ 89 $ (5,974) $ 47
=================================================================================================================================
Impact on diluted earnings per share $ (0.07) $ - $ (0.13) $ -
=================================================================================================================================
Salaries and benefits expense reported for second quarter 2000 include a $4
million one-time charge, before minority interest, related to the recent
departure of OPAY's chief financial officer. OPAY is expected to report
operating losses for the remainder of the year.
BALANCE SHEET ANALYSIS
Investment Securities
The following tables provide comparative period-end balances of securities held
to maturity and securities available for sale for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2000
Industrial development bonds $ 3,661 $ - $ - $ 3,661
- ------------------------------------------------------------------------------------------------------------------------
Total $ 3,661 $ - $ - $ 3,661
========================================================================================================================
December 31, 1999
Industrial development bonds $ 3,744 $ - $ - $ 3,744
- ------------------------------------------------------------------------------------------------------------------------
Total $ 3,744 $ - $ - $ 3,744
========================================================================================================================
Page 27 of 37
========================================================================================================================
Securities Available for Sale Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2000
U.S. Treasury and federal agencies $ 879,799 $ - $ (5,892) $ 873,907
Commercial Paper 68,571 68,571
Mutual funds 43,703 - - 43,703
Other securities 34,451 11,186 - 45,637
- ------------------------------------------------------------------------------------------------------------------------
Total $1,026,524 $ 11,186 $ (5,892) $1,031,818
========================================================================================================================
December 31, 1999
U.S. Treasury and federal agencies $ 678,462 $ - $ (4,322) $ 674,140
Commercial Paper 228,670 - - 228,670
Mutual funds 92,184 - - 92,184
Other securities 23,718 21,573 - 45,291
- ------------------------------------------------------------------------------------------------------------------------
Total $1,023,034 $ 21,573 $ (4,322) $1,040,285
========================================================================================================================
Gross gains totaling $12.0 million and gross losses totaling $636,000,
respectively, were realized on sales of securities available for sale during the
six months ended June 30, 2000. The gains on sales of equity securities
available for sale arose from sales of equity securities obtained through the
exercise of warrants.
Loans Held for Sale
Loans held for sale at June 30, 2000, totaling $35.5 million, include the
remaining $19.0 million balance of Lewis Horwitz Organization ("LHO") loans held
for sale and $16.5 million of SBA loans held for sale. The LHO loans were
reclassified to the held for sale category in October 1999 following
finalization of an agreement to sell the loans to ICII at a fixed price
(effectively the book value less the allocated allowance less the interest
spread over the sale period as defined in the agreement) over a 15-month period.
The balance of loans made to ICII by Imperial Bank to facilitate their purchase
of LHO loans was $8.1 million as of June 30, 2000. Management expects the
remaining loans to be either paid off by the borrower in the normal course of
business or purchased by ICII on or before December 29, 2000. The loan to ICII
is performing in accordance with the terms of the loan agreement.
Loans
The following table provides a summary of loans by category for the periods
indicated:
========================================================================================================================
(Dollars in thousands) June 30, 2000 December 31, 1999 June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
Commercial $ 3,297,452 83.42% $ 3,016,695 83.52% $ 3,066,214 85.05%
Loan secured by real estate:
Real estate term loans 85,823 2.17 100,012 2.77 124,308 3.45
Residential tract construction loans 530,869 13.43 457,337 12.66 377,067 10.46
Consumer loans 38,570 0.98 38,104 1.05 37,545 1.04
- ------------------------------------------------------------------------------------------------------------------------
Gross loans 3,952,714 100.00% 3,612,148 100.00% 3,605,134 100.00%
Less allowance for loan losses (80,535) (71,677) (70,200)
- ------------------------------------------------------------------------------------------------------------------------
Total loans $ 3,872,179 $ 3,540,471 $ 3,534,934
========================================================================================================================
Total loans grew to $4.0 billion at June 30, 2000, an increase of approximately
9% from $3.6 billion at December 31, 1999, and an increase of 10% from June 30,
1999. Management anticipates loan growth in the 3-4% range for the remainder of
the year.
CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES
Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned
Nonaccrual loans, which include loans 90 days or more past due, totaled $56.1
million, or 1.42% of total loans, at June 30, 2000, compared with $27.6 million,
or 0.76% of total loans, at December 31, 1999, and $49.6 million, or 1.38% of
Page 28 of 37
total loans, at June 30, 1999. The increase in nonaccrual loans compared with
year-end and a year ago is largely due to a limited number of loans in the
Syndicated Finance Segment. See - "Operating Segment Results." The remaining
nonaccrual loans at quarter end consisted of commercial loans individually no
larger than $3.5 million.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
- -----------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial $ 55,683 $ 35,408 $ 27,020 $ 31,630 $ 39,032
Real estate 461 480 569 496 10,576
Loans held for sale at fair market value - - - 10,909 -
- -----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 56,144 35,888 27,589 43,035 49,608
=======================================================================================================================
Restructured loans 6,401 6,914 4,081 4,640 5,704
=======================================================================================================================
Real estate and other assets owned:
Real estate and other assets owned, gross 826 935 935 1,237 1,741
- -----------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net 826 935 935 1,237 1,741
- -----------------------------------------------------------------------------------------------------------------------
Total $ 63,371 $ 43,737 $ 32,605 $ 48,912 $ 57,053
=======================================================================================================================
The $28.6 million net increase in nonaccrual loans at June 30, 2000, compared
with December 1999 reflects new loans totaling $83.1 million placed on
nonaccrual status offset by $24.7 million in charge-offs, $19.3 million in
payments on nonaccrual loans and $10.5 million of nonaccrual loans returning to
accrual status. The Company's focus on business customers generates a relatively
large average loan size that contributes to the variability of its nonaccrual
asset totals.
Restructured loans, loans that have had their original terms modified, totaled
$6.4 million, $4.1 million and $5.7 million at June 30, 2000, December 31, 1999,
and June 30, 1999, respectively. All restructured loans were performing in
accordance with their modified terms as of June 30, 2000.
Real estate and other assets owned ("OREO") include properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the collateral, less the estimated costs of disposal,
and the loan balance at the time of transfer to OREO is reflected in the
allowance for loan losses as a charge-off. Any subsequent declines in the fair
value of the property after the date of transfer are recorded through a
provision for write-downs on OREO. OREO totaled $826,000, $935,000 and $1.7
million at June 30, 2000, December 31, 1999 and June 30, 1999, respectively.
There were no valuation allowances on OREO for these reporting dates. Two
properties were sold during the six months ended June 30, 2000. A loss of $2,600
was recorded on these sales.
All loans on nonaccrual status are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the criteria of all payments being current and the loan underwriting must
support the debt service requirements. Factors that contribute to a performing
loan being classified as impaired include substantial doubt about the ability of
the borrower to make all principal and interest payments under the original
terms of the loan, a below market interest rate, delinquent taxes and debts to
other lenders that cannot be serviced from existing cash flow.
Page 29 of 37
The following table contains information for loans classified as impaired:
====================================================================================================
Net
Carrying Specific Net
(Dollars in thousands) Value Allowance Balance
- ----------------------------------------------------------------------------------------------------
June 30, 2000
Loans with specific allowances $ 49,507 $ (18,804) $ 30,703
Loans without specific allowances 19,182 - 19,182
- ----------------------------------------------------------------------------------------------------
Total $ 68,689 $ (18,804) $ 49,885
====================================================================================================
December 31, 1999
Loans with specific allowances $ 28,779 $ (10,160) $ 18,619
Loans without specific allowances 11,978 - 11,978
- ----------------------------------------------------------------------------------------------------
Total $ 40,757 $ (10,160) $ 30,597
====================================================================================================
Impaired loans were classified as follows:
====================================================================================================
June 30, December 31,
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
Current $ 10,701 $ 12,920
Past due 1,844 248
Nonaccrual 56,144 27,589
- ----------------------------------------------------------------------------------------------------
Total $ 68,689 $ 40,757
====================================================================================================
Loans classified as impaired totaled $68.7 million at June 30, 2000, compared
with $40.8 million at December 31, 1999. The $27.9 million net increase in
impaired loans at June 30, 2000, compared with December 1999 reflects loans
totaling $83.1 million newly classified as impaired offset by $24.7 million in
charge-offs, $20.9 million in payments on impaired loans and $9.6 million of
loans removed from impaired status. The Company's average recorded investment in
impaired loans for the first six months of 2000 was $51.3 million. Interest
income collected on impaired loans totaled approximately $620,000 for the first
half of 2000, compared with $1.3 million for the year-earlier period.
Allowance and Provision for Loan Losses
The allowance for loan losses is maintained at a level considered appropriate by
management to be adequate to absorb estimated known and inherent risks in the
existing portfolio. The Company's Credit Review Department performs an ongoing
assessment of the risks inherent in the loan portfolio. The allowance for loan
losses is increased by the provision for loan losses which is charged against
current period operating results, and is decreased by the amount of net
charge-offs during the period. The Company utilizes a migration model, a
technique that estimates the inherent loss in the portfolio by applying loss
factors to grades of loans, to determine the level of the allowance and
provision for loan losses. The migration model utilizes an average loss rate
over a rolling twelve quarter base period and incorporates a standard deviation
analysis to provide probabilities for loss experience. The loss factors used in
the model are updated quarterly. The primary qualitative factors considered in
the assessment of loss factors are: changes in local economic and business
conditions, including the condition of specific market segments; changes in
lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices; the existence and effect of any
concentrations within the portfolio and changes in the level of such
concentrations; changes in the trend of delinquencies and in the volume and
nature of adversely graded nonaccrual and impaired loans; and external factors
such as competition and legal and regulatory requirements that could potentially
impact the level of credit losses in the portfolio. Management believes that the
allowance for loan losses at June 30, 2000, is adequate. Future additions to the
allowance will be subject to continuing evaluation of inherent risk in the loan
portfolio.
At June 30, 2000, the allowance for loan losses was $80.5 million, or 2.04% of
total loans, compared with $71.7 million, or 1.98% of total loans at December
31, 1999, and $70.2 million, or 1.95% of total loans, at June 30, 1999.
Page 30 of 37
The allowance for loan losses represented 143% of nonaccrual loans at June 30,
2000, compared with 260% of nonaccrual loans at December 31, 1999, and 142% of
nonaccrual loans at June 30, 1999. The following table summarizes activity in
the allowance for loan losses:
======================================================================================================================
Six months ended June 30, (Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 71,677 $ 62,649
- ----------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (28,100) (8,159)
Real estate - (195)
Consumer (237) (9)
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs (28,337) (8,363)
- ----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 2,674 1,022
Real estate 21 67
Consumer 6 5
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries 2,701 1,094
- ----------------------------------------------------------------------------------------------------------------------
Net loans charged off (25,636) (7,269)
Provision for loan losses 34,494 14,820
- ----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 80,535 $ 70,200
======================================================================================================================
Loans outstanding, end of period 3,952,714 3,605,134
- ----------------------------------------------------------------------------------------------------------------------
Average loans outstanding 4,115,148 3,859,024
======================================================================================================================
Ratio of net charge-offs to average loans (annualized) 1.25% 0.38%
Ratio of allowance for loan losses to loans outstanding at June 30 2.04 1.95
Ratio of allowance for loan losses to nonaccrual loans at June 30 143.44 141.51
Ratio of provision for loan losses to net charge-offs 134.55 203.88
======================================================================================================================
Asset Quality by Type of Operation
The Company's exposure to credit quality varies by type of operation.
Management considers the exposure to credit risk, potential returns and
allocated financial capital in operating the Company. Management believes that
it is not appropriate to use the aggregate credit quality statistics to
understand the credit exposure of the Company's operations.
The Company devotes capital to its principal subsidiary, Imperial Bank, to two
operating subsidiaries of Bancorp and the Bank, Imperial Credit Corporation
("ICC") and Imperial Ventures, Inc., ("IVI"), respectively, as well as to the
Company itself. The activities of ICC and IVI include loans to and investments
in emerging companies. The underwriting standards for these activities differ
from those used by the Bank and the expected returns and possible credit losses
are each higher than what would be expected from application of the Bank's loan
underwriting criteria. Based upon these circumstances, the Company limits the
amount of capital allocated to the type of lending and investing undertaken by
ICC and IVI.
A portion of the Bank's nonaccrual loans are covered by government guarantees
and, accordingly, management excludes such loans from its assessment of Bank
credit quality. In addition, as discussed above in "Operating Segment Results,"
the Syndicated Loan Segment has specialized underwriting.
As contrasted with the segment disclosure, the following supplemental analysis
reflects material nationally syndicated credits managed in regional offices
(primarily because of deposit relationships) in the syndicated loan results.
Management's supplemental analysis of credit quality by business activity is
provided in the tables below:
Page 31 of 37
- ---------------------------------------------------------------------------------------------------------------------
For the six months ended Syndicated SBA Loans All Other Bank IVI and Consolidated
June 30, 2000 Segment (2) (3) Operations Total Bank ICC Total
- ---------------------------------------------------------------------------------------------------------------------
Average loans and equity
investments (1) $ 540,989 $ 84,430 $ 3,467,843 $ 4,093,262 $40,840 $ 4,134,102
Average nonaccrual loans 10,596 2,296 31,619 44,511 27 44,538
Nonaccrual loans at June 30 23,984 1,664 26,196 51,844 4,300 56,144
Average allocated capital - - - 446,290 46,510 492,800
Net charge-offs 13,317 25 11,594 24,936 700 25,636
YTD warrant and equity
investment income - - 10,216 10,216 16,288 26,504
Avg nonaccrual loans/avg loans 1.92% 2.65% 0.90% 1.07% 0.12% 1.07%
Net charge-offs as a percentage
of total average loans (annualized) 4.86 0.06 0.66 1.21 6.11 1.23
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual
loans, and equity investments.
(2) Average nonaccrual loans and net charge-offs include an $8.8 million
syndicated loan managed in a commercial banking office due to a deposit
relationship. This loan was charged-off in May 2000.
(3) Approximately 75% of SBA balances are backed by a U.S. Government
guarantee.
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
For the six months ended Syndicated SBA Loans All Other Bank IVI and Consolidated
June 30, 1999 Segment (2) (3) Operations Total Bank ICC Total
- ---------------------------------------------------------------------------------------------------------------------
Average loans and equity
investments (1) $ 603,377 $ 19,709 $ 3,192,742 $ 3,815,828 $21,316 $ 3,837,144
Average nonaccrual loans 3,559 195 38,305 42,059 27 42,086
Nonaccrual loans at June 30 - 1,072 48,536 49,608 - 49,608
Average allocated capital - - - 372,416 20,880 393,296
Net charge-offs (recoveries) 4,500 (35) 2,804 7,269 - 7,269
YTD warrant and equity
investment income - - 7,382 7,382 846 8,228
Avg nonaccrual loans/avg loans 0.59% 0.98% 1.18% 1.09% 0.18% 1.08%
Net charge-offs as a percentage
of total average loan (annualized) 1.50 (0.35) 0.17 0.38 - 0.38
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual
loans, and equity investments.
(2) Average nonaccrual loans and net charge-offs include a $4.5 million
syndicated loan managed in a commercial banking office due to a deposit
relationship. This loan was fully charged-off by June 30, 1999.
(3) Approximately 75% of SBA balances are backed by a U.S. Government
guarantee.
- --------------------------------------------------------------------------------
Management's observations from the above analyses are that (1) the current
year's annualized charge-off rate for the All Other Bank Operations
(representing approximately 84% of consolidated loans) is only 66 basis points,
approximately one-half the aggregate rate of 123 basis points, (2) the highest
charge-off rate is in the IVI/ICC subsidiaries and is acceptable to management
because the warrant and investment gains of approximately $16 million
substantially exceed the credit risk from this type of investing activity
(approximately $700,000 in charge-offs), (3) the increase in the annualized net
charge-off rate for syndicated loans is reflective of the matters discussed
above, and (4) the 1999 net-charge-off rate for the All Other Bank Operations
was at an extremely low level (17 basis points) and the current year's rate
(approximately 66 basis points) is more indicative of the bank's historical
results.
CAPITAL RESOURCES AND REGULATORY MATTERS
At June 30, 2000, shareholders' equity increased to $508.5 million from $473.4
million at December 31, 1999, and $406.6 million at June 30, 1999. During the
six months ended June 30, 2000, shareholders' equity was reduced by $9.2 million
due to common stock repurchases under the Company's Stock Repurchase Program.
The Company repurchased and retired 488,300 shares of its common stock during
the first half of 2000. At June 30, 2000, 1,700,824 shares remain available for
repurchase under the Company's Stock Repurchase Program.
Page 32 of 37
Management is committed to maintaining capital at a level sufficient to assure
shareholders, customers and regulators that the Company and its bank
subsidiaries are financially sound. The Company and its bank subsidiaries are
subject to risk-based capital regulations promulgated by the federal banking
regulators. These guidelines are used to evaluate capital adequacy and are based
on an institution's asset risk profile and off-balance sheet exposures. The
risk-based capital guidelines assign risk weightings to assets both on- and
off-balance sheet and place increased emphasis on common equity. Federal law
requires each federal banking agency to take prompt corrective action to resolve
problems of insured depository institutions including, but not limited to, those
that fall below one or more prescribed capital ratios.
According to the regulations, institutions whose Tier I and total capital ratios
meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well
capitalized". Tier I capital basically consists of common shareholders' equity
and noncumulative perpetual preferred stock and minority interest of
consolidated subsidiaries minus intangible assets. Based on the guidelines, the
Company's Tier I and total capital ratios at June 30, 2000, were 10.75% and
13.80% respectively, compared with 9.64% and 12.96%, respectively, at June 30,
1999.
Capital Ratios for Imperial Bancorp and Imperial Bank/(1)/
- -------------------------------------------------------------------------------------------------------------------------
June 30, 2000
- -------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars in thousands) Actual Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets):
Company $766,240 13.80% $ 444,286 8.00% $ 555,358 10.00%
Bank 689,947 12.59 438,385 8.00 547,982 10.00
Tier I Capital (to risk-weighted assets):
Company 597,240 10.75 222,143 4.00 333,215 6.00
Bank 521,864 9.52 219,193 4.00 328,789 6.00
Leverage (to average assets):
Company 597,240 9.31 192,408 3.00 320,681 5.00
Bank 521,864 8.24 190,072 3.00 316,786 5.00
- -------------------------------------------------------------------------------------------------------------------------
/(1)/ Includes common shareholders' equity (excluding unrealized gains on
securities available for sale) less goodwill and other disallowed
intangibles.
Risk-weighted assets for the Company and Imperial Bank were $5,553.6 million and
$5,479.8 million, respectively, at June 30, 2000. Risk-weighted assets for the
Company and the Bank were $4,911.9 million and $4,841.9 million at June 30,
1999, respectively.
In April 1999, Imperial Bank issued $100 million of 8.5% 10-year Subordinated
Capital Notes. The notes qualify as Tier 2 capital under regulatory guidelines.
In May 2000, the Company redeemed $10.0 million of its Capital Securities. These
securities qualify as Tier 1 capital under regulatory guidelines.
In addition to the risk-weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3 percent. The ratio is defined as Tier I capital to average total
assets for the most recent quarter. The Company's leverage ratio was 9.31% at
June 30, 2000, compared with 8.50% at June 30, 1999, well in excess of minimum
regulatory requirements.
The Company's declaration filed with the Federal Reserve to become a Financial
Holding Company ("FHC") became effective on May 12, 2000. A FHC is a new type of
financial services company created by the Gramm-Leach-Bliley Act enacted in late
1999 that expands the range of permissible activities, primarily in the areas of
insurance and investment banking, that may be conducted by an FHC and its
affiliated companies. The Company plans to selectively pursue opportunities in
the investment banking area.
Page 33 of 37
LIQUIDITY
Liquidity management relates to the Company's ability to meet its cash
requirements and is managed through its asset/liability management process. The
Company monitors its cash inflows and outflows associated with its lending and
deposit activities and modifies its asset and liability positions as liquidity
requirements change. The Company also relies on projections of loan and deposit
growth in managing its liquidity position.
The Company's primary source of liquidity is its deposit base. This source has
historically provided a significant majority of the Company's liquidity needs.
Total deposits grew to $6.2 billion at June 30, 2000, from $5.9 billion at
December 31, 1999, and $5.7 billion at June 30, 1999. Demand deposits increased
to $3.4 billion, or 55% of total deposits, at June 30, 2000, from $2.5 billion,
or 43% of total deposits at December 31, 1999, and $3.3 billion, or 58% of total
deposits, at June 30, 1999. See - "Operating Segment Results."
The Company also uses other methods of meeting its liquidity requirements
including short-term borrowings in the form of federal funds purchased,
repurchase agreements, commercial paper, Treasury tax and loan notes ("TT & L")
and occasionally the sale of securities held in its available for sale
portfolio. Short-term borrowings decreased to $14.4 million at June 30, 2000,
from $156.7 million at December 31, 1999, and $170.7 million at June 30, 1999.
The large decrease in short-term borrowings compared with the earlier periods is
due to a reduction in TT & L balances. Management made the decision to reduce
the level of TT & L borrowings in order to use the collateral in connection with
the formation of ISII.
The Company has recently been in a position of having excess liquidity due
primarily to strong demand deposit growth that surpassed loan funding
requirements. The Company has a policy of maintaining net liquid assets to total
deposits (the liquidity ratio) of at least 20%. The liquidity ratio averaged 28%
for the first half of 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity Management
The primary objective of the asset liability management process is to manage the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies that attempt to protect pretax net
interest income assuming various interest rate scenarios. This is accomplished
by adjusting the repricing characteristics of the Company's assets and
liabilities as interest rates change. The Company's Asset Liability Committee
("ALCO") chooses strategies in conformance with its policies to achieve an
appropriate trade off between interest rate sensitivity and the volatility of
pretax net interest income and net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
the net interest margin by simulating various interest rate scenarios over
future time periods. Through the use of these simulations, the Company can
approximate the impact these projected rate changes may have on its entire on-
and off-balance sheet positions, on any particular segment of the balance sheet,
and on overall profitability. The majority of the Company's loan portfolio is
variable rate, therefore, net interest income will increase during a period of
rising interest rates and decrease during a period of declining interest rates.
The Company's net interest margin is sensitive to changes in interest rates. In
addition, the Company's interest-earning assets, primarily its loans, are
generally tied to the prime rate, an index which tends to react more slowly to
changes in market rates than other money market indices such as LIBOR. The rates
paid for the Company's interest-bearing liabilities, however, do correlate with
LIBOR. This mismatch creates a spread relationship risk between the Company's
prime based assets and LIBOR correlated liabilities. The Company has developed
strategies to protect both net interest income and net interest margin from
significant movements in interest rates. These strategies involve purchasing
interest rate floors, caps and swaps.
RISK FACTORS AFFECTING FUTURE RESULTS
This report contains statements that may be considered forward-looking. Actual
results could differ materially from the results indicated by these statements
because of many factors that are beyond our ability to control or predict. The
following is a list of primary risks facing the Company:
Page 34 of 37
Interest Rate Risk: The Company's profitability is primarily dependent on the
net interest spread between its earning assets and the related funding sources.
A large portion of its earning asset base relates to the prime interest rate.
Future reductions in the prime interest rate could have material and adverse
effects on the Company's profitability. A large portion of its funding sources
are non-interest bearing and face the possibility of disintermediation either to
a competing bank - creating a loss of market share and/or a need for replacement
- - or disintermediation into an interest-bearing account - causing a significant
reduction to net interest income. The Company employs financial derivatives to
hedge interest rate risk, specifically a $2 billion floor in effect each quarter
through September 2001. If the cost of the hedges increases, the Company would
either have to pay the increased cost to maintain the hedge or find alternative
methods to mitigate interest rate risk.
Credit Risk: The Company generally faces risk from its borrower base in that
they may fail to perform in accordance with the terms of their loans, especially
the full repayment of loan principal. The Company has adopted underwriting
standards in an effort to minimize these risks. The Company's profitability
could be both materially and adversely effected should it experience increased
loan defaults and charge-offs.
Regulatory Risk: As a part of the banking industry, the Company is subject to
extensive regulatory control and attention. Legislation such as the repeal of
the Glass-Steagal Act in the recently adopted Gramm-Leach-Bliley Act have moved
the banking industry and financial intermediaries to the forefront in terms of
regulatory attention and concern. Limitations concerning client activity,
liquidity requirements, capital requirements, transactions with affiliates,
business focus, tax consequences, interstate banking and treatment of
subsidiaries could have material and adverse impact on profitability.
Local and National Economic Risk: The Company has broadened its lending focus
with expansion into Austin, Boston, Dallas, Denver, Kirkland, New York, Phoenix,
Raleigh-Durham and Reston. However, the vast majority of clients and business
still come from California. Therefore, the Company faces some concentrated risks
concerning future economic status for California along with the nation as a
whole. A significant reduction in demand for the Company's products and
increased credit losses could result from an economic slowdown either locally or
nationally.
Subsidiary Risk: The Company is a 56% owner of Official Payments Corporation
("OPAY"), a leading provider of electronic payment options to government
entities. OPAY is in the early stages of operations and expects to incur losses
from operations in the future, of which the Company will record its
proportionate interest. Currently, OPAY generates most of its revenues from
processing income tax payments. Tax payments are seasonal in nature and produce
inconsistent earnings streams. These inconsistent earnings will be reflected in
the Company's financial statements and press releases. OPAY is extremely
dependent on maintaining its relationship with the IRS to maintain future
revenues. Loss of IRS processing would severely limit OPAY's ability to earn
consistent future revenues and establish market share and name recognition.
Warrants and Equity Investments Income Risk: In the past, the Company has been
able to generate substantial income derived from the sale of stock, obtained by
the Company through the exercise of warrants received from certain clients as
provided in the loan terms. The Company has also realized income from equity
investments in emerging growth companies and investments in venture capital
funds. Many factors may influence the ability to collect future income from
these sources such as equity market fluctuations, market acceptance for IPOs,
the client's ability to establish and maintain a successful company and the
unexercised expiration of the warrant agreements. The nature and timing of these
factors could create situations that would greatly reduce gains on sales of
equity securities.
Competitive Risk: The Company faces constant competition for loans, deposits and
fee-based income from other national, regional and community commercial banks as
well as other financial intermediaries such as, savings and loans, finance
companies, brokerage firms, insurance companies and credit unions. A loss of
market share in its deposit base would force the Company to turn to higher
priced funding sources to support its balance sheet. These higher priced funding
sources would significantly reduce net interest income. On the asset side, the
Company also faces intense competition for typical loan products.
Page 35 of 37
Legal Liability Risk: Claims and lawsuits against the Company arise throughout
the normal course of operations. Currently, the Company believes that the
liability, if any, relating to these actions will not have a material impact on
the Company. However, future claims could have material and adverse impacts on
profitability.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge.
On June 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB No.
133." SFAS No. 138 addresses a limited number of issues causing implementation
difficulties for numerous entities that are required to apply SFAS No. 133. SFAS
No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB statement No. 133, and Statement 138," continues to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
Management is evaluationg the impact of the adoption of SFAS No. 133 on its
results of operations and financial position.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Due to the nature of the businesses, the Company and its subsidiaries
are subject to numerous legal actions, threatened or filed, arising in
the normal course of business. Certain of the actions currently
pending seek punitive damages, in addition to other relief. The
Company is of the opinion that the eventual outcome of all currently
pending legal proceedings will not be materially adverse to the
Company.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
Exhibit Number Description
10.1 Amended Employment Agreement between
U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans
27.1 Financial Data Schedule
Page 36 of 37
All other material referenced in this report which is required to be filed as an
exhibit hereto has previously been submitted.
(b) No reports have been filed on Form 8-K for the quarter ended June
30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
IMPERIAL BANCORP
Dated: August 14, 2000 By:/s/ Dennis J. Lacey
-----------------------
Dennis J. Lacey
Executive Vice President and
Chief Financial Officer
By:/s/ Paul E. Adkins
-----------------------
Paul E. Adkins
Senior Vice President and
Controller
Page 37 of 37