<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
8/3/99
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended June 30, 1999
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
Commission file number: 0-7722
Securities registered pursuant to Section 12(g) of the Act:
Common Stock: Number of Shares of Common Stock outstanding as of June 30, 1999:
41,751,869 shares.
Debt Securities: Floating Rate Notes Due 1999 and Fixed Rate Debentures Due
1999. As of June 30, 1999, $1,106,000 in principal amount of
such Notes and $999,000 in principal amount of such Debentures
were outstanding. Imperial Bank Subordinated Capital Notes Due
2009. As of June 30, 1999, $100,000,000 in principal amount of
such Notes was outstanding.
Capital Securities: 9.98 percent Series B Capital Securities of Imperial Capital
Trust I Due 2026. As of June 30, 1999, $75,000,000 in
principal amount was outstanding.
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
<PAGE>
IMPERIAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE AND SIX MONTHS ENDED JUNE 30, 1999
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.
FINANCIAL REVIEW
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, 1999. This
information should be read in conjunction with the Company's 1998 consolidated
financial statements and notes thereto, and the accompanying quarterly unaudited
consolidated financial statements and notes thereto.
PERFORMANCE SUMMARY
Net income for the three months ended June 30, 1999, increased approximately 20
percent to $19.8 million, or $0.46 a share, from $16.6 million, or $0.37 a
share, for the year-earlier period. The annualized return on average assets
increased to 1.43 percent for the three months ended June 30, 1999, from 1.36
percent for the year-earlier period. Net income for the second quarter includes
a $5.1 million after-tax gain on the sale of the business portfolio of Imperial
Trust Company ("trust business") and a $978,000 after-tax gain, net of related
transaction expenses, on the sale of 3.7 million shares of Imperial Credit
Industries, Inc. (NASDAQ-ICII) ("ICII") common stock. As a result of the sale,
the Company's ownership of ICII common stock decreased to 5.3 million shares, or
approximately 15.9 percent of the total outstanding shares. The Company no
longer applies the equity method of accounting for its investment in ICII due to
the reduction in its ownership percentage.
Net income for the six months ended June 30, 1999, increased approximately 14
percent to $34.0 million, or $0.79 a share, from $29.9 million, or $0.67 a
share, for the year-earlier period. The annualized return on average assets
decreased to 1.25 percent for the six months ended June 30, 1999, from 1.30
percent for the year-earlier period. The recent increase in the Company's prime
lending rate to 8.00 percent is expected to favorably impact net income for the
second half of 1999.
Earnings per share calculations for the 1998 reporting periods have been
adjusted to reflect an 8 percent stock dividend paid on March 5, 1999.
Normalized Net Income
Normalized net income was $14.1 million, or $0.33 a share, for the three months
ended June 30, 1999, compared with $14.4 million, or $0.32 a share, for the
year-earlier period. For the six months ended June 30, 1999, normalized net
income increased to $27.0 million, or $0.62 a share, from $26.1 million, or
$0.58 a share, for the year-earlier period. For purposes of these comparisons,
normalized net income for the 1999 reporting periods excludes equity in the
earnings/losses of ICII, the gain on the sale of the trust business and the net
gain on the sale of ICII common stock. The normalizing adjustments reduced net
income by $5.7 million and $7.0 million for the three and six months ended June
30, 1999, respectively. Normalized earnings for 1998 excludes equity in the
earnings of ICII. The normalizing adjustments reduced net income by $2.2 million
and $3.9 million for the three and six months ended June 30, 1998, respectively.
Net income growth continues to be driven by the Company's core commercial
banking business.
The following table provides the calculation of normalized net income for the
periods indicated:
1
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 19,811 $ 16,567 $ 34,035 $ 29,942
After-tax adjustments: (1)
Equity in net loss (income) of ICII 345 (2,211) (954) (3,882)
Net gain on sale of ICII common stock (978) - (978) -
Net gain on sale of trust business (5,109) - (5,109) -
- -------------------------------------------------------------------------------------------------------------------------------
Normalized net income $ 14,069 $ 14,356 $ 26,994 $ 26,060
- -------------------------------------------------------------------------------------------------------------------------------
Normalized diluted earnings per share $ 0.33 $ 0.32 $ 0.62 $ 0.58
Normalized return on average assets (2) (3) 1.02% 1.20% 1.00% 1.15%
Normalized return on average equity (3) 14.14% 15.21% 13.84% 14.25%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjustment increases (decreases) reported income.
(2) Average assets excludes the Company's investment in ICII.
(3) Annualized.
- --------------------------------------------------------------------------------
The annualized return on average assets, based on normalized net income,
decreased to 1.02 percent for the three months ended June 30, 1999, from 1.20
percent for the year-earlier period. The annualized return on average assets,
based on normalized net income, decreased to 1.00 percent for the six months
ended June 30, 1999, from 1.15 percent for the year-earlier period. Although
average earning assets grew by approximately 14 percent and 18 percent for the
three and six months ended June 30, 1999, respectively, compared with the year-
earlier periods, the annualized return on average assets was adversely impacted
by a decline in the net interest margin compared with the prior year. The
annualized return on average equity, based on normalized net income, decreased
to 14.14 percent for the three months ended June 30, 1999, from 15.21 percent
for the year-earlier period. The annualized return on average equity, based on
normalized net income, decreased to 13.84 percent for the six months ended June
30, 1999, from 14.25 percent for the year-earlier period.
Net interest income increased to $65.5 million for the three months ended June
30, 1999, from $65.4 million for the three months ended June 30, 1998. Net
interest income increased to $128.3 million for the six months ended June 30,
1999, from $126.2 million for the year-earlier period. The increase in net
interest income for the three and six months ended June 30, 1999, was primarily
due to loan growth. The increase in net interest income due to loan growth was
partially offset by a lower net interest margin for each period, resulting from
a decrease in the yield on loans, compared with the year-earlier periods.
Average loan balances increased approximately $685.9 million, or 21 percent, and
$759.4 million, or 24 percent, for the three and six months ended June 30, 1999,
respectively, compared with the year-earlier periods.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 92,217 $ 90,474 $ 179,650 $ 174,732
Interest expense 26,724 25,077 51,329 48,510
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 65,493 $ 65,397 $ 128,321 $ 126,222
- ---------------------------------------------------------------------------------------------------------
Net interest margin 5.21% 5.95% 5.23% 6.09%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The net interest margin decreased to 5.21 percent and 5.23 percent for the three
and six months ended June 30, 1999, respectively, from 5.95 percent and 6.09
percent for the year-earlier periods. The decline in net interest margin for the
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three and six months ended June 30, 1999, compared with the comparable periods
of 1998 is due to a decrease in the yield on commercial loans. A majority of
the Company's commercial loans are tied to the prime rate. The prime rate
averaged 7.75 percent for the first six months of 1999 compared with 8.50
percent for the first six months of 1998. The Company anticipates that the July
1, 1999, increase in its prime lending rate to 8.00 percent from 7.75 percent
will have a positive impact on its net interest margin. It is anticipated that
the net interest margin could increase approximately 10 basis points for the
second half 1999. The Company's overall cost of funds decreased to 4.13 percent
and 4.09 percent for the three and six months ended June 30, 1999, respectively,
from 4.64 percent and 4.67 percent for the year-earlier periods.
Loan loss provisions totaled $10.0 million and $14.8 million for the three and
six months ended June 30, 1999, respectively, compared with $14.1 million and
$20.0 million for the comparable periods of 1998, respectively. Net charge-offs
were $3.6 million, or 0.37 percent of average loans on an annualized basis, for
the second quarter of 1999 compared with $11.8 million, or 1.47 percent of
average loans on an annualized basis, for the year-earlier quarter. Net charge-
offs include $3.1 million and $7.0 million on one loan to a company in the
healthcare industry for the three months ended June 30, 1999 and 1998,
respectively. Net charge-offs were $7.3 million, or 0.38 percent of average
loans on an annualized basis, for the six months ended June 30, 1999, compared
with $13.1 million, or 0.85 percent of average loans on an annualized basis, for
the year-earlier period. The ratio of the allowance for loan losses to period-
end outstanding loans increased to 1.95 percent at June 30, 1999, from 1.82
percent at December 31, 1998, and 1.80 percent at June 30, 1998.
Noninterest income increased to $36.6 million for the three months ended June
30, 1999, from $35.2 million for the year-earlier period. Normalized
noninterest income for the second quarter of 1999, which excludes equity in the
loss of ICII, an $8.8 million gain on the sale of the trust business and a $5.4
million gain on the sale of ICII stock, decreased to $23.0 million from $31.4
million, excluding equity in the earnings of ICII, for the year-earlier period.
Normalized noninterest income includes gains on the exercise and sale of equity
warrants totaling $3.4 million and $16.6 million, for the three months ended
June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999,
noninterest income increased to $58.6 million from $53.1 million for the year-
earlier period. Normalized noninterest income decreased to $42.7 million for
the first six months of 1999 from $46.4 million for the year-earlier period. On
a year-to-date basis, gains on the exercise and sale of equity warrants totaled
$7.4 million for 1999, compared with $17.0 million for 1998. The Company expects
to continue to exercise equity warrants during the second half of 1999,
dependent on market conditions.
Noninterest expense decreased to $58.4 million for the three months ended June
30, 1999, from $59.1 million for the year-earlier period. Normalized
noninterest expense, which excludes $3.7 million of consulting expense related
to the sale of ICII stock, decreased approximately 7 percent to $54.7 million
for the three months ended June 30, 1999, from $59.1 million for the year-
earlier period. The decrease in normalized noninterest expense for the three
months ended June 30, 1999, compared with the year-earlier period, is primarily
due to reductions in salaries and benefits expense and customer services
expense. The decrease in salaries and benefits expense is largely due to lower
commissions associated with the sale of equity warrants, which totaled $937,000
for the quarter ended June 30, 1999, compared with $5.0 million for the year-
earlier quarter. The decrease in customer services expense is due to lower rates
on deposit balances generated by the Financial Services Division. For the six
months ended June 30, 1999, normalized noninterest expense increased to $111.2
million from $109.2 million for the year-earlier period. A decrease in salaries
and benefits expense, due to lower commission expense, was offset by increases
in occupancy expense, data processing expense, business development expense and
other noninterest expense. The increase in occupancy and equipment expense and
business development expense is the result of growth in the Company's lending
and deposit businesses and support operations. The average number of full-time
equivalent staff increased to 1,271 for the six months ended June 30, 1999, from
1,086 for the same period of 1998. The increase in data processing expense is
primarily due to higher volumes in merchant card processing.
Total assets were $6.6 billion at June 30, 1999, an increase of approximately 7
percent from $6.2 billion at December 31, 1998, and $6.2 billion at June 30,
1998. Total loans grew to $3.6 billion at June 30, 1999, an increase of
approximately 5 percent from $3.4 billion at December 31, 1998, and an increase
of approximately 12 percent from $3.2 billion at June 30, 1998. The growth in
the loan portfolio at June 30, 1999, occurred in commercial and interim
construction loans, which increased $249.8 million, or approximately 9 percent,
and $193.9 million, or approximately
3
<PAGE>
106 percent, over June 30, 1998, respectively. Total deposits increased to $5.7
billion at June 30, 1999, from $5.6 billion at December 31, 1998, and $5.5
billion at June 30, 1998. Noninterest-bearing demand deposits comprised 58
percent of total deposits at June 30, 1999, a decrease from 59 percent of total
deposits at December 31, 1998, and 64 percent at June 30, 1998. Shareholders'
equity increased to $406.6 million at June 30, 1999, from $381.8 million at
December 31, 1998, and $389.4 million at June 30, 1998.
Nonaccrual loans totaled $49.6 million, or 1.38 percent of total loans, at June
30, 1999, compared with $30.6 million, or 0.89 percent of total loans, at
December 31, 1998, and $25.9 million, or 0.80 percent of total loans, at June
30, 1998. Restructured loans decreased to $5.7 million at June 30, 1999, from
$9.8 million at December 31, 1998, and $23.7 million at June 30, 1998. The
percentage of nonaccrual and restructured loans to total loans increased to 1.53
percent at June 30, 1999, from 1.17 percent at December 31, 1998, and decreased
from 1.54 percent at June 30, 1998. The increase in nonaccrual loans at June
30, 1999, compared with December 31, 1998, includes a $10.0 million commercial
real estate loan that was repaid in full in July. The decrease in restructured
loans from June 30, 1998, is largely due to the payoff of a $14.3 million loan
on a retail shopping center during the fourth quarter of 1998. All restructured
loans were performing in accordance with their modified terms at June 30, 1999.
The balance of real estate and other assets owned net of allowance ("OREO")
decreased to $1.7 million at June 30, 1999, from $2.3 million at December 31,
1998, and $3.3 million at June 30, 1998.
Imperial Bancorp is classified as well capitalized with leverage, Tier 1 and
total capital ratios of 8.50 percent, 9.64 percent and 12.96 percent,
respectively, at June 30, 1999.
Subordinated Debt Issue
On April 7, 1999, Imperial Bank completed a $100 million offering of 8.5 percent
Subordinated Capital Notes due 2009. The Notes qualify as Tier 2 capital under
FDIC guidelines.
Sale of Trust Business
On April 23, 1999, the Company announced the sale of the business portfolio of
Imperial Trust Company ("ITC") to Union Bank of California, N.A. ("UBOC"). The
Company recorded a pretax gain of $8.8 million on the sale, which closed on May
14, 1999. An additional gain of up to $3.5 million may be recorded in the
second quarter of 2000, based on business retention as measured by trust fee
revenues of the trust business for UBOC. ITC was not considered to be a
significant operating segment.
Sale of Imperial Credit Industries, Inc. Common Stock
On May 17, 1999, the company sold 3.7 million shares of ICII common stock to
ICII for $8.00 a share. The Company recorded a pretax gain of $1.7 million on
the sale, net of $3.7 million of related transaction expenses. As a result of
the sale, the Company's ownership of ICII common stock decreased to 5.3 million
shares, or approximately 15.9 percent of the total outstanding shares as of June
30, 1999. Due to the reduction in its ownership percentage, the Company
discontinued the equity method of accounting for its investment in ICII. On
July 27, 1999, the Company announced the sale of the remaining 5.3 million ICII
shares it owned for $6.00 a share. The sale will result in a pretax loss of
approximately $2.8 million that will be reported in the third quarter.
EARNINGS PERFORMANCE
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 interest-earning
assets. Net interest income increased to $65.5 million for the three months
ended June 30, 1999, from $65.4 million for the year-earlier period. The
increase in net interest income is due to growth in average earning assets,
which increased approximately 14 percent to $5.0 billion for the quarter ended
June 30, 1999, from $4.4 billion for the year-earlier period. Average loan
balances grew approximately 21 percent to $3.9 billion for the three months
ended June 30, 1999, from $3.2 billion for the year-earlier period. Loans
comprised approximately 77 percent of average earnings assets for the current
quarter compared with approximately 73 percent for the second quarter of 1998.
The average balance of trading instruments increased to $68.8 million for the
three months ended June 30, 1999, from $18.7 million for the year-earlier
period. The growth in trading
4
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instruments occurred primarily in Small Business Administration ("SBA") loan
certificates. The increases in average loans and trading instruments were
partially offset by a decrease in the average balance of Federal funds sold and
securities purchased under resale agreements to $362.6 million for the three
months ended June 30, 1999, from $489.3 million for the year-earlier period.
The balance of Federal funds sold and securities purchased under resale
agreements tends to correspond with demand deposit balances maintained by the
Company's customers in the real estate services industry. Although there was a
decline in the overall yield on earning assets to 7.34 percent for the second
quarter of 1999 from 8.23 percent compared with the year-earlier quarter, the
Company experienced an increase in net interest income due to growth in earning
asset balances.
5
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 3,901,754 $ 77,568 (3) 7.97% $ 3,215,901 $ 73,637 (3) 9.18%
Trading instruments 68,840 980 5.71% 18,729 242 5.18%
Securities available for sale 679,306 8,627 5.06% 671,693 9,555 5.74%
Securities held to maturity 3,844 71 7.41% 3,992 70 7.03%
Federal funds sold and securities
purchased under resale agreements 362,627 4,370 4.83% 489,254 6,722 5.51%
Loans held for sale 21,798 601 11.06% 9,846 248 10.10%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,038,169 $ 92,217 7.34% $ 4,409,415 $ 90,474 8.24%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (67,757) (57,032)
Cash 369,577 337,698
Other assets 224,103 196,449
------------ ------------
Total assets $ 5,564,092 $ 4,886,530
============ ============
Interest-bearing liabilities:
Savings $ 27,229 $ 142 2.09% $ 26,190 $ 165 2.53%
Money market 1,098,435 7,716 2.82% 940,796 7,873 3.36%
Time-under $100,000 162,397 2,342 5.78% 185,037 2,610 5.66%
Time-$100,000 and over 1,058,209 12,200 4.62% 813,122 11,041 5.45%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,346,270 $ 22,400 3.83% $ 1,965,145 $ 21,689 4.43%
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 75,313 894 4.76% 123,538 1,714 5.56%
Long-term borrowings 101,155 1,954 7.75% 3,699 67 7.27%
Capital securities 73,393 1,476 8.07% 73,335 1,607 8.79%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,596,131 $ 26,724 4.13% $ 2,165,717 $ 25,077 4.64%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,474,673 2,265,377
Other liabilities 94,160 76,839
Shareholders' equity 399,128 378,597
Total liabilities and
-------------- --------------
shareholders' equity $ 5,564,092 $ 4,886,530
============== ==============
Net interest income/Net interest margin $ 65,493 5.21% $ 65,397 5.95%
========= ========= ========= =========
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</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $5.4 million and $6.8
million for the three months ended June 30, 1999 and 1998, respectively.
6
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans-net of unearned income
and deferred loan fees (2) $ 3,859,024 $ 152,155 (3) 7.95% $ 3,099,621 $ 143,868 (3)9.36%
Trading instruments 67,762 1,869 5.56% 22,414 592 5.33%
Securities available for sale 645,488 16,021 5.01% 653,923 18,897 5.83%
Securities held to maturity 3,859 143 7.47% 4,006 140 7.05%
Federal funds sold and securities
purchased under resale agreements 351,125 8,425 4.84% 395,275 10,843 5.53%
Loans held for sale 20,206 1,037 10.35% 7,558 392 10.46%
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 4,947,464 $ 179,650 7.32% $ 4,182,797 $ 174,732 8.42%
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (65,704) (54,580)
Cash 363,697 324,269
Other assets 231,913 196,007
----------- -----------
Total assets $ 5,477,370 $ 4,648,493
=========== ===========
Interest-bearing liabilities:
Savings $ 31,915 $ 294 1.86% $ 25,770 $ 325 2.54%
Money market 1,082,839 15,171 2.83% 912,839 15,357 3.39%
Time-under $100,000 159,535 4,111 5.20% 185,938 4,843 5.25%
Time-$100,000 and over 1,039,662 24,592 4.77% 779,242 21,521 5.57%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 2,313,951 $ 44,168 3.85% $ 1,903,789 $ 42,046 4.45%
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 90,561 2,158 4.81% 112,700 3,089 5.53%
Long-term borrowings 52,344 1,998 7.70% 3,672 131 7.19%
Capital securities 73,386 3,005 8.26% 73,327 3,244 8.92%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,530,242 $ 51,329 4.09% $ 2,093,488 $ 48,510 4.67%
- ------------------------------------------------------------------------------------------------------------------------
Demand deposits 2,462,328 2,115,086
Other liabilities 91,504 71,076
Shareholders' equity 393,296 368,843
Total liabilities and
----------- -----------
shareholders' equity $ 5,477,370 $ 4,648,493
=========== ===========
Net interest income/Net interest margin $ 128,321 5.23% $ 126,222 6.09%
========= ==== ========= ====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The yields are not presented on a tax equivalent basis as the effects are
not material.
(2) Average loan balance includes nonaccrual loans.
(3) Includes net loan fee income and amortization of $10.3 million and $12.9
million for the six months ended June 30, 1999 and 1998, respectively.
7
<PAGE>
Net interest income increased to $128.3 million for the six months ended June
30, 1999, from $126.2 million for the year-earlier period. The increase in net
interest income is primarily due to growth in loans. Average loan balances
increased approximately 24 percent to $3.9 billion for the six months ended June
30, 1999, from $3.1 billion for the year-earlier period. Loans comprised
approximately 78 percent of average earnings assets for the six months ended
June 30, 1999, compared with approximately 74 percent for the comparable period
of 1998. Although there was a decline in the overall yield on earning assets to
7.32 percent for the six months ended June 30, 1999, from 8.42 percent compared
with the year-earlier period, the Company experienced an increase in net
interest income due to growth in earning asset balances.
The Company's net interest margin decreased to 5.21 percent and 5.23 percent for
the three and six months ended June 30, 1999, respectively, from 5.95 percent
and 6.09 percent for the year-earlier periods. The decrease in the net interest
margin for the current quarter and year-to-date is largely due to a decline in
the yield on commercial loans. The average yield on loans decreased to 7.97
percent and 7.95 percent for the three and six months ended June 30, 1999,
respectively, from 9.18 percent and 9.36 for the year-earlier periods. The
Company's loans are generally tied to a rate index, with the majority tied to
the prime rate. Some loans, including entertainment loans and purchased loan
participations, are tied to the London Interbank Offered Rate ("LIBOR"). The
prime rate averaged 7.75 percent for the first six months of 1999 compared with
an average of 8.50 percent for the same period of 1998. The yield on commercial
loans was also negatively impacted, although to a lesser extent, by the increase
in nonaccrual loan balances compared with the prior year. Interest income was
reduced by approximately $271,300 and $712,200 due to interest reversals on
nonaccrual loans for the three and six months ended June 30, 1999, respectively.
Average demand deposits increased to $2.5 billion for the three months ended
June 30, 1999, from $2.3 billion for the year-earlier period. Average demand
deposits represented approximately 51 percent of total average deposits for the
second quarter of 1999 compared with approximately 54 percent of total average
deposits for the year-earlier quarter. The net interest margin was positively
impacted by a decrease in the overall cost of funds to 4.13 percent for the
three months ended June 30, 1999, from 4.64 percent for the year-earlier period.
This decrease is largely due to a reduction in the cost of deposits. On a year-
to-date basis, the overall cost of funds decreased to 4.09 percent for 1999 from
4.67 percent for the same period of 1998.
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,
1999 and 1998. 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.
8
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $15,705 $ (9,704) $(2,070) $ 3,931
Trading instruments 647 25 66 738
Securities available for sale 110 (1,136) 99 (928)
Securities held to maturity (3) 4 - 1
Federal funds sold and securities
purchased under resale agreements (1,740) (826) 214 (2,352)
Loans held for sale 302 23 28 353
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income $15,021 $(11,614) $(1,663) $ 1,743
- ----------------------------------------------------------------------------------------------------------------------------------
Savings $ 7 $ (29) $ (1) $ (23)
Money market 1,319 (1,264) (212) (157)
Time-under $100,000 (320) 59 (7) (268)
Time-$100,000 and over 3,328 (1,667) (502) 1,159
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 4,334 $ (2,901) $ (722) $ 711
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (669) (248) 97 (820)
Long-term borrowings 1,765 4 118 1,887
Capital securities 1 (132) 0 (131)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 5,431 $ (3,277) $ (507) $ 1,647
- ----------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 9,590 $ (8,337) $(1,156) $ 96
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 over 1998
(Dollars in thousands) Volume Rate Rate/Volume Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $35,247 $(21,655) $(5,305) $ 8,287
Trading instruments 1,198 26 53 1,277
Securities available for sale (244) (2,666) 34 (2,876)
Securities held to maturity (5) 8 - 3
Federal funds sold and
securities purchased
under resale agreements (1,211) (1,359) 152 (2,418)
Loans held for sale 656 (4) (7) 645
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income $35,641 $(25,650) $(5,073) $ 4,918
- -------------------------------------------------------------------------------------------------------------------------------
Savings $ 77 $ (87) $ (21) $ (31)
Money market 2,860 (2,568) (478) (186)
Time-under $100,000 (687) (52) 7 (732)
Time-$100,000 and over 7,192 (3,089) (1,032) 3,071
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 9,442 $ (5,796) $(1,524) $ 2,122
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (607) (403) 79 (931)
Long-term borrowings 1,737 9 121 1,867
Capital securities 3 (242) 0 (239)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense $10,575 $ (6,432) $(1,324) $ 2,819
- -------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $25,066 $(19,218) $(3,749) $ 2,099
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In conformity with banking industry practice, payments for accounting, courier
and other deposit-related services provided to the Company's real estate
services customers are recorded as noninterest expense. If these deposits were
treated as interest-bearing and the payments reclassified as interest expense,
the Company's reported net interest income and noninterest expense would have
been reduced by $6.2 million and $12.6 million for the three and six months
ended June 30, 1999, respectively, and by $6.9 million and $12.8 million for the
three and six months ended June 30, 1998, respectively. The net interest margin
would have decreased to 4.72 percent for the three and six months ended June 30,
1999, respectively, and 5.32 percent and 5.47 percent for the comparable periods
of 1998, respectively.
Noninterest Income:
Noninterest income increased to $36.6 million for the three months ended June
30, 1999, from $35.2 million for the year-earlier period. Normalized noninterest
income for the second quarter of 1999, which excludes equity in the loss of
ICII, an $8.8 million gain on the sale of the trust business and a $5.4 million
gain on the sale of ICII stock, decreased to $23.0 million from $31.4 million,
excluding equity in the earnings of ICII, for the year-earlier period. For the
six months ended June 30, 1999, noninterest income increased to $58.6 million
from $53.1 million for the year-earlier period. Normalized noninterest income
for the first six months of 1999 decreased to $42.7 million from $46.4 million
for the year-earlier period.
The following table provides the components of noninterest income for the
periods indicated:
10
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,936 $ 1,686 $ 3,779 $ 3,118
Trust fees 2,195 2,094 4,410 4,185
Gain on origination and sale of loans 500 1,452 1,721 2,536
Equity in net (loss) income of Imperial Credit
Industries, Inc. (596) 3,815 1,644 6,699
Gain on the sale of Imperial Credit Industries, Inc.
stock 5,391 - 5,391 -
Other service charges and fees 5,034 3,542 9,483 6,268
Merchant and credit card fees 2,506 1,631 4,741 3,106
International income and fees 3,130 3,469 5,931 6,409
Gain on securities available for sale 54 8 54 12
Gain on trading instruments 365 163 384 371
Gain on exercise and sale of equity warrants 3,430 16,617 7,382 17,040
Gain on sale of the trust business 8,817 - 8,817 -
Gain on sale of software license 2,461 - 2,461 -
Other income 1,379 696 2,393 3,344
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 36,602 $ 35,173 $ 58,591 $ 53,088
- -----------------------------------------------------------------------------------------------------------------------------------
Normalized noninterest income:
Excludes equity in the (losses) earnings of ICII, gain
on the sale of ICII stock and gain on the sale of the
trust business $ 22,990 $ 31,358 $ 42,739 $ 46,389
Normalized noninterest income less gains on the
exercise and sale of equity warrants $ 19,560 $ 14,741 $ 35,357 $ 29,349
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Normalized noninterest income includes gains on the exercise and sale of equity
warrants totaling $3.4 million and $16.6 million for the three months ended June
30, 1999 and 1998, respectively. Gains on equity warrants were larger than
normal in the second quarter of 1998 due to one large transaction recorded by
one of the Company's nonbank subsidiaries. Excluding gains on equity warrants,
noninterest income increased approximately 33 percent to $19.6 million for the
three months ended June 30, 1999, from $14.7 million for the year-earlier
period. For the six months ended June 30, 1999, gains on the exercise and sale
of equity warrants totaled $7.4 million, compared with $17.0 million for the
first six months of 1998. Excluding gains on equity warrants, noninterest
income increased approximately 20 percent to $35.4 million for the six months
ended June 30, 1999, from $29.3 million for the year-earlier period. The growth
in noninterest income for the three and six months ended June 30, 1999, compared
with the prior year occurred primarily in merchant card processing fees, due to
higher volumes, fees derived from the sale of nonproprietary mutual funds and
deposit service charges. Noninterest income for the three months ended June 30,
1999, also includes $2.5 million related to a previously deferred gain
recognized by one of the Company's nonbank subsidiaries on the sale of a
software license.
Noninterest Expense:
Noninterest expense decreased to $58.4 million for the three months ended June
30, 1999, from $59.1 million for the year-earlier period. Normalized
noninterest expense, which excludes $3.7 million of consulting expense related
to the sale of ICII stock, decreased approximately 7 percent to $54.7 million
for the quarter ended June 30, 1999, from $59.1 million for the year-earlier
period. For the six months ended June 30, 1999, noninterest expense increased by
approximately 5 percent to $114.9 million from $109.2 million for the same
period of 1998. Normalized noninterest expense increased approximately 2
percent to $111.2 million for the first six months of 1999, from $109.2 million
for the year-earlier period.
The following table provides detail of noninterest expense by category for the
periods indicated:
11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salary and employee benefits $29,527 $33,189 $ 60,243 $ 61,900
Net occupancy expense 2,592 2,646 5,287 4,969
Furniture and equipment 2,814 2,583 5,718 4,800
Data processing 2,875 2,455 5,401 4,655
Customer services 6,228 6,878 12,579 12,784
Professional and legal fees 5,738 2,799 8,581 5,098
Business development 2,169 1,597 3,554 2,724
Other expense 6,482 6,927 13,517 12,227
- ----------------------------------------------------------------------------------------------------------------------------
Total $58,425 $59,074 $114,880 $109,157
- ----------------------------------------------------------------------------------------------------------------------------
Normalized noninterest expense:
Excludes $3.7 million of consulting expense
related to the sale of ICII stock $54,721 $59,074 $111,176 $109,157
Normalized noninterest expense less commissions
on sales of equity warrants $53,784 $54,096 $109,053 $104,171
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in normalized noninterest expense for the three months ended June
30, 1999, compared with the year-earlier period, is primarily due to reductions
in salaries and benefits expense and customer services expense. The decrease in
salaries and benefits expense is largely due to lower commissions associated
with the sale of equity warrants, which totaled $937,000 for the three months
ended June 30, 1999, compared with $5.0 million for the year-earlier period.
Excluding commissions associated with the sale of equity warrants, normalized
noninterest expense decreased to $53.8 million for the three months ended June
30, 1999, from $54.1 million for the same period of 1998. For the first six
months of 1999, normalized noninterest expense, excluding commissions associated
with the sale of equity warrants, increased to $109.1 million from $104.2
million for the year-earlier period. For the six months ended June 30, 1999, the
decrease in salaries and benefits expense, due to lower commissions associated
with the sale of equity warrants, was offset by increases in occupancy expense,
data processing expense, business development expense and other noninterest
expense. The increase in occupancy and equipment expense and business
development expense is the result of growth in the Company's lending and deposit
businesses and support operations. The average number of full-time equivalent
staff increased to 1,271 for the six months ended June 30, 1999, from 1,086 for
the same period of 1998. Excluding the impact of warrant commissions, the level
of salaries expense and staff is expected to stabilize for the remainder of
1999. The increase in data processing expense is primarily due to higher volumes
in merchant and credit card processing and, to a lesser extent, to expenses
associated with the Company's Year 2000 Program.
Customer services expense includes accounting and courier expenses that the
Company pays on behalf of its depositors in the real estate services industry.
Customer services expense is a function of the volume of these deposits and
interest rates. The average balance of these demand deposits increased to $1.5
billion for the six months ended June 30, 1999, from $1.3 billion for the
comparable period of 1998. The decrease in customer services expense is due to
lower rates on these deposit balances.
Other noninterest expense increased to $13.5 million for the six months ended
June 30, 1999, from $12.2 million for the year-earlier period. The increase is
due to expenses associated with the Company's factoring business ($627,400),
goodwill amortization ($309,400), dues and memberships ($300,800), expense
associated with the writedown of certain equity investments to fair value
($260,300), expenses related to the Company's Community Redevelopment activities
($229,800), insurance expense ($220,700) and courier expense ($126,900). These
increases were offset in part by reductions in noninterest expense related to
the deferral of loan origination costs by the SBA division ($238,500), the
reimbursement of operating expenses incurred to service the trust portfolio
pending conversion to the purchaser's
12
<PAGE>
system ($541,300) and a decrease in lawsuit settlement expense ($450,000). The
remaining net increase in noninterest expense occurred in a number of smaller
categories.
Income Taxes:
The Company recorded income tax expense of $13.8 million and $10.8 million,
representing an effective tax rate of 41.1 percent and 39.5 percent, for the
three months ended June 30, 1999 and 1998, respectively. Income tax expense was
$23.2 million and $20.2 million, representing an effective tax rate of 40.5
percent and 40.3 percent, for the six months ended June 30, 1999 and 1998,
respectively. The change in income tax expense for the periods reported is
primarily due to changes in net income before taxes. Tax expense for the first
six months of 1999 includes estimated tax credits totaling $840,000 related to
the Company's investment in low-income housing projects.
LOANS
The following table provides a summary of loans by category for the periods
indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) June 30, 1999 December 31, 1998 June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Percent Balance Percent Balance Percent
Commercial $ 3,066,214 85.05% $ 3,010,555 87.32% $ 2,816,434 87.31%
Loan secured by real estate:
Real estate term loans 124,308 3.45 142,866 4.14 196,352 6.09
Interim construction loans 377,067 10.46 258,763 7.51 183,203 5.68
Consumer loans 37,545 1.04 35,354 1.03 29,676 0.92
- -------------------------------------------------------------------------------------------------------------------
Gross loans 3,605,134 100.00% 3,447,538 100.00% 3,225,665 100.00%
Less allowance for loan losses (70,200) (62,649) (58,007)
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 3,534,934 $ 3,384,889 $ 3,167,658
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company continued to experience increased loan demand although the rate of
growth has moderated from that experienced in 1998. Total loans increased by
$157.6 million, or approximately 5 percent, to $3.6 billion at June 30, 1999,
from $3.4 billion at December 31, 1998, and by $379.5 million, or approximately
12 percent, from June 30, 1998. The commercial loan portfolio remains broadly
diversified among many industries including manufacturing, entertainment, real
estate services, high technology, healthcare, retail trade and professional
services. The Company has experienced strong growth in interim construction
loans which increased by $118.3 million, or approximately 46 percent, from
December 31, 1998, and by $193.9 million, or approximately 106 percent, from
June 30, 1998. The increase in interim construction loans compared with December
31, 1998, and June 30, 1998, occurred primarily in the moderately priced segment
of the residential housing market. Loan growth is expected to be moderate for
the remainder of 1999.
ASSET QUALITY
Nonaccrual Loans, Restructured Loans and Real Estate Owned:
Nonaccrual loans, which include loans 90 days or more past due, totaled $49.6
million, or 1.38 percent of total loans, at June 30, 1999, compared with $30.6
million, or 0.89 percent of total loans, at December 31, 1998, and $25.9
million, or 0.80 percent of total loans, at June 30, 1998. The increase in
nonaccrual loans at June 30, 1999, compared with December 31, 1998, includes a
$10.0 commercial real estate loan that was repaid in full in July. The remaining
increase from December 31, 1998, reflects commercial loans distributed
proportionally throughout the portfolio. Loans totaling $37.2 million were
placed on nonaccrual status during the six months ended June 30, 1999. This
increase in nonaccrual loans for the first six months of 1999 was partially
offset by gross charge-offs totaling $7.9 million, receipt of payments totaling
$5.3 million, loans brought current totaling $4.7 million and loans transferred
to OREO totaling $283,800. When a loan reaches nonaccrual status, any interest
accrued but uncollected is reversed and charged against interest income.
Interest income was reduced by approximately $271,300 and $712,200 for the three
and six months ended June 30, 1999, respectively, due to interest reversals on
nonaccrual loans.
13
<PAGE>
Restructured loans, loans that have had their original terms modified, totaled
$5.7 million, $9.8 million and $23.7 million at June 30, 1999, December 31,
1998, and June 30, 1998, respectively. The decrease in restructured loans since
December 31, 1998, is due to payments received totaling $1.8 million, loans
removed from restructured status of $1.0 million and a $1.3 million loan that
was moved to nonaccrual status. The decrease in restructured loans from June 30,
1998, is largely due to the payoff of a $14.3 million loan on a retail shopping
center during the fourth quarter of 1998.
Real estate and other assets owned includes 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 writedowns on OREO. OREO, net of valuation allowances, totaled
$1.7 million, $2.3 million and $3.3 million at June 30, 1999, December 31, 1998,
and June 30, 1998, respectively. For the six months ended June 30, 1999, four
properties with a total book value of $591,500 were sold, one property with a
book value of $132,000 was added to OREO and payments totaling $108,500 were
applied to OREO. A net gain of $128,900 was recognized on the sales.
The following table provides information on nonaccrual loans, restructured loans
and real estate and other assets owned for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
(Dollars in thousands) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial $39,032 $31,348 $29,853 $ 33,720 $25,039
Real estate 10,576 11,604 692 788 831
Consumer - - 70 - 49
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $49,608 $42,952 $30,615 $ 34,508 $25,919
- --------------------------------------------------------------------------------------------------------------------
Restructured loans $ 5,704 $ 7,287 $ 9,770 $ 27,591 $23,652
- --------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
Real estate and other assets owned, gross $ 1,741 $ 2,023 $ 2,309 $ 2,700 $ 4,343
Less valuation allowance - - - - (1,089)
- --------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned, net $ 1,741 $ 2,023 $ 2,309 $ 2,700 $ 3,254
- --------------------------------------------------------------------------------------------------------------------
Total $57,053 $52,262 $42,694 $ 64,799 $52,825
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
All loans on nonaccrual status are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status must
meet the following criteria: all payments must be 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 of
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 out of existing cash flow.
The following table contains information for loans deemed impaired:
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Net
Carrying Specific Net
(Dollars in thousands) Value Allowance Balance
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1999
Loans with specific allowances $69,977 $(14,454) $55,523
Loans without specific allowances 3,686 - 3,686
- --------------------------------------------------------------------------------------------------------------------
Total $73,663 $(14,454) $59,209
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998
Loans with specific allowances $56,746 $(12,775) $43,971
Loans without specific allowances 4,847 - 4,847
- --------------------------------------------------------------------------------------------------------------------
Total $61,593 $(12,775) $48,818
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans were classified as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ 22,750 $27,414
Past due 1,305 3,564
Nonaccrual 49,608 30,615
- --------------------------------------------------------------------------------------------------------------------
Total $ 73,663 $61,593
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Loans classified as impaired totaled $73.7 million at June 30, 1999, compared
with $61.6 million at December 31, 1998. During the first six months of 1999,
$34.9 million of loans were newly classified as impaired. The additions to
impaired loans were partially offset by charge-offs totaling $8.4 million, the
receipt of payments on impaired loans totaling $8.3 million, loans removed from
impaired status totaling $5.8 million and loans transferred to OREO of $283,800.
The Company's average recorded investment in impaired loans for the six months
ended June 30, 1999, was $64.1 million. Interest income totaling approximately
$1.3 million and $4.0 million was collected on impaired loans during the six
months ended June 30, 1999 and 1998, respectively.
Allowance and Provision for Loan Losses:
The allowance for loan losses is maintained at a level considered appropriate by
management and is based on 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's
determination of the level of the allowance for loan losses, and
correspondingly, the provision for loan losses is based upon various judgments
and assumptions, including general economic conditions in California and out-of-
state markets served, loan growth, loan portfolio composition and
concentrations, prior loan loss experience, collateral value, identification of
problem and potential problem loans and other relevant data to identify the
risks in the loan portfolio. While management believes that the allowance for
loan losses was adequate at June 30, 1999, future additions to the allowance
will be subject to continuing evaluation of inherent risk and probable loan
losses in the loan portfolio.
At June 30, 1999, the allowance for loan losses equaled $70.2 million, or 1.95
percent of total loans, compared with $62.6 million, or 1.82 percent of total
loans, at December 31, 1998, and $58.0 million, or 1.80 percent of total loans,
at June 30, 1998. The allowance for loan losses represented 142 percent of
nonaccrual loans at June 30, 1999, compared with 205 percent of nonaccrual loans
at December 31, 1998, and 224 percent of nonaccrual loans at June 30, 1998. The
following table summarizes changes in the allowance for loan losses:
15
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, (Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 62,649 $ 51,143
- ----------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (8,159) (13,791)
Real estate (195) (329)
Consumer (9) (47)
- ----------------------------------------------------------------------------------------------------------------------------
Total charge-offs $ (8,363) $ (14,167)
- ----------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 1,022 911
Real estate 67 153
Consumer 5 1
- ----------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 1,094 $ 1,065
- ----------------------------------------------------------------------------------------------------------------------------
Net loans charged off (7,269) (13,102)
Provision for loan losses 14,820 19,966
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 70,200 $ 58,007
----------------------------------------------------------------------------------------------------------------------------
Loans outstanding, end of period $3,605,134 $3,225,665
- ----------------------------------------------------------------------------------------------------------------------------
Average loans outstanding $3,859,024 $3,099,621
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans /(1)/ 0.38% 0.85%
Ratio of allowance for loan losses to loans outstanding at June 30 1.95% 1.80%
Ratio of allowance for loan losses to nonaccrual loans 142% 224%
Ratio of provision for loan losses to net charge-offs 204% 152%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Annualized
The provision for loan losses for the six months ended June 30, 1999 and 1998,
totaled $14.8 million and $20.0 million, respectively. Net charge-offs
decreased to $7.3 million, or 0.38 percent of average loans on an annualized
basis, for the first six months of 1999 compared with $13.1 million, or 0.85
percent of average loans on an annualized basis, for the year-earlier period.
Net charge-offs for the six months ended June 30, 1999 and 1998, include $4.5
million and $7.0 million, respectively, on a commercial loan to a company in the
healthcare industry. As of June 30, 1999, this loan was fully charged off.
Securities:
Securities available for sale increased to $761.5 million at June 30, 1999, from
$694.8 million at December 31, 1998. The change in securities available for
sale reflects an $83.3 million increase in U.S. Treasury and federal agency
securities to $646.7 million at June 30, 1999. In addition, other securities
increased by $34.9 million to $53.7 million at June 30, 1999. The increase in
other securities is largely due to the reclassification of the Company's
remaining investment in ICII common stock to the securities available for sale
category following the sale of 3.7 million shares in May 1999. The Company
discontinued the equity method of accounting for its investment in ICII after it
sold the ICII shares. These increases were partially offset by a $51.5 million
reduction in mutual funds to $61.1 million at June 30, 1999. Federal funds sold
and securities purchased under resale agreements increased to $1.5 billion at
June 30 1999, from $1.4 billion at December 31, 1998. The Company generally
invests short-term liquidity in mutual funds and Federal funds sold and
securities purchased under resale agreements. The fluctuation in these balances
is largely a function of changes in the level of demand deposits. Demand
deposits increased by $36.4 million from year end to $3.3 billion at June 30,
1999.
16
<PAGE>
A summary of securities held to maturity as of June 30, 1999, and December 31,
1998, is provided below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1999
Industrial development bonds $ 3,831 $ - $ - $ 3,831
- ------------------------------------------------------------------------------------------------------------
Total $ 3,831 $ - $ - $ 3,831
- ------------------------------------------------------------------------------------------------------------
December 31, 1998
Industrial development bonds $ 3,898 $ - $ - $ 3,898
- ------------------------------------------------------------------------------------------------------------
Total $ 3,898 $ - $ - $ 3,898
- ------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the amortized cost and estimated fair value of securities available
for sale as of June 30, 1999, and December 31, 1998, is provided below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1999
U.S. Treasury and federal agencies $ 647,193 $ 59 $ (583) $ 646,669
Mutual funds 61,108 - - 61,108
Other securities 56,546 2,945 (5,750) 53,741
- ------------------------------------------------------------------------------------------------------------
Total $ 764,847 $ 3,004 $ (6,333) $ 761,518
- ------------------------------------------------------------------------------------------------------------
December 31, 1998
U.S. Treasury and federal agencies $ 560,332 $ 3,024 $ (1) $ 563,355
Mutual funds 112,579 - - 112,579
Other securities 22,792 - (3,912) 18,880
- ------------------------------------------------------------------------------------------------------------
Total $ 695,703 $ 3,024 $ (3,913) $ 694,814
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains totaling $53,500 were realized on the sale of securities available
for sale during the six months ended June 30, 1999. Gross gains and losses
realized on the sale of securities available for sale during the six months
ended June 30, 1998, were $16,500 and $4,900, respectively.
Deferred Tax Asset
The Company reported a net deferred tax asset of $32.4 million at June 30, 1999,
compared with $21.8 million at December 31, 1998. The deferred tax asset is
reported net of deferred tax liabilities. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management believes that it is more likely than not the
Company will realize the benefits of these deductible differences. The amount of
the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
Other Assets
The balance of other assets increased to $110.5 million at June 30, 1999, from
$91.1 million at December 31, 1998. The increase in other assets at June 30,
1999, compared with year-end 1998 reflects the following: a $4.0 million
increase in
17
<PAGE>
prepaid insurance due to the purchase of additional life insurance to fund the
Company's deferred compensation plan, a $4.1 million increase in foreign
exchange settlement accounts, a $2.5 million increase in miscellaneous assets
primarily due to the increase in the cash surrender value of life insurance
funding the deferred compensation plan, $1.5 million of asset balances related
to the leasing business and $1.3 million of unamortized debt issuance costs
related to the Bank's Subordinated Capital Notes issued in April 1999. These
increases were offset in part by a $1.8 million decrease in accounts receivable.
The remaining change in other assets occurred in a number of smaller categories.
Short-term Borrowings:
Short-term borrowings increased to $170.7 million at June 30, 1999, from $60.6
million at December 31, 1998. The increase is primarily due to a $69.4 million
increase in borrowed funds backed by Treasury, Tax and Loan deposits ("T,T&L")
and a $48.9 million increase in Federal funds purchased and reverse repurchase
balances. These increases were partially offset by a $8.2 million reduction in
commercial paper outstanding.
Long-term Borrowings
The net principal balance of notes and debentures increased to $101.5 million at
June 30, 1998, from $2.1 million at December 31, 1998. The increase is due to
the issuance of $100.0 million of 8.5 percent, 10-year subordinated capital
notes by Imperial Bank in April 1999. Other borrowed funds increased to $5.5
million at June 30, 1999, from $290,000 at December 31, 1998, due to a borrowing
to fund the purchase of common stock by the Company's Employee Stock Ownership
Plan ("ESOP").
ASSET/LIABILITY MANAGEMENT
Liquidity:
Liquidity management involves the Company's ability to meet the cash flow
requirements of its lending and deposit businesses. For the Company, as with
most commercial banking institutions, this involves an ongoing process of
managing the cash inflows and outflows associated with a commercial deposit
base. The Company's ability to acquire new deposits at pricing levels consistent
with management's targets is largely based upon its financial condition and
capital base.
The Company's liquid assets consist of cash, Federal funds sold, securities
purchased under resale agreements and investment securities, excluding those
pledged as collateral. The majority of the Company's securities portfolio is
held as available for sale. Available for sale securities can be sold in
response to liquidity needs or pledged as collateral under repurchase
agreements. It is the Company's policy to maintain a minimum liquidity ratio
(liquid assets to deposits) of 20 percent and to limit gross loans to no more
than 80 percent of deposits. At June 30, 1999, the Company's liquidity ratio
was 41 percent and the loan to deposit ratio was 63 percent.
The overall liquidity position of the Company has been enhanced by a sizable
base of demand deposits resulting from the Company's longstanding relationships
with the real estate services industry which have provided a relatively stable
and low cost funding base. Total demand deposits averaged $2.5 billion for the
three months ended June 30, 1999, compared with $2.3 billion for the year-
earlier period. For the six months ended June 30, 1999, approximately 36 percent
of average total deposits were from the real estate services industry compared
with 37 percent of average total deposits for the year-earlier period. The
Company's average demand deposits and average shareholders' equity funded
approximately 52 percent and 53 percent, of average total assets for the six
months ended June 30, 1999 and 1998, respectively.
These funding sources are augmented by payments of principal and interest on
loans, the routine liquidation of securities from the trading and available for
sale portfolios, Federal funds sold and securities purchased under resale
agreements. For the six months ended June 30, 1999, the Company experienced a
net cash outflow from its investing activities of approximately $235.2 million.
The net outflow related to investing activities is largely due to a $85.0
million increase in Federal funds sold and securities purchased under resale
agreements and a $154.6 million increase in loans. Net cash provided by
financing activities totaled approximately $365.7 million for the six months
ended June 30, 1999. Net cash
18
<PAGE>
provided by financing activities for the six months ended June 30, 1999,
includes a $158.8 million increase in deposits and a $214.8 million increase in
borrowed funds. These increases were offset in part by a $5.2 million repurchase
of common stock for the Company's ESOP plan and a $3.1 million repurchase of
common stock under the Company's Stock Repurchase Program.
Interest Rate Sensitivity Management:
The primary objective of the asset liability management process is to manage the
Company's exposure to interest rate fluctuations while maintaining adequate
levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies that attempt to limit the change
in pretax net interest income assuming various interest rate scenarios. This is
accomplished by adjusting the repricing characteristics of the Company's assets
and liabilities as interest rates change. The Company's Asset Liability
Committee ("ALCO") chooses strategies in conformance with its policies to
achieve an appropriate trade off between interest rate sensitivity and the
volatility of pretax net interest income and net interest margin.
Each month, the Company assesses its overall exposure to potential changes in
interest rates and the impact such changes may have on net interest income and
the net interest margin by simulating various interest rate scenarios over
future time periods. Through the use of these simulations, the Company can
approximate the impact these projected rate changes may have on its entire on-
and off-balance sheet positions, on any particular segment of the balance sheet,
and on overall profitability.
Cumulative interest sensitivity gap represents the difference between interest-
earning assets and interest-bearing liabilities maturing or repricing, whichever
is earlier, at a given point in time. At June 30, 1999, the Company maintained a
positive one-year gap of approximately $3.2 billion; meaning its interest rate
sensitive assets exceeded its interest rate sensitive liabilities. This positive
cumulative gap position indicates that the Company is asset sensitive and
positioned for increased net interest income during a period of rising interest
rates but also exposed to an adverse impact on net interest income in a falling
rate environment. At June 30, 1998, the Company maintained a positive one-year
gap of approximately $2.5 billion.
The Company's net interest margin is sensitive to sudden changes in interest
rates. In addition, the Company's interest-earning assets, primarily its loans,
are generally tied to the prime rate, an index which tends to react more slowly
to changes in market rates than other money market indices such as LIBOR. The
rates paid for the Company's interest-bearing liabilities, however, do correlate
with LIBOR. This mismatch creates a spread relationship risk between the
Company's prime based assets and LIBOR correlated liabilities.
The Company has developed strategies to protect both net interest income and net
interest margin from significant movements in interest rates. These strategies
involve purchasing interest rate floors, caps and swaps. The following tables
provide information concerning the Company's derivative financial instruments at
June 30, 1999:
19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Weighted
Notional Average
At June 30, 1999 (Dollars in thousands) Amount Rate Terms
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate caps and collars purchased
<S> <C> <C> <C>
Over the counter $1,000,000 n/a Expires March 2001.
Over the counter 10,914 n/a Expires $6.6 million first quarter 2000,
$914,000 July 1999 and $3.4 million
October 1999. Contracts hedge specific
lending transactions.
Interest rate floors purchased
Exchange traded $8,000,000 n/a Expires $1.75 billion September 1999,
$2.0 billion December 1999, $2.0 billion
March 2000, $2.0 billion June 2000 and
$250 million September 2000. The floors
have an average strike price of 4.23 percent.
Interest rate swaps
Loans and leases:
Pay-fixed rate $ 26,002 5.83% Matures $17.0 million September 2003,
Receive-3 month LIBOR 26,002 5.11% $5.0 million March 2004 and $4.0 million
July 2004.
Deposits:
Pay 3 month LIBOR less 11 basis points $ 35,000 5.18% Matures June 2009, callable by the Company
Receive-fixed rate 35,000 7.04% June 2000 and semi-annually thereafter.
Subordinated Capital Notes:
Pay 3-month LIBOR $ 100,000 5.00% Matures April 2009.
Receive 100,000 6.06%
Capital securities:
Pay 3-month LIBOR $ 75,000 5.07% Matures second quarter 2007.
Receive fixed rate 75,000 7.18%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Notional Unrealized Unamortized
At June 30, 1999 (Dollars in thousands) Amount Gain (loss) Premium
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate caps and collars purchased
Over the counter $1,000,000 $ 256 $263
Over the counter 10,914 (9) -
Interest rate floors purchased
Exchange traded (1) $8,000,000 $ 273 $856
Interest rate swaps
Loans and leases $ 26,002 $ 57 $ -
Deposits 35,000 (538) -
Subordinated Capital Notes 100,000 (3,891) 716
Capital securities 75,000 3,284 -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In October 1998, following a decline in the LIBOR rate, the Company
sold exchange-traded floors with a notional amount totaling $4.5
billion in order to reset the strike price on the floors from 4.75
percent to approximately 4.00 percent. The gain on the sale of the
floors is being amortized over the term of the original floors and will
be fully amortized by the end of the third quarter of 1999. The balance
of the deferred gain on the floors was $151,300 at June 30, 1999.
- ------------------------------------------------------------------------------
CAPITAL SECURITIES
On April 23, 1997, Imperial Capital Trust I (the "Trust"), a statutory business
trust and wholly owned subsidiary of the Company, issued in a private placement
transaction $75.0 million of 9.98 percent Capital Securities which represent
undivided preferred beneficial interests in the assets of the Trust. The Company
is the owner of all the beneficial interests represented by the common
securities of the Trust (the "Common Securities"), together with the Capital
Securities. The Trust exists for the sole purpose of issuing the Capital
Securities and investing the proceeds thereof in 9.98 percent Junior
Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") issued by the Company and engaging in certain other limited
activities. The Junior Subordinated Debentures held by the Trust will mature on
December 31, 2026.
The Indenture for the Capital Securities includes provisions that restrict the
payment of dividends under certain conditions and changes in ownership of the
Trust. The Indenture also includes provisions relating to the payment of
expenses associated with the issuance of the Capital Securities. The Company was
in compliance with the provisions of the Indenture at June 30, 1999.
The Company used $67.2 million of the net proceeds from the sale of the Junior
Subordinated Debentures to make additional investments in Imperial Bank. The
remainder of the proceeds was used to implement the Company's stock repurchase
plan. The Capital Securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve. The net principal balance of the Capital
Securities was $73.4 million at June 30, 1999.
CAPITAL
At June 30, 1999, shareholders' equity totaled $406.6 million compared with
$381.8 million at December 31, 1998. For the first six months of 1999,
shareholders' equity was reduced by $5.2 million due to the purchase of common
stock for the Company's ESOP plan and by $3.1 million due to common stock
repurchases under the Company's Stock Repurchase Program. Shareholders' equity
increased by $450,000 during the period due to exercises of employee stock
options.
21
<PAGE>
The tax benefit associated with nonqualified options exercised, which is
recorded as a component of shareholders' equity, approximated $145,000 for the
first six months of 1999.
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, 1999, were 9.64 percent
and 12.96 percent, respectively, compared with 10.25 percent and 11.57 percent,
respectively, at June 30, 1998.
Capital Ratios for Imperial Bancorp and Imperial Bank /(1)/
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(Dollars in thousands) Actual Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets):
Company $ 636,385 12.96% $392,954 8.00% $491,192 10.00%
Bank 566,914 11.71% 387,355 8.00% 484,194 10.00%
Tier I Capital (to risk-weighted assets):
Company $ 473,393 9.64% $196,477 4.00% $294,715 6.00%
Bank 406,894 8.40% 193,678 4.00% 290,516 6.00%
Leverage (to average assets):
Company $ 473,393 8.50% $166,989 3.00% $278,314 5.00%
Bank 406,894 7.45% 163,766 3.00% 272,943 5.00%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes common shareholders' equity (excluding unrealized gains on
securities available for sale) less goodwill and other disallowed
intangibles.
Risk-weighted assets for the Company and Imperial Bank ("the Bank") were
$4,911.9 million and $4,841.9 million, respectively, at June 30, 1999. Average
assets for the Company and the Bank were $5,566.3 million and $5,458.9 million,
respectively, at June 30, 1999.
In addition to the risk-weighted ratios, all banks are required to maintain
leverage ratios, to be determined on an individual basis, but not below a
minimum of 3 percent. The ratio is defined as Tier I capital to average total
assets for the most recent quarter. The Company's leverage ratio was 8.50
percent at June 30, 1999, compared with 9.32 percent at June 30, 1998, well in
excess of minimum regulatory requirements.
YEAR 2000
To fulfill the Company's business responsibility and ensure compliance with
regulatory requirements, the Company has established a Year 2000 Readiness
Program ("Y2K") with the objective of having the Company Year 2000 compliant
prior to year end. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computers that have date-sensitive software may recognize a date
22
<PAGE>
using "00" as the year 1900 rather than year 2000. The Company's Y2K Readiness
Program is managed by an enterprise-wide Program Office ("Office") under the
guidance of the Company's Management Committee. The Office is staffed with
representatives from each of the Company's primary business units. Within some
business units, the Office representative is supported by a business unit Year
2000 project team.
The Company has adopted the approach set forth by the Federal Financial
Institutions Examination Council ("FFIEC"). This approach is based on five
crucial phases: awareness, assessment, remediation, validation, and
implementation. The Company's approach considers the FFIEC guidelines a minimum
set of prudent business practices needed to become Y2K ready.
Awareness:
As of the end of June 1999, the Company has completed extensive internal and
external communication related to the Y2K issue. The communication has been in
the form of customer statement enclosures, Web site disclosures, monthly and
quarterly reports to the Company's Management Committee, internal mailings, and
periodic meetings.
Assessment:
The Company has conducted a comprehensive review of its information technology
("IT") and non-IT computer systems. All systems have been evaluated and
classified as critical, important or ordinary. Systems requiring upgrades or
replacement have been identified.
The Company utilizes the services of third-party service providers and software
vendors for substantially all of its data processing functions. As such, the
Company has focused on monitoring the Y2K compliance progress of its primary
vendors and providers. The Company has identified its significant customers,
i.e., fund providers, fund takers, and counterparties. The initial evaluation
and assignment of risk for the Company's fund takers, fund providers, and
counterparties has been completed. Follow-up was performed for some customers
and completed March 31, 1999.
The Company is making progress on the overall Y2K contingency effort.
Contingency plans are being designed to mitigate the risks associated with (1)
the failure to successfully complete renovation, validation, or implementation
of its Y2K readiness plan (Remediation Contingency Plan), and (2) the failure of
systems at critical dates (Business Resumption Contingency Planning) ("BRCP").
The Company has completed the Remediation Contingency Plans and the Business
Resumption Contingency Plans as of June 30, 1999. This milestone date adheres
to the FFIEC statement requiring the four phases of the BRCP effort be
substantially complete.
Remediation/Validation/Implementation:
The Company employs a small programming staff, but does not customize
application code that affects the books of record or customer accounting. The
Company's vendors and service providers are committed to delivering Y2K ready
capabilities.
At June 30, 1999, system testing was approximately 99 percent complete for
critical systems, 98 percent complete for important systems, and 98 percent
complete for ordinary systems. Testing of critical systems was completed in
July 1999. Testing of important and ordinary systems is scheduled for
completion by the end of August 1999. Systems requiring remediation are placed
into production after testing has been completed and authorization from the
business unit has been obtained.
Non-IT systems, such as security systems, vault alarms and elevators, have been
identified and the Company is in the process of evaluating readiness. Most of
the Company's facilities are leased; therefore, the Company's efforts to
determine the status of Y2K readiness and contingency plans is focused on the
vendors and property managers. This evaluation and resolution was completed in
July 1999.
Costs:
Through June 30, 1999, the Company had incurred $2.4 million of the total $2.5
million of operating expenses budgeted for the Y2K project. It is currently
anticipated that total expense for the project will be within $100,000 of the
estimated budget. Y2K capital expenditures total $1.4 million through June 30,
1999. At present, the Company expects to complete the project with capital
expenditures at or slightly under the estimated budget of $1.9 million.
23
<PAGE>
The Office presently believes that with updates and upgrades to existing
software and minimal conversions to new software, the Company's computer systems
will be Y2K ready. However, the potential impact of the Y2K issue on the
financial services industry could be significant due to the interdependent
nature of banking transactions. Despite its efforts towards achieving Y2K
readiness, the Company could be adversely impacted if the entities with which it
transacts business do not address this issue successfully.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. It specifies necessary conditions to be met to
designate a derivative as a hedge. Implementation of SFAS No. 133 has been
postponed to fiscal years beginning after June 15, 2000. Early implementation
is permitted under this statement. The Company does not believe that the
adoption of SFAS No. 133 will have a material impact on its operations and
financial position.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries June 30, December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 486,568 $ 355,317
Trading instruments 53,596 52,971
Securities available for sale, at fair value 761,518 694,814
Securities held to maturity (fair value of $3,831 and $3,898 for 1999 and 1998, respectively) 3,831 3,898
Federal funds sold and securities purchased under resale agreements 1,531,000 1,446,000
Loans held for sale (fair value of $19,462 and $19,416 for 1999 and 1998, respectively) 18,562 18,287
Loans:
Loans, net of unearned income and deferred loan fees 3,605,134 3,447,538
Less allowance for loan losses (70,200) (62,649)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net loans $3,534,934 $3,384,889
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 33,267 30,938
Accrued interest receivable 27,302 25,505
Real estate and other assets owned, net 1,741 2,309
Deferred tax asset 32,448 21,809
Investment in Imperial Credit Industries, Inc. - 56,796
Other assets 110,520 91,070
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $6,595,287 $6,184,603
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $3,334,442 $3,298,070
Savings 24,122 25,135
Money market 1,112,081 1,086,959
Time - under $100,000 154,822 171,224
Time - $100,000 and over 1,103,022 988,259
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $5,728,489 $5,569,647
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 7,927 5,428
Income taxes payable 19,568 1,504
Short-term borrowings 170,731 60,601
Long-term borrowings:
Notes and debentures 101,484 2,105
Other borrowed funds 5,546 290
Capital securities of subsidiary trust:
Company-obligated mandatorily redeemable capital securities of subsidiary trust holding
solely junior subordinated deferrable interest debentures of the Company, net 73,401 73,372
Other liabilities 81,578 89,834
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $6,188,724 $5,802,781
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock - no par, 50,000,000 shares authorized; 41,751,869
shares at June 30, 1999, and 41,863,935 shares at
December 31, 1998, issued and outstanding 274,513 224,433
Unearned employee stock ownership plan shares; 252,528 shares (5,235) -
Accumulated other comprehensive loss, net of tax (1,930) (515)
Retained earnings 139,215 157,904
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 406,563 $ 381,822
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,595,287 $6,184,603
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Three months ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $77,568 $73,637 $152,155 $143,868
Trading instruments 980 242 1,869 592
Securities available for sale 8,627 9,555 16,021 18,897
Securities held to maturity 71 70 143 140
Federal funds sold and securities purchased under resale 4,370 6,722 8,425 10,843
Loans held for sale 601 248 1,037 392
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $92,217 $90,474 $179,650 $174,732
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 22,400 21,689 44,168 42,046
Short-term borrowings 894 1,714 2,158 3,089
Long-term borrowings 3,430 1,674 5,003 3,375
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $26,724 $25,077 $ 51,329 $ 48,510
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 65,493 65,397 128,321 126,222
Provision for loan losses 10,026 14,127 14,820 19,966
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $55,467 $51,270 $113,501 $106,256
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 1,936 1,686 3,779 3,118
Trust fees 2,195 2,094 4,410 4,185
Gain on origination and sale of loans 500 1,452 1,721 2,536
Equity in net (loss) income of Imperial Credit Industries, Inc. (596) 3,815 1,644 6,699
Gain on sale of Imperial Credit Industries, Inc. stock 5,391 - 5,391 -
Other service charges and fees 5,034 3,542 9,483 6,268
Merchant and credit card fees 2,506 1,631 4,741 3,106
International income and fees 3,130 3,469 5,931 6,409
Gain on securities available for sale 54 8 54 12
Gain on trading instruments 365 163 384 371
Gain on exercise and sale of equity warrants 3,430 16,617 7,382 17,040
Gain on sale of the trust business 8,817 - 8,817 -
Gain on sale of software license 2,461 - 2,461 -
Other income 1,379 696 2,393 3,344
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $36,602 $35,173 $ 58,591 $ 53,088
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salary and employee benefits 29,527 33,189 60,243 61,900
Net occupancy expense 2,592 2,646 5,287 4,969
Furniture and equipment 2,814 2,583 5,718 4,800
Data processing 2,875 2,455 5,401 4,655
Customer services 6,228 6,878 12,579 12,784
Professional and legal fees 5,738 2,799 8,581 5,098
Business development 2,169 1,597 3,554 2,724
Other expense 6,482 6,927 13,517 12,227
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $58,425 $59,074 $114,880 $109,157
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,644 27,369 57,212 50,187
Income tax provision 13,833 10,802 23,177 20,245
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $19,811 $16,567 $ 34,035 $ 29,942
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.47 $ 0.39 $ 0.81 $ 0.70
Diluted earnings per share $ 0.46 $ 0.37 $ 0.79 $ 0.67
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings per share for the 1998 reporting periods have been adjusted to reflect
an 8 percent stock dividend paid on March 5, 1999.
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Six months ended
June 30,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 34,035 $ 29,942
Adjustments for noncash charges (credits):
Depreciation and amortization (4,325) (12,765)
Provision for loan losses 14,820 19,966
Equity in net income of Imperial Credit Industries, Inc. (1,644) (6,699)
Gain on sale of Imperial Credit Industries, Inc. stock (5,391) -
Gain on exercise and sale of stock warrants (7,382) (17,040)
Gain on sale of the trust business (8,817) -
Gain on sale of software license (2,461) -
(Gain) loss on sale of real estate and other assets owned (129) 67
(Gain) loss on sale of premises and equipment (23) 17
Benefit for deferred taxes (9,467) (572)
Gain on securities available for sale (54) (12)
Net change in trading instruments (625) 7,246
Net change in loans held for sale (275) (4,678)
Net change in accrued interest receivable/payable 702 (2,042)
Net change in income taxes receivable/payable 18,064 3,190
Net change in other assets/liabilities (26,278) (6,025)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 750 $ 10,595
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from securities held to maturity 67 46
Proceeds from maturities of securities available for sale 1,265,116 418,465
Proceeds from sale of securities available for sale 593,825 2,102,556
Proceeds from sale of Imperial Credit Industries, Inc. stock 29,460 -
Purchase of securities available for sale (1,894,064) (2,603,135)
Proceeds from exercise and sale of equity warrants 7,382 5,940
Proceeds from sale of the trust business 8,817 -
Net change in Federal funds sold and securities
purchased under resale agreements (85,000) (753,000)
Net change in loans (154,553) (415,443)
Premises and equipment expenditures (7,204) (6,543)
Proceeds from sale of real estate and other assets owned 829 884
Proceeds from sale of premises and equipment 138 12
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (235,187) $(1,250,218)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits, savings, and
money market accounts 60,481 1,204,592
Net change in time deposits 98,361 167,745
Net change in short-term borrowings 110,130 80,059
Net proceeds from issuance of subordinated capital notes 98,364 -
Net proceeds from ESOP loan 5,985 -
Net change in long-term borrowings 286 (23)
Repurchase of common stock for ESOP (5,235) 29
Repurchase of common stock (3,116) -
Proceeds from exercise of employee stock options 450 2,428
Other (18) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 365,688 $ 1,454,830
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks $ 131,251 $ 215,207
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year $ 355,317 $ 316,600
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of period $ 486,568 $ 531,807
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------------------
Imperial Bancorp and Subsidiaries Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> $ <C> <C>
Net income $ 19,811 $ 16,567 34,035 $ 29,942
Other comprehensive income, net of tax:
Reclassification adjustments, net of tax of $12 and $1 16 3 16 3
Unrealized gain (loss) on securities available for sale,
net of tax effect of $570, ($197), ($1,038) and $300 $ 786 (272) $ (1,431) $ 413
- -------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 20,613 $ 16,298 $ 32,620 $ 30,358
===============================================================================================================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL BANCORP AND SUBSIDIARIES
NOTE (1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all footnotes as would be necessary for a fair presentation of financial
position, results of operations, and changes in cash flows in conformity with
generally accepted accounting principles. However, these interim financial
statements reflect all normal recurring adjustments, which are, in the opinion
of the management, necessary for a fair presentation of the results for the
interim periods presented. All such adjustments were of a normal recurring
nature. The Consolidated Balance Sheet, Consolidated Statement of Income and
Consolidated Statement of Cash Flows are presented in the same format as that
used in the Company's most recently filed Report on Form 10-K. A Consolidated
Statement of Comprehensive Income has been added to the Company's interim
financial statements. The consolidated financial statements include the accounts
of the Company and its wholly and majority-owned subsidiaries.
NOTE (2) IMPERIAL CREDIT INDUSTRIES, INC.
On May 17, 1999, the company sold 3.7 million shares of ICII common stock to
ICII for $8.00 a share. As a result of the sale, the Company's ownership of ICII
common stock decreased to 5.3 million shares, or approximately 15.9 percent of
the total outstanding shares. Due to the reduction in its ownership percentage,
the Company discontinued the equity method of accounting for its investment in
ICII as of the date of the sale. At June 30, 1999, the Company's investment in
ICII common stock was classified as securities available for sale in the
Consolidated Balance Sheet. On July 27, 1999, the Company announced the sale of
the remaining 5.3 million ICII shares it owned for $6.00 a share. The sale will
result in a pretax loss of approximately $2.8 million that will be reported in
the third quarter.
NOTE (3) STATEMENT OF CASH FLOWS
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the six months ended June 30, (Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 48,830 $ 47,636
Taxes paid 13,492 17,614
Significant noncash transactions:
Reclassification of investment in ICII stock to securities available for sale 34,370 -
Loans transferred to OREO 132 915
Net change in accumulated other comprehensive income, net of tax 1,431 413
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
NOTE (4) EARNINGS PER SHARE
The Company reports earnings per share ("EPS") in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128").
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders 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,
1999:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
For the three months ended June 30, 1999 1998
------------------------------------ ----------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income $19,811 41,777,281 $ 0.47 $ 16,567 42,889,597 $0.39
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,378,991 1,885,619
------------ -------------
Diluted EPS
Income available to shareholders:
Net income $19,811 43,156,272 $ 0.46 $ 16,567 44,775,216 $0.37
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
For the six months ended June 30, 1999 1998
------------------------------------ ----------------------------------
Per Per
Share Share
(Dollars in thousands, except per share data) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income $34,035 41,831,418 $ 0.81 $ 29,942 42,698,227 $0.70
Effect of dilutive securities
Incremental shares from outstanding
common stock options 1,450,773 2,002,075
------------ -----------
Diluted EPS
Income available to shareholders:
Net income $34,035 43,282,191 $ 0.79 $ 29,942 44,700,302 $0.67
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The weighted average number of shares used for calculating EPS for the 1998
reporting periods have been adjusted to reflect an 8 percent stock dividend paid
on March 5, 1999.
NOTE (5) OPERATING SEGMENT RESULTS
The Company has identified seven principal operating segments for purposes of
management reporting. Information related to the Company's remaining businesses
and centralized functions has been aggregated and is included in either "Other
Segments" or "Unallocated" as appropriate. The Company's management reporting
is structured to support management's strategic focus on mid-sized companies,
high-growth and niche markets, and new enterprises that exhibit solid growth
potential.
The following tables present the operating results and other key financial
measures for the individual operating segments for the three and six months
ended June 30, 1999 and 1998. Operating segment results are based on the
Company's internal management reporting process, which reflects assignments and
allocations of capital, certain operating and administrative costs and the loan
loss provision. Any future changes in the Company's management structure or
reporting methodologies may result in changes in the measurement of operating
segment results. In that case, results for prior periods would be restated for
comparability.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the three months ended Entertainment and
June 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 22,342 $ 10,707 $ 8,251 $ 6,921 $ 4,057
Provision for loan losses 3,151 327 191 279 28
Noninterest income 3,862 3,704 266 923 405
Noninterest expense 15,304 7,018 1,036 2,767 749
- -----------------------------------------------------------------------------------------------------
Income before taxes 7,749 7,066 7,290 4,798 3,685
Taxes 3,258 2,971 3,064 2,017 1,550
- -----------------------------------------------------------------------------------------------------
Net income $ 4,491 $ 4,095 $ 4,226 $ 2,781 $ 2,135
- -----------------------------------------------------------------------------------------------------
Average net loans $ 1,372,239 $ 541,103 $ 498,129 $ 447,354 $ 449,848
Average assets 1,382,050 544,361 505,170 449,838 452,828
Average deposits 1,222,700 657,206 15,913 88,047 -
- -----------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the three months ended
June 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
Net interest income $ 13,894 $ - $ 3,265 $ (3,944) $ 65,493
Provision for loan losses 26 - 221 5,803 10,026
Noninterest income 2,930 4,795 19,425 292 36,602
Noninterest expense 11,758 3,704 10,396 5,693 58,425
- -----------------------------------------------------------------------------------------------------
Income before taxes 5,040 1,091 12,073 (15,148) 33,644
Taxes 2,118 459 5,076 (6,680) 13,833
- -----------------------------------------------------------------------------------------------------
Net income $ 2,922 $ 632 $ 6,997 $ (8,468) $ 19,811
- -----------------------------------------------------------------------------------------------------
Average net loans $ 494,147 $ - $ 124,392 $ (93,215) $3,833,997
Average assets 501,364 46,727 $1,202,534 479,220 5,564,092
Average deposits 2,080,144 - 723,150 33,783 4,820,943
- -----------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the three months ended Entertainment and
June 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 22,387 $ 9,346 $ 7,121 $ 7,723 $ 3,654
Provision for loan losses 9,105 2,137 (43) 232 -
Noninterest income 4,011 885 344 577 566
Noninterest expense 15,735 5,879 1,618 2,616 461
- ------------------------------------------------------------------------------------------------------
Income before taxes 1,558 2,215 5,890 5,452 3,759
Taxes 655 931 2,477 2,292 1,580
- ------------------------------------------------------------------------------------------------------
Net income $ 903 $ 1,284 $ 3,413 $ 3,160 $ 2,179
- ------------------------------------------------------------------------------------------------------
Average net loans $1,238,258 $468,512 $ 418,055 $ 372,882 $ 406,073
Average assets 1,275,262 472,004 426,487 375,573 408,607
Average deposits 1,200,031 498,290 14,237 79,102 -
- ------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the three months ended
June 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 16,146 $ - $ 1,854 $ (2,834) $ 65,397
Provision for loan losses 20 - 625 2,051 14,127
Noninterest income 139 3,815 24,461 375 35,173
Noninterest expense 11,322 - 15,425 6,018 59,074
- ------------------------------------------------------------------------------------------------------
Income before taxes 4,943 3,815 10,265 (10,528) 27,369
Taxes 2,078 1,604 4,316 (5,131) 10,802
- ------------------------------------------------------------------------------------------------------
Net income $ 2,865 $ 2,211 $ 5,949 $ (5,397) $ 16,567
- ------------------------------------------------------------------------------------------------------
Average net loans $ 249,842 $ - $ 62,308 $ (57,061) $3,158,869
Average assets 250,063 77,988 1,208,071 392,475 4,886,530
Average deposits 1,770,768 - 639,192 28,902 4,230,522
- ------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the six months ended Entertainment and
June 30, 1999 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 43,934 $ 20,286 $ 15,302 $ 13,782 $ 8,019
Provision for loan losses 4,903 2,105 190 362 28
Noninterest income 6,998 8,633 493 1,347 892
Noninterest expense 30,467 14,153 2,711 5,773 1,500
- -----------------------------------------------------------------------------------------------------
Income before taxes 15,562 12,661 12,894 8,994 7,383
Taxes 6,543 5,323 5,421 3,781 3,104
- ------------------------------------------------------------------------------------------------------
Net income $ 9,019 $ 7,338 $ 7,473 $ 5,213 $ 4,279
- -----------------------------------------------------------------------------------------------------
Average net loans $1,353,091 $541,530 $ 469,501 $ 444,876 $ 454,052
Average assets 1,362,500 545,034 476,398 447,428 457,238
Average deposits 1,229,056 630,936 15,487 86,237 -
- -----------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the six months ended
June 30, 1999 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 27,929 $ - $ 6,190 $ (7,121) $ 128,321
Provision for loan losses 60 - 383 6,789 14,820
Noninterest income 3,409 7,035 29,147 637 58,591
Noninterest expense 23,618 3,704 22,261 10,693 114,880
- -----------------------------------------------------------------------------------------------------
Income before taxes 7,660 3,331 12,693 (23,966) 57,212
Taxes 3,221 1,401 5,337 (10,954) 23,177
- ------------------------------------------------------------------------------------------------------
Net income $ 4,439 $ 1,930 $ 7,356 $ (13,012) $ 34,035
- -----------------------------------------------------------------------------------------------------
Average net loans $ 502,064 $ - $ 113,663 $ (85,457) $3,793,320
Average assets 509,372 51,773 1,172,104 455,523 5,477,370
Average deposits 2,072,421 - 706,978 35,164 4,776,279
- -----------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the six months ended Entertainment and
June 30, 1998 Commercial Special Real Independent Film Syndicated
(Dollars in thousands) Banking Markets Estate Production Finance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 44,105 $ 18,326 $ 14,007 $ 15,036 $ 6,870
Provision for loan losses 9,080 3,201 126 (60) -
Noninterest income 7,086 1,612 566 1,161 992
Noninterest expense 30,130 11,059 3,309 5,367 911
- -----------------------------------------------------------------------------------------------------
Income before taxes 11,981 5,678 11,138 10,890 6,951
Taxes 5,038 2,388 4,683 4,579 2,922
- ------------------------------------------------------------------------------------------------------
Net income $ 6,943 $ 3,290 $ 6,455 $ 6,311 $ 4,029
- -----------------------------------------------------------------------------------------------------
Average net loans $1,194,391 $454,596 $ 428,730 $ 361,971 $ 382,388
Average assets 1,229,330 457,876 437,417 364,761 384,676
Average deposits 1,163,814 475,547 12,489 80,707 -
- -----------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the six months ended
June 30, 1998 Financial Other
(Dollars in thousands) Services ICII Segments Unallocated Consolidated
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 29,860 $ - $ 3,982 $ (5,964) $ 126,222
Provision for loan losses 362 - 661 6,596 19,966
Noninterest income 217 6,699 31,608 3,147 53,088
Noninterest expense 21,526 - 25,316 11,539 109,157
- -----------------------------------------------------------------------------------------------------
Income before taxes 8,189 6,699 9,613 (20,952) 50,187
Taxes 3,443 2,817 4,042 (9,667) 20,245
- ------------------------------------------------------------------------------------------------------
Net income $ 4,746 $ 3,882 $ 5,571 $ (11,285) $ 29,942
- -----------------------------------------------------------------------------------------------------
Average net loans $ 214,567 $ - $ 63,339 $ (54,941) $3,045,041
Average assets 214,848 76,264 1,106,287 377,034 4,648,493
Average deposits 1,622,579 - 636,515 27,224 4,018,875
- -----------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Detail of amounts included in unallocated is provided below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income:
Internal funding $(3,349) $(1,744) $(5,983) $(4,956)
Deferred loan fees (1,295) (1,338) (2,777) (2,530)
Reclass of late fees and factoring interest 581 677 1,423 1,057
Other 119 (429) 216 465
- ------------------------------------------------------------------------------------------------------------------------
$(3,944) $(2,834) $(7,121) $(5,964)
- ------------------------------------------------------------------------------------------------------------------------
Loan loss provision:
Unallocated allowance $ 5,803 $ 1,801 $ 6,828 $ 6,421
Mortgage loans - 50 (41) 50
Other - 200 2 125
- ------------------------------------------------------------------------------------------------------------------------
$ 5,803 $ 2,051 $ 6,789 $ 6,596
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Item processing revenue $ 1,033 $ 972 $ 2,094 $ 1,919
Reclass of late fees and factoring (581) (677) (1,423) (1,057)
interest
Other (160) 80 (34) 2,285
- ------------------------------------------------------------------------------------------------------------------------
$ 292 $ 375 $ 637 $ 3,147
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Unallocated administration and $ 6,898 $ 7,622 $12,654 $13,841
operations
Deferred loan costs (1,297) (1,410) (2,483) (2,414)
Other 93 (193) 522 112
- ------------------------------------------------------------------------------------------------------------------------
$ 5,693 $ 6,018 $10,693 $11,539
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Unallocated average assets include the Company's cash and due from accounts with
correspondent banks and the Federal Reserve, the unallocated portion of the allowance
for loan losses and the balance of deferred fees. Unallocated deposit balances include
official checks and Treasury, Tax and Loan accounts.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
TABLE 1 - FINANCIAL RATIOS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income as a percentage of: (1)
Average shareholders' equity 19.91% 17.55% 17.45% 16.37%
Average total assets 1.43% 1.36% 1.25% 1.30%
Average earning assets 1.58% 1.51% 1.39% 1.44%
Normalized income as a percentage of: (1)(2)
Average shareholders' equity 14.14% 15.21% 13.84% 14.25%
Average total assets (3) 1.02% 1.20% 1.00% 1.15%
Average earning assets 1.12% 1.31% 1.10% 1.26%
Average shareholders' equity as a
percentage of:
Average assets 7.17% 7.75% 7.18% 7.93%
Average loans 10.23% 11.77% 10.19% 11.90%
Average deposits 8.28% 8.95% 8.23% 9.18%
Shareholders' equity at period end as a
percentage of:
Total assets at period end - - 6.16% 6.26%
Total loans at period end - - 11.28% 12.07%
Total deposits at period end - - 7.10% 7.02%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized
(2) Normalized net income for 1999 reporting periods excludes equity in the
earnings/losses of ICII, the gain on the sale of the trust business and the
net gain on the sale of ICII common stock. Normalized net income for 1998
reporting periods excludes equity in the earnings of ICII.
(3) Average assets for calculating normalized return on assets excludes the
Company's investment in ICII.
- -------------------------------------------------------------------------------
EXHIBITS
PART I
None
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, nor has the resolution of any proceeding since the Company's
last filing with the Commission materially adversely affected the
registrant or any subsidiary thereof.
34
<PAGE>
ITEM 2. Changes in Securities
No events have transpired which would make response to this item
appropriate.
ITEM 3. Defaults upon Senior Securities
No events have transpired which would make response to this item
appropriate.
ITEM 4. Submission of Matters to a Vote of Securities Holders
No events have transpired which would make response to this item
appropriate.
ITEM 5. Other Information
No events have transpired which would make response to this item
appropriate.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index
Exhibit Number Description
-------------- -----------
10.1 Asset Purchase Agreement among
Union Bank of California,
N.A., Imperial Trust Company
and Imperial Bank
10.2 Transition Agreement Between
Union Bank of California,
N.A., Imperial Trust Company
and Imperial Bank
27 Financial Data Schedule
All other material referenced in this report which is required to be filed
as an exhibit hereto has previously been submitted.
(b) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
IMPERIAL BANCORP
Dated: August 6, 1999 By: /s/ Christine M. McCarthy
-------------------------
Christine M. McCarthy
Executive Vice President and
Chief Financial Officer
35
<PAGE>
EXHIBIT 10.1
-------------------------------------------------
-------------------------------------------------
ASSET PURCHASE AGREEMENT
among
UNION BANK OF CALIFORNIA, N.A.,
IMPERIAL TRUST COMPANY
and
IMPERIAL BANK
April 23, 1999
---------------------------------------------
---------------------------------------------
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
---------
April 23, 1999 among UNION BANK OF CALIFORNIA, N.A., a national banking
association ("Purchaser"), IMPERIAL TRUST COMPANY, a California corporation
---------
("Seller"), and IMPERIAL BANK, a California state bank ("Imperial").
------ --------
R E C I T A L S
- - - - - - - -
A. Seller is engaged in the Trust Business (as defined herein).
B. Imperial owns all of the issued and outstanding capital stock of
Seller.
C. Seller desires to sell to Purchaser, and Purchaser desires to
purchase from Seller, the Trust Business, and Purchaser further agrees to assume
those liabilities and obligations of Seller relating to the Trust Business, as
specifically set forth herein, and in accordance with the terms and conditions
of this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
DEFINITIONS
-----------
Unless otherwise defined herein or the context otherwise requires, the
terms defined in this Article 1 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined. Unless otherwise indicated, any reference
herein to a "Section," "Article," "Annex" or "Schedule" shall mean the
applicable section, article, annex or schedule of or to this Agreement. All
accounting terms used in this Agreement not defined in this Article 1 shall,
except as otherwise provided for herein, be construed in accordance with
generally accepted accounting principles, consistently applied.
"Action" shall mean any actual or threatened claim, action, suit,
------
arbitration, hearing, inquiry, proceeding or investigation by or before any
Governmental Entity or arbitrator and any appeal from any of the foregoing.
"Assets" shall have the meaning ascribed to such term in Section 2.1,
------ -----------
as limited by Section 2.2.
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the Treasury Regulations promulgated thereunder.
"Damages" shall mean any and all losses, liabilities, obligations
-------
costs, expenses, damages or judgments of any kind or nature whatsoever
(including reasonable attorneys' and other costs and expenses incurred in
connection with indemnification claims under Article 9 hereof).
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
"Fiduciary Assets" shall mean the properties, assets, deposits, funds,
----------------
investments, agreements, bills, notes, securities, contracts and rights
(including claims against third parties) that are administered, utilized, held
as collateral or held for the benefit of others (whether or not constituting all
or a portion of the corpus of any trust) by Seller as agent, custodian, trustee
or in any other capacity pursuant to or in connection with the Trusts.
"Governing Agreements" shall mean all material contracts and
--------------------
agreements governing the Trusts.
"Governmental Entity" shall mean any local, state, federal or foreign
-------------------
(i) court, (ii) government or (iii) governmental department, commission,
instrumentality, board, agency or authority, including the United States
Internal Revenue Service and other taxing authorities.
"Legal Requirement" shall mean any statute, law, regulation, ordinance
-----------------
or rule enacted or promulgated by any Governmental Entity or any arbitrator.
"Lien" shall mean all liens, mortgages, assessments, security
----
interests, claims, pledges, trusts (constructive or other), or other charges,
encumbrances or restrictions, other than those incurred in the Ordinary Course.
"Manageable Income" shall mean all manageable income related to the
-----------------
Trust Business as reflected in the financial statements relating to the Trust
Business, excluding any interest income, all as calculated in a manner
consistent with Seller's accounting policies and practices prior to the Closing
Date.
"Material Adverse Effect" shall mean (a) when used with reference to
-----------------------
Seller, a material adverse effect on the Trust Business or (b) when used with
reference to Purchaser, a material adverse effect on Purchaser's business or
financial condition.
"Ordinary Course" shall mean, when used with reference to Seller, the
---------------
ordinary course of Seller's Trust Business, consistent with past practices.
"Out-of-Balance Condition" with respect to any Trust shall mean a
------------------------
situation that exists on the Closing Date whereby the amount of the assets or
liabilities
<PAGE>
actually held by Seller as of the Closing Date (and transferred to
Purchaser pursuant to the transactions contemplated by this Agreement) in
respect of such Trust is different than the assets or liabilities which such
Trust is reported to hold or owe pursuant to the Systems Records.
"Person" shall mean all natural persons, corporations, business
------
trusts, associations, companies, limited liability companies, partnerships,
joint ventures, Governmental Entities and any other entities.
"Proprietary Assets" shall mean assets of Seller other than Fiduciary
------------------
Assets.
"Systems Records" shall mean all accounting information, reports,
---------------
books, records, statements and data regularly maintained on the electronic
information systems or electronic storage media separately specifying or
accounting for each Trust, including an electronic summary of the fees.
"Transition Agreement" shall mean that certain Transition Agreement
--------------------
executed by Purchaser, Seller and Imperial on the Closing Date, in substantially
the form attached hereto as Annex A.
"Trust Business" shall mean all of the business of Seller conducted up
--------------
to the Closing Date, including without limitation, Seller's business of acting
as executor, administrator, guardian or conservator of estates, assignee,
receiver, depositary, custodian or trustee under the appointment of any court,
or by authority of any law of this or any other state of the United States, as
trustee for any purpose permitted by law, and all agency and other fiduciary or
representative capacities.
"Trusts" shall mean the trusteeships, executorships, administrations,
------
guardianships, conservatorships, custodianships, agencies and other fiduciary
and representative capacities held by Seller and any common, collective, or
commingled trust funds maintained by Seller on or prior to the Closing or to
which Seller may be named or appointed after the Closing, including but not
limited to trust documents where Seller is named successor trustee and wills on
deposit.
ARTICLE 2
---------
PURCHASE AND SALE OF ASSETS
---------------------------
2.1 Purchase and Sale. Subject to the terms and conditions set forth
-----------------
herein, at the Closing (as hereinafter defined), the Seller agrees to sell
transfer, assign, convey, and deliver to Purchaser, and Purchaser agrees to
purchase, accept, and acquire from Seller, free and clear of all Liens and
subject to the rights of other Persons to the extent conferred by California
Financial Code 4842 or other applicable law, all of Seller's right, title and
interest in all assets and properties used in connection with the conduct of the
Trust Business, all of which are collectively referred to herein as the
"Assets." The Assets include, without limitation:
------
<PAGE>
(a) the whole of the Trust Business, including, without
limitation,all Trusts as identified on Schedule 2.1(a)(i), Governing Agreements
------------------
and Fiduciary Assets, and all agreements and rights of Seller under the Trusts
and Governing Agreements;
(b) all of the goodwill associated with the Assets; and
(c) all of the Systems Records.
2.2 Excluded Assets. Notwithstanding Section 2.1, the Assets shall
---------------
not include any of the following assets or properties of Seller (the "Excluded
--------
Assets"):
- ------
(a) the consideration delivered to Seller pursuant to this
Agreement;
(b) all Proprietary Assets consisting of revenues, including,
without limitation, compensation, management fees and other fees and income of
the Trust Business accrued through the Closing Date;
(c) all Proprietary Assets consisting of cash on hand, securities
and financial instruments;
(d) all Proprietary Assets consisting of assets and properties
used in connection with the administration of the Trust Business, including,
without limitation, premises, furniture, fixtures and equipment and other
tangible personal property, accounts and notes receivable, advances, leasehold
interests, software and software licenses, all licenses, copyrights, trademarks,
patents and other intellectual property rights used in the conduct of the Trust
Business and all Resources (as that term is defined in the Transition
Agreement);
(e) all deposits of Seller with the Treasurer of the State of
California pursuant to California Financial Code Sections 1540 et. seq., or any
-- ---
similar deposit.
(f) all rights and benefits under all contracts and agreements
listed in Schedule 3.6(a) and Schedule 3.6(b);
--------------- ---------------
(g) all corporate and tax books and records including, without
limitation, minute books, corporate seals, stock books and tax records and other
books and records relating to the corporate and tax matters of Seller; and
2.3 Limited Assumption of Liabilities; Excluded Liabilities.
-------------------------------------------------------
(a) At the Closing, Purchaser shall assume, and agrees to pay,
perform and discharge in due course as and from the Closing, those liabilities
and obligations of Seller arising under the Trusts or the Governing Agreements
attributable or related to the Trust Business which are due to be paid,
performed and discharged from
<PAGE>
and after the Closing (collectively, the "Assumed Liabilities"). However, in no
-------------------
event shall Assumed Liabilities include any Excluded Liabilities (as defined
below). Except for the Assumed Liabilities, Purchaser shall not assume or have
any responsibility for any debt, liability or obligation relating to Seller (the
Excluded Liabilities). The "Excluded Liabilities" include, without limitation:
--------------------
(i) all liabilities and obligations of Seller relating to
the Excluded Assets;
(ii) all liabilities and obligations of Seller which are
accrued through the Closing under the Trusts and the Governing Agreements;
(iii) all liabilities and obligations of Seller with
respect to its employees, including, without limitation, any wages, bonuses,
commissions, accrued vacation benefits or other compensation, and any other
liabilities or obligations under any employee benefit or profit-sharing plan,
any retirement or welfare plan or any other benefit or compensation plan
relating to Seller's employees, whether such liabilities or obligations arise
by agreement or law;
(iv) all liabilities and obligations of Seller in its
corporate capacity (including legal fees and expenses) arising out of or related
to any actions, suits or proceedings described in Schedule 3.5 (or which should
------------
have been described in Schedule 3.5 to make the representations and warranties
------------
set forth in Section 3.5 complete and accurate).
-----------
(v) all liabilities and obligations of Seller of any kind,
character or description, whether known or unknown, accrued, absolute,
contingent or otherwise with respect to claims by third parties against Seller
relating to the operation of the Trust Business prior to the Closing, including,
without limitation, all breaches by Seller of its fiduciary duty in connection
with the operation of the Trust Business prior to the Closing;
(vi) all violations of statute, regulation or law (including
trust law) by Seller; and
(vii) all criminal or civil wrongdoing by Seller, including
negligent or otherwise tortious action.
(b) In no event shall Seller have after the Closing any
liability on account of any obligation, Trust or liability transferred to
Purchaser unless expressly provided to the contrary in this Agreement.
Notwithstanding the foregoing, the parties hereto have executed the Transition
Agreement and have the responsibilities described therein.
<PAGE>
2.4 Purchase Price.
--------------
(a) Purchase Price; Adjusted Purchase Price. Subject to the
---------------------------------------
terms and conditions of this Agreement, the aggregate purchase price to be paid
by Purchaser (in addition to Purchaser's assumption of the Assumed Liabilities)
to Seller for the Assets and for Seller's covenants and agreements hereunder
shall be $14,000,000 plus the aggregate book value of any other assets
identified on Schedule 2.4(a) (the "Purchase Price"), as adjusted pursuant to
--------------
the terms of this Section 2.4. The Purchase Price, as so adjusted, is
-----------
referred to herein as the "Adjusted Purchase Price". The Purchase Price and
-----------------------
Adjusted Purchase Price will be calculated without regard to or consideration of
any fees or commissions received with respect to Seller's or Imperial's
"employee benefit plans" (as such term is defined in Section 3(3) of ERISA)
which are part of the Assets as of the Closing Date.
(b) Closing Payment; Closing Payment Reimbursement.
----------------------------------------------
(i) In accordance with Section 2.8, at the Closing the
Purchaser shall deliver to Seller an amount equal to $10,500,000 (the "Closing
-------
Payment").
- -------
(ii) Within thirty (30) days after the Closing, Seller shall
calculate and deliver to Purchaser Seller's calculation of the First Quarter
1999 Gross Fee Revenue (as defined below) (the "Sellers Calculated First
------------------------
Quarter 1999 Gross Fee Revenue"), together with a statement, in reasonable
- ------------------------------
detail, of the manner by which such calculation was determined and such other
documentation that supports such determination. Seller shall cause Seller's
officers and representatives to make available to the Purchaser any work papers,
financial data and other information used by Seller in calculating the Seller's
Calculated First Quarter 1999 Gross Fee Revenue.
(iii) Within thirty (30) days after receipt of the Seller's
Calculated First Quarter 1999 Gross Fee Revenue, Purchaser shall notify the
Seller in writing (an "Objection Notice") of any objection to the Seller's
----------------
Calculated First Quarter 1999 Gross Fee Revenue. If no Objection Notice is
given within such thirty-day period, then the Seller's Calculated First Quarter
1999 Gross Fee Revenue shall be final and binding on all parties and shall be
deemed for all purposes to be the Final First Quarter 1999 Gross Fee Revenue.
In the event Purchaser timely provides an Objection Notice, Purchaser and the
Seller shall, for a period of five (5) business days, use their collective best
efforts to resolve any differences between the parties as to the determination
of the First Quarter 1999 Gross Fee Revenue. In the event Purchaser and the
Seller are not, within such five (5) business-day period, able to resolve such
differences, the determination of the First Quarter 1999 Gross Fee Revenue shall
be referred for final resolution to the Los Angeles office of such independent
nationally recognized accounting firm, which has not been retained by either
Seller or Purchaser within the preceding twelve (12) months, as the parties
shall mutually approve. Should the parties fail to so agree upon an independent
accounting firm within five (5) days after expiration of such resolution period,
the parties shall each designate an accounting firm and such two designated
firms shall select a third independent accounting firm, which has not been
<PAGE>
retained by either Seller or Purchaser within the preceding twelve (12) months,
and such selected independent accounting firm shall make such determination.
Such accounting firm shall, as promptly as practicable, but in no event later
than ten (10) days after its selection, make a determination of the First
Quarter 1999 Gross Fee Revenue. The determination by such accounting firm of
the First Quarter 1999 Gross Fee Revenue shall be final and binding on all
parties and shall be deemed for all purposes to be the Final First Quarter 1999
Gross Fee Revenue. The costs and fees of such accounting firm shall be borne
50% by Purchaser and 50% by Seller.
(iv) If the Final First Quarter 1999 Gross Fee Revenue is
less than $2,200,000, then the Purchase Price shall be deemed adjusted so that
the Adjusted Purchase Price as of such date shall be an amount equal to (a)
$14,000,000 multiplied by (b) a fraction, the numerator of which is the Final
First Quarter 1999 Gross Fee Revenue, and the denominator of which is
$2,200,000. If the Purchase Price is adjusted pursuant to this Section
2.4(b)(iv), then on the later to occur of (x) sixty (60) days following the
Closing Date or (y) five (5) days after the determination of the Final First
Quarter 1999 Gross Fee Revenue in accordance with clause (iii) above, Seller
shall pay to Purchaser an amount equal to (a) the Closing Payment less (b) the
Adjusted Purchase Price multiplied by .75 (the "Closing Payment Reimbursement").
-----------------------------
(c) Second Purchase Payment.
-----------------------
(i) On or before April 30, 2000, Purchaser shall calculate
and deliver to Seller Purchaser's calculation of the First Quarter 2000 Gross
Fee Revenue (as defined below) (the "Purchaser's Calculated First Quarter 2000
-----------------------------------------
Gross Fee Revenue"), together with a statement, in reasonable detail, of the
- -----------------
manner by which such calculation was determined and such other documentation
that supports such determination. Purchaser shall cause Purchaser's officers and
representatives to make available to the Seller any work papers, financial data
and other information used by Purchaser in calculating the Purchaser's
Calculated First Quarter 2000 Gross Fee Revenue.
(ii) Within thirty (30) days after receipt of the
Purchaser's Calculated First Quarter 2000 Gross Fee Revenue, Seller shall notify
the Purchaser with an Objection Notice of any objection to the Purchaser's
Calculated First Quarter 2000 Gross Fee Revenue. If no Objection Notice is given
within such thirty-day period, then the Purchaser's Calculated First Quarter
2000 Gross Fee Revenue shall be final and binding on all parties and shall be
deemed for all purposes to be the Final First Quarter 2000 Gross Fee Revenue. In
the event Seller timely provides an Objection Notice, Purchaser and the Seller
shall, for a period of five (5) business days, use their collective best efforts
to resolve any differences between the parties as to the determination of the
First Quarter 2000 Gross Fee Revenue. In the event Purchaser and the Seller are
not, within such five (5) business-day period, able to resolve such differences,
the determination of the First Quarter 2000 Gross Fee Revenue shall be referred
for final resolution to the Los Angeles office of such independent nationally
recognized accounting firm, which has not been retained by either Seller or
Purchaser within the preceding twelve (12) months, as the parties shall mutually
approve. Should
<PAGE>
the parties fail to so agree upon an independent accounting firm within five (5)
days after expiration of such resolution period, the parties shall each
designate an accounting firm and such two designated firms shall select a third
independent accounting firm which has not been retained by either Seller or
Purchaser within the preceding twelve (12) months, and such selected independent
accounting firm shall make such determination. Such selected or chosen
accounting firm shall, as promptly as practicable, but in no event later than
ten (10) days after its selection period, make a determination of the First
Quarter 2000 Gross Fee Revenue. The determination by such accounting firm of the
First Quarter 2000 Gross Fee Revenue shall be final and binding on all parties
and shall be deemed for all purposes to be the Final First Quarter 2000 Gross
Fee Revenue. The costs and fees of such accounting firm shall be borne 50% by
Purchaser and 50% by Seller.
(iii) Within five (5) days after determination of the Final
First Quarter 2000 Gross Fee Revenue, Purchaser shall pay to Seller an amount
equal to 25% of the Adjusted Purchase Price as adjusted pursuant to Section
2.4(b)(iv) (the "Second Payment"); provided, however, if the Final First Quarter
--------------
2000 Gross Fee Revenue multiplied by 4 (the "Annualized 2000 Gross Fee Revenue")
---------------------------------
is less than 90% of the Final First Quarter 1999 Gross Fee Revenue multiplied by
4 (the "Adjusted Annualized 1999 Gross Fee Revenue"), then, the Second Payment
------------------------------------------
shall be reduced by an amount equal to (a) the Adjusted Annualized 1999 Gross
Fee Revenue less the Annualized 2000 Gross Fee Revenue, multiplied by (b) two.
Notwithstanding the foregoing, the Second Payment shall not be reduced below
zero.
(d) As used in this Section 2.4, "First Quarter 1999 Gross Fee
----------------------------
Revenue" shall mean the Manageable Income derived from all accounts of the Trust
- -------
Business during the time period between January 1, 1999, up to and including
March 31, 1999.
(e) As used in this Section 2.4, "First Quarter 2000 Gross Fee
----------------------------
Revenue" shall mean the Manageable Income derived from all accounts which were
- -------
accounts of the Trust Business as of the Closing Date plus Manageable Income
associated with any prospective customers of the Trust Business as of the
Closing Date, as identified on Schedule 2.4(e) hereto, during the time period
---------------
between January 1, 2000, up to and including March 31, 2000; provided, that the
--------
First Quarter 2000 Gross Fee Revenue shall include (i) all Manageable Income
derived from all escrow accounts and all accounts associated with the following:
(x) each individual money manager or individual union which was a customer of
the Trust Business as of the Closing Date or is identified on Schedule 2.4(e),
---------------
and (y) each member of the Ahmanson family; and (ii) all Manageable Income that
would have been derived from all accounts of the Trust Business as of the
Closing Date that were sold, transferred or otherwise disposed of by Purchaser
after the Closing by including all Manageable Income derived from such accounts
in the calculation of First Quarter 1999 Gross Fee Revenue.
2.5 Allocation. Schedule 2.5 hereto contains the allocation of the
---------- ------------
Adjusted Purchase Price to the Assets and the covenants of Seller hereunder
which has been agreed upon by Purchaser and Seller. Such allocation shall be
adopted for all purposes related to the sale of the Assets hereunder, and Seller
and Purchaser agree not to
<PAGE>
file a tax return or otherwise take a position for tax purposes inconsistent
with this allocation and to use reasonable efforts to sustain such allocation in
any subsequent tax audit or dispute.
2.6 Transferee Liability. The parties hereto acknowledge and agree
--------------------
that:
(a) all consent fees, sales tax and assignment or transfer fees,
and other fees and charges and taxes payable in connection with the transactions
contemplated hereby, if any, shall be paid by Purchaser; and
(b) all Federal and state income taxes, if any, incurred by
Purchaser or Seller shall be borne by the party incurring such taxes.
2.7 Prorations and Adjustments.
--------------------------
(a) Purchaser and Seller shall prorate as of the Closing Date, to
the extent any such item constitutes an Asset or Assumed Liability, any assigned
charges, taxes, rental expenses, utility and maintenance expenses, tenant or
property insurance premiums, prepaid service contracts and any other items as to
which a payment made before the Closing Date relates to any period after the
Closing Date or a payment made after the Closing Date relates to any period
before the Closing Date. The amount of any net proration shall be added or
subtracted, as appropriate, from the Closing Payment.
(b) To the extent that Purchaser receives any Excluded Asset
following the Closing, Purchaser shall promptly deliver the same to Seller,
identifying the source thereof. To the extent that Seller receives any Asset
following the Closing, Seller shall promptly deliver the same to Purchaser,
identifying the source thereof.
2.8 Closing. The transactions contemplated by this Agreement shall
-------
be consummated (the "Closing") at 10:00 a.m., Los Angeles time, on the later of
-------
(i) April 30, 1999 or (ii) two (2) business days after the date on which the
conditions set forth in Sections 7.1(g) and 7.2(g) may be satisfied, at the
offices of Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, 23rd
Floor, Los Angeles, California 90071 or at such other time or on such other date
as shall be agreed between Seller and Purchaser upon fulfillment of all
conditions precedent to the Closing, such hour and date being herein generally
referred to as the "Closing Date". At the Closing:
------------
(a) Seller shall deliver or cause to be delivered to Purchaser,
against payment by Purchaser to Seller of the Closing Payment, all of the
documents, certificates and instruments required to be delivered, or caused to
be delivered, by Seller pursuant to Section 7.1 hereof.
(b) Purchaser shall:
<PAGE>
(i) deliver or cause to be delivered to Seller a wire
transfer of immediately available funds to an account designated in writing by
Seller in an amount representing the Closing Payment;
(ii) deliver or cause to be delivered to Seller all of the
documents, if any, required to be delivered by Purchaser pursuant to Section 7.2
hereof; and
(iii) assume the Assumed Liabilities and deliver or cause
to be delivered to Seller any instruments or documents reasonably satisfactory
in form and substance to Seller and Seller's counsel evidencing such assumption
of the Assumed Liabilities.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
CONCERNING THE SELLER
---------------------
Seller hereby represents and warrants to Purchaser that:
3.1 Organization and Good Standing. The Seller has been duly
------------------------------
organized and is existing as a corporation in good standing under the laws of
the State of California with full corporate power and authority (i) to own and
lease its properties, (ii) to conduct the Trust Business as currently
conducted, (iii) to hold and perform the Trusts that it holds as part of the
Trust Business, (iv) to own, lease or hold as trustee, custodian, agent or
otherwise, as the case may be, the Fiduciary Assets in accordance with the
Governing Agreements, and (v) to carry out the transactions contemplated by this
Agreement.
3.2 Execution and Delivery. All consents, approvals, authorizations
----------------------
and orders necessary for the execution, delivery and performance by Seller of
this Agreement, the Transition Agreement and the Covenant and the consummation
by Seller of the transactions contemplated hereby and thereby have been duly and
lawfully obtained, and Seller has, and at the Closing will have, full right,
power and authority to execute, deliver and perform this Agreement, the
Transition Agreement and the Covenant. Each of this Agreement, the Transition
Agreement and the Covenant has been duly executed and delivered by Seller and
each constitutes a legal, valid and binding agreement of Seller enforceable
against Seller in accordance with its terms.
3.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Transition Agreement and the Covenant and the consummation of
the transactions contemplated hereby and thereby will not (a) conflict with or
result in a breach or violation of any term or provision of, or constitute a
default under (with or without notice or passage of time, or both), any
indenture, mortgage, deed of trust, loan or credit agreement, lease, license or
other agreement or instrument to which the Seller is a party or to which any of
the property or assets of the Seller is bound or affected which would have a
Material Adverse Effect, (b) result in an automatic termination or material
<PAGE>
breach of any Governing Agreement, (c) result in the violation of the provisions
of the Articles of Incorporation or Bylaws of the Seller or any Legal
Requirement applicable to or binding upon it or (d) result in the creation or
imposition of any Lien upon any of the Assets.
3.4 Trust Business. All of the accounts listed on Schedule 2.1(a)(i)
-------------- ------------------
constitute all of the Trusts held by Seller as of the date thereof and, together
with the Fiduciary Assets, constitute the Trust Business as of the date thereof.
All of the accounts listed on Schedule 2.1(a)(i) as updated on the Closing Date
------------------
will constitute all of the Trusts held by the Seller as of the Closing Date and,
together with the Fiduciary Assets, will constitute the Trust Business as of the
Closing Date. Schedule 3.4(a) lists a summary of the Fiduciary Assets as of
---------------
March 31, 1999, such summary to be updated by the most recent month-end summary
then available as of the Closing Date. As of the Closing Date, the Fiduciary
Assets delivered to Purchaser will constitute all of the Fiduciary Assets
required by the Governing Agreements to be held by Seller in connection with all
Trusts.
3.5 Judgments; Litigation. Except as set forth on Schedule 3.5, to
--------------------- ------------
the knowledge of Seller, there is no (i) outstanding judgment, order, decree,
award, stipulation or injunction of any Governmental Entity or arbitrator
against Seller or any of the Assets or Trusts, (ii) Action pending or threatened
against any of the Trusts or Assets, or against Seller as trustee,
representative or in such other capacity with respect to the Trusts, or (iii)
Action pending or threatened against Seller in its individual capacity or
otherwise which, if decided adversely, would, in the opinion of Seller's
management, have a Material Adverse Effect. Except as set forth in Schedule
--------
3.5, to the knowledge of Seller, there is no Action pending or threatened by
- ---
Seller on behalf of any of the Assets or Trusts.
3.6 Material Contracts; No Defaults.
-------------------------------
(a) Schedule 3.6(a) contains a true and complete list of all
---------------
written contracts, agreements, understandings, arrangements and commitments of
Seller with any employee of Seller listed on Schedule 6.10.
-------------
(b) Schedule 3.6(b) contains a true and complete list of all
---------------
written agreements to which Seller is a party other than as trustee or in any
other representative capacity and which are material to the operation of the
Trust Business, and all such agreements and instruments have been made available
to Purchaser for its inspection.
(c) All of the Governing Agreements are included in the System
Records and have been made available to Purchaser for its inspection.
(d) Except as described in Schedule 3.6(d):
---------------
<PAGE>
(i) each agreement, contract, arrangement or commitment
described above in paragraphs (a), (b) and (c) of this Section 3.6 is a valid
-----------
and binding obligation of Seller, enforceable against Seller in accordance with
its terms;
(ii) no event or condition has occurred or become known to
Seller or is alleged to have occurred that:
(x) constitutes or, with notice or the passage of time, or
both, would constitute a default by Seller under any
contract, agreement or commitment described above in
paragraphs (a), (b) and (c) of this Section 3.6;
-----------
(y) has extinguished or impaired the right of Seller (or
any successor trustee, custodian or agent) to recover
or receive reimbursement for its costs, trust or agency
fees or other expenses out of any Fiduciary Assets or
relating to any Trust except any such events or
conditions which in the aggregate do not have a
Material Adverse Effect; or
(z) would cause Seller (or any successor trustee, custodian
or agent) to be subject to disqualification or removal
from any capacity Seller now occupies with respect to
any Trust, nor has Seller been so disqualified or
removed;
(iii) to Seller's knowledge, (a) no person with whom Seller
has a contract, agreement or commitment described above in paragraphs (a), (b)
and (c) of this Section 3.6 is in default in any material respect thereunder and
(b) no party to any Governing Agreement has expressly repudiated its obligation
to pay fees, expenses or charges expressly provided for in the applicable
Governing Agreement; and
(iv) all of the fees and reimbursements that Seller is
entitled to receive pursuant to the Governing Agreements are being paid in the
Ordinary Course without any delinquencies or nonpayments except such
delinquencies or nonpayments which in the aggregate do not have a Material
Adverse Effect; and
3.7 Absence of Certain Changes. Since December 31, 1998, except as
--------------------------
disclosed in Schedule 3.7, Seller has not:
------------
(i) made or suffered any change in, or condition affecting,
its Trust Business other than changes, events or conditions in the Ordinary
Course, none of which (individually or in the aggregate) has had or in the
opinion of Seller's management, may have, a Material Adverse Effect;
<PAGE>
(ii) made any change in the accounting principles, methods,
records or practices followed by it or depreciation or amortization policies or
rates theretofore adopted;
(iii) entered into any employment or loan or loan guarantee
agreement with any of the employees identified on Schedule 6.10;
-------------
(iv) paid, or made any accrual or arrangement for payment
of, any increase in compensation, bonuses or special compensation of any kind to
any employee identified on Schedule 6.10 other than pursuant to an agreement
-------------
disclosed on Schedule 3.6 or other than in the Ordinary Course;
------------
(v) made any material change in the fees or other
compensation charged by Seller to its customers in connection with the Trust
Business or in the manner such fees or compensation have been charged or
collected; or
(vi) entered into any agreement or otherwise obligated
itself to do any of the foregoing.
3.8 Compliance with Law. To Seller's knowledge, Seller has conducted
-------------------
the Trust Business in compliance with all Legal Requirements, except where such
noncompliance would not have a Material Adverse Effect.
3.9 No Brokers. No broker, finder or similar agent has been employed
----------
by or on behalf of Seller in connection with this Agreement or the transactions
contemplated hereby, and Seller has not entered into any agreement or
understanding of any kind with any person or entity for the payment of any
brokerage commission, finder's fee or any similar compensation in connection
with this Agreement or the transactions contemplated hereby.
3.10 Financial Statements. Schedule 3.10 hereto contains a true and
--------------------
complete copy of (i) the unaudited balance sheet of Seller at December 31, 1998
and the related unaudited statement of income for the twelve (12) months then
ended, and (ii) the unaudited balance sheet of Seller at March 31, 1999 and the
related unaudited statement of income for the three (3) months then ended
(collectively, the "Financial Statements"). The Financial Statements present
--------------------
fairly the financial condition of Seller as of the dates indicated therein and
the results of operations of Seller for the periods specified therein and have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods covered thereby.
3.11 Tax Reports. As of the Closing Date, Seller will have, in all
-----------
material respects, accurately prepared and timely filed all tax reports, forms,
information statements and similar items that are required to be filed on or
before the Closing Date by Seller as trustee, custodian or agent in connection
with the operation of the Trust Business, and on the Closing Date, Seller will
have complied in all material respects, with all tax withholding obligations and
responsibilities applicable to it in such capacities, all
<PAGE>
as required by the Code, and all applicable foreign, state and local tax laws
and regulations.
3.12 Employees. Seller is not a party to any employment agreement or
---------
arrangement with respect to any employee listed on Schedule 6.10, and Seller is
not a party to any collective bargaining agreement with respect to any employee
of Seller. Seller has not received any notice from any labor union (or
representative thereof) with respect to attempts to organize any employee of
Seller, or any notice of any strikes, slowdowns, work stoppages, lockouts or
threats by any employee of Seller. To Seller's knowledge, there is no Action
pending or threatened against Seller by any of its employees alleging unfair
labor practices.
3.13 Systems Records. Seller has maintained in all material respects
---------------
the Systems Records in accordance with Seller's policies and procedures with
respect thereto, and the Systems Records provide in all material respects an
accurate and complete separate accounting for each Trust's Fiduciary Assets.
3.14 Environmental Conditions. Except as set forth on Schedule 3.14,
------------------------
to Seller's knowledge, none of the Assets constitutes real property which
contains any hazardous material, hazardous substance or toxic substance as
defined in applicable environmental laws, rules and regulations which Seller is
required by applicable law to remove, treat or mitigate or which could give rise
to loss or liability affecting Seller or any Person, in its representative or
individual capacity, succeeding to Seller's position as trustee, custodian,
agent or other representative of any Trust.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to, and covenants and agrees
with, Seller that:
4.1 Organization and Good Standing. Purchaser has been duly
------------------------------
organized and is existing as a national banking association in good standing
under the laws of the United States with full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby.
4.2 Trust Powers. Purchaser has all licenses, franchises, permits
------------
and other governmental authorizations that are required for it to conduct trust
business in the State of California.
4.3 Execution and Delivery. All consents, approvals, authorizations
----------------------
and orders necessary for the execution, delivery and performance by Purchaser of
this Agreement have been duly and lawfully obtained, and Purchaser has, and at
the Closing will have, full right, power and authority to execute, deliver and
perform this Agreement. This Agreement has been duly executed and delivered by
Purchaser and constitutes a
<PAGE>
legal, valid and binding agreement of Purchaser enforceable against Purchaser in
accordance with its terms.
4.4 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the consummation of the transactions contemplated hereby will not
(a) conflict with or result in a breach or violation of any term or provision
of, or constitute a default under (with or without notice or passage of time, or
both), any indenture, mortgage, deed of trust, loan or credit agreement, lease,
license or other agreement or instrument to which Purchaser is a party or to
which any of the property or assets of the Purchaser is bound or affected which
would have a Material Adverse Effect, (b) result in the violation of the
revisions of the Articles of Incorporation or by Bylaws of Purchaser or any
Legal Requirement applicable to or binding upon it which would have a Material
Adverse Effect, or (c) result in the creation or imposition of any Lien upon any
property or assets of the Purchaser which would have a Material Adverse Effect.
4.5 No Brokers. No broker, finder or similar agent has been employed
----------
by or on behalf of Purchaser in connection with this Agreement or the
transactions contemplated hereby, and Purchaser has not entered into any
agreement or understanding of any kind with any person or entity for the payment
of any brokerage commission, finder's fee or any similar compensation in
connection with this Agreement or the transactions contemplated hereby.
ARTICLE 5
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
During the period commencing on the date hereof and continuing through
the Closing Date, Seller covenants and agrees (except as expressly contemplated
by this Agreement or to the extent that Purchaser shall otherwise expressly
consent in writing) that:
5.1 Ordinary Course. Seller shall conduct the Trust Business in, and
---------------
only in, the Ordinary Course and, to the extent consistent with such business,
shall preserve intact its current business organizations, and preserve its
relationships with customers, suppliers and others having business dealings with
it.
5.2 Accounting. Seller shall not make any material change in the
----------
accounting principles, methods, records or practices followed by it or
depreciation or amortization policies or rates heretofore adopted by it.
5.3 Compliance with Legal Requirements. Seller shall comply in all
----------------------------------
material respects with all Legal Requirements applicable to it and its
operations and with respect to the transactions contemplated by this Agreement
except where such noncompliance would not have a Material Adverse Effect, and
shall administer the Fiduciary Assets in all material respects in accordance
with their Governing Agreements and applicable law.
<PAGE>
5.4 Disposition of Assets. Seller shall not sell, transfer, or
---------------------
otherwise dispose of, or cause the encumbrance by any Lien upon any of the
Assets, except in the Ordinary Course.
ARTICLE 6
ADDITIONAL COVENANTS
--------------------
6.1 Covenants of Seller. During the period from the date hereof and
-------------------
through the Closing Date, Seller agrees to:
(a) use its reasonable efforts to obtain (and to cooperate with
Purchaser in obtaining) any consent, authorization or approval of, or exemption
by, any Person required to be obtained or made by Seller in connection with the
transactions contemplated by this Agreement or to take any action in connection
with the consummation thereof;
(b) use its reasonable efforts to bring about the satisfaction of
the conditions precedent to Closing set forth in Section 7.1 of this Agreement;
and
(c) deliver to Purchaser prior to the Closing an update, if
necessary, of any of the schedules to Seller's representations and warranties in
Section 3 as a result of any change, circumstance, event or development between
the date of this Agreement and the Closing Date.
6.2 Covenants of Purchaser. During the period from the date hereof
----------------------
through the Closing Date, Purchaser shall:
(a) use its reasonable efforts to obtain (and cooperate with the
Seller in obtaining) any consent, authorization or approval of, or exemption by,
any Person required to be obtained or made by Purchaser in connection with the
transactions contemplated by this Agreement or to take any action in connection
with the consummation thereof;
(b) use its reasonable efforts to bring about the satisfaction of
the conditions precedent to Closing set forth in Section 7.2 of this Agreement;
and
(c) deliver to Seller prior to the Closing an update, if
necessary, of any of the schedules to Purchaser's representations and warranties
in Section 4 as a result of any change, circumstance, event or development
between the date of this Agreement and the Closing Date.
6.3 Access and Information.
----------------------
(a) During the period commencing on the date hereof and continuing
through the Closing Date, Seller shall afford to Purchaser and to Purchaser's
accountants, counsel, investment bankers and other representatives reasonable
access to
<PAGE>
all of its books, contracts, commitments and records related to the
Trust Business during normal business hours (provided such access does not
unreasonably disrupt Seller's business) and, during such period, will furnish to
Purchaser all information concerning the Trust Business as Purchaser may
reasonably request.
(b) After the Closing, the Seller shall afford to Purchaser and
to Purchasers accountants, counsel, investment bankers and other representatives
reasonable access to all of the corporate and tax books and records of the
Seller, as described in Section 2.2(g) of this Agreement, related to the Trust
Business during normal business hours (provided such access does not
unreasonably disrupt Seller's business).
(c) Except to the extent permitted by the provisions of Section
6.6 hereof, Purchaser shall hold in confidence, and shall use reasonable efforts
to ensure that its employees and representatives hold in confidence, all such
information supplied to it by Seller and its officers, directors and employees
concerning Seller and the Trust Business and shall not disclose such information
to any third party except as may be required by any Legal Requirement and except
for information that (i) is or becomes generally available to the public other
than as a result of disclosure by Purchaser or its representatives, (ii) becomes
available to Purchaser or its representatives from a third party other than
Seller, and Purchaser or its representatives have no reason to believe that such
third party is not entitled to disclose such information, or (iii) is known to
Purchaser or its representatives on a non-confidential basis prior to its
disclosure by Seller. Purchasers obligations under the foregoing sentence shall
expire on the Closing Date, provided, however that if the Closing does not
occur, Purchaser's obligations shall survive for a period of two years from the
date hereof.
6.4 Expenses. All costs and expenses (including, without limitation,
--------
all legal fees and expenses and fees and expenses of any brokers, finders or
similar agents) incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same.
6.5 Certain Notifications. At all times from the date hereof to the
---------------------
Closing Date, each party shall promptly notify the others in writing of the
occurrence of any event that will or may result in the failure to satisfy any of
the conditions specified in Article 7 hereof.
6.6 Publicity; Employee Communications. At all times prior to the
----------------------------------
Closing Date, each party shall obtain the consent of all other parties hereto
prior to issuing, or permitting any of its directors, officers, employees or
agents to issue, any press release or other information to the press or any
third party with respect to this Agreement or the transactions contemplated
hereby; provided, however, that no party shall be prohibited from supplying any
-------- -------
information to any of is representatives, agents, attorneys and advisors to the
extent necessary to complete the transactions contemplated hereby so long as
such representatives, agents, attorneys and advisors are made aware of the terms
of this Section 6.6; provided, further, Seller shall be permitted to supply any
-------- -------
information to and discuss with any of Seller's employees the transactions
contemplated
<PAGE>
by this Agreement. Nothing contained in this Agreement shall prevent any party
to this Agreement at any time from furnishing any required information to any
Governmental Entity or authority pursuant to a Legal Requirement or from
complying with its legal or contractual obligations. Notwithstanding anything
to the contrary herein, the parties shall use reasonable best efforts to agree
upon the text of a public press release to be issued by Seller and Purchaser
regarding the transactions contemplated herein.
6.7 Further Assurances.
------------------
(a) Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees to use all reasonable efforts to take, or cause to
be taken, all action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable Legal Requirements, to consummate and make
effective the transactions contemplated by this Agreement.
(b) If at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, Seller and
Purchaser, as the case may be, shall take or cause to be taken all such
necessary or convenient action and execute, and deliver and file, or cause to be
executed, delivered and filed, all necessary or convenient documentation.
6.8 Competing Offers; Merger. From the date hereof to the Closing
------------------------
Date, Seller agrees that it will not directly or indirectly, through any
officer, director, agent, or otherwise, solicit, initiate or encourage the
submissions of bids, offers or proposals by, any Person with respect to an
acquisition of the Trust Business, and Seller will not engage any broker,
financial adviser or consultant with an incentive to initiate or encourage
proposals or offers from other parties. Furthermore, Seller shall not, directly
or indirectly, through any officer, director, agent or otherwise, engage in
negotiations concerning any such transaction with, or provide information to,
any Person other than Purchaser and its representatives with a view to engaging,
or preparing to engage, that Person with respect to any matters in this Section.
6.9 Referral. Purchaser shall make a proposal to Seller for a
--------
referral arrangement whereby Purchaser will pay to Seller or Imperial fees for
income derived from customers or accounts referred to Purchaser by Seller or
Imperial.
6.10 Employees. Purchaser agrees:
---------
(a) to offer employment to those certain employees of Seller
listed Schedule 6.10 hereto (the "Offered Employees"). Schedule 6.10 shall not
------------- ----------------- -------------
be amended from the date hereof except to add other employees of Seller to
Schedule 6.10 on or before the expiration or termination of the Transition
- -------------
Agreement Notwithstanding the foregoing, Purchaser shall not be required to
offer or continue to offer employment to Offered Employees on authorized medical
leaves of absence on the Closing Date (i) where the Offered Employee's expected
date of return as of the Closing Date is more than six (6) months after the
Closing Date; and (ii) in the case of an Offered Employee whose expected date of
return as of the Closing Date is not more than six (6) months after the
<PAGE>
Closing Date, until such Offered Employee is released by his/her medical
provider to return to work and the Offered Employee's actual return-to-work date
is not more than six (6) months after the Closing Date;
(b) within one week from the date hereof to make offers (each, an
"Offer") to the Offered Employees with the titles, job descriptions and
-----
responsibilities and at the salaries set forth on Schedule 6.10 hereto. Each
-------------
such Offer shall be contingent upon the Offered Employees' completion of
Purchaser's customary new-hire paperwork (including, but not limited to, the
application for employment and consent for background information screening),
and receipt by Purchaser of satisfactory results from its background screening
efforts. Each such Offer shall require acceptance or rejection of the Offer by
the Offered Employees within seven (7) days after receipt thereof, and each such
Offer as accepted shall become effective as of the Closing Date;
(c) to, as of the Closing Date, waive its usual 60-day waiting
period for new employees and permit each of the Offered Employees who accept
employment with Purchaser (an "Accepting Employee") to be immediately eligible
------------------
to participate in Purchaser's "cafeteria-style" flexible benefits program (which
includes options for medical coverage, dental and vision coverage, life and
accident insurance, pre-tax reimbursement accounts, and vacation buying), on the
identical terms and conditions as those options are made available to
Purchaser's other employees and subject to the specific eligibility requirements
of each such option. In accordance with the terms and conditions of the flexible
benefits program governing the vacation buying option, Accepting Employees will
not be eligible to purchase vacation until January 1, 2000. The Accepting
Employees currently participating in Imperial Bancorp's 401(k) Plan shall be
given credit in determining vesting and eligibility for Purchaser's 401(k) plan
for the period during which they were credited with service by the Seller prior
to the Closing Date. Such service shall not, however, be counted for purposes of
benefit accrual under any such plan; and
(d) except as otherwise provided herein, as of the Closing Date,
permit all Accepting Employees to participate in all employee benefit plans,
programs and policies established, maintained or contributed to by Purchaser on
an equal basis and subject to identical terms and conditions as Purchaser's
other newly-hired employees.
6.11 Conduct of Trust Business. From the Closing Date and
-------------------------
continuing until the Second Payment is paid in accordance with Section 2.4,
Purchaser agrees:
(a) to use reasonable efforts to continue to (i) conduct the
Trust Business in the Ordinary Course, (ii) preserve its relationships with
customers, and (iii) preserve the goodwill and relationships with trustors and
beneficiaries of the Trust Business; provided, that, Purchaser may offer to
-------- ----
customers of the Trust Business any additional trust services which Seller did
not provide as of the Closing Date;
(b) to maintain the System Records and any other books and
records relating to the Assets;
<PAGE>
(c) for purposes of calculating the Final First Quarter 2000
Gross Fee Revenue, not to make any material change in the accounting principles,
methods, records or practices relating to the determination of Manageable Income
as followed by Seller prior to the Closing Date; and
(d) to use its commercially reasonable efforts to maximize
Manageable Income of the Trust Business.
6.12 Privileged Documents in Trust Files. The parties to this
-----------------------------------
Agreement acknowledge and agree that the Trust files presently may contain
documents that are subject to privilege of Seller or Imperial based upon
attorney work product or confidential attorney-client communication ("Privileged
----------
Documents") and may in the future contain Privileged Documents of Purchaser, and
- ---------
that there is no intention to waive any such privilege notwithstanding the
transfer of possession of the Trust files to Purchaser pursuant to this
Agreement or the implementation of the procedures described in this Section
6.12.
(a) Purchaser shall notify Seller or Imperial of any claim or
commencement of any litigation or any discovery request related to any Trust or
Trusts arising out of Sellers conduct up to and including the Closing Date.
Seller or Imperial thereupon shall have the right to review the files of the
Trust or Trusts involved in such claim or litigation, to instruct Purchaser to
segregate into separate files any documents that Seller or Imperial determines,
in its sole discretion, are Privileged Documents from the files of the affected
Trust or Trusts, and to make and take copies of any such Privileged Documents;
provided, that any such review and segregation shall not unreasonably interfere
with Purchaser's business operations or the management of any Trust. Purchaser
also may segregate any documents it determines, in its sole discretion, are
subject to the privilege of Purchaser. Seller or Imperial will furnish
Purchaser with a privilege log of all such documents identified by it as
Privileged Documents.
(b) Purchaser shall not turn over or make available any documents
in any Trust files affected by any such claim or litigation to any third party
in connection therewith until Seller or Imperial has had a reasonable
opportunity to complete its review as provided in Section 6.12(a). In addition,
Purchaser shall not turn over any documents identified by Seller or Imperial as
Privileged Documents to any third party without having obtained Seller's or
Imperial's written consent unless required to do so pursuant to valid legal
process.
ARTICLE 7
CONDITIONS PRECEDENT TO CLOSING
-------------------------------
7.1 Conditions of Purchaser. Notwithstanding any other provision of
-----------------------
this Agreement, the obligations of Purchaser to consummate the transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
<PAGE>
(a) There shall not be instituted and pending or threatened any
Action before any Governmental Entity challenging the acquisition of the Assets
by Purchaser or otherwise seeking to restrain or prohibit the consummation of
the transactions contemplated hereby;Payment).
(b) The representations and warranties of Seller in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and Seller
shall have complied with all covenants and agreements and satisfied all
conditions on Seller's part to be performed or satisfied on or prior to the
Closing Date;
(c) Seller and Imperial shall have entered into the Transition
Agreement in substantially the form attached as Annex A hereto;
-------
(d) Seller and Imperial shall have entered into the
Noncompetition Covenant (the "Covenant") in substantially the form attached as
--------
Annex B hereto;
(e) Purchaser shall have received from Seller a certificate dated
the Closing Date in substantially the form attached as Annex C hereto;
-------
(f) All consents from third parties, including from any Person
necessary for the consummation of the transactions contemplated hereby shall
have been obtained;
(g) The Purchaser, Seller and Imperial shall have received all
required approvals from Governmental Entities to consummate the transactions
contemplated by this Agreement, and Purchaser shall have received confirmation
from the California Department of Financial Institutions, and/or an opinion from
its counsel, reasonably satisfactory to it, to the effect that Section 4859 of
the California Financial Code is applicable to Purchaser's acquisition of the
Trust Business;
(h) No Material Adverse Effect shall have occurred on or prior to
the Closing;
(i) The Purchaser shall have received copies of resolutions of
the Boards of Directors of the Seller and Imperial, duly certified by a
corporate secretary as of the Closing, authorizing performance of this
Agreement, the Transition Agreement and the Covenant and authorizing an officer
to execute this Agreement, the Transition Agreement and the Covenant and any
other agreements or documents required in connection herewith or therewith to
which the Seller is a party;
(j) The Purchaser shall have received an opinion of counsel for
the Seller and Imperial (which may be in-house counsel), dated as of the date of
the Closing, and in form and substance reasonably satisfactory to the Purchaser,
to the effect that:
<PAGE>
(i) the Seller is a trust company within the meaning of
Section 103 of the California Financial Code, duly established and validly
existing under the laws of California;
(ii) each of the Seller and Imperial has the organizational
power and authority to execute, deliver and perform this Agreement, the
Transition Agreement and the Covenant and to consummate the transactions
contemplated hereby and thereby; all organizational acts and other proceedings
required to be taken by or on the part of the Seller and Imperial to execute,
deliver and perform this Agreement, the Transition Agreement and the Covenant
and to consummate the transactions contemplated hereby and thereby have been
duly and validly taken; and this Agreement, the Transition Agreement and the
Covenant have been duly executed and delivered by the Seller and Imperial, and
this Agreement and the Transition Agreement constitute the valid and binding
agreements of, the Seller and Imperial, enforceable in accordance with their
respective terms, except as limited by applicable bankruptcy, insolvency,
receivership, conservatorship, reorganization, liquidation, readjustment of
debt, moratorium or other similar laws affecting the rights of creditors (or the
rights of creditors of a state or national banking association), trustees and
agents generally and by general equitable principles; and
(iii) the execution, delivery and performance by the Seller
and Imperial of this Agreement, the Transition Agreement and the Covenant do
not, and the consummation by the Seller and Imperial of the transactions
contemplated hereby and thereby will not, violate or conflict with the articles
of association, bylaws or other constituent documents of the Seller or Imperial,
as the case may be, or, to the best of such counsel's knowledge, any law or
regulation currently applicable to the Seller or Imperial or, to the best of
such counsel's knowledge, any agreement or instrument, or currently applicable
award, order, judgment or decree, known to such counsel to be material to the
consummation of the transactions contemplated by this Agreement, the Transition
Agreement and the Covenant, to which the Seller or Imperial is a party or by
which it is bound, or require any filing by the Seller or Imperial with, or
authorization, approval, consent or other action with respect to the Seller or
Imperial by, any governmental agency, except such as have been made or obtained
and are in full force and effect.
(k) The Seller shall have executed and delivered to Purchaser a
Bill of Sale for the Assets substantially in the form attached as Annex D
-------
hereto.
(l) The Seller shall have provided evidence reasonably
satisfactory to Purchaser that Seller has obtained for the benefit of Purchaser
the insurance coverages described in, and otherwise complied with the
requirements of, Section 9.4(a) (iii) and (iv).
7.2 Conditions of Seller. Notwithstanding any other provision of
--------------------
this Agreement, the obligations of Seller to consummate the transactions
contemplated hereby shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
<PAGE>
(a) There shall not be instituted and pending or threatened any
Action before any Governmental Entity challenging the sale of the Assets by
Seller or otherwise seeking to restrain or prohibit the consummation of the
transactions contemplated hereby;
(b) The representations and warranties of Purchaser in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and Purchaser
shall have complied with all covenants and agreements and satisfied all
conditions on Purchasers part to be performed or satisfied on or prior to the
Closing Date;
(c) Purchaser shall have entered into the Transition Agreement in
substantially the form attached as Annex A hereto;
-------
(d) Purchaser shall have entered into the Covenant in
substantially the form attached hereto as Annex B;
-------
(e) Seller shall have received from Purchaser a certificate dated
the Closing Date in substantially the form attached as Annex E hereto;
-------
(f) All consents from third parties, including from any Person
necessary for the consummation of the transactions contemplated hereby shall
have been obtained;
(g) The Purchaser, Seller and Imperial shall have received all
required approvals from Governmental Entities to consummate the transactions
contemplated by this Agreement, and Purchaser shall have received confirmation
from the California Department of Financial Institutions, and/or an opinion from
its counsel, reasonably satisfactory to it, to the effect that Section 4859 of
the California Financial Code is applicable to Purchaser's acquisition of the
Trust Business;
(h) The Seller shall have received resolutions of the Board of
Directors for the Purchaser, duly certified by a corporate secretary as of the
Closing, authorizing performance of this Agreement, the Transition Agreement and
the Covenant and any other agreements or documents required in connection
herewith or therewith to which the Purchaser is a party;
(i) The Seller shall have received an opinion of counsel for the
Purchaser (which may be in-house counsel), dated as of the date of the Closing,
and in form and substance reasonably satisfactory to the Purchaser, to the
effect that:
(i) the Purchaser is a national banking association, duly
established and validly existing under federal law;
(ii) the Purchaser has the organizational power and
authority to execute, deliver and perform this Agreement and the Transition
Agreement and to consummate the transactions contemplated hereby and thereby;
all organizational
<PAGE>
acts and other proceedings required to be taken by or on the part of the
Purchaser to execute, deliver and perform this Agreement and the Transition
Agreement and to consummate the transactions contemplated hereby and thereby
have been duly and validly taken; and this Agreement and the Transition
Agreement have been duly executed and delivered by the Purchaser, and constitute
the valid and binding agreements of, the Purchaser, enforceable in accordance
with their respective terms, except as limited by applicable bankruptcy,
insolvency, receivership, conservatorship, reorganization, liquidation,
readjustment of debt, moratorium or other similar laws affecting the rights of
creditors (or the rights of creditors of a state or national banking
association), trustees and agents generally and by general equitable principles;
and
(iii) the execution, delivery and performance by the Purchaser
of this Agreement and the Transition Agreement do not, and the consummation by
the Purchaser of the transactions contemplated hereby and thereby will not,
violate or conflict with the articles of association, bylaws or other
constituent documents of the Purchaser, or, to the best of such counsel's
knowledge, any law or regulation currently applicable to the Purchaser or, to
the best of such counsel's knowledge, any agreement or instrument, or currently
applicable award, order, judgment or decree, known to such counsel to be
material to the consummation of the transactions contemplated by this Agreement
or the Transition Agreement, to which the Purchaser is a party or by which it is
bound, or require any filing by the Purchaser with, or authorization, approval,
consent or other action with respect to the Purchaser by, any governmental
agency, except such as have been made or obtained and are in full force and
effect;
(j) those certain executives and employees of Seller identified on
Schedule 6.10 hereto shall each have received an offer of employment from
- -------------
Purchaser in accordance with Section 6.10; and
------------
(k) The Purchaser shall have executed to Seller a Bill of Sale for
the Assets substantially in the form attached as Annex D hereto.
-------
(l) The Purchaser shall have provided evidence reasonably
satisfactory to Seller that Purchaser has obtained for the benefit of Seller the
insurance coverages described in, and otherwise complied with the requirements
of, Section 9.4(b) (iii) and (iv).
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
8.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing:
(a) by mutual consent of Purchaser and Seller;
<PAGE>
(b) by Seller or by Purchaser by written notice to the other
party hereto if the transactions contemplated herein shall not have been
consummated on or before May 31, 1999 (or such later date as Purchaser and
Seller may agree), provided that in the case of a termination under this clause
(b), the party or parties terminating this Agreement shall not then be in
material breach of any of its or their obligations under this Agreement;
(c) by Purchaser if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by Seller under this
Agreement or (ii) any of the conditions precedent to Closing set forth in
Section 7.1 have not been met on the Closing Date, and, in each case, Purchaser
is not then in material default of its obligations hereunder; or
(d) by Seller if (i) there has been a material misrepresentation,
breach of warranty or breach of covenant by Purchaser under this Agreement or
(ii) any of the conditions precedent to Closing set forth in Section 7.2 have
not been met on the Closing Date, and, in each case, Seller is not then in
material default of its obligations hereunder.
8.2 Effect of Termination.
---------------------
(a) In the case of any termination of this Agreement, the
provisions of Section 6.3 and 6.4 shall remain in full force and effect.
(b) Upon termination of this Agreement as provided in Section
8.1(a), except as stated in subsection (a) above, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of any
party hereto or their respective directors, officers, employees, agents or other
representatives.
(c) In the event of termination of this Agreement as provided in
Section 8.1(b), (c) or (d) hereof, such termination shall be without prejudice
to any rights that the terminating party or parties may have against the
breaching party or parties or any other person under the terms of this Agreement
or otherwise.
8.3 Amendment. This Agreement may be amended at any time by a
---------
written instrument executed by Purchaser and Seller. Any amendment effected
pursuant to this Section 8.3 shall be binding upon all parties hereto.
8.4 Waiver. Any term or provision of this Agreement may be waived in
------
writing at any time by the party or parties entitled to the benefits thereof.
Any waiver effected pursuant to this Section 8.4 shall be binding upon all
parties hereto. No failure to exercise and no delay in exercising any right,
power or privilege shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege preclude the exercise of any
other right, power or privilege. No waiver of any breach of any covenant or
agreement hereunder shall be deemed a waiver of any preceding or subsequent
breach of the same or any other covenant or agreement. The rights and
<PAGE>
remedies of each party under this Agreement are in addition to all other rights
and remedies, at law or in equity, that such party may have against the other
parties.
ARTICLE 9
INDEMNIFICATION
---------------
9.1 Survival of Representations and Warranties. The representations
------------------------------------------
and warranties of the parties hereto contained in this Agreement or in any
writing delivered pursuant hereto or at the Closing shall survive the Closing
and the consummation of the transactions contemplated hereby (and any
examination or investigation by or on behalf of any party hereto) until the
fourth anniversary of the Closing Date. No claim for indemnification may be
made hereunder after the fourth anniversary of the Closing Date.
Notwithstanding the applicability of its provisions hereto, if any, the parties
hereto agree that California Financial Code Section 4860 shall have no effect
upon Purchaser's right to indemnification under this Article 9.
9.2 Indemnification.
---------------
(a) Each of Seller and Imperial, jointly and severally, covenants
and agrees to defend, indemnify and hold harmless Purchaser from and against any
Damages arising out of or resulting from: (i) any inaccuracy in or breach of any
representation or warranty made by Seller in this Agreement or in any writing
delivered pursuant to this Agreement or at the Closing; or (ii) the failure of
Seller to perform or observe fully any covenant or agreement to be performed or
observed by Seller pursuant to this Agreement; or (iii) any Excluded Liability;
or (iv) any Action arising out of or resulting from the conduct by Seller of the
Trust Business, or Seller's conduct with respect to the Assets, on or prior to
the Closing Date; or (v) any Out-of-Balance Condition.
(b) Purchaser covenants and agrees to defend, indemnify and hold
harmless Seller from and against any Damages arising out of or resulting from:
(i) any inaccuracy in or breach of any representation or warranty made by
Purchaser in this Agreement or in any writing delivered pursuant to this
Agreement or at the Closing; (ii) the failure by Purchaser to perform or observe
any covenant or agreement to be performed or observed by it pursuant to this
Agreement; or (iii) any Assumed Liability; or (iv) any Action arising out of or
resulting from the conduct by Purchaser of the Trust Business, or Purchaser's
conduct with respect to the Assets, after the Closing Date.
9.3 Third Party Claims.
------------------
(a) If any party entitled to be indemnified pursuant to Section
--------
9.2 (an "Indemnified Party") receives notice of the assertion by any third party
- --- -----------------
of any claim or the commencement by any such third person of any Action, or if
the Indemnified Party determines the existence of any such claim or of the
commencement by any such third party of any Action, whether or not the same
shall have been asserted (any such claim or Action being referred to herein as
an "Indemnifiable Claim") with
-------------------
<PAGE>
respect to which another party hereto (an "Indemnifying Party") is or may be
------------------
obligated to provide indemnification, the Indemnified Party shall notify the
Indemnifying Party in writing (the "Claim Notice") of the Indemnifiable Claim
------------
within thirty (30) business days of the assertion of the claim, liability or
obligation, within ten (10) business days of receipt of notice of the filing of
any Action based upon such assertion, or, with respect to a claim not yet
asserted against the Indemnified Party, within fifteen (15) business days
following the determination by an executive officer of the Indemnified Party of
the existence of the same; provided, that the failure to provide such notice
shall not relieve or otherwise affect the obligation of the Indemnifying Party
to provide indemnification hereunder, except to the extent that any Damages
directly resulted or were caused by such failure.
(b) The Indemnifying Party shall have thirty (30) days after
receipt of the Claim Notice to undertake, conduct and control, through counsel
of its own choosing, and at its expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith if such cooperation is so requested and the request is reasonable,
provided that the Indemnifying Party shall hold the Indemnified Party harmless
- --------
from all of its out-of-pocket expenses, including attorneys' fees (including the
allocated costs and expenses of in-house counsel and legal staff), incurred in
connection with the Indemnified Party's cooperation. If the Indemnifying Party
assumes responsibility for the settlement of defense of any such claim, (i) the
Indemnifying Party shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by the Indemnified Party (subject
to the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld), provided that, other than in the event of a conflict of
interest requiring the retention of separate counsel, the fees and expenses of
such counsel shall not be borne by the Indemnifying Party, and (ii) the
Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent, which consent shall not be unreasonably withheld or
delayed if the settlement involves only payment of money, and which consent may
be withheld for any reason if the settlement involves more than the payment of
money, including any admission by the Indemnified Party. So long as the
Indemnifying Party is vigorously contesting any such Indemnifiable Claim in good
faith, the Indemnified Party shall not pay or settle such claim without the
Indemnifying Party's consent, which consent shall not be unreasonably withheld.
(c) If the Indemnifying Party does not notify the Indemnified
Party within thirty (30) days after receipt of the Claim Notice that it elects
to undertake the defense of the Indemnifiable Claim described therein, the
Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided, that
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
(d) To the extent Purchaser may be entitled to obtain
reimbursement therefor from a Trust with respect to any Indemnifiable Claim,
Purchaser shall make a good faith effort to do so, but Purchaser shall not be
barred, notwithstanding any time limitation imposed herein on asserting rights
to indemnification, from asserting an Indemnifiable Claim therefor against the
Indemnifying Party if Purchaser charges or
<PAGE>
otherwise receives reimbursement from such Trust, and such charge or
reimbursement is later challenged, disallowed or reversed.
9.4 Limitations.
-----------
(a) Limitation on Seller's Indemnification. Notwithstanding any
--------------------------------------
other provision of this Agreement (except for the last sentence of this
paragraph (a)):
(i) the total amount Seller and Imperial shall be obligated
to pay to Purchaser under Section 9.2(a) for any Damages with respect to any
claims for indemnification asserted by Purchaser against Seller or Imperial
under Section 9.2(a) on or prior to the second anniversary of the Closing (the
"Initial Indemnity Period") shall not exceed in the aggregate $20,000,000;
- -------------------------
provided that this limitation shall not apply to any amounts recoverable under
subparagraphs (iii) and (iv) below.
(ii) Purchaser shall be entitled to indemnification under
this Article 9 with respect to claims asserted by Purchaser against Seller after
the Initial Indemnity Period only to the extent provided in subparagraphs (iii)
and (iv) below.
(iii) as and from the Closing to and including the fourth
anniversary of the Closing, Imperial shall cause Purchaser to be named as an
additional insured under Imperials fidelity bond insurance ("Imperial's Fidelity
Insurance") as its interests may appear and shall take such other measures as
are reasonable and appropriate to provide Purchaser with the benefit of
Imperial's Fidelity Insurance with respect to those acts and omissions of Seller
(and its agents and employees) indemnifiable by Seller and Imperial under
Section 9.2(a) and covered by Imperial's Fidelity Insurance (or which would have
been so covered in the normal course but for the sale of the Trust Business).
Any additional expense incurred by Imperial in so obtaining the benefits of such
insurance for Purchaser up to $50,000 shall be borne by Imperial. Any amounts
recovered by Purchaser under Imperial's Fidelity Insurance shall constitute
indemnification by Seller and Imperial pursuant to Section 9.2(a) of this
Agreement.
(iv) as and from the Closing to and including the fourth
anniversary of the Closing, Imperial shall cause Purchaser to be named as an
additional insured under Imperials professional liability insurance policy
("Imperial's E & O Insurance") as its interests may appear and shall take such
other measures as are reasonable and appropriate to provide Purchaser with the
benefit of Imperial's E & O Insurance with respect to those errors and omissions
of Seller (and its agents and employees) indemnifiable by Seller and Imperial
under Section 9.2(a) and covered by Imperial's E & O Insurance (or which would
have been so covered in the normal course but for the sale of the Trust
Business). Any additional expense incurred by Imperial in so obtaining the
benefits of such insurance for Purchaser up to $50,000 shall be borne by
Imperial. Imperial agrees to maintain Imperial's E & O Insurance with a coverage
limit of at least $10,000,000 until the fourth anniversary of the
<PAGE>
Closing. Any amounts recovered by Purchaser under Imperial's E & O Insurance
shall constitute indemnification by Seller and Imperial pursuant to Section
9.2(a) of this Agreement.
(v) Seller shall not be obligated to indemnify Purchaser
under Section 9.2(a) for any Damages until the Damages exceed, in the aggregate,
$50,000, in which event Seller shall be obligated to indemnify Purchaser under
Section 9.2(a) only for Damages in excess of $50,000. Notwithstanding the
foregoing, the limitations set forth in this Section 9.4(a) shall not apply to
Seller's indemnification obligations pursuant to Section 9.2(a)(v).
(b) Limitation on Purchaser's Indemnification. Notwithstanding
-----------------------------------------
any other provision of this Agreement:
(i) the total amount Purchaser shall be obligated to pay to
Seller under Section 9.2(b) for any Damages with respect to any claims for
indemnification asserted by Seller against Purchaser under Section 9.2(b) during
the Initial Indemnity Period shall not exceed in the aggregate $20,000,000;
provided that this limitation shall not apply to any amounts recoverable under
subparagraphs (iii) and (iv) below.
(ii) Seller shall be entitled to indemnification under this
Article 9 with respect to claims asserted by Seller against Purchaser after the
second anniversary of the Closing only to the extent provided in subparagraphs
(iii) and (iv) below.
(iii) as and from the Closing to and including the fourth
anniversary of the Closing, Purchaser shall cause Seller to be named as an
additional insured under Purchaser's fidelity bond insurance ("Purchaser's
Fidelity Insurance") as its interests may appear and shall take such other
measures as are reasonable and appropriate to provide Seller with the benefit of
Purchaser's Fidelity Insurance with respect to those acts and omissions of
Purchaser (and its agents and employees) indemnifiable by Purchaser under
Section 9.2 (b) and covered by Purchaser's Fidelity Insurance. Any additional
expense incurred by Purchaser in so obtaining the benefits of such insurance for
Seller up to $50,000 shall be borne by Purchaser. Any amounts recovered by
Seller under Purchaser's Fidelity Insurance shall constitute indemnification by
Purchaser pursuant to Section 9.2(b) of this Agreement.
<PAGE>
(iv) as and from the Closing to and including the fourth
anniversary of the Closing, Purchaser shall cause Seller to be named as an
additional insured under Purchaser's professional liability insurance policy
("Purchaser's E & O Insurance") as its interests may appear and shall take such
other measures as are reasonable and appropriate to provide Seller with the
benefit of Purchaser's E & O Insurance with respect to those errors and
omissions of Purchaser (and its agents and employees) indemnifiable by Purchaser
under Section 9.2 (b) and covered by Purchaser's E & O Insurance. Any additional
expense incurred by Purchaser in so obtaining the benefits of such insurance for
Seller up to $50,000 shall be borne by Purchaser. Purchaser agrees to maintain E
& O Insurance with a coverage limit of at least $10,000,000 until the fourth
anniversary of the Closing. Any amounts recovered by Seller under Purchaser's E
& O Insurance shall constitute indemnification by Purchaser pursuant to Section
9.2(b) of this Agreement.
(v) Purchaser shall not be obligated to indemnify Seller
under Section 9.2(b) for any Damages until the Damages exceed, in the aggregate,
$50,000, in which event Purchaser shall be obligated to indemnify Seller under
Section 9.2(b) only for Damages in excess of $50,000.
9.5 Interest. The Indemnified Party receiving payment in respect of
--------
any Indemnifiable Claim shall also be entitled to receive interest on the amount
of the Indemnifiable Claim, accruing from the date which is thirty (30) days
after the date on which the Indemnified Party is out-of-pocket any costs or
damages relating to the Indemnifiable Claim, at the fluctuating rate per annum
equal to the overnight federal funds rate in effect from time to time published
in the Wall Street Journal.
9.6 Indemnification Exclusive. The foregoing indemnification
-------------------------
provisions shall be the exclusive remedies any party may have for any breach of
representation, warranty, covenant or agreement or any other claims arising out
of this Agreement or the transactions contemplated hereby, except as provided in
the Transition Agreement. Nothing contained in this Section 9.6 shall prevent
Purchaser from pursuing remedies in its fiduciary capacity.
ARTICLE 10
GENERAL PROVISIONS
------------------
10.1 Notices. All notices and other communications under or in
-------
connection with this Agreement shall be in writing and shall be deemed given (a)
if delivered personally (including by overnight express or messenger), upon
delivery, (b) if delivered by registered or certified mail (return receipt
requested), upon the earlier of actual delivery or three days after being
mailed, or (c) if given by telecopy, upon confirmation of transmission by
telecopy, in each case to the parties at the following addresses:
(1) If to Seller addressed to:
Imperial Trust Company
c/o Imperial Bank
9920 South La Cienega Blvd., Suite 636
Inglewood, California 90301
<PAGE>
Attention: Legal Department
Telecopy: (310) 417-5695
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
Twenty-Third Floor
555 South Flower Street
Los Angeles, California 90071
Attention: Siobhan McBreen Burke, Esq.
Telecopy: (213) 627-0705
(2) If to Imperial addressed to:
Imperial Bank
9920 South La Cienega Blvd., Suite 636
Inglewood, California 90301
Attention: Legal Department
Telecopy: (310) 417-5695
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
Twenty-Third Floor
555 South Flower Street
Los Angeles, California 90071
Attention: Siobhan McBreen Burke, Esq.
Telecopy: (213) 627-0705
(3) If to Purchaser, addressed to:
Union Bank of California, N.A.
400 California Street
San Francisco, CA 94104
Attention: Mr. John McGuckin, Jr.
Executive Vice President & General Counsel
Telecopy: (415) 765-3391
With a copy to:
Union Bank of California, N.A.
Business Trust Division
445 South Figueroa Street
Los Angeles, CA 90071
Attention: Mr. Piet Westerbeek, III
Senior Vice President
Telecopy: (213) 236-5115
<PAGE>
10.2 Severability. If any term or provision of this Agreement or the
------------
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity or unenforceability
without invalidating or rendering unenforceable such term or provision in any
other jurisdiction, the remaining terms and provisions of this Agreement or the
application of such terms and provisions to circumstances other than those as to
which it is held invalid or enforceable.
10.3 Entire Agreement. Except for the provisions of that certain
----------------
Confidentiality Agreement between the parties dated as of December 15, 1998,
this Agreement, including the annexes and schedules attached hereto and other
documents referred to herein, together with the Transition Agreement and the
Covenant, contains the entire understanding of the parties hereto in respect of
its subject matter and supersedes all prior and contemporaneous agreements and
understandings, oral and written, between the parties with respect to such
subject matter, including, without limitation, that certain Letter of Intent
dated February 9, 1999, between Purchaser and Imperial Bank.
10.4 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of Purchaser and Seller and their respective
successors, heirs and assigns; provided, however, that neither Purchaser nor
Seller shall directly or indirectly transfer or assign any of its respective
rights hereunder in whole or in part without the prior written consent of the
other party, and any such transfer or assignment without said consent shall be
void, ab initio. Subject to the immediately preceding sentence, and except as
set forth in Article 9, this Agreement is not intended to benefit, and shall not
run to the benefit of or be enforceable by, any other person or entity other
than the parties hereto and their permitted successors and assigns.
10.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Agreement.
10.6 Recitals, Schedules and Annexes. The recitals, schedules and
-------------------------------
annexes to this Agreement are incorporated herein and, by this reference, made a
part hereof as if fully set forth at length herein.
10.7 Construction.
------------
(a) The article, section and subsection headings used herein are
inserted for reference purposes only and shall not in any way affect the meaning
or interpretation of this Agreement.
(b) As used in this Agreement, the masculine, feminine or neuter
gender shall be deemed to include the others whenever and wherever the context
so requires.
(c) For the purposes of this Agreement, unless the context
clearly requires, "or" is not exclusive.
10.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws (and not the law of conflicts) of
the State of California.
<PAGE>
10.9 Financial Code. Seller and Purchaser intend to effect the
--------------
purchase and sale of Sellers Trust Business pursuant to this Agreement subject
to and in accordance with Article 3, Chapter 3, of Division 1.5 of the
California Financial Code, as amended from time to time, and this Agreement
shall be construed and enforced to give effect to that intention.
10.10 Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES ITS
--------------------
RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN
ANY ACTION OR PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY A PARTY
AGAINST THE OTHER PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS,
OR OTHERWISE. EACH PARTY HERETO AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
EACH PARTY HERETO FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
10.11 Dispute Resolution.
------------------
(a) Other than the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in the State of California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil Procedure, or
its successor section ("CCP"), which shall constitute the exclusive remedy for
---
the settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in Los Angeles County in California (the "Court").
-----
The referee shall be a retired judge of the Court selected by mutual agreement
of the parties, and if they cannot so agree within twenty-five (25) days after
the Claim Date, the referee shall be promptly selected by the Presiding Judge of
the Court (or his representative). The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted rule). Each party shall have one peremptory challenge pursuant to CCP
Section 170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the Claim Date and (b) try any and all issues of
law or fact and report a statement of decision upon them, if possible, within
ninety (90) days of the Claim Date. Any decision rendered by the referee will
be final, binding and conclusive and judgment shall be entered pursuant to CCP
<PAGE>
Section 644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute or
claim, by filing a petition for a hearing and/or trial. All discovery permitted
by this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf by a representative duly authorized, all
as of the date first above set forth.
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Piet Westerbeek III
------------------------------
Name: Piet Westerbeek III
-------------------------
Title: Senior Vice President
------------------------
IMPERIAL TRUST COMPANY
By: /s/ Norman P. Creighton
------------------------------
Name: Norman P. Creighton
-------------------------
Title: Chairman
------------------------
IMPERIAL BANK
By: /s/ Norman P. Creighton
------------------------------
Name: Norman P. Creighton
-------------------------
Title: Vice Chairman and CEO
------------------------
By: /s/ Richard M. Baker
------------------------------
Name: Richard M. Baker
-------------------------
Title: SVP, General Counsel
and Secretary
------------------------
<PAGE>
ANNEX A
-------
Transition Agreement
<PAGE>
ANNEX B
-------
COVENANT NOT TO COMPETE
-----------------------
<PAGE>
ANNEX C
-------
IMPERIAL TRUST COMPANY
Certificate of Seller
---------------------
The undersigned, _____________, hereby certifies that:
1. He is delivering this Certificate pursuant to Section 7.1(d) of the
Asset Purchase Agreement (the "Purchase Agreement"), dated as of April ___,
1999, between Union Bank of California, N.A., a national banking association
("Purchaser"), and Imperial Trust Company, a California corporation (the
"Seller"). Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings assigned to them in the Purchase Agreement.
2. The representations and warranties of Seller in the Purchase
Agreement are true and correct in all material respects on and as of the date
hereof with the same force and effect as if made on the date hereof.
3. All covenants, agreements, obligations and conditions required by
the Purchase Agreement to be performed and complied with by Seller on or prior
to the date hereof have been performed and complied with on or prior to the date
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as
of this _____ day of April 1999.
________________________
____________
<PAGE>
ANNEX D
-------
BILL OF SALE
------------
KNOW ALL MEN BY THESE PRESENTS that pursuant to the Asset Purchase
Agreement (the "Agreement") dated as of April ____, 1999 among Union Bank of
---------
California, N.A., a national banking association ("Purchaser"), Imperial Trust
---------
Company, a California corporation ("Seller"), and Imperial Bank, a California
------
state bank ("Imperial"), and for good and valuable consideration, receipt of
--------
which is hereby acknowledged, Seller does hereby sell, assign, convey, transfer
and deliver to Purchaser (and acknowledge the sale, assignment, conveyance,
transfer and delivery to Purchaser by operation of Section 4859 of the
California Financial Code), free and clear of all security interests, liens,
mortgages, pledges, claims, conditional sales contracts and any other
encumbrances of any nature whatsoever (other than liens on any other
encumbrances incurred in the Ordinary Course) and subject to the rights of other
Persons to the extent conferred by California Financial Code Section 4842 or
other applicable law, all of Seller's right, title and interest in all assets
and properties used in connection with the conduct of the Trust Business,
including without limitation:
(i) Seller's business of acting as executor, administrator,
guardian or conservator of estates, assignee, receiver, depositary, custodian or
trustee under the appointment of any court, or by authority of any law of this
or any other state of the United States, as trustee for any purpose permitted by
law, and all agency and other fiduciary or representative capacities;
(ii) all of the trusteeships, executorships, administrations,
guardianships, conservatorships, custodianships, agencies and other fiduciary
and representative capacities held by Seller and any common, collective, or
commingled trust funds maintained by Seller on or prior to the Closing or to
which Seller may be named or appointed after the Closing, including but not
limited to trust documents where Seller is named successor trustee and wills on
deposit (the "Trusts");
------
(iii) all material contracts and agreements governing the Trusts;
(iv) all properties, assets, deposits, funds, investments,
agreements, bills, notes, securities, contracts and rights (including claims
against third parties) that are administered, utilized, held as collateral or
held for the benefit of others (whether or not constituting all or a portion of
the corpus of any trust) by Seller as agent, custodian, trustee or in any other
capacity pursuant to or in connection with Trusts;
(v) all of the goodwill associated with the Assets; and
(vi) all of the accounting information, reports, books, records
statements and data regularly maintained on the electronic information systems
or electronic storage media separately specifying or accounting for each Trust,
including an electronic summary of the fees.
Capitalized terms not defined herein shall have the meanings ascribed
to such terms in the Agreement.
Each of Seller and Purchaser acknowledges that Purchaser only assumes
the Assumed Liabilities and does not assume and shall have no responsibility for
any
<PAGE>
other debt, liability or obligation relating to Seller whatsoever except those
explicitly assumed or undertaken pursuant to the Agreement.
IN WITNESS WHEREFORE, each party has caused this Bill of Sale to be
executed on its behalf by its duly authorized officers as of this ____ day of
April, 199 9.
UNION BANK OF CALIFORNIA, N.A.
By: ___________________________________
Its:
IMPERIAL TRUST COMPANY
By: ___________________________________
Its:
<PAGE>
ANNEX E
-------
UNION BANK OF CALIFORNIA, N.A.
Certificate of Purchaser
------------------------
The undersigned, _____________, hereby certifies that:
1. He is delivering this Certificate pursuant to Section 7.2 of the Asset
Purchase Agreement (the "Purchase Agreement"), dated as of April ___, 1999,
between Union Bank of California, N.A., a national banking association
("Purchaser"), and Imperial Trust Company, a California corporation (the
"Seller"). Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings assigned to them in the Purchase Agreement.
2. The representations and warranties of Purchaser in the Purchase
Agreement are true and correct in all material respects on and as of the date
hereof with the same force and effect as if made on the date hereof.
3. All covenants, agreements, obligations and conditions required by the
Purchase Agreement to be performed and complied with by Purchaser on or prior to
the date hereof have been performed and complied with on or prior to the date
hereof.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
this _____ day of April 1999.
________________________
____________
<PAGE>
EXHIBIT 10.2
TRANSITION AGREEMENT
BETWEEN UNION BANK OF CALIFORNIA, N.A.
IMPERIAL TRUST COMPANY, AND
IMPERIAL BANK
This Agreement (the "Transition Agreement"), dated as of the 23rd day of
April, 1999, is between Union Bank of California, N.A., a national banking
association ("UBOC"), on the one hand, and Imperial Bank, a California state
chartered bank ("Imperial"), and Imperial Trust Company ("ITC"), a wholly owned
subsidiary of Imperial, on the other hand.
R E C I T A L S :
-----------------
UBOC has entered into an agreement (the "Purchase Agreement") with Imperial
and ITC dated the date hereof, to acquire substantially all of the business of
ITC (as defined in the Purchase Agreement, the "Trust Business") as of the
Closing Date (as defined in the Purchase Agreement);
In connection with the acquisition of the Trust Business, UBOC does not
intend to acquire, and ITC does not intend to sell, certain back office and
other operations and systems of ITC which are used in the operation of the Trust
Business, and UBOC does not intend to offer employment to certain of the
personnel of ITC who are responsible for the operation of such systems;
UBOC anticipates that it will be able to take over the back office and
other operations and systems used in the conduct of the Trust Business by the
end of 1999 and convert such operations to its own systems or to those of third-
party vendors engaged by UBOC. Prior to that time UBOC wishes ITC to make
available to UBOC its hardware, software and facilities used in such back office
operations and services and to further make available its back-office personnel
to assist in providing such operations and services;
NOW, THEREFORE, in consideration of the promises and covenants contained
herein, and intending to be legally bound hereby, UBOC, Imperial and ITC agree
as follows:
SECTION 1. -- RESOURCES AND ITC PERSONNEL.
- -----------------------------------------
Section 1.01 Provision of Resources. ITC shall make available to UBOC for
----------------------
the Transition Period (as defined below in Section 8) the premises, equipment,
---------
systems, software, applications and other non-personnel resources used by ITC
that ITC has access to during the Transition Period and that are used for the
administration and operation of the Trust Business immediately prior to the
Closing Date (the "Resources") to enable the ITC Personnel (as defined below in
Section 1.03) and any replacement personnel engaged by UBOC to perform the
functions set forth in Exhibit A-1 (the "Functions"). Set forth on Schedule
--------
1.01 hereto is a complete and accurate description of the Resources, including
- ----
without limitation the following:
. the facilities at which the ITC Personnel will be located;
<PAGE>
. the equipment used at the premises;
. all software used by the ITC Personnel; and
. all vendors providing services to ITC; the nature and scope of the
services performed by such vendors; and a summary of the terms and
conditions of the agreements between ITC and such vendors.
Section 1.02 Appropriate Resources. ITC shall use its commercially
---------------------
reasonable efforts to maintain all of the Resources that ITC has access to
throughout the Transition Period.
Section 1.03 ITC Personnel. Schedule 1.03(i) hereto sets forth a complete
------------- ----------------
and accurate list of all personnel who will be performing the Functions
immediately following the Closing Date (the "ITC Personnel"), their titles, a
summary description of the duties of each, and a description of the severance
made available to each of them by ITC. Schedule 1.03(ii) hereto further sets
-----------------
forth a description of a special bonus program for specifically designated ITC
Personnel (the "Transition Period Bonus Program"), including without limitation,
the ITC Personnel participating therein, the standards under which the bonuses
are to be paid, and a description of the procedures to be used in determining
the amount of the bonuses to be paid. UBOC shall reimburse ITC for the cost of
the bonuses due under the Transition Period Bonus Program. ITC shall remain
responsible for all wages, benefits, worker's compensation, severance and
similar employee-related costs for the ITC Personnel, except as stated herein,
to the extent currently paid by ITC prior to the Closing Date. In the event any
ITC Personnel is terminated or leaves his or her position during the Transition
Period, UBOC shall be responsible for finding, engaging and compensating any
necessary replacement personnel.
Section 1.04 Management Supervision of Personnel. All ITC Personnel shall
------------------------------------
remain employees of ITC unless any such ITC Personnel are terminated or leave
their positions. ITC shall make available its senior executive officer who
shall manage the day-to-day activities of the ITC Personnel and any replacement
personnel engaged by UBOC. Such senior executive officer shall consult with
designated UBOC managers for guidance and direction, and shall manage the ITC
Personnel and any replacement personnel engaged by UBOC in performing the
Functions. Except as expressly provided in this Transition Agreement, ITC shall
have no liability to UBOC from the management of personnel or the performance of
the Functions. In the event of termination, resignation or disability of the
senior executive officer, UBOC and ITC agree to consult and agree upon measures
to carry out the intent of this Transition Agreement.
Section 1.05 ITC Insurance. Without limiting ITC's liability to UBOC or
-------------
third parties hereunder, ITC agrees to maintain the following insurance
coverages with insurance carriers with an A.M. Best rating of at least A-VII, or
otherwise acceptable to UBOC, in UBOC's sole discretion. All insurance shall
include a Primary and Non-Contributing Endorsement.
-2-
<PAGE>
(a) All insurance coverages required by federal, state or local law, and
statute, including Worker's Compensation Insurance and Employers' Liability
Insurance. Such Employers' Liability Insurance shall provide limits of at least
$1,000,000 for each person.
(b) Comprehensive or Commercial General Liability Insurance, including
coverage for Products and Completed Operations, Independent Contractors, and
Personal Injury; and Blanket Contractual Liability coverage for all obligations
undertaken by ITC to UBOC under this agreement.
(c) Comprehensive Automobile Liability Insurance including coverage for
Owned, Hired, and Non-Owned Automobile Liability, with Combined Bodily Injury
and Property Damage coverage limits of at least $5,000,000 per occurrence,
naming UBOC as Additional Insured.
(d) Professional Liability Insurance, also known as Errors and Omissions
Insurance, with limits of not less than $5,000,000.
(e) Financial Institution Bond, including Fidelity Coverage, On-Premises,
In-Transit, Forgery or Alteration, and Computer Crime coverages, for a limit of
at least $10,000,000 per occurrence.
(f) All Risk Property Insurance, including valuable papers and sprinkler
leakage coverage, with the limit of at least 90% of the replacement cost of
property. UBOC shall be named as a Loss Payee, as its interests may appear.
Within ten (10) days after the commencement of the Transition Period, ITC
shall provide to UBOC certificates of insurance evidencing such required
insurance coverages and naming UBOC as Additional Insured (for coverages
required by items (b) and (c) above). Said certificates shall include a
provision whereby the insurance carrier is required to provide directly to UBOC
thirty (30) days advance written notice before termination, change or
cancellation of coverage takes effect for such policies evidenced on such
certificates, regardless of whether cancelled by ITC or by its insurance
carrier. The insurer of each policy shall waive, and ITC hereby waives, all
rights of recovery or subrogation against UBOC which might arise with regard to
damage or loss which is insured against under any insurance policies in force at
the time of the damage or loss.
Section 1.06 Access and Source Codes. Immediately upon the commencement
-----------------------
of the Transition Period, ITC shall provide UBOC, to the extent ITC has the
right to disclose such information to third parties, with all access and source
code and other security and operational information to which ITC has access to
on the Closing Date to permit UBOC to have access to the Resources and to the
Data (as defined below in Section 5). UBOC and ITC shall have adopted mutually
---------
agreeable procedures as set forth on Schedule 1.06 for the safekeeping by UBOC
-------------
of such information during the Transition Period.
-3-
<PAGE>
Section 1.07 Deliveries. During the Transition Period, ITC agrees to
----------
provide to UBOC the reports and statements (the "Deliveries") as set forth on
Exhibit A-2.
SECTION 2. -- REIMBURSEMENT OF EXPENSES FOR RESOURCES AND ITC PERSONNEL.
- -----------------------------------------------------------------------
Section 2.01 Expense Reimbursements. As compensation for making available
----------------------
the Resources and ITC Personnel, ITC shall be entitled to be reimbursed for the
expenses incurred by ITC in providing the Resources and ITC Personnel in
accordance with the procedures set forth in Exhibit B.
Section 2.02 Audit Rights. ITC shall, upon request, provide to UBOC
-------------
reasonable access to its accounting records, including its workpapers, on which
the cost calculations used in computing such expenses were based.
Section 2.03 Disagreements Regarding Expenses to be Reimbursed. In the
-------------------------------------------------
event UBOC disagrees regarding the calculation of any expense reimbursement
statement, it shall invoke the same procedure for resolving differences as is
used to resolve disagreements regarding the calculation of the Purchase Price in
the Purchase Agreement, by providing an Objection Notice to ITC.
SECTION 3. -- COMPLIANCE WITH LAWS AND PROCEDURES.
- -------------------------------------------------
Section 3.01 Adherence to Regulatory Requirements. During the Transition
------------------------------------
Period, ITC will comply in all material respects with all applicable federal and
state laws to the same extent as applicable prior to the Closing Date. During
the Transition Period, upon notice from UBOC, ITC will also comply with any
additional applicable federal or state rule, regulation or law to which UBOC is
subject, provided, however, that UBOC shall reimburse ITC for the additional
-------- -------
costs of such compliance.
Section 3.02 Adherence to Operations Policies and Procedures. During the
-----------------------------------------------
Transition Period, ITC Personnel and any replacement personnel engaged by UBOC
shall be instructed by ITC to perform the Functions and operate consistently
with ITC's operations policies and procedures in place on the Closing Date. A
complete and accurate description of such policies and procedures has been
provided to UBOC. During the Transition Period, ITC shall not make any changes
therein without prior written approval from UBOC.
Section 3.03 Risk of Errors and Omissions. Except to the extent set forth
----------------------------
in Section 3.04, ITC shall assume the risk of and assume full responsibility for
------------
any errors and omissions made, or wrongful acts undertaken, (a) by the ITC
Personnel or (b) in the functioning or operation of the Resources during the
Transition Period. Any exceptions must be covered by a written indemnification
or hold harmless agreement.
Section 3.04 Good Faith Reliance; Acting on Instructions; Force Majeure.
----------------------------------------------------------
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<PAGE>
(a) ITC shall be protected to the extent ITC Personnel (a) rely upon any
communication, written or oral, believed by them in good faith to be genuine and
correct and to have been signed, sent or made by the proper person or persons or
(b) act, or refrain from acting, with respect to any Functions and Deliveries in
accordance with a written or oral request of UBOC.
(b) Unless such failure of performance is covered by an ITC insurance
policy in effect, ITC shall not be liable for any failure of performance of ITC
Personnel or Resources attributable to acts or events beyond its control
(including war, conditions or events of nature, civil disturbances, work
stoppage, power failure, failure of telephone lines and equipment, fire and
earthquake) which prevent the performance of ITC Personnel or Resources
hereunder. Notwithstanding the foregoing, this Section 3.04(b) shall not
--------------
relieve ITC from its responsibilities under Sections 5.05 and 5.06.
------------- ----
Section 3.05. Audit Exceptions and Other Operational Problems. ITC has
-----------------------------------------------
provided UBOC with a complete and accurate list of all internal and external
audit exceptions and criticisms of the Resources and their operation for the
period commencing January 1, 1996 to the present, together with a report of the
action taken by ITC in response thereto. As soon as practicable upon
occurrence, ITC shall report to the UBOC representative appointed under Section
-------
11.01 of this Transition Agreement any and all operational, processing or
- -----
systems problems, disruptions, breakdowns, errors or other occurrences which ITC
believes would prevent or impair the performance of the Functions or Deliveries
or the appropriate operation of the Resources. ITC has taken or is in the
process of taking remedial measures with respect to any material audit
exceptions or other material operational problems relating to the Functions or
the Deliveries.
SECTION 4. -- CUSTOMER COMMUNICATIONS AND DISPUTES.
- --------------------------------------------------
Section 4.01 Customer Communications. During the Transition Period, ITC
-----------------------
Personnel shall not initiate any oral or written communication with any
customers of the Trust Business ("Customers"), other than in the ordinary course
of business, without the prior consent of UBOC. All written communications sent
by ITC Personnel to Customers during the Transition Period shall bear UBOC's
name and such other identification or information as UBOC may reasonably request
in order to identify UBOC as having acceded to responsibility for management and
administration of the accounts pursuant to the acquisition of the Trust
Business. Prior to sending any account statements, fee invoices or other
general or specific communications to Customers during the Transition Period,
ITC shall cause ITC Personnel to submit the form thereof to UBOC for prior
approval, which approval shall not be unreasonably withheld.
Section 4.02 Customer Disputes. In the event of any dispute, complaint or
-----------------
controversy with a Customer during the Transition Period, ITC will cause ITC
Personnel promptly to advise UBOC, and UBOC will have the right to intervene in
or take control of such matter to the extent it considers necessary or
appropriate. At UBOC's request, during the Transition Period ITC will
-5-
<PAGE>
cause ITC Personnel to respond to inquiries and, at UBOC's direction and with
UBOC's approval, resolve any dispute, complaint or controversy with a Customer
with respect to any transaction or event where ITC or ITC Personnel has or have
possession of the relevant records and data.
SECTION 5. -- INTEGRITY AND CONFIDENTIALITY OF DATA.
- ---------------------------------------------------
Section 5.01 Confidentiality of UBOC Proprietary Materials and Customer
----------------------------------------------------------
Data. ITC agrees that all data delivered by UBOC to ITC in connection with
- ----
Customers and any other information about Customers (hereinafter referred to as
"Data") is the exclusive property of UBOC and is strictly confidential and
proprietary material. ITC agrees that during the term of this Transition
Agreement and thereafter, neither ITC nor its agents or employees shall make use
of such information for any purpose other than as necessary to carry out ITC's
responsibilities under this Transition Agreement or make known, divulge, or
communicate to any person or entity the Data, provided, however, that if so
requested, upon reasonable notice to UBOC, ITC may (and upon request by UBOC,
shall) disclose such information to its regulators and to UBOC's regulators, and
provided further, that if ITC is legally compelled to disclose such information
by subpoena, court order or otherwise, it will provide UBOC with prompt notice.
Section 5.02 Retention of Data. All Data shall be retained by ITC until
-----------------
it has received instructions from UBOC concerning the return or delivery or
destruction of the Data to UBOC or Customers; provided, however, that if ITC is
required by UBOC to retain such records for any period of time in excess of the
document retention policies of ITC, then UBOC shall reimburse ITC for any
additional costs of such retention; provided further that, notwithstanding any
instruction for return, delivery or destruction of Data by UBOC, ITC may retain
such records as long as is necessary to comply with legal document retention
requirements applicable to it. At any time following the expiration or
termination of this Transition Agreement, ITC shall forward to UBOC all Data
requested by UBOC that has been submitted to ITC hereunder at UBOC's sole cost
and expense; provided, however, ITC may destroy or otherwise dispose of all such
Data if UBOC furnishes ITC with written instructions for destruction or other
disposition thereof.
Section 5.03 Security Precautions. ITC agrees to provide and take all
--------------------
necessary security precautions to insure that the Data is available only to ITC
Personnel. Set forth on Schedule 5.03 hereto is a complete and accurate
-------------
description of ITC's recovery and data security procedures. ITC shall utilize
such procedures for preservation of Data, except as otherwise are required by
law or rule or regulation applicable to ITC. ITC further agrees to follow such
file, safekeeping and back up procedures for the Data as UBOC advises in writing
to ITC; provided, however, UBOC shall reimburse ITC for any cost of compliance
with such additional procedures.
Section 5.04 Access by UBOC's Auditors. Upon reasonable notice and during
-------------------------
regular business hours, during the Transition Period ITC agrees to grant the
internal and external auditors of UBOC and other personnel authorized by UBOC
reasonable access to ITC's facilities, books and records that relate to the
Functions and Deliveries and the Resources.
-6-
<PAGE>
Section 5.05 Disaster Recovery. A complete and accurate description of
-----------------
ITC's disaster recovery plan (the "ITC Disaster Recovery Plan") has been
delivered to UBOC by ITC. In the event of any major disaster during the
Transition Period, ITC shall consult with UBOC to the extent feasible or
possible and shall proceed in accordance with the ITC Disaster Recovery Plan
unless otherwise instructed by UBOC; provided, however, UBOC shall reimburse ITC
for any additional costs incurred by reason of such instruction.
Section 5.06 Y-2K Compliance. A complete and accurate description of
---------------
ITC's Y-2K compliance plan has been delivered to UBOC by ITC, and except as set
forth in Schedule 5.06, ITC has complied with such plan in all material
-------------
respects. ITC agrees to comply, and to cause ITC Personnel to comply, with such
plan during the Transition Period. ITC further agrees to cooperate during the
Transition Period with UBOC, UBOC's vendors and Customers, in accordance with
UBOC's Y-2K compliance plan; provided UBOC shall reimburse ITC for any costs
incurred in providing such cooperation with respect to UBOC's Y-2K compliance
plan.
SECTION 6. -- INDEMNIFICATION.
- -----------------------------
Section 6.01 ITC's Promise to Indemnify. Each of ITC and Imperial jointly
--------------------------
and severally covenants and agrees to defend, indemnify and hold harmless UBOC
from and against all losses, liabilities, obligations, costs, expenses, damages
or judgments of any kind or nature whatsoever (including reasonable attorneys'
and other costs and expenses incurred in connection therewith) ("Damages") (x)
arising out of or resulting from any (a) nonfulfillment of or failure by ITC or
Imperial to comply with any agreement or covenant of this Transition Agreement
or any schedule or exhibit hereto (other than those, if any, the performance of
which shall have been waived in writing by UBOC), or (b) except to the extent
errors or omissions are excused pursuant to Section 3.04 above, (i) any error or
omission, or wrongful conduct, of any ITC Personnel in the performance of the
Functions or (ii) any error or omission in the functioning or operation of the
Resources, or (y) to the extent ITC or Imperial has recovered under any claim
for recourse against any third-party vendor through which Functions or Resources
are provided, whether by way of indemnification or otherwise. ITC shall use
its best efforts to collect the full amount of any Damages from such vendor in
respect of such recourse or assign its rights against the vendor, to the extent
assignable, to UBOC.
Section 6.02 UBOC's Promise to Indemnify. UBOC covenants and agrees to
---------------------------
defend, indemnify and hold harmless ITC from and against any Damages arising out
of or resulting from (i) nonfulfillment of or failure by UBOC to comply with any
agreement or covenant of this Transition Agreement (other than those, if any,
the performance of which shall have been waived in writing by ITC) or of any
document delivered pursuant hereto or in connection herewith, (ii) the
compliance by ITC with any instruction provided by UBOC under this Transition
Agreement, or (iii) any act or omission of any replacement employees engaged by
UBOC except to the extent such act or omission was at the direction of ITC's
senior executive officer.
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<PAGE>
Section 6.03 Procedure for Indemnification.
-----------------------------
(a) If any party entitled to be indemnified pursuant to Section 6 (an
"Indemnified Party") receives notice of the assertion by any third party of any
- ------------------
claim or of the commencement by any such third person of any Action, or if the
Indemnified Party determines the existence of any such claim or the commencement
by any such third party of any Action, whether or not the same shall have been
asserted (any such claim or Action being referred to herein as an "Indemnifiable
-------------
Claim") with respect to which another party hereto (an "Indemnifying Party") is
- ----- ------------------
or may be obligated to provide indemnification, the Indemnified Party shall
notify the Indemnifying Party in writing (the "Claim Notice") of the
------------
Indemnifiable Claim within thirty (30) days of the assertion of the claim,
liability or obligation and within ten (10) days of receipt of notice of the
filing of any Action based upon such assertion, or, with respect to a claim not
yet asserted against the Indemnified Party, promptly upon the determination by
an executive officer of the Indemnified Party of the existence of the same;
provided, that the failure to provide such notice shall not relieve or otherwise
- --------
affect the obligation of the Indemnifying Party to provide indemnification
hereunder, except to the extent that any Damages directly resulted or were
caused by such failure.
(b) The Indemnifying Party shall have thirty (30) days after receipt of the
Claim Notice to undertake, conduct and control, through counsel of its own
choosing, and at its expense, the settlement or defense thereof, and the
Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith if such cooperation is so requested and the request is reasonable,
provided that the Indemnifying Party shall hold the Indemnified Party harmless
- --------
from all of its out-of-pocket expenses, including attorneys' fees (including the
allocated costs and expenses of in-house counsel and legal staff), incurred in
connection with the Indemnified Party's cooperation. If the Indemnifying Party
assumes responsibility for the settlement or defense of any such claim, (i) the
Indemnifying Party shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by the Indemnified Party (subject
to the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld), provided that, other than in the event of a conflict of
--------
interest requiring the retention of separate counsel, the fees and expenses of
such counsel shall not be borne by the Indemnifying Party, and (ii) the
Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent, which consent shall not be unreasonably withheld or
delayed if the settlement involves only payment of money, and which consent may
be withheld for any reason if the settlement involves more than the payment of
money, including any admission by the Indemnified Party. So long as the
Indemnifying Party is vigorously contesting any such Indemnifiable Claim in good
faith, the Indemnified Party shall not pay or settle such claim without the
Indemnifying Party's consent, which consent shall not be unreasonably withheld.
(c) If the Indemnifying Party does not notify the Indemnified Party within
thirty (30) days after receipt of the Claim Notice that it elects to undertake
the defense of the Indemnifiable Claim described therein, the Indemnified Party
shall have the right to contest, settle or compromise the Indemnifiable Claim in
the exercise of its reasonable discretion; provided, that
--------
-8-
<PAGE>
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
SECTION 7. -- AUTHORIZED SIGNERS.
- --------------------------------
During the Transition Period, each of the parties hereto will maintain with
the other a current list of the names, together with specimen signatures, of
persons authorized to execute documents on behalf of that party, and each other
party shall be entitled to rely on such list as authority in taking any action
hereunder.
SECTION 8. -- TRANSITION PERIOD; TERMINATION.
- --------------------------------------------
Section 8.01 Term and Transition Period. This Transition Agreement (and
---------------------------
the Transition Period) shall terminate on December 31, 1999, unless terminated
prior thereto pursuant to this Section 8. The Transition Period shall commence
on the Closing.
Section 8.02 Termination. This Transition Agreement may be terminated
-----------
before December 31, 1999 with effect as of (a) any date after September 30, 1999
by not less than thirty days' written notice given by UBOC to ITC, or (b) any
date, by mutual agreement of UBOC, ITC and Imperial.
Section 8.03 UBOC Option. At any time during the Transition Period or at
-----------
its termination, UBOC shall have the right to make offers to engage any or all
of the ITC Personnel (provided, however, that any offers extended by UBOC to ITC
Personnel during the Transition Period shall expire if such offers are not
accepted prior to the termination of the Transition Period); to acquire from
ITC, at ITC's depreciated book value, any and all hardware, software, supplies
and materials identified on Schedule 1.01; to enter into contracts with the
-------------
vendors used by ITC; and to sublease from ITC through December 31, 1999 (or to
lease from ITC's lessor) at ITC's cost the facilities at 201 North Figueroa in
Los Angeles to the extent permitted under ITC's lease.
SECTION 9. -- CONVERSION.
- ------------------------
Immediately upon the commencement of the Transition Period, ITC shall
cooperate with UBOC in UBOC's formulation of a reasonable plan to convert the
Functions and Resources provided hereunder to UBOC's systems (or systems of
third parties designated by UBOC) (the "Conversion") at the sole cost and
expense of UBOC. During the Transition Period, ITC shall provide all requested
Customer, system, and processing information necessary for the Conversion. At
the time of Conversion ITC will perform a final reconciliation of accounts; ITC
will be responsible for any payments or losses due to any Out-of-Balance
Condition as of the Closing.
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<PAGE>
SECTION 10. -- GENERAL PROVISIONS.
- ---------------------------------
Section 10.01 Management of Transition Agreement. UBOC and ITC shall each
----------------------------------
appoint a primary liaison, who shall endeavor to establish appropriate
mechanisms for the management of this Transition Agreement.
Section 10.02 Further Assurances. The parties agree to do such further
------------------
acts and things, and to execute and deliver such additional conveyances,
assignments, agreements and instruments, as any party may at any time and from
time to time reasonably request in order to better assure and confirm unto each
party its respective rights, powers and remedies conferred hereunder.
Section 10.03 Expenses. Except as otherwise specifically set forth in
--------
this Transition Agreement, each party shall bear its own costs, charges and
expenses.
Section 10.04 Assignment and Delegation of Rights and Duties. Neither
----------------------------------------------
party shall have the right to assign its rights or delegate its duties hereunder
without the prior written consent of the other party provided that any party
delegating any duties remains liable for the performance thereof. Subject to
the foregoing limits, this Transition Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successors and assigns.
Section 10.05 Relationship of Parties. Except as otherwise provided
-----------------------
herein, it is acknowledged and agreed by UBOC and ITC that no joint venture,
partnership, employment or any other relationship is intended, accomplished or
embodied in this Transition Agreement.
Section 10.06 Communication/Use of Name. Except as otherwise provided
-------------------------
herein, each party agrees not to use the other party's name in communications
with third parties, including advertising or marketing material, related to this
Transition Agreement without the prior written consent of the other party, which
shall not be unreasonably withheld.
Section 10.07 Notice. Any and all notices, invoices, and payments sent
------
pursuant to or in connection with this Transition Agreement shall be in writing
and delivered via hand, private courier service for next day delivery or fax to
ITC, Imperial and UBOC at the addresses set forth below or to such other
address as any such party may from time to time designate in writing:
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<PAGE>
Union Bank of California, N. A.
Mr. John McGuckin, Jr.
Executive Vice President & General Counsel
Union Bank of California, N.A.
400 California Street
San Francisco, CA 94104
Fax: 415-765-3391
with a copy to:
Piet Westerbeek
Senior Vice President
Union Bank of California, N.A.
445 S. Figueroa St.
Los Angeles, CA 90071
Fax: 213-236-5115
Imperial Trust Company or Imperial Bank
Richard M. Baker
Senior Vice President, General Counsel and Secretary
Imperial Bank
9920 S. La Cienega Blvd., Suite 1030
Inglewood, CA 90301
Fax: (310) 417-5695
with a copy to:
Ms. Siobhan McBreen Burke
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90071-2371
Fax: 213-627-0705
All notices shall be deemed validly given and legally effective when sent,
except for notices sent by next-day courier service, which shall be deemed to be
given on the day after being sent.
Section 10.08 Sole Benefit of ITC, Imperial and UBOC. This Transition
--------------------------------------
Agreement is for the sole and exclusive benefit of ITC, Imperial and UBOC and
shall not be deemed to be for the direct or indirect benefit of any other
person, including Customers. Neither Customers nor ITC Personnel shall be
deemed to be third-party beneficiaries of this Transition Agreement.
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<PAGE>
Section 10.09 Specific Performance. The parties expressly recognize and
--------------------
acknowledge that no adequate remedy at law exists for any breach or threatened
breach by ITC of any covenant or agreement contained in this Transition
Agreement and that UBOC would suffer irreparable harm as a result thereof and
that UBOC may, in addition to the other remedies that may be available to it,
commence proceedings in equity for any injunction preliminarily or permanently
enjoining ITC from breaching or threatening any such breach of any covenant or
agreement contained in this Transition Agreement. Such remedies and any and all
other remedies provided for in this Transition Agreement shall, however, be
cumulative in nature and not exclusive and shall be in addition to any other
remedies whatsoever which any party may have under this Transition Agreement or
otherwise.
Section 10.10 Dispute Resolution. Except as otherwise explicitly set
------------------
forth herein, any dispute hereunder shall be resolved using the same dispute
resolution procedures set forth in the Purchase Agreement. In connection with
an arbitration or any other action or proceeding, the parties hereto expressly,
intentionally and deliberately waive any right to trial by jury.
Section 10.11 Governing Law. This Transition Agreement shall be governed
-------------
and construed in accordance with the internal laws of the State of California
without regard to conflicts of laws principles.
Section 10.12 Headings. All sections headings contained in this
--------
Transition Agreement are for convenience of reference only, do not form a part
of this Transition Agreement and shall not affect in any way the meaning or
interpretation of this Transition Agreement. Words used herein, regardless of
the number and gender specifically used, shall be deemed and construed to
include any other number, singular or plural, and any other gender, masculine,
feminine, or neuter, as the contract requires.
Section 10.13 Entire Agreement. This Transition Agreement, together with
-----------------
the Purchase Agreement, constitutes the entire agreement between the parties
with respect to the subject matter hereof. This Transition Agreement and the
Purchase Agreement supersede all prior written and oral arrangements,
agreements, or understanding with respect to the subject matter hereof. This
Transition Agreement may not be amended except pursuant to a writing signed by
the parties.
Section 10.14 Waiver. Any term or provision of this Transition Agreement
------
may be waived at any time by the party entitled to the benefit thereof by
written instrument executed by such party. No failure of either party hereto to
exercise any power or right granted hereunder, or to insist upon strict
compliance with any obligation hereunder, and no custom or practice of the
parties with regard to the terms of performance hereof, shall constitute a
waiver of the rights of such party to demand full and exact compliance with the
terms of this Transition Agreement.
Section 10.15 Severability. In the event that any provision of this
------------
Transition Agreement shall be found in violation of public policy or illegal or
unenforceable in law or equity, such finding shall in no event invalidate any
other provision of this Transition Agreement.
-12-
<PAGE>
Section 10.16 Counterparts. This Transition Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
Section 10.17 Capitalized Terms. Any capitalized terms not defined herein
-----------------
shall have the meaning ascribed to them in the Purchase Agreement.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE>
[SIGNATURE PAGE TO TRANSITION AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Transition Agreement
to be executed in their respective names as of the day and year first above
written.
UNION BANK OF CALIFORNIA, N.A. IMPERIAL TRUST COMPANY
By: /s/ Piet Westerbeek III By: /s/ Norman P. Creighton
-------------------------- ------------------------------------
Name: Piet Westerbeek III Name: Norman P. Creighton
-------------------------- ------------------------------------
Title: Senior Vice President Title: Chairman
-------------------------- ------------------------------------
By: /s/ Richard M. Baker
------------------------------------
Name: Richard M. Baker
------------------------------------
Title: Secretary
------------------------------------
IMPERIAL BANK
By: /s/ Norman P. Creighton
------------------------------------
Name: Norman P. Creighton
------------------------------------
Title: Vice Chairman and CEO
------------------------------------
By: /s/ Richard M. Baker
------------------------------------
Name: Richard M. Baker
------------------------------------
Title: SVP, General Counsel & Secretary
------------------------------------
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<PAGE>
EXHIBIT A-1
"FUNCTIONS"
ITC Personnel and any replacement personnel engaged by UBOC shall perform the
following functions (the "Functions"):
1. Settlements for securities trades
2. Mutual fund processing
3. Receipt and disbursements of funds
4. Handling of suspense and reconcilement items
5. Handling of corporate actions
6. Fiduciary tax reporting and other regulatory activities
7. Customer statement processing including but not limited to preparation and
verification of accrual statements
8. Fee processing and delinquent fee reporting
9. Income collection on all account assets
10. Common Trust Fund processing
11. Processing of periodic pension checks
12. Preparation of management reports
13. Management of existing ITC corporate vendor relationships, including timely
payment of invoices
-15-
<PAGE>
EXHIBIT A-2
"DELIVERIES"
ITC shall provide the following Deliveries:
1. Quarterly tax returns will be sent to UBOC within 3 days of filing.
2. Any fee delinquencies will be reported to the UBOC relationship manager for
that account. Reports of all fee calculations, billings, and collections
will be produced and sent to UBOC within seven (7) business days after such
reports are prepared.
3. Report to UBOC any system changes or new users for the systems.
4. All suspense and reconcilement reports will be sent to UBOC within five (5)
business days after the completion of such reports.
5. The `CALL Report" generated from the SEI system will be forwarded to UBOC
within two (2) business days after it is prepared.
6. Within ten (10) business days of the last business day of each calendar
month, ITC shall submit to UBOC a report detailing all billing activity for
the previous calendar month. The report must detail each account number,
whether the account was billed electronically or manually, and the billing
amount.
A-16
<PAGE>
EXHIBIT B
"REIMBURSEMENT OF EXPENSES"
Reimbursable Expenses are defined as any expenses incurred by ITC for Resources
and ITC Personnel provided to UBOC during the term of this Transition Agreement.
For the payment of Reimbursable Expenses, ITC must submit to UBOC the Imperial
Bank GLR 380 report or similar report as the source report for expense activity.
1. UBOC will remit payment for Resources and ITC Personnel within ten (10)
business days after receiving the detailed report referenced above.
2. UBOC will reimburse ITC for reasonable and customary costs for the Resources
and ITC Personnel, and other costs incurred by ITC for actions requested by UBOC
during the term of this Transition Agreement.
3. If a circumstance arises in which Reimbursable Expenses must be prorated, a
simple calculation using days as the pro ration factor will be used.
4. UBOC will not reimburse for the following categories/accounts, which shall
not be considered Reimbursable Expenses:
Commissions
Profit Sharing in excess of actual allocations
Legal Services
Audit Services
Advertising
Operating Losses caused by ITC Personnel in excess of $25,000 annualized
Business Promotions
Brochures/Publications
Training/Seminars
Donations
Goodwill Amortization
Employee Referral Fees
Regulatory Assessments
Indirect Expense, other than Imperial Bank allocations for human resources
and operations center support consistent with past practices
Severance
Meetings/Conventions
Contract Terminations
Vacation and Sick pay accrued through the Closing Date
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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