<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-26960
ITLA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 95-4596322
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification
Organization) No.)
888 PROSPECT STREET, SUITE 110, LA JOLLA, CALIFORNIA 92037
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (858) 551-0511
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 17, 2000, there were issued and outstanding 7,126,484 shares
of the Registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of such stock as of March 17, 2000, was $91.8 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
================================================================================
<PAGE> 2
ITLA CAPITAL CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk 39
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure 75
PART III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners and Management 84
Item 13. Certain Relationships and Related Transactions 85
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 86
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
ITLA Capital Corporation ("ITLA Capital") is the largest financial
services company headquartered in San Diego County, California. ITLA Capital
conducts its business principally through Imperial Capital Bank, a 25-year-old
California Industrial Bank, which became ITLA Capital's principal operating
subsidiary upon completion of its holding company reorganization on October 1,
1996.
Imperial Capital Bank was formerly named Imperial Thrift and Loan
Association. The name change to Imperial Capital Bank was effective January 1,
2000. All references in this form 10-K to ITLA Capital, unless otherwise
indicated, prior to October 1, 1996, refer to its subsidiaries, including
Imperial Capital Bank and its subsidiaries on a consolidated basis. Imperial
Capital Bank is primarily engaged in originating real estate loans secured by
income producing properties for retention in its loan portfolio, funded
primarily by deposits insured by the FDIC up to applicable limits. Imperial
Capital Bank is also active in acquiring pools of single family mortgages in the
secondary market for investment purposes. Imperial Capital Bank's lending
business is conducted through four offices in California and one office in
Nevada. Deposit gathering activities are concentrated in Los Angeles and Orange
Counties, the San Francisco Bay Area, and the San Diego area. Imperial Capital
Bank also accepts out-of-state deposits.
ITLA Capital continuously evaluates business expansion opportunities,
including loan pool acquisitions, acquisitions or joint ventures with companies
that originate or purchase commercial and multi-family real estate loans as well
as residential mortgage loans and other types of secured commercial loans. In
connection with this activity, ITLA Capital periodically has discussions with
and receives financial information about other companies that may or may not
lead to the acquisition of all or part of that company by or joint venture
opportunities with ITLA Capital.
In this regard, subsequent to December 31, 1999, ITLA Capital acquired
100 percent of the equity and certain collateralized mortgage bonds (CMOs) of
the ICCMAC Multifamily and Commercial Trust 1999-1 (the Trust). As of December
31, 1999, the Trust held approximately $255 million of assets, comprised of
approximately 65 percent and 35 percent of multifamily and commercial loans,
respectively, with over 50 percent of the loans in California. Over two-thirds
of the loans are adjustable rate mortgages. The Trust's assets, liabilities and
earnings will be consolidated in ITLA Capital's financial statements on a
prospective basis.
FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: This Form 10-K contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, changes in economic
conditions in ITLA Capital's market areas, changes in policies by regulatory
agencies, the impact of competitive loan products, loan demand risks,
fluctuations in interest rates and operating results and other risks detailed
from time to time in ITLA Capital's filings with the Securities and Exchange
Commission. ITLA Capital cautions readers not to place undue reliance on
forward-looking statements. ITLA Capital does not undertake and specifically
disclaims any obligation to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements. These risks could cause
3
<PAGE> 4
ITLA Capital's actual results for 2000 and beyond to differ materially from
those expressed in any forward-looking statements by, or on behalf of, ITLA
Capital.
LOAN PORTFOLIO
Imperial Capital Bank concentrates its lending activities on originating
loans secured by income producing real estate, both commercial and residential
(including apartments), and the acquisition of pools of single-family mortgage
loans. The interest rates charged on loans generally vary based on a number of
factors, including the degree of credit risk, size and maturity of the loan,
whether the loan has a fixed or a variable rate, and prevailing market rates for
similar types of loans. At December 31, 1999, ITLA Capital's gross loan
portfolio held for investment totaled $974.5 million. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information regarding the composition of the loan portfolio at
December 31, 1999.
REAL ESTATE LENDING
Marketing and Originations. Imperial Capital Bank originates real estate
loans through branch offices located in San Francisco, Costa Mesa, Glendale and
Del Mar, and a loan production office in Las Vegas. These offices are staffed by
a total of eleven loan officers. Loan officers solicit mortgage loan brokers for
loan applications that meet Imperial Capital Bank's underwriting criteria, and
also accept applications directly from borrowers. A majority of the loans funded
by Imperial Capital Bank are originated through mortgage loan brokers, with the
balance resulting from direct applications from borrowers. Mortgage loan brokers
act as intermediaries between property owners and Imperial Capital Bank in
arranging real estate loans and earn a fee based upon the principal amount of
each loan funded. Since a large portion of Imperial Capital Bank's marketing
effort in its branches and loan production offices is through the contact of
loan officers with mortgage loan brokers, Imperial Capital Bank does not incur
significant expenses for advertising its lending services to the general public.
Also, Imperial Capital Bank provides only limited deposit products and not a
full range of banking services, and generally does not market its lending
services to, or receive loan applications from its depositors.
Income Producing Property Loans. Imperial Capital Bank originates loans
secured primarily by first trust deeds on income producing properties, such as
retail centers, small office and light industrial buildings, apartments, hotels,
mobile home parks, mini-storage facilities, and other mixed use or special
purpose commercial properties. At December 31, 1999, Imperial Capital Bank had
$773.3 million of income producing property loans outstanding representing 79.3%
of its loans receivable. Most of Imperial Capital Bank's real estate borrowers
are business owners, individual investors or investment partnerships. The income
producing property lending that Imperial Capital Bank engages in typically
involves larger loans to a single borrower and is generally viewed as exposing
the lender to a greater risk of loss than one-to four family residential
lending. Income producing property values are also generally subject to greater
volatility than residential property values. The liquidation values of income
producing properties may be adversely affected by risks generally incident to
interests in real property, including changes or continued weakness in general
or local economic conditions and/or specific industry segments; declines in real
estate values; declines in rental, room or occupancy rates; increases in
interest rates, real estate and personal property tax rates, and other operating
expenses (including energy costs); the availability of refinancing; changes in
governmental rules, regulations and fiscal policies, including rent control
ordinances, environmental legislation and taxation; and other factors beyond the
control of the borrower or the lender.
Income producing property loans are generally made in amounts up to 75%
of the appraised value, however, in certain instances, multifamily originations
may be made at a loan to value ratio of 80%. Loans are generally made for terms
up to ten years, with amortization periods up to 30 years. Depending on market
conditions at the time the loan was originated, certain loan agreements may
include prepayment penalties. Most loans are subject to a quarterly adjustment
of their interest rate based on one of several interest rate indexes. As of
December 31, 1999, Imperial Capital Bank's real estate loan portfolio included
51.4% indexed to the Six-Month London Interbank Offered Rate; 15.3% indexed to
the reference rate charged by Bank of America; 5.4% indexed to the Federal Home
Loan Bank 11th District Cost of Funds Index; 22.2% fixed for an initial period
and then adjustable; 1.0% indexed to either the United States Treasury security
indexes or the Federal Home Loan Bank of San Francisco advance rate; and the
balance of 4.7% was fixed rate. Most variable rate loans may not adjust downward
4
<PAGE> 5
below their initial rate, with increases generally limited to maximum
adjustments of 2% per year up to 4% for the life of the loan. The inability of
Imperial Capital Bank's loans to adjust downward can contribute to increased
income in periods of declining interest rates, and also assists Capital Bank in
its efforts to limit the risks to earnings and equity value resulting from
changes in interest rates. At December 31, 1999, 93.8% of Imperial Capital
Bank's variable rate and fixed/adjustable loan portfolio contained interest rate
floors. The weighted-average minimum interest rate on this portfolio was 9.5%.
At that date, 84.7% of the variable rate loans outstanding had a lifetime
interest rate cap. The weighted-average lifetime interest rate cap on this
portfolio was 14.6%.
The underwriting standards for loans secured by income producing real
estate properties consider the borrower's financial resources and ability to
repay and the amount and stability of cash flow, if any, from the underlying
collateral, to be comparable in importance to the loan-to-value ratio as a
repayment source. Management believes that, in recent years, the California
economy has strengthened in some respects, which has contributed to Imperial
Capital Bank's improved asset quality. A worsening of economic conditions in the
state and surrounding regions could have an adverse effect on Imperial Capital
Bank's real estate lending business, including reducing the demand for new
loans, limiting the ability of borrowers to pay financed amounts, and impairing
the value of Imperial Capital Bank's real estate collateral.
A small portion of ITLA Capital's real estate loan portfolio consists of
loans secured by junior liens on real estate. At December 31, 1999, 46 real
estate loans in the aggregate amount of $5.3 million, or 0.5%, were secured by
second trust deeds. Of these loans collateralized by junior liens, 93% were
secured by income producing properties and 7% were secured by one-to-four family
residential properties. Of the real estate loans outstanding at December 31,
1999, $10.5 million represented loans to facilitate the sale of other real
estate owned.
In 1996, 1997, and 1998, Imperial Capital Bank purchased income
producing real estate loans totaling $62.1 million, $3.7 million, and $2.4
million, respectively. Imperial Capital Bank generally uses similar underwriting
criteria for income producing real estate loans purchased as for loans
originated, except that current appraisals and borrower credit reports are not
obtained. In its commercial real estate loan purchases, Imperial Capital Bank
generally reserves the right to reject particular loans from a loan package
being purchased and does so for loans in a package that do not meet its
underwriting criteria. In determining whether to purchase a commercial real
estate loan, Imperial Capital Bank reviews the borrower's financial resources
and ability to repay and the amount and stability of cash flow, if any, from the
underlying collateral. On commercial real estate loan purchases, Imperial
Capital Bank reviews the appraisal and credit report obtained by the loan seller
or originator and arranges for a staff member or an outside consultant to
perform an analysis of the loan and the value of the underlying collateral,
including on-site inspection, before purchasing the loan. Similar to its loan
originations, on commercial real estate loan purchases, Imperial Capital Bank
reviews information concerning the income, financial condition, employment and
credit history of the applicant. In addition, Imperial Capital Bank generally
obtains an updated title search separate from that provided by the loan seller.
Construction Loans. Imperial Capital Bank also originates construction
loans for income producing properties, as well as for single-family home
construction. At December 31, 1999, Imperial Capital Bank had $107.8 million of
construction loans outstanding, representing 11.1% of its loans receivable. In
addition to the lending risks previously discussed, construction loans also
present risks associated with the accuracy of the initial estimate of the
property's value upon completion and its actual value, the timely completion of
construction activities for their allotted costs and the time needed to
stabilize income properties or sell residential tract developments. These risks
can be affected by a variety of factors, including the oversight of the project,
localized costs for labor and materials, and the weather.
Residential Lending. In 1999, Imperial Capital Bank implemented a
strategy to diversify its product mix and concentration of commercial real
estate loans through the bulk purchase of single-family residential loans. Ten
pools were purchased totaling $90.8 million in 1999, out of over $2.0 billion of
loans that were reviewed. The servicing of these purchased residential loans is
outsourced to Fairbanks Capital Corporation, an organization that specializes in
the collection and servicing of residential loans. ITLA Capital determines bid
prices on these loan pools on a pool by pool basis, through an analysis of the
pool's return on equity and return on assets, desired yield spreads, acceptable
risk characteristics, market conditions and a thorough analysis of the
originator/seller. After bids are accepted, ITLA Capital conducts a due
diligence review of the loans in the pool. Based on due diligence results,
individual loans are kept in the proposed pool, rejected from the pool or put on
hold pending additional information or a pricing adjustment. The pool and
pricing is then finalized, a purchase and sale agreement is signed, and the
purchase is completed. During 1999, Imperial Capital Bank bought a total of 805
loans with a total outstanding principal balance of $90.8 million, paying a
total premium of $2.7 million to acquire these loans. At December 31, 1999, 757
of these loans remained, with a remaining outstanding principal balance of $83.4
million and a remaining unamortized purchase premium of $2.3 million.
5
<PAGE> 6
Lending, Origination, Purchases and Underwriting. Many of Imperial
Capital Bank's income producing property loans are made to lower credit grade
borrowers that have marginal histories or on properties that due to debt to
income ratios or location prevent the borrower from obtaining a prime interest
rate. Likewise, residential loans purchased generally do not meet the Federal
National Mortgage Association or Federal Home Loan Mortgage Corporation's
underwriting standards with respect to credit, debt ratios and documentation,
whether as a result of marginal credit histories, the absence of credit
history, high debt-to-income ratios, reliance on the borrower's stated income
with verification of employment, non-owner occupied property, rural property,
balloon payment or a variety of other exceptions from agency guidelines.
Imperial Capital Bank attempts to mitigate the risk associated with these loans
by charging higher interest rates and through its loan approval and loan
purchasing process.
Imperial Capital Bank's loan underwriters prepare a written presentation
on every loan application submitted to its loan committee which is comprised of
Imperial Capital Bank's Chairman and Chief Executive Officer; President and
Chief Operating Officer; Vice Chairman and Chief Credit Officer; the Loan
Operations Director; and the Manager of Commercial Underwriting for approval.
This presentation includes a description of the prospective borrower and any
guarantors, the collateral, and the proposed use(s) of loan proceeds, as well as
borrower and property financial statements and analysis. Each application is
evaluated from a number of underwriting perspectives, including property
appraised value, level of debt service coverage, remaining economic life, use
and condition, as well as borrower liquidity, net worth, cash investment,
income, credit history and operating experience. Imperial Capital Bank's real
estate loans are both nonrecourse and full recourse and Imperial Capital Bank
generally seeks to obtain personal guarantees from the principals of borrowers
which are single asset or limited liability entities (such as partnerships,
corporations or trusts) on properties that have not achieved stabilization.
Loans up to $750,000 may be approved by any loan committee member. Loans of
$750,000 to $1,000,000 require approval by any two members of Imperial Capital
Bank's loan committee, while loans in excess of $1,000,000 require approval of
three loan committee members. Variable rate loans over $500,000 must generally
satisfy an interest rate sensitivity test in order for the loan to be approved;
that is, the current stabilized income of real property security must be
adequate to achieve a minimum debt service coverage ratio of 90% if the interest
rate on the loan was at the maximum amount allowed under the terms of the note
which is generally the fully indexed start rate plus 400 basis points.
All reviews of residential loans are initially performed through
Imperial Capital Bank's loan acquisition department. Imperial Capital Bank
places bids on pools of loans meeting its investment and credit risk objectives,
subject to due diligence and negotiation of an acceptable purchase agreement.
The Vice Chairman and Chief Credit Officer and the Chief Financial Officer must
each approve the bid prior to submission. All purchases by Imperial Capital Bank
are made within the parameters set by the Board of Directors of Imperial Capital
Bank for loan purchases and originations and require the approval of both the
loan committee and the asset/liability management committee.
If Imperial Capital Bank is the successful bidder, Imperial Capital Bank
conducts an acquisition review of each loan to finalize inclusion within the
pool of loans to be acquired. This review includes an evaluation of the seller's
representations and warranties and of the adequacy of the applicable loan
documentation (e.g., the existence of a note, including confirmation of the
interest rate and outstanding loan balance, mortgage, title policy, borrower
financial statements, tax returns, environmental reports, etc.). The current
value of the security property is estimated utilizing various methods,
considering, among other factors, the type of property, the loan balance, the
recourse nature of the debt, the age and performance of the loan, and the
resources of the borrower.
At least one loan committee member or designee must personally conduct
on-site inspections of any property involved in loan recommendations of $1.0
million or more. Additionally, loans over $1,500,000 must be approved by the
President and Chief Operating Officer; loans over $3,000,000 require the
additional signature of the Vice Chairman and Chief Credit Officer; and
individual loans over $5,000,000, loans resulting in an aggregate borrowing
relationship to one borrower in excess of $7,500,000, and purchased loan pools
over $10,000,000 must be approved by the executive committee of the board of
directors. Imperial Capital Bank's loan underwriters are responsible for initial
reviews of borrowers, properties, loan terms, and submission of loans to the
loan committee. Following loan approval and prior to funding, Imperial Capital
Bank's underwriting and processing departments assure that all loan approval
terms have been satisfied, that they conform with lending policies (including
authorized exceptions), and all required documentation is present and in proper
form.
The maximum size of a single real estate loan made by Imperial Capital
Bank is limited by California law to 20% of Imperial Capital Bank's equity
capital. At December 31, 1999, that limit was approximately $19.7 million.
Imperial Capital Bank's largest combined credit extension to related borrowers
was $13.8 million at December 31, 1999. At December 31, 1999, Imperial Capital
Bank had a total of 128 extensions of credit, with a combined outstanding
principal balance of $493.2 million, that were over $2.0 million to a single
borrower or related borrowers. One of these combined extensions of credit, with
a total principal balance of $2.3 million (and a net book balance of $1.7
million), was on nonaccrual status at December 31, 1999. All other combined
extensions of credit over $2.0 million were performing in accordance with their
repayment terms. At December 31, 1999, Imperial Capital Bank had 1,691 secured
real estate loans outstanding, with an average balance per loan of approximately
$0.6 million.
6
<PAGE> 7
Servicing and Collections. Servicing of Imperial Capital Bank's
purchased residential loans is outsourced to Fairbanks Capital Corporation, an
organization specializing in that product. All other loans are serviced by
Imperial Capital Bank's loan servicing department, which is designed to provide
prompt customer service, and accurate and timely information for account
follow-up, financial reporting and management review. Imperial Capital Bank's
loans are serviced through the loan administration department located in
Imperial Capital Bank's facility in Glendale, California. Following the funding
of an approved loan, all pertinent loan data is entered into Imperial Capital
Bank's data processing system, which provides monthly billing statements, tracks
payment performance, and processes contractual interest rate adjustments on
variable rate loans. Regular loan service efforts include payment processing and
collection follow-up, as well as tracking the performance of additional borrower
obligations with respect to the maintenance of casualty insurance coverage,
payment of property taxes and senior liens, if any, and periodically requesting
required information, including current borrower and property financial and
operating statements. Additional services are performed by Imperial Capital Bank
in connection with the monitoring of loans to borrowers secured by stabilizing
projects. These projects involve lease-up or renovation activities. Imperial
Capital Bank monitors these loans to ensure that projects are performing as
underwritten. This monitoring allows Imperial Capital Bank to take a proactive
approach to addressing projects that do not perform as planned. When payments
are not received by their contractual due date, collection efforts begin on the
fifth day of delinquency with a telephone contact, and proceed to written
notices that progress from reminders of the borrower's payment obligation to an
advice that a notice of default may be forthcoming. Accounts delinquent for more
than 30 days are generally transferred to Imperial Capital Bank's asset
management department which, following a review of the account and management
approval, implements a collection or restructure plan, or a disposition
strategy, and evaluates any potential loss exposure on the asset.
Competition. Imperial Capital Bank's competition in originating real
estate loans is principally from community banks, certain other industrial
banks, real estate financing conduits, small insurance companies, and
occasionally larger banks and savings and loan associations. Many of these
entities enjoy competitive advantages over Imperial Capital Bank relative to a
potential borrower in terms of a prior business relationship, wider geographic
presence or more accessible branch office locations, the ability to offer
additional services or more favorable pricing alternatives, or a lower cost of
funds structure. Imperial Capital Bank tries to offset the potential effect of
these factors by providing borrowers with greater individual attention and a
more flexible and time-sensitive underwriting, approval and funding process than
they might obtain elsewhere.
NONPERFORMING ASSETS AND OTHER LOANS OF CONCERN
At December 31, 1999, nonperforming assets, consisting of nonaccrual
loans and other real estate owned, totaled $9.0 million or 0.81% of total
assets. Nonaccrual loans totaled $8.0 million, consisting of 28 loans. Three of
these loans had an outstanding balance greater than $1.0 million. For additional
information regarding nonperforming assets, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Credit Risk
Elements."
In addition to nonaccrual loans, as of December 31, 1999, Imperial
Capital Bank had 19 loans with an aggregate outstanding loan balance of $38.9
million with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the properties securing the loans
have caused management to be concerned about the ability of the borrowers to
comply with present loan repayment terms, which may result in the future
inclusion of such loans in the nonaccrual loan category. At December 31, 1999,
10 of these loans had a book value in excess of $500,000, of which 4 loans had a
book value in excess of $2.0 million.
The following is a brief discussion of ITLA Capital's three nonaccrual
loans where the remaining principal balance of the loan at December 31, 1999
exceeded $1.0 million.
Loan Secured by a Retail Center - Nevada. This loan originated
in May 1998 with an original amount of $1.3 million. The balance of the
loan at December 31, 1999 was $1.3 million. The loan was placed on
nonaccrual status in March 1999 because of delinquent payments. The
borrower subsequently filed Chapter 11 bankruptcy in May of 1999 to stop
the pending trustee sale. A sale of the property securing the loan to a
third party, which would have paid off our loan in full, was approved by
the bankruptcy court, but has not been completed. Imperial Capital Bank
is continuing to pursue its rights with the bankruptcy court to obtain
relief from stay and to take title to the property through foreclosure.
7
<PAGE> 8
Loan Secured by an Office/Restaurant Complex - Arizona. This
loan was originated in January 1997 with an original loan amount of $1.9
million. In November 1997, an additional advance of $0.4 million was
funded to complete construction. In 1999, the loan was written down to
its current book balance of $1.7 million. The loan was placed on
nonaccrual status in September 1998 because of delinquent monthly
payments and the filing of a Chapter 11 bankruptcy by the borrower.
Loan Secured by a Retail Center - Washington. This loan
originated in August 1997 with an original loan amount of $1.3 million.
The loan became delinquent, and Imperial Capital Bank filed notice of
default in April 1999. At December 31, 1999, the loan had been written
down to $1.0 million due to a decline in the value of the loan's
collateral. The borrower filed bankruptcy to delay foreclosure, but
Imperial Capital Bank prevailed in bankruptcy court and was granted the
right to foreclose. Subsequent to December 31, 1999, the property was
purchased at the foreclosure sale by an unrelated third party and
Imperial Capital Bank recovered $0.1 million of the $0.3 million it had
previously written off.
The following is a brief discussion of Imperial Capital Bank's "other
loans of concern" where the remaining principal balance of the loan at December
31, 1999 exceeded $2.0 million.
Loan Secured by Office Building - Arizona. This construction
loan originated in December 1997 with an original commitment amount of
$13.5 million to construct an office building. The building shell was
completed in November 1998. The outstanding balance of the loan as of
December 31, 1999 was $6.7 million. The borrower continues to make cash
payments to keep interest on the loan paid current. The office building
was originally being marketed to large single tenant users, however
leasing efforts were unsuccessful. The borrower is now focusing their
leasing efforts on smaller tenants, and Imperial Capital Bank is in the
process of renegotiating the terms of our loan to provide the
construction funds necessary to configure the building for multiple
tenants.
Loan Secured by Three Apartment Buildings - Florida. This loan
originated in December 1998 with an original loan amount of $3.2
million. The loan currently has a balance of $3.1 million. Imperial
Capital Bank began monitoring this loan because of a delinquent payment
history shortly after origination and because several loan payments had
been returned for non sufficient funds. The loan is now current and has
been paying as agreed for the past several months.
Loan Secured by Retail Center - California. This loan was
originated in March 1998 with a total loan commitment of $17.0 million.
The funds advanced at origination totaled $14.0 million, and $3.0
million of the unfunded loan commitment was to fund tenant improvements
and future leasing costs. At December 31, 1999, the loan had a balance
of $13.8 million. The loan agreement provided for the borrower to meet
certain leasing accomplishments within an agreed upon timeframe. If
these leasing accomplishments were not met, the unfunded portion of the
loan commitment would not be advanced and instead the borrower would be
required to make a principal reduction on the loan. The leasing targets
were not met and the required principal reduction was not made, although
scheduled principal and interest payments have always been made. In
December 1999, a troubled debt restructuring of this loan was agreed to,
and subsequent to December 31, 1999 the borrower made a $0.5 million
principal reduction under the restructuring agreement. Imperial Capital
Bank continues to closely monitor the lease-up of the property.
Loan Secured by a Distribution / Warehouse Facility -
Mississippi. This loan originated in February 1999 with a total
commitment amount of $8.5 million. The loan had an outstanding balance
of $8.1 million at December 31, 1999. In February 2000, the building's
single tenant, a large food supply company, filed for Chapter 11
bankruptcy. The loan is being monitored because of the bankruptcy filing
of the tenant, although the loan continues to be paid in accordance with
the terms of the loan agreement.
8
<PAGE> 9
CLASSIFIED ASSETS
Management uses a loan classification system consistent with the
classification system used by bank regulatory agencies to help it evaluate the
risks inherent in its real estate loan portfolio. Loans are identified as
"pass", "special mention", "substandard", "doubtful" or "loss" based upon
consideration of all sources of repayment, underlying collateral values, current
and anticipated economic conditions, trends and uncertainties, and historical
experience. Pass loans are further divided into four additional sub-categories,
based on the borrower's financial strength and ability to service the debt
and/or the value and debt service capacity of the underlying collateral.
Underlying collateral values for real estate dependent loans are supported by
property appraisals or evaluations. Imperial Capital Bank reviews its loan
classifications on at least a monthly basis. At December 31, 1999, Imperial
Capital Bank classified $28.0 million of loans as "substandard" and $17.3
million as "special mention". Of the 46 loans comprising the $28.3 million in
"substandard" loans, 28 loans totaling $8.0 million were included in the
nonperforming assets table in "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition - Credit Risk Elements", and the
balance was included in the $38.9 million of "other loans of concern", discussed
above.
FUNDING SOURCES
The primary source of funding for Imperial Capital Bank's lending
operations and investments are investment certificates, which are functionally
equivalent to certificates of deposit at banks and savings and loan associations
and are hereinafter referred to as "deposits". Imperial Capital Bank's deposits
are federally insured by the FDIC to the extent permitted by law. Approximately
86% of Imperial Capital Bank's deposits are term deposits that pay fixed rates
of interest for periods ranging from 90 days to five years. The remaining 14% of
Imperial Capital Bank's deposits are variable rate passbook accounts and a
variable rate money market accounts with limited checking features.
As with many other industrial banks in California, Imperial Capital
Bank's strategy with all deposit accounts is to offer rates significantly above
those customarily offered by other financial institutions in its market.
Imperial Capital Bank has generally accumulated deposits by relying on renewals
of term accounts by existing depositors, participating in deposit rate surveys
which list Imperial Capital Bank among the higher rate paying insured
institutions, and periodically advertising in various local market newspapers
and other media. Imperial Capital Bank is able to pursue this strategy by
operating a savings branch system offering fewer products and services than many
institutions. Because Imperial Capital Bank does not provide demand checking
accounts, safe deposit boxes, money orders, trust services, and various other
retail banking services, management believes its staffing and overhead costs are
significantly lower than banks and savings institutions. Management further
believes that its deposits are a reliable funding source and that the cost of
funds resulting from Imperial Capital Bank's deposit gathering strategy is
comparable to those of other industrial banks pursuing a similar strategy.
However, because Imperial Capital Bank competes for deposits primarily on the
basis of rates, Imperial Capital Bank could experience difficulties in
attracting deposits if it could not continue to offer deposit rates at levels
above those of banks and savings institutions. Management also believes that any
efforts to significantly increase the size of its deposit base may require
greater marketing efforts and/or increases in deposit rates to the higher levels
of the deposit rate surveys in which Imperial Capital Bank participates.
Although there were no brokered deposits outstanding at December 31, 1999,
Imperial Capital Bank may seek such deposits in the future. For information
concerning overall deposits outstanding during the periods indicated and the
rates paid thereon, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Interest Income".
Imperial Capital Bank has also used advances from the Federal Home Loan
Bank of San Francisco as a funding source. Imperial Capital Bank became a member
of the Federal Home Loan Bank of San Francisco in 1994 and was subsequently
approved for a credit line up to 25% of its total assets. Federal Home Loan Bank
advances are collateralized by pledges of qualifying cash equivalents,
investment securities, mortgage-backed securities and whole loan collateral. At
December 31, 1999, Federal Home Loan Bank advances outstanding totaled $67.3
million, and the remaining available borrowing capacity, based on the loans and
securities pledged as collateral, totaled $36.6 million, net of the $5.1 million
of additional FHLB Stock that ITLA Capital would be required to
9
<PAGE> 10
purchase to support the additional borrowings. Additionally, Imperial Capital
Bank also has uncommitted, unsecured lines of credit with banks renewable daily
in the amount of $30.0 million. See "Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Notes 2, 3, 7
and 8".
OTHER BUSINESS ACTIVITIES
ITLA Funding Corporation. In 1998 and 1997, ITLA Funding sold fixed rate
originations on a whole loan table funded basis to conduits that issue
commercial mortgage-backed securities. ITLA Funding also originated variable
rate loans that were placed in Imperial Capital Bank's portfolio of loans held
for investment. However, ITLA Funding experienced a significant decline in the
demand for fixed rate commercial real estate loans originated for sale to third
party investors due to a decline in the commercial real estate securities
market. As a result of these market conditions, the ongoing operations of ITLA
Funding were assumed by Imperial Capital Bank in 1999, and ITLA Funding's
separate operations were suspended.
Other. Management intends to evaluate the feasibility of ITLA Capital
entering other financial related businesses. There can be no assurance, however,
that ITLA Capital will elect to enter such additional businesses or, if it does,
that it will achieve favorable results in any such activities.
REGULATION
Imperial Capital Bank is subject to supervision and regulation by the
Department of Financial Institutions of the State of California and, as an
insured institution, by the FDIC. ITLA Capital is not a bank holding company and
is not directly regulated or supervised by the Department of Financial
Institutions, the FDIC, the Federal Reserve Board or any other bank regulatory
authority, except with respect to the general regulatory and enforcement
authority of the Department of Financial Institutions and the FDIC over
transactions and dealings between ITLA Capital and Imperial Capital Bank, and
except with respect to both the specific limitations regarding ownership of the
capital stock of the parent corporation of any industrial bank.
CALIFORNIA LAW
The industrial banking business conducted by Imperial Capital Bank is
governed by the California Industrial Loan Law and the rules and regulations of
the Department of Financial Institutions, which, among other things, regulate
the issuance of certain deposit accounts as well as the collateral requirements
and maximum maturities of the various type of loans that are permitted to be
made by California-chartered industrial loan companies ("industrial banks").
Subject to restrictions imposed by applicable California law, Imperial
Capital Bank is permitted to make secured and unsecured consumer and nonconsumer
loans. Although nonconsumer secured loans of fewer than ten years may generally
be repaid in unequal periodic payments, consumer loans must generally be repaid
in substantially equal periodic payments. California law limits lending
activities outside of California by industrial banks to no more than 25% of
total assets, unless prior approval is obtained, in which case the amount may be
increased to 50%. Imperial Capital Bank has received approval from the
Department of Financial Institutions to increase its maximum out-of-state
lending activities to 40% of total assets. At December 31, 1999, 29.3% of
Imperial Capital Bank's total assets consisted of loans or obligations made
outside the state of California.
California law contains extensive requirements for the diversification
of the loan portfolios of industrial banks. At December 31, 1999, Imperial
Capital Bank satisfied all of these requirements. Management believes that
Imperial Capital Bank can maintain compliance with such regulatory requirements
by managing the mix of its assets and loans without any material adverse impact
on earnings or liquidity.
An industrial bank generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the Department of Financial Institutions. An industrial bank also
may not make any loan to, or hold any obligation of, any of its shareholders or
any shareholder of its holding company or affiliates, except that this
10
<PAGE> 11
prohibition does not apply to persons who own less than 10% of the stock of a
holding company or affiliates which are listed on a national securities
exchange. Any person who wishes to acquire 10% or more of the capital stock or
capital of a California industrial bank, or 10% or more of the voting capital
stock or other securities giving control over management of its parent company,
must obtain the prior written approval of the Department of Financial
Institutions. Insured depository institutions, and their institution-affiliated
parties, may be subject to potential enforcement actions by the FDIC and the
Department of Financial Institutions for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency. Management is not aware of any pending or threatened enforcement actions
against Imperial Capital Bank.
An industrial bank is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
Under California law, industrial banks that desire to increase their leverage
must meet specified minimum standards for liquidity reserves in cash, loan loss
reserves, minimum capital stock levels and minimum unimpaired paid-in surplus
levels. For example, in order for an industrial bank to increase its deposits to
more than 15 times the aggregate amount of its paid-up and unimpaired capital
and unimpaired surplus not available for dividends, the industrial bank must,
among other things, maintain a liquidity reserve in cash or cash equivalents
equal to 1.5% of its total deposits outstanding, maintain its capital stock not
less than $1.25 million, and maintain its unimpaired paid-in surplus not less
than $750,000. At December 31, 1999, Imperial Capital Bank's total deposits were
9.3 times its paid-up and unimpaired capital and unimpaired surplus not
available for dividends. In addition, at December 31, 1999, Imperial Capital
Bank maintained a liquidity reserve in cash or cash equivalents equal to 11.8%
of its total deposits outstanding and its allowance for credit losses was $18.7
million.
Industrial banks are not permitted to borrow, except by the sale of
investment or thrift certificates, in an amount exceeding 300% of its
outstanding capital stock, surplus and undivided profits, without the Department
of Financial Institutions' prior consent. All amounts borrowed in excess of 150%
of its outstanding capital stock, surplus and undivided profits must be
unsecured borrowings or, if secured, approved in advance by the Department of
Financial Institutions, and be included as investment or certificates of deposit
for purposes of computing the maximum amount of certificates an industrial bank
may issue. However, loans from the Federal Home Loan Bank, a Federal Reserve
bank or the FDIC are excluded from the limitations on borrowings and are not
specifically limited by California law. Imperial Capital Bank had $67.3 million
of outstanding borrowings at December 31, 1999, consisting solely of
collateralized Federal Home Loan Bank advances.
Industrial banks are generally limited to investments, other than loans,
that are legal investments for commercial banks. California commercial banks are
prohibited from investing an amount exceeding 15% of shareholders' equity in the
securities of any one issuer, except for specified obligations of the United
States, California, and local governments and agencies thereof. An industrial
bank may acquire real property only in satisfaction of debts previously
contracted, pursuant to certain foreclosure transactions, or as may be necessary
for the transaction of its business, in which case such investment is limited to
one-third of an industrial bank's paid-up capital stock and surplus not
available for dividends. Imperial Capital Bank complied with these requirements
at December 31, 1999.
Although the investment and other activities that Imperial Capital Bank
may be engaged in are generally prescribed under the California Industrial Loan
Law, certain provisions of the Federal Deposit Insurance Act may limit Imperial
Capital Bank's ability to engage in certain activities that otherwise are
authorized under the California Industrial Loan Law. See "Federal Law -
Restrictions on Imperial Capital Bank's Investments and Activities".
An industrial bank is not permitted to declare dividends on its capital
stock unless it has at least $750,000 of unimpaired capital, plus additional
capital of $50,000 for each branch office maintained. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed an industrial bank's retained earnings, or (ii) in the alternative, after
giving effect to the distributions, the sum of an industrial bank's assets (net
of goodwill, capitalized research and development expenses, and deferred
charges) would not be less than 125% of its liabilities (net of deferred taxes,
income and other credits). See "Federal Law - Prompt Corrective Action
Requirements".
11
<PAGE> 12
An industrial bank is likewise prohibited from paying dividends from
that portion of capital that has been restricted for dividend payment purposes
by its bylaws or by resolution of its board of directors. The amount of
restricted capital maintained by an industrial bank provides the basis for
establishing various lending and deposit taking limitations, such as the maximum
amount that an industrial bank may lend to one single borrower and the aggregate
amount that an industrial bank may accept in deposits from all depositors.
Accordingly, an industrial bank typically restricts as much capital as necessary
to achieve its desired loan to one borrower limit, which in turn restricts the
funds available for the payment of dividends. Imperial Capital Bank's Board of
Directors has passed a resolution requiring Imperial Capital Bank to maintain a
Tier 2 capital ratio of not less than 10.0%.
FEDERAL LAW
Our deposits are insured by the bank insurance fund of the FDIC to the
full extent permissible by law. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports, and
generally supervises the operations of institutions to which it provides deposit
insurance. The FDIC is also the federal agency charged with regulating
state-chartered banks that are not members of the Federal Reserve System, such
as Imperial Capital Bank. Therefore any person who wishes to acquire control of
Imperial Capital Bank must obtain the consent of both the FDIC and the
Department of Financial Institutions. Insured depository institutions, and their
institution-affiliated parties, may be subject to potential enforcement actions
by the FDIC and the Department of Financial Institutions for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Management is not aware of any pending or threatened
enforcement actions against Imperial Capital Bank.
Regulatory Capital Requirements. Federally-insured, state-chartered
banks, including industrial banks such as Imperial Capital Bank, are required to
maintain minimum levels of regulatory capital as specified in the FDIC's capital
maintenance regulations. The FDIC also is authorized to impose capital
requirements in excess of these standards on individual banks on a case-by-case
basis.
Imperial Capital Bank is required to comply with three separate minimum
capital requirements: a "tier 1 capital ratio" and two "risk-based" capital
requirements. "Tier 1 capital" generally includes common shareholders' equity,
including retained earnings, qualifying noncumulative perpetual preferred stock
and any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangible assets, other than properly valued
purchased mortgage servicing rights up to certain specified limits and less net
deferred tax assets in excess of certain specified limits.
Tier 1 Capital Ratio. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total average assets for the most highly-rated
state-chartered, FDIC-supervised banks. All other FDIC supervised banks must
maintain at least a 4.0% tier 1 capital ratio. Under FDIC regulations,
highly-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity and
good earnings. At December 31, 1999, Imperial Capital Bank's required tier 1
capital ratio was 4.0% and its actual tier 1 capital ratio was 9.04%.
Risk-Based Capital Requirements. The risk-based capital requirements
generally require Imperial Capital Bank to maintain a ratio of tier 1 capital to
risk-weighted assets of at least 4.0% and a ratio of total risk-based capital to
risk-weighted assets of at least 8.0%. To calculate the amount of capital
required, assets are placed in one of four categories and given a percentage
weight (0%, 20%, 50% or 100%) based on the relative risk of the category. For
example, United States Treasury Bills and Ginnie Mae securities are placed in
the 0% risk category. Fannie Mae and Freddie Mac securities are placed in the
20% risk category, loans secured by one-to four family residential properties
and certain privately-issued mortgage-backed securities are generally placed in
the 50% risk category, and commercial and consumer loans and other assets are
generally placed in the 100% risk category. In addition, certain
off-balance-sheet items are converted to balance sheet credit equivalent amounts
and each amount is then assigned to one of the four categories.
12
<PAGE> 13
For purposes of the risk-based capital requirements, "total capital"
means tier 1 capital plus supplementary or tier 2 capital, so long as the amount
of supplementary or tier 2 capital that is used to satisfy the requirement does
not exceed the amount of tier 1 capital. Tier 2 capital includes cumulative or
other perpetual preferred stock, mandatory convertible subordinated debt and
perpetual subordinated debt, mandatory redeemable preferred stock,
intermediate-term preferred stock, mandatory convertible subordinated debt and
subordinated debt, and the allowance for credit losses up to a maximum of 1.25%
of risk-weighted assets. At December 31, 1999, Imperial Capital Bank's tier 1
risk-based and total capital ratios were 10.11% and 11.37%, respectively.
The federal banking agencies have adopted regulations specifying that
the agencies will include, in their evaluations of a bank's capital adequacy, an
assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The FDIC and the other federal banking
agencies have also promulgated final amendments to their respective risk-based
capital requirements which would explicitly identify concentration of credit
risk and certain risks arising from nontraditional activities, and the
management of such risk, as important factors to consider in assessing an
institution's overall capital adequacy. The FDIC may now require higher minimum
capital ratios based on certain circumstances, including where the institution
has significant risks from concentration of credit or certain risks arising from
nontraditional activities.
For regulatory purposes, the federal banking agencies have adopted
Statement of Financial Accounting Standards No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities" as amended, which requires that net
unrealized gains and losses on certain securities classified available for sale
be included in accumulated other comprehensive income. The FDIC requires that
the net amount of unrealized losses from available for sale equity securities
with readily determinable fair values be deducted for purposes of calculating
the tier 1 capital ratio. All other net unrealized holding gains and losses on
available for sale securities are excluded from the definition of tier 1
capital. While Imperial Capital Bank had no available for sale equity securities
at December 31, 1999, ITLA Capital had $16.2 million of such securities in its
investment portfolio.
Prompt Corrective Action Requirements. The FDIC has implemented a system
requiring regulatory sanctions against state-chartered banks (which, for this
purpose, includes Imperial Capital Bank) that are not adequately capitalized,
with the sanctions growing more severe the lower the institution's capital. The
FDIC has established specific capital ratios for five separate capital
categories: "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized".
An institution is treated as "well capitalized" if its total risk based
capital ratio is 10.0% or more, its tier 1 risk-based ratio is 6.0% or more, its
tier 1 capital ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. Imperial Capital Bank
exceeded these requirements at December 31, 1999.
The FDIC is authorized and, under certain circumstances, required to
take certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized" institution. Any such institution must
submit a capital restoration plan and, until such plan is approved by the FDIC,
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
In addition, the FDIC must appoint a receiver or conservator for an
institution, with certain limited exceptions, within 90 days after it becomes
"critically undercapitalized". Any "undercapitalized" institution is also
subject to the general enforcement authority of the FDIC, including the
appointment of a conservator or a receiver.
The FDIC is also generally authorized to reclassify an institution into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
Safety and Soundness Standards. The federal banking agencies adopted
guidelines that establish standards for safety and soundness. The guidelines set
forth operational and managerial standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure,
13
<PAGE> 14
asset growth, fees and benefits. The guidelines establish the safety and
soundness standards that the agencies will use to identify and address problems
at insured depository institutions before capital becomes impaired. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
FDIC Insurance Assessments. The FDIC assesses deposit insurance premiums
under a risk-based assessment system, which is based on the probability that the
deposit insurance fund will incur a loss with respect to the institution, the
likely amount of any loss, and the revenue needs of the deposit insurance fund.
For the fiscal year ended December 31, 1999, Imperial Capital Bank paid $0.1
million of assessments to the FDIC.
Restrictions on Imperial Capital Bank's Investments and Activities. A
state-chartered bank and its subsidiaries may not engage as principal in any
activities that are not permissible for national banks and their subsidiaries
unless: (1) the bank meets the applicable FDIC capital standards described
above; and (2) the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund. With limited exceptions, the FDIC
may not use this authority to permit a state-chartered bank to engage in equity
investments (other than investments in subsidiaries) or in insurance
underwriting. Imperial Capital Bank's activities are permissible activities for
national banks.
In addition, federal law imposes restrictions on transactions between
Imperial Capital Bank and its affiliates. All these transactions, including
leases and service contracts, must be on terms and under circumstances that are
substantially the same, or at least as favorable to Imperial Capital Bank, as
those prevailing at the time for comparable transactions involving nonaffiliated
companies. The California Industrial Loan Law also applies certain restrictions
to transactions with affiliates. Federal and state law also places limitations
on loans by Imperial Capital Bank to its directors, officers and controlling
persons. Among other things, such loans must be made on terms substantially the
same as for loans to unaffiliated persons.
Community Reinvestment Act and Fair Lending Developments. Imperial
Capital Bank is subject to certain fair lending requirements and reporting
obligations involving lending operations and Community Reinvestment Act
activities. Federal banking agencies are required to evaluate the record of
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with
such laws and into account when regulating and supervising other activities. In
its most recent examination, the FDIC rated Imperial Capital Bank "satisfactory"
in complying with its Community Reinvestment Act obligations.
DATA PROCESSING AGREEMENT
ITLA Capital has an agreement with a third party to provide data
processing services, including loan portfolio accounting and transaction
processing, deposit account processing, and general ledger accounting. The fees
under the agreement consist of a base monthly fee, which may vary based on the
number of accounts processed, as well as other charges based on usage. The
initial term of this agreement, which ended in September 1999, was for five
years, with annual renewals thereafter unless either party gives 180 days prior
written notice of intent to terminate. The agreement is now being renewed
annually. Charges under the agreement totaled approximately $385,000 in 1999. As
of December 31, 1999, the estimated remaining payments due under the contract,
at current portfolio and service levels, were approximately $190,000.
ITEM 2. PROPERTIES
ITLA Capital leases all of its operating facilities. ITLA Capital's only
material lease obligations are for Imperial Capital Bank's loan operations
division and loan administration division / retail branch location, both of
which are in Glendale, California. The loan administration division / retail
branch location lease extends until 2006 with base annual rental expense of
approximately $493,000 for the entire term, plus common area expenses that are
14
<PAGE> 15
subject to annual increases. The loan operations division's lease extends until
2005 with base annual rental expense of approximately $277,000 for the entire
term, plus common area expenses that are subject to annual increases.
The following table sets forth certain information regarding ITLA
Capital's facilities.
<TABLE>
<CAPTION>
YEAR CURRENT
Square LEASE TERM
Locations Office Uses Footage EXPIRES
--------- ----------- ------- -------
<S> <C> <C> <C>
La Jolla, CA Corporate Headquarters 10,582 2003
Glendale, CA Loan Operations Division 8,932 2005
San Francisco, CA Retail Deposit Branch / Mortgage Brokerage Division 5,005 2002
Beverly Hills, CA Retail Deposit Branch 2,218 2005
Costa Mesa, CA Retail Deposit Branch / Money Desk Operations / 3,493 2000
Real Estate Lending
Del Mar, CA Retail Deposit Branch / Savings Operations Division 6,352 2004
Encino, CA Retail Deposit Branch / Operations Support Division 5,298 2004
Glendale, CA Retail Deposit Branch / Loan Administration Division 23,498 2006
Las Vegas, NV Real Estate Lending 800 2000
</TABLE>
For additional information regarding ITLA Capital's premises, see "Item
8. Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 12".
Management believes that ITLA Capital's present facilities are adequate
for its current needs, and that alternative or additional space, if necessary,
will be available on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
ITLA Capital is party to certain legal proceedings incidental to its
business. Management believes that the outcome of such proceedings, in the
aggregate, will not have a material effect on ITLA Capital's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITLA Capital's common stock is traded on the NASDAQ national market
system under the symbol "ITLA". At December 31, 1999, there were approximately
10 holders of record of ITLA Capital common stock and 7,181,484 shares
outstanding.
The following table sets forth, for the periods indicated, the range of
high and low trade prices for ITLA Capital's common stock. Stock price data on
NASDAQ reflects interdealer prices, without retail mark-up, mark-down or
commission.
<TABLE>
<CAPTION>
MARKET PRICE
----------------------------------------- AVERAGE DAILY
HIGH LOW CLOSE CLOSING PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999
4th Quarter $ 15.25 $ 12.00 $ 12.56 $ 14.16
3rd Quarter 16.50 14.63 14.75 15.68
2nd Quarter 17.50 14.50 15.75 15.35
1st Quarter 15.50 13.38 14.50 14.69
1998
4th Quarter $ 18.00 $ 9.00 $ 15.13 $ 15.04
3rd Quarter 22.25 13.50 13.50 18.67
2nd Quarter 24.00 19.88 20.75 22.10
1st Quarter 21.25 17.88 21.25 19.47
</TABLE>
16
<PAGE> 17
The following table includes supplementary quarterly operating results
and per share information for the past two years. The data presented should be
read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with "Item 8. Financial Statements and
Supplementary Data" included elsewhere in this report.
QUARTERLY OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net interest income $12,670 $13,271 $13,318 $13,494
Provision for estimated credit losses 1,200 1,200 1,400 1,150
Noninterest income 278 310 201 112
General and administrative expense 5,102 5,425 5,117 5,113
Total real estate operations, net 8 147 21 296
Provision for income taxes 2,724 2,788 2,862 2,896
Net income 3,914 4,021 4,119 4,151
Basic Earnings Per Share $ 0.55 $ 0.56 $ 0.57 $ 0.58
Diluted Earnings Per Share $ 0.53 $ 0.54 $ 0.55 $ 0.57
1998
Net interest income $11,766 $12,558 $13,008 $12,946
Provision for estimated credit losses 1,400 1,600 800 750
Provision for valuation allowance -- -- 1,400 --
Noninterest income 859 646 601 341
General and administrative expense 5,198 5,166 4,906 5,394
Total real estate operations, net 80 154 130 620
Provision for income taxes 2,438 2,576 2,619 2,671
Net income 3,509 3,708 3,754 3,852
Basic Earnings Per Share $ 0.46 $ 0.48 $ 0.49 $ 0.52
Diluted Earnings Per Share $ 0.44 $ 0.46 $ 0.47 $ 0.51
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following condensed statements of operations and financial condition
and selected performance ratios as of December 31, 1999, 1998, 1997, 1996, and
1995 and for the years then ended have been derived from the audited
consolidated financial statements of ITLA Capital. The information below
reflects an 86.4 for 1 stock split effective October 17, 1995 and is qualified
in its entirety by the detailed information included elsewhere herein and should
be read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations".
17
<PAGE> 18
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Total interest income $ 101,213 $ 101,665 $ 85,117 $ 69,898 $ 62,107
Total interest expense 48,460 51,387 43,310 34,399 29,343
---------- ---------- ---------- ---------- ----------
Net interest income before provisions
for estimated credit losses and valuation
allowance on loans held for sale 52,753 50,278 41,807 35,499 32,764
Provision for estimated credit losses 4,950 4,550 3,300 4,871 13,098
Provision for valuation allowance on loans held for sale -- 1,400 350 700 4,774
---------- ---------- ---------- ---------- ----------
Net interest income after provisions
for estimated credit losses and valuation
allowance on loans held for sale 47,803 44,328 38,157 29,928 14,892
---------- ---------- ---------- ---------- ----------
Noninterest income 901 2,447 1,640 651 1,075
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 9,739 10,564 8,511 5,723 7,313
Occupancy and equipment 2,788 2,783 2,444 1,929 2,230
Other general and administrative expenses 8,230 7,317 7,277 5,434 5,717
Real estate operations, net 472 984 433 1,049 5,070
---------- ---------- ---------- ---------- ----------
Total noninterest expense 21,229 21,648 18,665 14,135 20,330
---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes 27,475 25,127 21,132 16,444 (4,363)
Provision (benefit) for income taxes 11,270 10,304 8,655 6,420 (1,960)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 16,205 $ 14,823 $ 12,477 $ 10,024 $ (2,403)
========== ========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 2.26 $ 1.95 $ 1.61 $ 1.38 $ (0.52)
DILUTED EARNINGS (LOSS) PER SHARE $ 2.21 $ 1.89 $ 1.57 $ 1.36 $ (0.52)
Dividends paid $ -- $ -- $ -- $ -- $ --
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Cash and cash equivalents $ 72,242 $ 125,602 $ 123,885 $ 62,599 $ 26,095
Investment securities available for sale 59,247 329 35,281 36,574 --
Stock in Federal Home Loan Bank 8,894 12,633 11,919 8,349 12,362
Investment and mortgage-backed securities
held to maturity -- -- 25,132 31,870 56,335
Loans held for investment, net 951,480 862,089 750,853 649,836 439,880
Loans held for sale, at lower of cost or
fair market value -- 12,188 50,544 1,130 55,812
Interest receivable 7,383 6,321 4,916 4,411 3,865
Other real estate owned, net 1,041 1,201 3,946 5,416 6,103
Premises and equipment, net 3,253 3,493 3,169 2,610 3,008
Deferred income taxes 9,401 6,270 4,190 3,613 3,309
Other assets 2,882 2,521 2,074 4,035 3,904
---------- ---------- ---------- ---------- ----------
Total assets $1,115,823 $1,032,647 $1,015,909 $ 810,443 $ 610,673
========== ========== ========== ========== ==========
Deposit accounts $ 913,613 $ 866,798 $ 843,813 $ 670,336 $ 494,793
Federal Home Loan Bank advances 67,250 48,500 61,500 43,500 54,000
Accounts payable and other liabilities 11,265 11,467 11,248 7,789 5,188
Shareholders' equity 123,695 105,882 99,348 88,818 56,692
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $1,115,823 $1,032,647 $1,015,909 $ 810,443 $ 610,673
========== ========== ========== ========== ==========
Book value per share $ 17.22 $ 14.77 $ 12.91 $ 11.35 $ 9.48
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS
Return on average assets 1.57% 1.46% 1.46% 1.44% (0.44%)
Return on average shareholders' equity 14.23% 13.95% 13.23% 12.86% (5.26%)
Net interest margin(1) 5.11% 4.96% 4.94% 5.19% 6.13%
Average interest-earning assets to average
interest-bearing liabilities 113.74% 113.06% 112.15% 112.14% 108.19%
Noninterest expense to average assets 2.05% 2.13% 2.19% 2.04% 3.70%
Efficiency ratio(2) 39.57% 41.06% 42.96% 39.10% 60.08%
Efficiency ratio excluding real estate operations, net 38.69% 39.19% 41.96% 36.20% 45.10%
General and administrative expense to average assets 2.01% 2.04% 2.14% 1.88% 2.78%
Average shareholders' equity to average assets 11.01% 10.47% 11.06% 11.23% 8.32%
Nonperforming assets to total assets 0.81% 0.64% 1.21% 1.56% 2.14%
Nonperforming assets held for investment to total
assets 0.81% 0.64% 1.21% 1.46% 2.08%
Allowance for credit losses to loans held for
investment, net(3) 2.05% 1.91% 1.60% 1.65% 1.81%
Allowance for credit losses to nonaccrual loans(4) 249.40% 309.37% 146.16% 169.50% 122.45%
Net loan charge-offs (recoveries) to average loans
held for investment, net 0.20% (0.01%) 0.28% 0.37% 3.27%
</TABLE>
- ------------------
(1) Net interest margin represents net interest income divided by total
average interest-earning assets.
(2) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
(3) Loans held for investment before allowance for credit losses and net of
unearned finance charges and loan fees.
(4) Excludes nonaccrual loans held for sale totaling $783,000 and $366,000
in 1996 and 1995, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis reviews the financial condition
and results of operations of ITLA Capital Corporation and its principal
wholly-owned subsidiaries: Imperial Capital Bank and ITLA Funding Corporation.
The following discussion and analysis is intended to identify the major
factors that influenced the financial condition as of December 31, 1999 and 1998
and results of operations of ITLA Capital for the years ended December 31, 1999,
1998 and 1997. ITLA Capital's principal business involves the origination of
loans secured primarily by income producing real estate, located predominately
in California, and, to a lesser extent, the purchase of pools of
non-conventional residential mortgage loans located throughout the United
States.
19
<PAGE> 20
Consolidated net income was $16.2 million, or $2.21 per diluted share,
in 1999 compared to $14.8 million, or $1.89 per diluted share, in 1998 and $12.5
million, or $1.57 per diluted share, in 1997.
The increase in net earnings in 1999 was due primarily to an increase in
net interest income to $52.8 million in 1999 compared to $50.3 million in 1998,
a decrease in provisions for estimated credit losses and valuation allowance on
loans held for sale, to $5.0 million in 1999 from $6.0 million in 1998, and a
decline in real estate owned expense to $0.5 million in 1999 from $1.0 million
in 1998, partially offset by a decrease in noninterest income derived from
mortgage banking activities to $0.1 million in 1999 from $1.6 million in 1998
and an increase in provision for income taxes to $11.3 million in 1999 compared
to $10.3 million in 1998.
The increase in net earnings in 1998 was due primarily to increased net
interest income, $50.3 million in 1998 compared to $41.8 million in 1997, and an
increase in noninterest income derived from mortgage banking activities, $1.6
million in 1998 compared to $1.0 million in 1997, partially offset by an
increase in provisions for estimated credit losses and valuation allowance on
loans held for sale, an aggregate of $6.0 million in 1998 compared to $3.7
million in 1997, an increase in total real estate operations, net, $1.0 million
in 1998 compared to $0.4 million in 1997, an increase in general and
administrative expense, $20.7 million in 1998 compared to $18.2 million in 1997,
and an increase in provision for income taxes, $10.3 million in 1998 compared to
$8.7 million in 1997.
The return on average assets was 1.57% in 1999 and 1.46% in 1998 and
1997. The return on average shareholders' equity was 14.23% in 1999 compared to
13.95% in 1998 and 13.23% in 1997.
Average total assets remained relatively unchanged at $1.0 billion in
both 1999 and 1998, although the composition of assets changed, largely due to
an increase in average loans of $77.8 million, or 9.2%, partially offset by a
decrease in the average balance of cash and investments and mortgage-backed
securities of $58.7 million or 35.4%.
Average total assets was $1,014.3 million in 1998 compared to $852.6
million in 1997, an increase of $161.7 million, or 19.0%, largely due to an
increase in average loans of $138.8 million, or 19.6%.
Total loan production, including the unfunded portion of construction
loans, was $394.3 million for the year ended December 31, 1999, consisting of
$293.8 million originated for the portfolio, $91.4 million purchased for the
portfolio, and $9.1 million brokered for outside investors, compared to total
loan production of $531.1 million and $442.0 million for the years ended
December 31, 1998 and 1997, respectively.
Average deposit accounts totaled $870.1 million in 1999 compared to
$839.3 million in 1998, an increase of $30.8 million, or 3.7%. This increase was
primarily utilized to fund the increase in the loan portfolio. Federal Home Loan
Bank advances averaged $37.2 million in 1999 compared to $56.5 million in 1998,
a decrease of $19.3 million, or 34.1%.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents, for the periods indicated, condensed
average balance sheet information for ITLA Capital, together with interest
income and yields earned on average interest-earning assets and interest expense
and rates paid on average interest-bearing liabilities. Average balances are
computed using daily average balances. Nonaccrual loans are included in loans
receivable.
20
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and investments $ 106,953 $ 5,910 5.53% $ 146,514 $ 7,849 5.36%
Mortgage-backed securities 19,162 1,209 6.31%
Loans receivable(1):
Secured by real estate 925,059 95,303 10.30% 847,219 92,607 10.93%
Other -- -- -- -- -- 0.00%
----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable 925,059 95,303 10.30% 847,219 92,607 10.93%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,032,012 $ 101,213 9.81% 1,012,895 $ 101,665 10.04%
=========== =========== =========== =========== =========== ===========
Noninterest-earning assets 20,456 16,281
Allowance for credit losses (18,298) (14,841)
----------- -----------
Total assets $ 1,034,170 $ 1,014,335
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 130,995 $ 6,477 4.95% $ 104,461 $ 5,505 5.27%
Time certificates 739,111 39,975 5.41% 734,856 42,548 5.79%
----------- ----------- ----------- ----------- ----------- -----------
Total deposit accounts 870,106 46,452 5.34% 839,317 48,053 5.73%
FHLB advances 37,235 2,008 5.39% 56,542 3,334 5.90%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 907,341 $ 48,460 5.34% 895,859 $ 51,387 5.74%
=========== =========== =========== =========== =========== ===========
Noninterest-bearing liabilities 12,966 12,256
Shareholders' equity 113,863 106,220
----------- -----------
Total liabilities and
shareholders' equity $ 1,034,170 $ 1,014,335
=========== ===========
Net interest spread(2) 4.47% 4.30%
=========== ===========
Net interest income before
provisions for estimated
credit losses and valuation
allowance on loans held for sale $ 52,753 $ 50,278
=========== ===========
Net interest margin(3) 5.11% 4.96%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1997
---------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and investments $ 108,796 $ 5,971 5.49%
Mortgage-backed securities 28,565 1,836 6.43%
Loans receivable(1):
Secured by real estate 708,134 77,257 10.91%
Other 313 53 16.93%
----------- ----------- -----------
Total loans receivable 708,447 77,310 10.91%
----------- ----------- -----------
Total interest-earning assets 845,808 $ 85,117 10.06%
=========== =========== ===========
Noninterest-earning assets 17,678
Allowance for credit losses (10,847)
-----------
Total assets $ 852,639
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 67,708 $ 3,508 5.18%
Time certificates 628,759 36,698 5.84%
----------- ----------- -----------
Total deposit accounts 696,467 40,206 5.77%
FHLB advances 53,714 3,104 5.78%
----------- ----------- -----------
Total interest-bearing liabilities 750,181 $ 43,310 5.77%
=========== =========== ===========
Noninterest-bearing liabilities 8,144
Shareholders' equity 94,314
-----------
Total liabilities and
shareholders' equity $ 852,639
===========
Net interest spread(2) 4.29%
===========
Net interest income before
provisions for estimated
credit losses and valuation
allowance on loans held for sale $ 41,807
===========
Net interest margin(3) 4.94%
===========
</TABLE>
- -----------------------
(1) Before allowance for credit losses and net of deferred loan fees and
costs. Net loan fee amortization of $2.5 million, $2.7 million and $2.2
million was included in net interest income for 1999, 1998 and 1997,
respectively.
(2) Average yield on interest-earning assets minus average rate paid on
interest-bearing liabilities.
(3) Net interest income divided by total average interest-earning assets.
ITLA Capital's primary source of revenue is net interest income. ITLA
Capital's net interest income is affected by (a) the difference between the
yields recognized on interest-earning assets, including loans and investments,
and the interest rates paid on interest-bearing liabilities, which is referred
to as "net interest spread", and (b) the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets equal or
exceed interest-bearing liabilities, any positive net interest spread will
generate net interest income; if interest-bearing liabilities exceed
interest-earning assets, ITLA Capital may incur a decline in net interest income
even when the net interest spread is positive. For 1999, 1998 and 1997, ITLA
Capital's ratio of average interest-earning assets to average interest-bearing
liabilities was 113.74%, 113.06% and 112.15%, respectively.
The following table sets forth a summary of the changes in interest
income and interest expense resulting from changes in average interest-earning
asset and interest-bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been allocated to
change due to volume and rate in proportion to the relationship of absolute
dollar amounts of each.
21
<PAGE> 22
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
------------------------------------ ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
---------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and fees earned on:
Loans receivable, net(1) $ 8,216 $ (5,520) $ 2,696 $ 15,226 $ 71 $ 15,297
Cash and investment securities (2,181) 242 (1,939) 1,952 (74) 1,878
Mortgage-backed securities (1,209) -- (1,209) (610) (17) (627)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest income 4,826 (5,278) (452) 16,568 (20) 16,548
-------- -------- -------- -------- -------- --------
Interest paid on:
Deposit accounts 1,732 (3,333) (1,601) 7,989 (142) 7,847
FHLB advances (1,058) (268) (1,326) 192 38 230
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest expense 674 (3,601) (2,927) 8,181 (104) 8,077
-------- -------- -------- -------- -------- --------
Increase (decrease) in net
interest income $ 4,152 $ (1,677) $ 2,475 $ 8,387 $ 84 $ 8,471
======== ======== ======== ======== ======== ========
</TABLE>
- ------------------
(1) Loans receivable, net consists of loans held for investment and loans
held for sale.
1999 Compared to 1998
Net interest income totaled $52.8 million in 1999 compared to $50.3
million in 1998, an increase of $2.5 million or 4.9%. The increase in net
interest income was due primarily to growth in average interest-earning assets,
which increased $19.1 million or 1.9%.
Interest income totaled $101.2 million in 1999 compared to $101.7
million in 1998, a decrease of $0.5 million, or 0.4%.
Interest and fee income from loans receivable totaled $95.3 million in
1999 compared to $92.6 million in 1998, an increase of $2.7 million, or 2.9%.
Interest and fee income from loans increased due to higher loan volume in 1999,
partially offset by a decrease in loan yield. The average balance of loans
receivable was $925.1 million in 1999 compared to $847.2 million in 1998, an
increase of $77.9 million, or 9.2% reflecting the increase in loans held for
investment. The average yield on loans receivable was 10.30% in 1999 compared to
10.93% in 1998. The decline in yield on loans receivable was due to declines in
market interest rates (which reduced the yield of adjustable rate loans in the
portfolio upon repricing and the yield received at the time of origination) and
due to the payoff of higher yielding commercial mortgages, as borrowers have
been able to refinance these loans at lower interest rates. The continued
origination of lower yielding real estate loans could result in ITLA Capital
achieving lower average yields in future operating periods. Interest and fee
income earned on loans receivable in 1999 and 1998 includes income recognized
from the early payoff of loans. Excluding this income from prepayments, the
yields on loans receivable would have been 10.06% in 1999 and 10.62% in 1998.
There was no interest income from mortgage-backed securities in 1999
compared to $1.2 million in 1998. The mortgage-backed securities were sold in
the fourth quarter of 1998.
22
<PAGE> 23
Interest income from cash and investments totaled $5.9 million in 1999
compared to $7.8 million in 1998, a decrease of $1.9 million, or 24.7%, due
primarily to a decrease in the average outstanding balance, partially offset by
an increase in yield. The average balance of cash and investment securities was
$107.0 million in 1999 compared to $146.5 million in 1998, a decrease of $39.5
million, or 27.0%. The average yield on cash and investment securities was 5.53%
in 1999 compared to 5.36% in 1998, which was consistent with the increase in
short-term market interest rates.
Interest expense totaled $48.5 million in 1999 compared to $51.4 million
in 1998, a decrease of $2.9 million or 5.7%.
Interest expense from deposit accounts totaled $46.5 million in 1999
compared to $48.1 million in 1998, a decrease of $1.6 million or 3.3%, due to a
decrease in the average rate paid on deposits, partially offset by an increase
in the average balance of deposit accounts. The average rate paid on deposits
was 5.34% in 1999 compared to 5.73% in 1998. The average balance of deposits was
$870.1 million in 1999 compared to $839.3 million in 1998, an increase of $30.8
million, or 3.7%, as ITLA Capital increased deposits to fund growth in the loan
portfolio.
Interest expense from Federal Home Loan Bank advances totaled $2.0
million in 1999 compared to $3.3 million in 1998, due to decreases in both the
average outstanding balance and in the average rate paid on Federal Home Loan
Bank advances. The average balance of Federal Home Loan Bank advances was $37.2
million in 1999 compared to $56.5 million in 1998, a decrease of $19.3 million,
or 34.1%. The average rate paid on FHLB advances was 5.39% in 1999 compared to
5.90% in 1998.
1998 Compared to 1997
Net interest income totaled $50.3 million in 1998 compared to $41.8
million in 1997, an increase of $8.5 million or 20.3%. The increase in net
interest income was due primarily to growth in average interest-earning assets,
which increased from $845.8 million in 1997 to $1,012.9 million in 1998.
Interest income totaled $101.7 million in 1998 compared to $85.1 million
in 1997, an increase of $16.6 million, or 19.4%.
Interest and fee income from loans receivable totaled $92.6 million in
1998 compared to $77.3 million in 1997, an increase of $15.3 million, or 19.8%.
Interest and fee income from loans increased due to higher loan volume in 1998
and a slight increase in loan yield. The average balance of loans receivable was
$847.2 million in 1998 compared to $708.4 million in 1997, an increase of $138.8
million, or 19.6% reflecting the increase in loans held for investment. The
average yield on loans receivable was 10.93% in 1998 compared to 10.91% in 1997.
The slight increase in loan yield was primarily due to prepayment fees realized
as a result of early loan payoffs. Excluding these prepayment fees, the average
yield on loans receivable would have been 10.62% in 1998 compared to 10.63% in
1997.
Interest income from mortgage-backed securities totaled $1.2 million in
1998 compared to $1.8 million in 1997, a decrease of $0.6 million, or 34.2%, due
to a decline in the average outstanding balance and a slight decrease in yield.
The average balance of mortgage-backed securities declined to $19.2 million in
1998 from $28.6 million in 1997 due to principal repayments received during the
first nine months of 1998 and the sale of the remaining mortgage-backed
securities in the fourth quarter of 1998. The yield on the mortgage-backed
securities was 6.31% in 1998 compared to 6.43% in 1997 due to decreased yields
from the underlying adjustable rate mortgages in 1998 compared to 1997.
Interest income from cash and investments totaled $7.8 million in 1998
compared to $6.0 million in 1997, an increase of $1.8 million, or 31.5%, due
primarily to an increased average outstanding balance, partially offset by a
decline in yield. The average balance of cash and investment securities was
$146.5 million in 1998 compared to $108.8 million in 1997, an increase of $37.7
million, or 34.7%. The average yield on cash and investment securities
23
<PAGE> 24
was 5.36% in 1998 compared to 5.49% in 1997, which was consistent with the
decline in short-term market interest rates.
Interest expense totaled $51.4 million in 1998 compared to $43.3 million
in 1997, an increase of $8.1 million or 18.6%.
Interest expense from deposit accounts totaled $48.1 million in 1998
compared to $40.2 million in 1997, an increase of $7.9 million, or 19.5%, due to
an increase in the volume of deposit accounts, partially offset by a decline in
the average rate paid on deposits. The average balance of deposits was $839.3
million in 1998 compared to $696.5 million in 1997, an increase of $142.8
million, or 20.5%, as ITLA Capital increased deposits to fund growth in the loan
portfolio. The average rate paid on deposits was 5.73% in 1998 compared to 5.77%
in 1997.
Interest expense from Federal Home Loan Bank advances totaled $3.3
million in 1998 compared to $3.1 million in 1997, due primarily to increases in
both the average outstanding balance and in the average rate paid on Federal
Home Loan Bank advances. The average balance of Federal Home Loan Bank advances
was $56.5 million in 1998 compared to $53.7 million in 1997, an increase of $2.8
million, or 5.3%. The average rate paid on FHLB advances was 5.90% in 1998
compared to 5.78% in 1997.
PROVISION FOR ESTIMATED CREDIT LOSSES
Provision for estimated credit losses totaled $5.0 million, $4.6 million
and $3.3 million in 1999, 1998 and 1997, respectively.
1999 Compared to 1998
Provision for estimated credit losses totaled $5.0 million in 1999
compared to $4.6 million in 1998, an increase of $0.4 million, or 8.8%. The
increase in the provision in 1999 reflects the growth in ITLA Capital's
portfolio of loans held for investment, which increased by $92.5 million, or
10.5% from $878.9 million at December 31, 1998 to $971.4 million at December 31,
1999. The provision also increased due to an increased concentration in
construction lending and the continued geographic expansion of the commercial
and residential real estate loan portfolios to loans outside of the state of
California. Construction loans totaled $107.8 million at December 31, 1999
compared to $71.4 million at December 31, 1998, an increase of $36.4 million or
51.0%. Loans outside the state of California totaled $326.5 million at December
31, 1999 compared to $191.1 million at December 31, 1998, to comprise 33.5% of
total loans held for investment at year end compared to 21.4% at the prior year
end. Because of the increased risk profile resulting from these changes to the
composition of ITLA Capital's loan portfolio, the provision for estimated credit
losses was increased in 1999. See also "Credit Risk Elements - Allowance for
Credit Losses and Nonperforming Assets".
1998 Compared to 1997
Provision for estimated credit losses totaled $4.6 million in 1998
compared to $3.3 million in 1997, an increase of $1.3 million, or 37.9%. The
increase in the provision in 1998 reflects the growth in ITLA Capital's
portfolio of loans held for investment, which increased by $115.9 million, or
15.2% from $763.0 million at December 31, 1997 to $878.9 million at December 31,
1998. The provision also increased to reflect changes in the composition of the
loan portfolio that occurred in 1998, including increased construction lending,
which totaled $71.4 million at December 31, 1998 compared to $39.7 million at
December 31, 1997, and increased risk resulting from the geographic expansion of
the loan portfolio to loans outside of the state of California, which totaled
$191.1 million at December 31, 1998 compared to $139.1 million at December 31,
1997. In addition, ITLA Capital increased by 5% its acceptable loan to value
ratios on new loan origination's during 1998 in response to competitive
pressures in the marketplace.
24
<PAGE> 25
PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD FOR SALE
There was no provision for valuation allowance on loans held for sale in
1999, compared to $1.4 million and $0.4 million in 1999, 1998 and 1997,
respectively.
1999 Compared to 1998
No provision for valuation allowance on loans held for sale was recorded
in 1999 compared to a $1.4 million provision in 1998, a decrease of $1.4
million. As part of its ongoing loan portfolio management activities, ITLA
Capital designated $23.5 million of loans as held for sale in 1999 and
subsequently sold them for no gain or loss. In 1998, the Company recorded a $1.4
million provision for the valuation allowance on loans held for sale in
conjunction with the marketing and sale of a $12.0 million portfolio of loans.
1998 Compared to 1997
Provision for valuation allowance on loans held for sale totaled $1.4
million in 1998 compared to $0.4 million in 1997, an increase of $1.0 million,
or 250.0%. In 1998, ITLA Capital designated a portfolio of loans with a gross
principal balance of $12.0 million, including $7.7 million of nonperforming
loans, previously classified as held for investment as held for sale. ITLA
Capital recorded a provision for valuation allowance on loans held for sale
totaling $1.4 million in conjunction with the designation of these loans. These
loans were sold during the year with no additional gain or loss. In 1997, a
provision for valuation allowance on loans held for sale totaling $0.4 million
was recorded to adjust the carrying value of the remaining portfolio of
automobile contracts held for sale to their estimated fair market value.
NONINTEREST INCOME
Noninterest income totaled $0.9 million, $2.4 million and $1.6 million
in 1999, 1998 and 1997, respectively.
1999 Compared to 1998
Noninterest income totaled $0.9 million in 1999 compared to $2.4 million
in 1998, a decrease of $1.5 million, or 63.2%. The decrease in noninterest
income in 1999 was due primarily to a decrease in fee income earned. In 1999,
$9.1 million of commercial real estate loans for third-party investors were
originated compared to $136.2 million of loans funded in 1998. The demand for
fixed rate commercial real estate loans of the type originated for purchase by
third-party investors declined significantly in the third quarter of 1998 due to
a disruption in the market for the securities created from these loans.
Accordingly, ITLA Capital experienced a reduction in the volume of loans
originated for third-party investors and a corresponding decline in fee income
from these originations.
1998 Compared to 1997
Noninterest income totaled $2.4 million in 1998 compared to $1.6 million
in 1997, an increase of $0.8 million, or 49.2%. The increase in noninterest
income in 1998 was due primarily to an increase in fee income earned. In 1998,
ITLA Capital originated $136.2 million in fixed rate loans on behalf of
third-party investors and recognized $1.6 million of fee income from these
loans, compared to $86.4 million of loan origination's and $1.0 million of fee
income from loans originated for third-party investors in 1997.
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense totaled $20.8 million, $20.7 million
and $18.2 million in 1999, 1998 and 1997, respectively. In 1999, ITLA Capital's
ratio of general and administrative expenses to average assets was
25
<PAGE> 26
2.01%, compared to 2.04% and 2.14% in 1998 and 1997, respectively. ITLA
Capital's efficiency ratio, excluding real estate operations, was 38.69% in 1999
compared to 39.19% and 41.96% in 1998 and 1997, respectively.
1999 Compared to 1998
General and administrative expense totaled $20.8 million in 1999
compared to $20.7 million in 1998, an increase of $0.1 million, or 0.5%.
Compensation and benefits expense totaled $9.7 million in 1999 compared
to $10.6 million in 1998, a decrease of $0.8 million, or 7.8%. The decrease in
compensation and benefits expense was due primarily to a decrease in staffing,
as the number of average full-time equivalent employees totaled 132 during 1999
compared to 167 during 1998. The decrease in staffing was due to the
discontinued operations of ITLA Capital's subsidiary ITLA Funding Corporation,
as well as a 15% workforce reduction, including management positions, in the
third quarter as a result of a decrease in loan production and general cost
saving initiatives. Compensation and benefits also decreased due to a decrease
in commissions paid for loans sold to third party investors, due to the decline
in loan volume.
Occupancy and equipment expense totaled $2.8 million in both 1999 and
1998. Other general and administrative expenses totaled $8.1 million in 1999
compared to $7.2 million in 1998, an increase of $0.9 million or 12.6%. The
increase in other general and administrative expenses was due primarily to an
increase in expenses incurred for corporate development activities.
1998 Compared to 1997
General and administrative expense totaled $20.7 million in 1998
compared to $18.2 million in 1997, an increase of $2.5 million, or 13.3%.
Compensation and benefits expense totaled $10.6 million in 1998 compared
to $8.5 million in 1997, an increase of $2.1 million, or 24.1%. The increase in
compensation and benefits expense was due primarily to an increase in staffing
at ITLA Funding, as the number of average full-time equivalent employees totaled
167 during 1998 compared to 151 during 1997. Compensation and benefits expense
also increased in 1998 due to the increased origination volume by ITLA Funding,
as the commissions paid to ITLA Funding's loan origination staff are expensed as
incurred, whereas the origination costs paid by Imperial Capital Bank for loans
placed into the portfolio are deferred and amortized over the loan term as an
adjustment to yield.
Occupancy and equipment expense totaled $2.8 million in 1998 compared to
$2.4 million in 1997, an increase of $0.4 million, or 13.9%. The increase in
occupancy and equipment expense was due primarily to additional office space
occupied by the loan operations division in Glendale, California, and due to
additional space leased at ITLA Capital's headquarters in La Jolla, California.
REAL ESTATE OPERATIONS, NET
Real estate operations, net, totaled $0.5 million, $1.0 million and $0.4
million in 1999, 1998 and 1997, respectively.
1999 Compared to 1998
Real estate operations, net, totaled $0.5 million in 1999 compared to
$1.0 million in 1998, a decrease of $0.5 million, or 52%. The decrease in real
estate operations, net, in 1999 compared to 1998 was primarily due to a decrease
in provisions for estimated losses recorded due to the accelerated disposition
of other real estate owned. Provision for estimated losses on other real estate
owned totaled $0.2 million in 1999 compared to $0.6 million in 1998. Other real
estate owned expenses totaled $0.1 million in 1999 compared to $0.3 million in
1998. The loss from sales of other real estate owned totaled $0.2 million in
1999 compared to $0.1 million in 1998.
26
<PAGE> 27
1998 Compared to 1997
Real estate operations, net, totaled $1.0 million in 1998 compared to
$0.4 million in 1997, an increase of $0.6 million, or 127.3%. The increase in
real estate operations, net, in 1998 compared to 1997 was primarily due to an
increase in provisions for estimated losses recorded due to the accelerated
disposition of other real estate owned. Provision for estimated losses on other
real estate owned totaled $0.6 million in 1998 compared to $0.2 million in 1997.
Other real estate owned expenses totaled $0.3 million in 1998 compared to $0.2
million in 1997. There was a loss of $0.1 million from sales of other real
estate owned in 1998 compared to substantially no gain or loss in 1997.
INCOME TAXES
Provision for income taxes totaled $11.3 million, $10.3 million and $8.7
million in 1999, 1998 and 1997, respectively.
1999 Compared to 1998
Provision for income taxes totaled $11.3 million in 1999 compared to
$10.3 million in 1998, an increase of $1.0 million, or 9.4%. The increase in
provision for income taxes was due to the increase in pretax net income. The
effective tax rate was 41.0% for both 1999 and 1998.
At December 31, 1999, ITLA Capital had a net deferred tax asset of $9.4
million. The deferred tax asset related primarily to loss provisions recognized
on ITLA Capital's financial statements which have not yet been recognized on
ITLA Capital's income tax returns. ITLA Capital has no deferred tax assets
relating to net operating loss carryforward deductions. The deferred tax asset
is considered fully realizable, as when the temporary differences associated
with the deferred tax asset are recognized for income tax purposes, those
deductions are expected to be fully offset, either by carryback against
previously taxed income or by future taxable income. Accordingly, ITLA Capital
has not established a valuation allowance on the deferred tax asset.
The effective tax rate differed from the applicable statutory federal
tax rate due to state income taxes and the state income tax deduction for tax
exempt income on loans located in designated redevelopment and enterprise zones.
1998 Compared to 1997
Provision for income taxes totaled $10.3 million in 1998 compared to
$8.7 million in 1997, an increase of $1.6 million, or 18.4%. The increase in
provision for income taxes was due to the increase in pretax net income, as the
effective tax rate remained at 41.0% for both 1998 and 1997.
YEAR 2000
No disruptions in systems, service to customers or operation of ITLA
Capital were experienced as a result of the year 2000, referring to the date
rollover from December 31, 1999 to January 1, 2000. 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 computer programs used by ITLA Capital
that have time-sensitive software could have recognized a date using "00" as the
year 1900 rather than the year 2000. This could have resulted in system failure
or miscalculations, had management not made the Year 2000 preparations disclosed
previously in its filings with the Securities and Exchange Commission. ITLA
Capital expensed all costs associated with its preparations for the year 2000.
The total cost of the Y2K project since it commencement in 1998 for ITLA Capital
was approximately $75,000.
27
<PAGE> 28
FINANCIAL CONDITION
GENERAL
Total assets increased $99.9 million to $1,115.8 million at December 31,
1999 from $1,015.9 million at December 31, 1997, an increase of 9.8%. The
increase in assets during this two year period was funded primarily by growth of
$69.8 million in deposits, an increase of $24.3 million in shareholders' equity,
resulting primarily from the retention of earnings from 1998 and 1999 totaling
$31.0 million, a $5.7 million increase in Federal Home Loan Bank advances, and
the issuance of $0.6 million of common stock from the exercise of stock options,
partially offset by the purchase of $8.7 million of treasury stock.
Total net loans receivable secured by real estate, including loans held
for sale, increased by $150.1 million to $951.5 million at December 31, 1999
from $801.4 million at December 31, 1997, an increase of 18.7%. Cash and
investment securities decreased by $55.8 million to $140.4 million at December
31, 1999 from $196.2 million at December 31, 1997. ITLA Capital held $25.1
million of mortgage-backed securities at December 31, 1997. Mortgage-backed
securities declined to zero at December 31, 1999 due to the sale of the
securities in the fourth quarter of 1998.
At December 31, 1999 Compared with December 31, 1998
Total assets increased by $83.2 million, or 8.1%, to $1,115.8 million at
December 31, 1999 compared to $1,032.6 million at December 31, 1998. This
increase was primarily due to a $77.2 million, or 8.8%, increase in net real
estate loans receivable, including real estate loans held for sale, to $951.5
million at December 31, 1999 from $874.3 million at December 31, 1998. Asset
growth also included increases in investment securities available for sale of
$58.9 million, in deferred income taxes of $3.1 million, in interest receivable
of $1.1 million and in other assets of $0.4 million. These increases were
partially offset by reductions in cash and cash equivalents of $53.4 million, in
Federal Home Loan Bank stock of $3.7 million, in other real estate owned, net of
$0.2 million and in premises and equipment, net of $0.2 million. The growth in
assets was funded primarily by an increase in deposits of $46.8 million. Deposit
growth was concentrated in time certificates, which increased from $734.1
million at December 31, 1998 to $787.1 million at December 31, 1999, partially
offset by a slight decrease in money market and passbook accounts, which
decreased from $132.7 million at December 31, 1998 to $126.5 million at December
31, 1999. Shareholders' equity increased due to the retention of $16.2 million
of net income as retained earnings for the year, the vesting of $0.7 million of
shares allocated under the Supplemental Executive Retirement Plan (SERP) funded
by the Recognition and Retention Plan (RRP) previously approved by the
shareholders, and a $0.9 million increase due to unrealized appreciation of
investment securities available for sale, partially offset by the purchase of
$0.5 million of ITLA Capital's stock currently held as treasury stock.
At December 31, 1998 Compared with December 31, 1997
Total assets increased slightly, by $16.7 million, or 1.6%, to remain at
approximately $1.0 billion at both December 31, 1998 and December 31, 1997. This
increase was primarily due to a $72.9 million, or 9.1%, increase in net real
estate loans receivable, including real estate loans held for sale, to $874.3
million at December 31, 1998 from $801.4 million at December 31, 1997. Asset
growth also included increases in cash and cash equivalents of $1.7 million and
in Federal Home Loan Bank stock of $0.7 million. These increases were partially
offset by reductions in investment securities to $0.3 million from $35.3
million, in mortgage-backed securities to zero from $25.1 million, and in other
real estate owned to $1.2 million from $3.9 million, at December 31, 1998 and
1997, respectively. The growth in assets was funded primarily by an increase in
deposits of $23.0 million from December 31, 1997 to December 31, 1998. Deposit
growth was concentrated in money market and passbook accounts, which increased
from $76.8 million at December 31, 1997 to $132.7 million at December 31, 1998,
partially offset by a decrease in time certificates, which decreased from $767.0
million at December 31, 1997 to $734.1 million at December 31, 1998.
Shareholders' equity increased by $6.6 million, due primarily to the retention
of $14.8 million of net income as retained earnings for the year and the
issuance of $0.1 million of common stock through the exercise of employee stock
options, partially offset by the purchase of $8.2 million of ITLA Capital's
stock currently held as treasury stock and a $0.1 million increase in unrealized
loss on investment securities available for sale.
28
<PAGE> 29
LOANS RECEIVABLE
The following table shows the comparison of ITLA Capital's loans held
for investment and held for sale by major categories as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 866,638 $ 811,076 $ 727,479 $ 644,079 $ 439,778
Construction 107,833 71,385 39,668 22,498 14,396
--------- --------- --------- --------- ---------
974,471 882,461 767,147 666,577 454,174
Deferred loan origination
fees and costs and unamortized
premium on purchased loans, net (3,096) (3,561) (4,116) (5,856) (6,189)
--------- --------- --------- --------- ---------
971,375 878,900 763,031 660,721 447,985
Allowance for credit losses (19,895) (16,811) (12,178) (10,885) (8,105)
--------- --------- --------- --------- ---------
$ 951,480 $ 862,089 $ 750,853 $ 649,836 $ 439,880
========= ========= ========= ========= =========
LOANS HELD FOR SALE
(AT LOWER OF COST OR FAIR MARKET VALUE):
Real estate $ -- $ 12,188 $ 50,786 $ -- $ --
Automobile finance contracts -- -- -- 1,291 68,034
Direct financing leases -- -- -- 44 63
--------- --------- --------- --------- ---------
-- 12,188 50,786 1,335 68,097
Unearned income on automobile
finance contracts -- -- -- (205) (12,285)
Deferred loan origination
fees and costs -- -- (242) -- --
--------- --------- --------- --------- ---------
$ -- $ 12,188 $ 50,544 $ 1,130 $ 55,812
========= ========= ========= ========= =========
TOTAL LOANS RECEIVABLE:
Real estate $ 866,638 $ 823,264 $ 778,265 $ 644,079 $ 439,778
Construction 107,833 71,385 39,668 22,498 14,396
Automobile finance contracts -- -- -- 1,291 68,034
Direct financing leases -- -- -- 44 63
--------- --------- --------- --------- ---------
974,471 894,649 817,933 667,912 522,271
Unearned income on automobile
finance contracts, net -- -- -- (205) (12,285)
Deferred loan origination fees
and costs and unamortized premium
on purchased loans, net (3,096) (3,561) (4,358) (5,856) (6,189)
--------- --------- --------- --------- ---------
971,375 891,088 813,575 661,851 503,797
Allowance for credit losses (19,895) (16,811) (12,178) (10,885) (8,105)
--------- --------- --------- --------- ---------
$ 951,480 $ 874,277 $ 801,397 $ 650,966 $ 495,692
========= ========= ========= ========= =========
</TABLE>
29
<PAGE> 30
The approximate contractual maturities of loans held for investment at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
LOANS MATURING IN
------------------------------------
BETWEEN GREATER
LESS THAN ONE AND THAN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate $ 23,950 $ 89,158 $753,530 $866,638
Construction 94,380 13,453 -- 107,833
-------- -------- -------- --------
$118,330 $102,611 $753,530 $974,471
======== ======== ======== ========
Loans with fixed interest rates $ 13,071 $ 18,139 $ 14,898 $ 46,108
Loans with variable interest rates 105,259 84,472 738,632 928,363
-------- -------- -------- --------
$118,330 $102,611 $753,530 $974,471
======== ======== ======== ========
Percentage with variable interest rates 89% 82% 98% 95%
======== ======== ======== ========
</TABLE>
The table above should not be regarded as a forecast of future cash
collections because a substantial portion of loans receivable may be renewed or
repaid prior to contractual maturity.
30
<PAGE> 31
The following table sets forth certain information regarding the real
property collateral securing ITLA Capital's loans held for investment as of
December 31, 1999.
<TABLE>
<CAPTION>
NUMBER PERCENT NON-
OF GROSS OF PRINCIPAL BALANCE ACCRUAL
LOANS AMOUNT TOTAL MINIMUM MAXIMUM AVERAGE LOANS
----- ------ ----- ------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Producing Property Loans:
Office 103 $118,911 12.2% $ 3 $ 9,093 $ 1,154 $ --
Retail 203 221,987 22.7% 21 13,790 1,094 2,561
Multi-family (5 or more units) 186 174,153 17.9% 22 5,333 936 818
Industrial / warehouse 67 39,855 4.1% 15 5,981 595 284
Hotel 60 117,095 12.0% 43 7,140 1,952 974
Mixed-use 65 24,837 2.5% 24 1,879 382 1,843
Mobile home parks 24 11,327 1.2% 8 742 472 36
Other 126 65,165 6.7% 25 5,963 517 --
----- -------- ------ --------
Total commercial 834 773,330 79.3% 6,516
----- -------- ------ --------
Construction and Land:
Construction 38 107,833 11.1% 328 11,287 2,838 --
Land 7 2,732 0.3% 21 1,446 390 --
----- -------- ------ --------
Total construction and land 45 110,565 11.4% --
----- -------- ------ --------
Single-family mortgages:
Single-family (1-4 units) 812 90,576 9.3% $ 1 $ 604 $ 112 1,461
----- -------- ------ --------
Total single-family 812 90,576 9.3% 1,461
----- -------- ------ --------
1,691 $974,471 100.00% $ 7,977
===== ======== ====== ========
</TABLE>
31
<PAGE> 32
The following table sets forth the location of the collateral for ITLA
Capital's loans held for investment as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER PERCENT
OF GROSS OF
LOANS AMOUNT TOTAL
-------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Southern California:
Los Angeles County 305 $235,682 24.1%
Orange County 47 49,775 5.1%
San Diego County 52 43,617 4.5%
Riverside County 36 32,902 3.4%
San Bernardino County 54 35,879 3.7%
All Other Southern California Counties 69 33,771 3.5%
-------- -------- -----
Total Southern California 563 431,626 44.3%
-------- -------- -----
Northern California:
San Francisco County 44 51,176 5.3%
Sacramento County 40 27,791 2.9%
Santa Clara County 43 30,694 3.1%
Alameda County 46 21,094 2.2%
Fresno County 53 15,935 1.6%
Contra Costa County 22 12,889 1.3%
All Other Northern California Counties 111 56,811 5.8%
-------- -------- -----
Total Northern California 359 216,390 22.2%
-------- -------- -----
Outside California:
Arizona 75 63,531 6.5%
Nevada 43 54,474 5.6%
Washington 47 25,276 2.6%
Texas 30 19,509 2.0%
Missouri 15 18,326 1.9%
Colorado 30 17,469 1.8%
Florida 56 12,463 1.3%
Utah 36 11,538 1.2%
Michigan 32 10,839 1.1%
New Jersey 40 10,698 1.1%
Other U.S. States 365 82,332 8.4%
-------- -------- -----
Total Outside California 769 326,455 33.5%
-------- -------- -----
1,691 $974,471 100.0%
======== ======== =====
</TABLE>
32
<PAGE> 33
Although ITLA Capital generally seeks to limit risks associated with its
portfolio of real estate and construction loans by limiting the geographic
concentration and by varying the types of underlying collateral, significant
risk concentrations still remain. Concentrations of loans in certain geographic
regions, for example, cause ITLA Capital's risk associated with these loans to
be closely associated with the general economic and social environment of the
region. Localized economic and competitive conditions, natural disasters or
social conditions all may affect the values of collateral located within a
particular geographic area. In addition, certain types of properties may be more
or less subject to changes in prevailing economic, competitive or social
conditions.
The following table sets forth certain information with respect to ITLA
Capital's originations and loans held for investment and loans held for sale.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross real estate loans originated and retained
in the Company's portfolio $293,781 $380,325 $351,832
Gross real estate loans originated
on behalf of third-party investors $ 9,089 $136,162 $ 86,389
Gross fixed rate loans classified as
held for sale $ -- $ 12,285 $ --
Gross real estate loans purchased $ 91,402 $ 2,361 $ 3,736
Gross real estate loans at end of period $974,471 $894,649 $817,933
Weighted-average portfolio yield 10.30% 10.93% 10.91%
Average size of loans originated and retained
in the Company's portfolio $ 2,260 $ 1,503 $ 1,530
</TABLE>
33
<PAGE> 34
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table shows the amortized cost and approximate fair value
of investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
APPROX- APPROX- APPROX-
IMATE IMATE IMATE
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency $43,260 $43,012 $ -- $ -- $35,056 $35,087
Equity securities 14,786 16,235 385 135 -- --
Certificates of deposit -- -- 194 194 194 194
------- ------- ------- ------- ------- -------
Total available-for-sale 58,046 59,247 579 329 35,250 35,281
------- ------- ------- ------- ------- -------
Held-to-maturity:
Mortgage-backed securities -- -- -- -- 25,132 25,063
------- ------- ------- ------- ------- -------
Total held-to-maturity -- -- -- -- 25,132 25,063
------- ------- ------- ------- ------- -------
Total investment and
mortgage-backed
securities $58,046 $59,247 $ 579 $ 329 $60,382 $60,344
======= ======= ======= ======= ======= =======
</TABLE>
During 1998, ITLA Capital sold its "held to maturity" mortgage-backed
securities portfolio, realizing a net gain of $85,000 from the sale, and
reinvested the proceeds from the sale in higher yielding loans originated
subsequent to the sale. The mortgage-backed securities portfolio was sold
because of a change in long-term investment strategy. At the time of the sale,
the mortgage-backed securities were carried at an amortized cost of $17.8
million.
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to ITLA Capital's ability to maintain cash flow
adequate to fund operations and meet obligations and other commitments on a
timely basis, including the payment of maturing deposits and the origination or
purchase of new loans receivable. ITLA Capital maintains a cash and investment
securities portfolio designed to satisfy operating and regulatory liquidity
requirements while preserving capital and maximizing yield. As of December 31,
1999 and 1998, Imperial Capital Bank's liquidity ratios were 11.8% and 12.3%,
respectively, exceeding the regulatory requirement of 1.5%. In addition, ITLA
Capital's liquidity position is supported by a credit facility with the Federal
Home Loan Bank of San Francisco. As of December 31, 1999, ITLA Capital had
remaining available borrowing capacity under this credit facility of $36.6
million, net of the $5.1 million of additional FHLB Stock that ITLA Capital
would be required to purchase to support those additional borrowings, plus $30.0
million of unused federal funds credit facilities under established lines of
credit with two banks.
Total deposit accounts increased to $913.6 million at December 31, 1999
from $866.8 million at December 31, 1998, an increase of $46.8 million, or 5.4%.
Total deposit accounts increased to $866.8 million at
34
<PAGE> 35
December 31, 1998 from $843.8 million at December 31, 1997, an increase of $23.0
million, or 2.7%. In both 1999 and 1998, the funds provided from the increase in
deposits were used to fund the growth in ITLA Capital's loan portfolio. ITLA
Capital retained 57% and 59% of the funds from maturing time certificates
through rollover of the certificates in 1999 and 1998, respectively. Although
ITLA Capital competes for deposits primarily on the basis of rates, based on its
historical experience regarding retention of deposits, management believes that
a significant portion of deposits will remain with ITLA Capital upon maturity on
an ongoing basis.
The following table sets forth information regarding deposits
outstanding at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market and passbook accounts $126,529 $132,697 $ 76,786
Time certificates under $100,000 522,227 518,309 522,014
Time certificates $100,000 and over 264,857 215,792 245,013
-------- -------- --------
$913,613 $866,798 $843,813
======== ======== ========
</TABLE>
CAPITAL RESOURCES
As of December 31, 1999, Imperial Capital Bank's leverage, tier 1
risk-based and total risk-based capital ratios were 9.04%, 10.11% and 11.37%,
respectively. These ratios were 8.66%, 9.34% and 10.60% as of December 31, 1998,
respectively. The minimum regulatory requirements for leverage, tier 1
risk-based and total risk-based capital ratios are 4.0%, 4.0% and 8.0%,
respectively. As of December 31, 1999, Imperial Capital Bank's capital position
was designated as "well capitalized" for regulatory purposes.
ITLA Capital's shareholders' equity increased $17.8 million from
December 31, 1998 to December 31, 1999, due to the accumulation of $16.2 million
in net income as retained earnings for the year and a $0.5 million increase from
the issuance of common stock through the exercise of employee stock options, a
$0.7 million increase due to the vesting of shares under the SERP/RRP and an
increase of $0.9 million due to unrealized appreciation of investment securities
available for sale, partially offset by a $0.5 million reduction due to the
repurchase of shares of ITLA Capital's stock currently held as treasury stock.
There were no dividends declared or paid by ITLA Capital during 1999.
35
<PAGE> 36
CREDIT RISK ELEMENTS
ALLOWANCE FOR CREDIT LOSSES AND NONPERFORMING ASSETS
The following table provides certain information with respect to ITLA
Capital's allowance for credit losses, including charge-offs, recoveries and
selected ratios, for the periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 16,811 $ 12,178 $ 10,885 $ 8,105 $ 11,076
Provision for estimated credit losses 4,950 4,550 3,300 4,871 13,098
Charge-offs:
Loans secured by real estate (2,088) (64) (2,124) (2,237) (9,491)
Automobile finance contracts -- -- -- -- (7,212)
Direct financing leases -- -- -- -- (82)
--------- --------- --------- --------- ---------
Total charge-offs (2,088) (64) (2,124) (2,237) (16,785)
--------- --------- --------- --------- ---------
Recoveries:
Loans secured by real estate 222 147 117 146 45
Automobile finance contracts -- -- -- -- 632
Direct financing leases -- -- -- -- 39
--------- --------- --------- --------- ---------
Total recoveries 222 147 117 146 716
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (1,866) 83 (2,007) (2,091) (16,069)
--------- --------- --------- --------- ---------
Balance at end of year $ 19,895 $ 16,811 $ 12,178 $ 10,885 $ 8,105
========= ========= ========= ========= =========
Loans Held for Investment:
Average loans held for investment
outstanding during the year $ 925,059 $ 811,847 $ 708,447 $ 559,275 $ 490,826
Loans held for investment, net, at
end of year(1) $ 971,375 $ 878,900 $ 763,031 $ 660,721 $ 447,985
Selected Ratios:
Net (charge-offs) recoveries to
average loans held for investment (0.20%) 0.01% (0.28%) (0.37%) (3.27%)
Net (charge-offs) recoveries to loans
held for investment, net, at end of year(1) (0.19%) 0.01% (0.26%) (0.32%) (3.59%)
Allowance for credit losses to loans held for
investment, net, at end of year(1) 2.05% 1.91% 1.60% 1.65% 1.81%
Allowance for credit losses to nonaccrual loans(2) 249.40% 309.37% 146.16% 169.50% 122.45%
</TABLE>
- ----------
(1) Loans held for investment, before allowance for credit losses and net of
unearned finance charges and loan fees.
(2) Excludes nonaccrual loans held for sale.
The allowance for credit losses increased to $19.9 million, 2.05% of
loans held for investment, at December 31, 1999 from $16.8 million, 1.91% of
loans held for investment, at December 31, 1998. The increase in
36
<PAGE> 37
the allowance was due primarily to growth in ITLA Capital's portfolio of loans
held for investment, net, which increased by $92.5 million, or 10.52% from
$878.9 million at December 31, 1998 to $971.4 million at December 31, 1999, as
well as due to the increased provisions for estimated credit losses recorded in
1999 due to increased construction lending and increased out of state lending in
1999.
The allowance for credit losses increased to $16.8 million, 1.91% of
loans held for investment, at December 31, 1998 from $12.2 million, 1.60% of
loans held for investment at December 31, 1997. The increase in the allowance
was due primarily to growth in ITLA Capital's portfolio of loans held for
investment, which increased by $115.9 million, or 15.2% from $763.0 million at
December 31, 1997 to $878.9 million at December 31, 1998, as well as due to
increased provisions for estimated credit losses recorded in 1998 due to
increased construction lending, increased out of state lending, and revised loan
underwriting criteria used in 1998. The allowance also increased due to lower
than expected level of loan losses charged against the allowance in 1998, as
ITLA Capital received net recoveries totaling $0.1 million in 1998 compared to
net charge offs totaling $2.0 million in 1997.
The allowance for credit losses increased to $12.2 million at December
31, 1997 from $10.9 million at December 31, 1996. The increase resulted from the
growth in ITLA Capital's loan portfolio as the level of nonaccrual loans and net
charge-offs remained relatively constant. Net charge-offs totaled $2.0 million
in 1997 and $2.1 million in 1996.
The following table sets forth management's historical allocation of the
allowance for credit losses by loan or contract category and the percentage of
gross loans in each category to total gross loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS
LOSSES (1) LOSSES (1) LOSSES (1) LOSSES (1) LOSSES (1)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN OR CONTRACT
CATEGORIES:
Secured by
real estate $19,895 100.0% $16,811 100.0% $12,178 100.0% $10,885 99.8% $ 8,096 85.1%
Automobile
finance(2) -- 0.0% -- 0.0% -- 0.0% -- 0.2% -- 14.8%
Direct financing
leases -- 0.0% -- 0.0% -- 0.0% -- 0.0% 9 0.1%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $19,895 100.0% $16,811 100.0% $12,178 100.0% $10,885 100.0% $ 8,105 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(1) Percentage represents the percent of gross loans in category to total
gross loans.
2) No allocation to automobile loans was provided at December 31, 1996 and
1995 as these loans were held for sale, at estimated fair market value.
The automobile loans were completely disposed of during 1997.
Management periodically assesses the adequacy of the allowance for
credit losses by reference to many factors which may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements:
- general portfolio trends relative to asset and portfolio size;
- asset categories;
- potential credit and geographic concentrations;
- delinquency trends and nonaccrual loan levels;
- historical loss experience and risks associated with changes in
economic, social and business conditions.
- The underwriting standards in effect when the loan was made.
37
<PAGE> 38
Accordingly, the calculation of the adequacy of the allowance for credit
losses is not based solely on the level of nonperforming assets. Management
believes that ITLA Capital's allowance for credit losses as of December 31, 1999
was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While management believes the estimates and assumptions
used in its determination of the adequacy of the allowance are reasonable, there
can be no assurance that such estimates and assumptions will not be proven
incorrect in the future, or that the actual amount of future provisions will not
exceed the amount of past provisions or that any increased provisions that may
be required will not adversely impact ITLA Capital's financial condition and
results of operations. In addition, the determination of the amount of the
allowance for credit losses is subject to review by Imperial Capital Bank's
regulators, as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.
The following table sets forth the delinquency status of ITLA Capital's
real estate loan portfolio at each of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ---------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PERIOD OF DELINQUENCY:
30 - 59 days $ 7,147 0.73% $ 2,699 0.30% $ 3,654 0.45%
60 - 89 days 988 0.10% 2,000 0.22% 2,833 0.35%
90 days or more 7,614 0.78% 4,023 0.45% 4,491 0.54%
------- ---- ------- ---- ------- ----
Total loans delinquent $15,749 1.61% $ 8,722 0.97% $10,978 1.34%
======= ==== ======= ==== ======= ====
</TABLE>
ITLA Capital's loan administration, underwriting and asset management
departments all participate in various aspects of our program to monitor real
estate loan performance. The loan administration department monitors payment
performance and borrower adherence to other contractual obligations. In addition
to reviewing the quality of newly originated loans, all real estate loans of
$1.5 million or greater are reviewed annually. In addition, independent outside
consultants periodically review the real estate loan portfolio and report
findings to management and the audit committee of the board of directors. Loans
considered by any initial review source to warrant special attention are
referred to the asset management department for its analysis and action
recommendations. The asset management department may further recommend
classification of loans to Imperial Capital Bank's review and reserve committee.
This committee meets at least monthly to review the status of classified loans,
consider new classifications or declassifications, determine the need for and
amount of any charge offs, and recommend to Imperial Capital Bank's executive
committee of the board of directors the level of allowance for credit losses to
be maintained. If management believes that the collection of the full amount of
principal is unlikely and the value of the collateral securing the obligation is
insufficient, steps are generally taken to protect and liquidate the collateral.
Losses resulting from the difference between the loan balance and the fair
market value of the collateral are recognized by a partial charge-off of the
loan balance to the collateral's fair market value. While real property
collateral is held for sale, it is subject to periodic evaluation and/or
appraisal. If an evaluation or appraisal indicates that the property will
ultimately sell for less than its recorded value, the loss by a charge to
provision for estimated losses on other real estate owned is recognized.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be doubtful. Subsequent cash collections on nonaccrual loans
are either recognized as interest income on a cash basis, if the loan is well
secured and in management's judgment the net book value is fully collectible, or
recorded entirely as a reduction of principal.
38
<PAGE> 39
The following table sets forth ITLA Capital's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1):
Loans secured by real estate, net $ 7,977(3) $ 5,434 $ 8,332 $ 6,422 $ 6,619
Other -- -- -- 783 366
-------- -------- -------- -------- --------
Total nonaccrual loans 7,977 5,434 8,332 7,205 6,985
Other real estate owned, net 1,041 1,201 3,946 5,416 6,103
-------- -------- -------- -------- --------
Total nonperforming assets $ 9,018 $ 6,635 $ 12,278 $ 12,621 $ 13,088
======== ======== ======== ======== ========
Troubled debt restructurings (2) $ 13,996 $ 805 $ 1,574 $ 2,106 $ 6,182
Nonaccrual loans held for investment to
total gross loans held for investment 0.82% 0.62% 1.09% 0.96% 1.46%
Allowance for credit losses to
nonaccrual loans (4) 249.40% 309.37% 146.16% 169.50% 122.45%
Nonperforming assets to total assets 0.81% 0.64% 1.21% 1.56% 2.14%
Nonperforming assets held for
investment to total assets 0.81% 0.64% 1.21% 1.46% 2.08%
</TABLE>
(1) Gross interest income that would have been recorded on nonaccrual loans had
they been current in accordance with original terms was $0.8 million for
the year ended December 31, 1999. The amount of interest income on such
nonaccrual loans included in net income for the year ended December 31,
1999 was $0.2 million.
(2) All of the restructured loans were accruing at December 31, 1999.
(3) In addition to the above, management has concerns as to the borrowers'
ability to comply with present repayment terms on $38.9 million of accruing
loans as of December 31, 1999.
(4) Excludes nonaccrual loans held for sale.
Nonaccrual loans held for investment totaled $8.0 million at December
31, 1999. Three of these loans had an outstanding balance greater than $1.0
million.
In 1999, $4.8 million of new other real estate owned was acquired, $4.8
million of other real estate owned was sold, and $0.2 million of write-downs
were taken, resulting in net other real estate owned at December 31, 1999 of
$1.0 million. Other real estate owned at December 31, 1999 consisted of six
properties with an average balance of approximately $0.2 million. The other real
estate owned property with the largest net book balance totaled $0.3 million.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITLA Capital realizes income principally from the differential or spread
between the interest earned on loans, investments and other interest-earning
assets and the interest paid on deposits and borrowings. Loan volumes and
yields, as well as the volume of and rates on investments, deposits and
borrowings, are affected by market interest rates. Additionally, because of the
terms and conditions of many of ITLA Capital's loan agreements and deposit
accounts, a change in interest rates could also affect the duration of the loan
portfolio and/or the deposit base, which could alter ITLA Capital's sensitivity
to future changes in interest rates.
ITLA Capital uses an internal earnings simulation model as a tool to
identify and manage our interest rate risk profile. The model is based on
projected cash flows and repricing characteristics for all financial instruments
and incorporates market-based assumptions regarding the impact of changing
interest rates on current volumes of applicable financial instruments,
considering applicable interest rate floors and caps associated with each
financial instrument. These assumptions are inherently uncertain and, as a
result, the model cannot precisely measure net
39
<PAGE> 40
interest income or precisely predict the impact of changes in interest rates on
net interest income. Actual results will differ from simulated results due to
timing, magnitude and frequency of interest rate changes as well as changes in
market conditions and management strategies.
Interest rate risk management focuses on maintaining consistent growth
in net interest income within board-approved policy limits while taking into
consideration, among other factors, ITLA Capital's overall credit, operating
income, operating cost and capital profile. The asset/liability management
committee, which includes senior management representatives and reports to the
Board of Directors, monitors and manages interest rate risk to maintain an
acceptable level of change in net interest income as a result of changes in
interest rates.
The following table shows ITLA Capital's estimated earnings sensitivity
profile as of December 31, 1999:
<TABLE>
<CAPTION>
CHANGES IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) (12 MONTHS)
------------------- --------------------
<S> <C>
+200 Over One Year +2.8%
+100 Over One Year +1.4%
-100 Over One Year +2.7%
-200 Over One Year +7.4%
</TABLE>
Another tool used to identify and manage ITLA Capital's interest rate
risk profile is the static gap analysis. Interest sensitivity gap analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods. An asset-sensitive position indicates that there
are more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a favorable
impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would
generally imply a negative impact on net interest income in periods of rising
rates and a positive impact in periods of falling rates.
In evaluating ITLA Capital's exposure to changes in interest rates,
certain risks inherent in the method of analysis presented in the following
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees and at different times to changes in market rates. Additionally, loan
prepayments and early withdrawals of time certificates could cause interest
sensitivities to vary from those that appear in the following table. Further,
certain assets, such as variable rate real estate loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. The majority of ITLA Capital's variable rate real estate loans may
not adjust downward below their initial rate, with increases generally limited
to maximum adjustments of 2% per year and up to 4% over the life of the loan.
These loans may also be subject to prepayment penalties. At December 31, 1999,
93.8% of ITLA Capital's variable rate loan portfolio would not adjust downward
below the initial interest rate with the weighted-average minimum interest rate
on this portfolio being 9.5% and 84.7% of the total loans outstanding had a
lifetime interest rate cap, with the weighted-average lifetime interest rate cap
on this portfolio being 14.6%. The anticipated effects of these various factors
are considered by management in implementing interest rate risk management
activities.
40
<PAGE> 41
The following table presents an estimate of ITLA Capital's static GAP
analysis as of December 31, 1999.
<TABLE>
<CAPTION>
MATURING OR REPRICING IN
----------------------------------------------------------------------------------
AFTER 3 AFTER
MONTHS 1 YEAR NON-
3 MONTHS BUT WITHIN BUT WITHIN AFTER INTEREST
OR LESS 1 YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans receivable (1) $ 718,354 $ 100,310 $ 140,909 $ 14,898 $ -- $ 974,471
Cash and cash equivalents 72,242 -- -- -- -- 72,242
Investment securities available for sale 26,235 -- 33,012 -- -- 59,247
Noninterest-earning assets less allowance
for credit losses and unearned loan fees -- -- -- -- 9,863 9,863
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 816,831 $ 100,310 $ 173,921 $ 14,898 $ 9,863 $1,115,823
========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Time certificates under $100,000 $ 157,200 $ 291,071 $ 73,956 $ -- $ -- $ 522,227
Time certificates $100,000 and over 87,136 148,594 29,127 -- -- 264,857
Money market and passbook accounts 126,529 -- -- -- -- 126,529
FHLB advances 40,000 15,500 11,750 -- -- 67,250
Other liabilities -- -- -- -- 11,265 11,265
Shareholders' equity -- -- -- -- 123,695 123,695
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity $ 410,865 $ 455,165 $ 114,833 $ -- $ 134,960 $1,115,823
========== ========== ========== ========== ========== ==========
Net repricing assets over (under) repricing
liabilities equals interest rate sensitivity
GAP $ 405,966 $ (354,855) $ 59,088 $ 14,898 $ (125,097)
========== ========== ========== ========== ==========
Cumulative interest rate sensitivity GAP $ 405,966 $ 51,111 $ 110,199 $ 125,097 $ --
========== ========== ========== ========== ==========
Cumulative GAP as a percentage of
total assets 36.4% 4.6% 9.9% 11.2% 0.0%
========== ========== ========== ========== ==========
</TABLE>
(1) Variable rate loans consist principally of real estate secured loans with a
maximum term of 30 years. Approximately 73% of these loans are generally
adjustable quarterly based on changes in various indexes, subject generally
to a maximum increase of 2% annually and up to 4% over the life of the
loan. Approximately 22% of these loans are fixed for an initial period of
two to five years from origination, and then are adjustable quarterly based
on changes in various indexes. Nonaccrual loans of approximately $8.0
million are assumed to reprice after five years.
41
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on the Consolidated Financial
Statements as of December 31, 1999 and 1998 and for Each of the Three
Years in the Period Ended December 31, 1999 43
Consolidated Balance Sheets as of December 31, 1999 and 1998 44
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 45
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1997 to December 31, 1999 46
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 47
Notes to Consolidated Financial Statements 48
</TABLE>
42
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
ITLA Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ITLA Capital
Corporation and subsidiaries ("the Company"), a Delaware corporation, as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ITLA Capital Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Los Angeles, California
January 26, 2000
43
<PAGE> 44
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1999 1998
----------- -----------
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 72,242 $ 125,602
Investment securities available for sale, at approximate fair value 59,247 329
Stock in Federal Home Loan Bank 8,894 12,633
Loans held for investment, net (net of allowance for credit losses of
$19,895 and $16,811 in 1999 and 1998, respectively) 951,480 862,089
Loans held for sale, at lower of cost or fair market value -- 12,188
Interest receivable 7,383 6,321
Other real estate owned, net 1,041 1,201
Premises and equipment, net 3,253 3,493
Deferred income taxes 9,401 6,270
Other assets 2,882 2,521
----------- -----------
Total assets $ 1,115,823 $ 1,032,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 913,613 $ 866,798
Federal Home Loan Bank advances 67,250 48,500
Accounts payable and other liabilities 11,265 11,467
----------- -----------
Total liabilities 992,128 926,765
----------- -----------
Commitments and contingencies (notes 11 and 12)
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Contributed capital - common stock, $.01 par value; 20,000,000
shares authorized, 8,202,916 and 8,151,916 issued and
outstanding in 1999 and 1998, respectively 57,184 55,917
Retained earnings 79,478 63,273
Accumulated other comprehensive income (loss) 706 (150)
----------- -----------
137,368 119,040
Less treasury stock, at cost - 1,021,432 and 985,432 shares in
1999 and 1998, respectively (13,673) (13,158)
----------- -----------
Total shareholders' equity 123,695 105,882
----------- -----------
Total liabilities and shareholders' equity $ 1,115,823 $ 1,032,647
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
44
<PAGE> 45
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 95,303 $ 92,607 $ 77,310
Investment securities 5,910 7,849 5,971
Mortgage-backed securities -- 1,209 1,836
-------- -------- --------
Total interest income 101,213 101,665 85,117
-------- -------- --------
Interest expense:
Deposit accounts 46,452 48,053 40,206
Federal Home Loan Bank advances 2,008 3,334 3,104
-------- -------- --------
Total interest expense 48,460 51,387 43,310
-------- -------- --------
Net interest income before provisions for estimated credit
losses and valuation allowance on loans held for sale 52,753 50,278 41,807
Provision for estimated credit losses 4,950 4,550 3,300
Provision for valuation allowance on loans held for sale -- 1,400 350
-------- -------- --------
Net interest income after provisions for estimated credit
losses and valuation allowance on loans held for sale 47,803 44,328 38,157
-------- -------- --------
Noninterest income:
Fee income from mortgage banking activities 73 1,554 1,007
Gain on sale of mortgage-backed securities -- 85 --
Other 828 808 633
-------- -------- --------
Total noninterest income 901 2,447 1,640
-------- -------- --------
Noninterest expense:
Compensation and benefits 9,739 10,564 8,511
Occupancy and equipment 2,788 2,783 2,444
FDIC assessment 99 99 208
Other 8,131 7,218 7,069
-------- -------- --------
Total general and administrative 20,757 20,664 18,232
-------- -------- --------
Real estate operations, net 72 252 226
Provision for estimated losses on other real estate owned 195 608 216
Loss (gain) on sale of other real estate owned, net 205 124 (9)
-------- -------- --------
Total real estate operations, net 472 984 433
-------- -------- --------
Total noninterest expense 21,229 21,648 18,665
-------- -------- --------
Income before provision for income taxes 27,475 25,127 21,132
Provision for income taxes 11,270 10,304 8,655
-------- -------- --------
NET INCOME $ 16,205 $ 14,823 $ 12,477
======== ======== ========
BASIC EARNINGS PER SHARE $ 2.26 $ 1.95 $ 1.61
======== ======== ========
DILUTED EARNINGS PER SHARE $ 2.21 $ 1.89 $ 1.57
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
45
<PAGE> 46
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1997 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
NUMBER OF SHARES SHAREHOLDERS' EQUITY
---------------------------------------- ---------------------------------------
CONTRIBUTED CAPITAL
GROSS NET ---------------------------------------
SHARES SHARES TOTAL
ISSUED AND TREASURY ISSUED AND SHARE EARNED CONTRIBUTED
OUTSTANDING SHARES OUTSTANDING CAPITAL COMPENSATION CAPITAL
----------- ---------- ----------- ---------- ------------ -----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,824,000 -- 7,824,000 52,845 -- 52,845
Issuance of common stock -
employee stock options 25,484 -- 25,484 318 -- 318
Common stock repurchased -- (152,500) (152,500) -- -- --
Total comprehensive income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 7,849,484 (152,500) 7,696,984 53,163 -- 53,163
Issuance of common stock -
employee stock options 8,500 -- 8,500 109 -- 109
Issuance of common stock -
pursuant to the Long-Term
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan 293,932 (293,932) -- 2,645 -- 2,645
Common stock repurchased -- (539,000) (539,000) -- -- --
Total comprehensive income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 8,151,916 (985,432) 7,166,484 55,917 -- 55,917
Issuance of common stock -
employee stock options 51,000 -- 51,000 542 -- 542
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan -- -- -- -- 725 725
Common stock repurchased -- (36,000) (36,000) -- -- --
Net income -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 8,202,916 (1,021,432) 7,181,484 $ 56,459 $ 725 $ 57,184
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY COMPREHENSIVE INCOME
------------------------------------------------------ ------------------------------------
ACCUMULATED
OTHER OTHER
COMPREHENSIVE TREASURY COMPREHENSIVE TOTAL
RETAINED INCOME STOCK, NET INCOME COMPREHENSIVE
EARNINGS (LOSS) AT COST TOTAL INCOME (LOSS) INCOME
---------- ------------- ---------- ---------- ---------- ----------- ------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 35,973 -- -- 88,818
Issuance of common stock -
employee stock options -- -- -- 318
Common stock repurchased -- -- (2,284) (2,284)
Total comprehensive income 12,477 19 -- 12,496 $ 12,477 $ 19 $ 12,496
---------- ---------- ---------- ---------- ========== ======= =========
Balance at December 31, 1997 48,450 19 (2,284) 99,348
Issuance of common stock -
employee stock options -- -- -- 109
Issuance of common stock -
pursuant to the Long-Term
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan -- -- (2,645) --
Common stock repurchased -- -- (8,229) (8,229)
Total comprehensive income 14,823 (169) -- 14,654 $ 14,823 $ (169) $ 14,654
---------- ---------- ---------- ---------- ========== ====== =========
Balance at December 31, 1998 63,273 (150) (13,158) 105,882
Issuance of common stock -
employee stock options -- -- -- 542
Earned compensation from
Supplemental Executive
Retirement Plan /
Recognition and Retention
Plan -- -- -- 725
Common stock repurchased -- -- (515) (515)
Net income 16,205 -- -- 16,205
Total comprehensive income -- 856 -- 856 $ 16,205 $ 856 $ 17,061
---------- ---------- ---------- ---------- ========== ====== =========
Balance at December 31, 1999 $ 79,478 $ 706 $ (13,673) $ 123,695
========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
46
<PAGE> 47
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 16,205 $ 14,823 $ 12,477
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 987 1,556 1,163
Accretion and Amortization of deferred loan origination fees, net of costs (2,513) (2,730) (2,225)
Provisions for estimated credit losses and valuation allowance 4,950 5,950 3,650
Provision for estimated losses on other real estate owned 195 608 216
Gain on sale of mortgage-backed securities -- (85) --
Loss (gain) on sales of other real estate owned 205 124 (9)
Increase in interest receivable (1,062) (1,405) (505)
Deferred income tax benefits (3,851) (1,941) (590)
(Increase) decrease in other assets (361) (934) 1,690
Increase in accounts payable and other liabilities 523 219 3,459
--------- --------- ---------
Net cash provided by operating activities 15,278 16,185 19,326
--------- --------- ---------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (57,345) (20,401) (32,995)
Proceeds from the maturity of investment securities available for sale -- 55,050 34,299
Decrease (increase) in stock in Federal Home Loan Bank 3,739 (714) (3,570)
Repayment of principal on mortgage-backed securities held to maturity -- 7,122 6,637
Proceeds from the sale of mortgage-backed securities held to maturity -- 17,924 --
Purchases of loans receivable (91,402) (2,361) (3,736)
Increase in loans receivable, net (16,562) (88,377) (152,594)
Proceeds from sale of real estate loans held for sale 23,501 14,150 2,047
Proceeds from sale of other real estate owned 4,586 2,501 3,690
Cash paid for capital expenditures (857) (1,227) (1,338)
Other, net 110 -- 9
--------- --------- ---------
Net cash used in investing activities (134,230) (16,333) (147,551)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from common stock issued through exercise of
employee stock options 542 109 318
Cash paid to acquire treasury stock (515) (8,229) (2,284)
Net increase in deposit accounts 46,815 22,985 173,477
Decrease (increase) in Federal Home Loan Bank advances 18,750 (13,000) 18,000
--------- --------- ---------
Net cash provided by financing activities 65,592 1,865 189,511
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (53,360) 1,717 61,286
Cash and cash equivalents at beginning of period 125,602 123,885 62,599
--------- --------- ---------
Cash and cash equivalents at end of period $ 72,242 $ 125,602 $ 123,885
========= ========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 48,150 $ 51,373 $ 42,768
Cash paid during the period for income taxes $ 15,245 $ 12,630 $ 7,500
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 4,826 $ 479 $ 2,427
Loans to facilitate the sale of other real estate owned $ 390 $ 1,392 $ 1,379
</TABLE>
See accompanying notes to the consolidated financial statements.
47
<PAGE> 48
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - ITLA Capital Corporation and Subsidiaries ("ITLA Capital"
and with its subsidiaries "the Company") is primarily engaged in the origination
of loans secured by income producing real estate. Through its principal
operating subsidiary, Imperial Capital Bank ("Imperial" or "the Bank"), the
Company accepts deposits insured by the Federal Deposit Insurance Corporation
("FDIC") which are used primarily to fund the investment in variable rate
commercial real estate loans. Through its other principal operating subsidiary,
ITLA Funding Corporation ("Funding"), the Company has originated
income-producing real estate loans for placement with third-party investors.
During 1998, the Company established a third operating subsidiary, ITLA
Commercial Investment Corporation ("CIC"), which was formed to be a real estate
investment trust which would invest in commercial real estate loans. However,
due to market conditions, CIC's activities were suspended during the year.
Imperial, Funding and CIC are wholly-owned by the Company.
The Company was organized in 1996 and became the sole shareholder of
Imperial as a result of a transaction that occurred on October 1, 1996. On that
date, a nonoperating subsidiary of the Company was merged with and into
Imperial, and all outstanding shares of Imperial common stock were converted
into an equal number of shares of Company common stock. This transaction was
accounted for as a reorganization of entities under common control.
Imperial has operated as a California industrial bank since 1974, and
became a publicly traded company in October 1995, when its shares were sold in
an initial public offering. Imperial operates six deposit branches in
California. From its formation in 1974 until December 31, 1999, Imperial's legal
name was Imperial Thrift and Loan Association. Effective January 1, 2000,
Imperial completed its name change to Imperial Capital Bank.
Funding was formed in October 1996 and commenced operations in 1997.
Funding, a Delaware corporation, was formed to originate commercial real estate
loans for sale in the secondary market. In 1998, Funding sold fixed rate
originations on a table funded basis to conduits that issue commercial
mortgage-backed securities. In the current year, Funding suspended separate
operations and all of its ongoing operations were merged into Imperial.
FINANCIAL STATEMENT PRESENTATION - The accounting and reporting policies
of the Company conform to generally accepted accounting principles in the United
States ("GAAP") and to prevailing practices within the financial services
industry. The consolidated financial statements include the accounts of the
Company and all wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated. Certain amounts in prior periods have been
reclassified to conform to the presentation in the current period. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
48
<PAGE> 49
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT SECURITIES - Investment securities available for sale are
carried at fair value with unrealized gains or losses reported net of taxes, as
a component of other comprehensive income, until realized.
LOANS RECEIVABLE - Loans receivable, which includes loans held for
investment and loans held for sale, are generally carried at principal amounts
outstanding adjusted for purchase premiums, charge-offs, net deferred
loan origination fees and other unearned income. Deferred loan origination fees
and other unearned income include deferred unamortized fees net of direct
incremental loan origination costs. Interest income is accrued as earned. Net
purchase premiums or discounts and deferred loan origination fees are amortized
or accreted as interest income using the interest method. Loans held for sale
are recorded at the lower of cost or fair market value.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be unlikely. When a loan is placed on nonaccrual status, all
previously accrued but uncollected interest is reversed against current period
operating results. Subsequent cash collections on nonaccrual loans are either
recognized as interest income on a cash basis, if the loan is well secured and
in management's judgment the net book value is fully collectible, or recorded
entirely as a reduction of principal.
Loans secured by income producing real estate are considered impaired
when, based upon current information and events, it is probable that the Bank
will be unable to collect all principal and interest amounts due according to
the contractual terms of the loan agreement on a timely basis. Once such a loan
is determined to be impaired, the impairment is measured based on the present
value of the expected future cash flows discounted at the loan's effective
interest rate or by using the loan's most recent market price or the fair value
of the collateral if the loan is collateral dependent.
When the measurement of an impaired income producing real estate loan is
less than the recorded amount of the loan, a valuation allowance is established
by a corresponding charge to the provision for estimated credit losses or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to the provision for estimated credit losses.
The Bank evaluates single-family real estate and other smaller balance,
homogeneous loans for impairment on a collective and individual basis. These
loans are evaluated for impairment by comparing management's estimate of the net
realizable value of such loans to the net carrying value of the portfolio.
The Company's policy for recognizing interest income on impaired loans
is the same as that for nonaccrual loans.
49
<PAGE> 50
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR CREDIT LOSSES - The Company maintains an allowance for
credit losses at a level considered adequate to cover probable losses on loans.
In evaluating the adequacy of the allowance for credit losses, management
estimates the amount of the loss for each loan that has been identified as
having more than standard credit risk. Those estimates give consideration to,
among other factors, economic and social conditions, estimated real estate
collateral value and cash flow, and the financial strength and commitment of the
borrower or guarantors, where appropriate. Additionally, an estimate for credit
loss is calculated for the remaining portion of the portfolio giving
consideration to the Company's historical loss experience in the portfolio,
adjusted, as appropriate, for the estimated effects of current economic
conditions and changes in the composition of the loan portfolio over time. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance, or portion thereof, has been confirmed.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") represents
real estate acquired through or in lieu of foreclosure. OREO is held for sale
and is initially recorded at fair value at the date of foreclosure, establishing
a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of cost or
estimated fair value less costs of disposition. The net operating results from
OREO are recognized in the current periods as non-interest expense.
PREMISES AND EQUIPMENT - Premises and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets ranging
from three to twelve years. Amortization of leasehold improvements is calculated
on the straight-line method over the shorter of the estimated useful lives of
the assets or the corresponding lease term.
INCOME TAXES - Provision for income taxes is the amount of estimated tax
due reported on the Company's tax returns and the change in the amount of
deferred tax assets and liabilities. Deferred income taxes represent the
estimated net income tax expense payable (or benefits receivable) for temporary
differences between the accounting basis and tax basis of the Company's assets
and liabilities.
EARNINGS PER SHARE - Earnings per share for all periods presented in the
consolidated statements of income are computed based on the weighted-average
number of shares outstanding during each year. Basic Earnings Per Share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of common shares. Diluted Earnings Per Share
includes the effect of common stock equivalents of the Company, which include
only shares issuable on the exercise of outstanding options. A reconciliation of
the computation of Basic Earnings Per Share and Diluted Earnings Per Share is
presented in Note 14 - Earnings Per Share.
STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation plan in accordance with Accounting Principles Board ("APB") Opinion
No. 25 - "Accounting for Stock Issued to Employees". Under APB Opinion No. 25,
no compensation expense is recognized for a stock option grant if the exercise
price of the stock option at measurement date is equal to or greater than the
fair market value of the common stock on the date of grant. The Company has
disclosed in Note 9 - Benefit Plans the pro forma effect on net income and
earnings per share as if the Company had elected to recognize compensation
expense for the stock options granted.
50
<PAGE> 51
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME - Other comprehensive income is displayed in the
Consolidated Statement of Changes in Shareholders' Equity and consists entirely
of the change in net unrealized holding gain or loss on securities classified as
available for sale, net of the related income tax effect.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). The Statement established accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or a liability measured at its fair value. The statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allow a derivative's gain and losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133". The Board
concluded that, due to effected entities and their auditors requesting more time
to study, understand, and implement the provisions of this statement, it is
appropriate to defer the effective date of SFAS No. 133. This Statement shall be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
Management expects that the Bank will adopt SFAS No. 133, as amended, on
January 1, 2001. The impact of the adoption is not anticipated to have a
material effect on the Bank's financial position or results of operations.
51
<PAGE> 52
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2---INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED APPROXIMATE --------------------
COST FAIR VALUE GAINS LOSSES
--------- ----------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Investment securities available for sale:
U.S. Government Agency $43,260 $43,012 $ -- $ 248
Equity securities 14,786 16,235 1,449 --
------- ------- ------- -------
Total investment securities available for sale $58,046 $59,247 $ 1,449 $ 248
======= ======= ======= =======
DECEMBER 31, 1998:
Investment securities available for sale:
Equity securities $ 385 $ 135 $ -- $ 250
Certificates of deposit 194 194 -- --
------- ------- ------- -------
Total investment securities available for sale $ 579 $ 329 $ -- $ 250
======= ======= ======= =======
</TABLE>
At December 31, 1999, the carrying value of U.S. government securities
available for sale consisted of $10 million of securities that mature in one
year or less with an average yield of 5.06%, with the remaining $33.0 million of
securities maturing within two years with an average yield of 6.22%.
During 1999, there were no transfers from the held to maturity portfolio
and no securities were sold prior to their maturity or call date.
During 1998, the Company sold its "held to maturity" mortgage-backed
securities portfolio, realizing a net gain of $85,000 from the sale, and
reinvested the proceeds from the sale in higher yielding loans originated
subsequent to the sale. The mortgage-backed securities portfolio was sold
because of a change in long-term investment strategy. At the time of sale, the
mortgage-backed securities were carried at an amortized cost of $17,800,000.
Since the time of the sale of securities from the "held to maturity"
classification, the Company has and will not designate any future
mortgage-backed securities investments it makes as "held to maturity" for
the forseeable future.
52
<PAGE> 53
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 866,638 $ 811,076
Construction 107,833 71,385
--------- ---------
974,471 882,461
Deferred loan origination fees and costs and unamortized
premium on purchased loans, net (3,096) (3,561)
--------- ---------
971,375 878,900
Allowance for credit losses (19,895) (16,811)
--------- ---------
$ 951,480 $ 862,089
========= =========
LOANS HELD FOR SALE - AT LOWER OF COST OR FAIR MARKET VALUE:
Real estate $ -- $ 12,188
--------- ---------
$ -- $ 12,188
========= =========
TOTAL LOANS RECEIVABLE:
Real estate $ 866,638 $ 823,264
Construction 107,833 71,385
--------- ---------
974,471 894,649
Deferred loan origination fees and costs and unamortized
premium on purchased loans, net (3,096) (3,561)
--------- ---------
971,375 891,088
Allowance for credit losses (19,895) (16,811)
--------- ---------
$ 951,480 $ 874,277
========= =========
</TABLE>
53
<PAGE> 54
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--LOANS RECEIVABLE (Continued)
At December 31, 1999, approximately 79.3%, 11.1% and 9.3% of the
Company's loans collateralized by real estate are secured by income producing
properties, properties under development and residential one-to four family
properties, respectively. Approximately 66.5% of the Company's loans secured by
real estate were collateralized by properties located in California.
At December 31, 1999, approximately $155,933,000 of loans receivable
were pledged to secure a line of credit at the Federal Home Loan Bank of San
Francisco ("FHLB").(See Note 8 - FHLB Advances.)
The following is the activity in the allowance for credit losses for the
periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 16,811 $ 12,178 $ 10,885
Provision for estimated credit losses 4,950 4,550 3,300
(Charge-offs) recoveries on loans secured by real estate:
Charge-offs (2,088) (64) (2,124)
Recoveries 222 147 117
-------- -------- --------
Net (charge-offs) recoveries (1,866) 83 (2,007)
-------- -------- --------
Balance at end of year $ 19,895 $ 16,811 $ 12,178
======== ======== ========
</TABLE>
The provision for valuation allowance on loans held for sale totaled $0
and $1,400,000 for the years ending December 31, 1999 and 1998, respectively.
During 1998, the Company designated a pool of loans previously classified as
held for investment as held for sale. In connection therewith, the Company
recorded a provision for valuation allowance of $1,400,000. These loans were
subsequently sold during the year with no additional gain or loss.
As of December 31, 1999 and 1998, the accrual of income had been
suspended on approximately $7,977,000 and $5,434,000 respectively, of loans
secured by real estate. The interest income that was contractually due on loans
that were on nonaccrual status that was not recognized during the years ended
December 31, 1999, 1998 and 1997 was approximately $574,000, $326,000 and
$384,000 respectively.
54
<PAGE> 55
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3--LOANS RECEIVABLE (Continued)
As of December 31, 1999 and 1998, restructured loans totaled $13,996,000
and $805,000, respectively. There were no related commitments to lend additional
funds on restructured loans. For the years ended December 31, 1999, 1998 and
1997, $1,384,000, $175,000 and $192,000, respectively, of gross interest income
would have been recorded had the loans been current in accordance with their
original terms compared to $1,376,000, $140,000 and $156,000, respectively, of
interest income which was included in net income for the same periods. The
average yield on restructured loans was 9.6% at December 31, 1999.
The Company's recorded investment in impaired loans, and the related
valuation allowance, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- --------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Valuation allowance required $ 3,724 $ 734 $ 978 $ 125
No valuation allowance required 16,602 -- 5,053 --
-------- -------- -------- --------
Total impaired loans $ 20,326 $ 734 $ 6,031 $ 125
======== ======== ======== ========
</TABLE>
All impaired loans with a valuation allowance were on nonaccrual status
at December 31, 1999. The average recorded investment in impaired loans for the
years ended December 31, 1999, 1998 and 1997 was $8,653,000, $5,460,000 and
$3,656,000, respectively. Interest income recognized on impaired loans for the
years ended December 31, 1999, 1998 and 1997 was $414,000, $22,000 and $129,000,
respectively.
Loans having carrying values of $4,826,000 and $479,000 were transferred
to OREO in 1999 and 1998, respectively.
55
<PAGE> 56
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4--OTHER REAL ESTATE OWNED
Other real estate owned was stated as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for sale $ 1,248 $ 1,422
Less valuation allowance (207) (221)
-------- --------
Other real estate owned, net $ 1,041 $ 1,201
======== ========
</TABLE>
The activity in the valuation allowance for other real estate owned was
as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 221 $ 732 $ 1,116
Provision for estimated losses on other real estate owned 195 608 216
Charge-offs upon sale of other real estate owned (209) (1,119) (600)
-------- -------- --------
Balance at end of year $ 207 $ 221 $ 732
======== ======== ========
</TABLE>
56
<PAGE> 57
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment $ 5,171 $ 5,287
Leasehold improvements 3,918 3,154
Automobiles 282 320
-------- --------
9,371 8,761
Less accumulated depreciation and amortization (6,118) (5,268)
-------- --------
$ 3,253 $ 3,493
======== ========
</TABLE>
Depreciation and amortization expense on premises and equipment for the
years ended December 31, 1999, 1998 and 1997 was $987,000, $903,000 and
$771,000, respectively.
57
<PAGE> 58
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6--DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market and passbook accounts $126,529 $132,697
Time certificates under $100,000 522,227 518,309
Time certificates $100,000 and over 264,857 215,792
-------- --------
$913,613 $866,798
======== ========
</TABLE>
Money market and passbook accounts have no contractual maturity and pay
interest at rates ranging from 1.00% to 7.50% per annum. Additionally, some
money market accounts have limited checking features which allow three check
withdrawals per month. Time certificates have maturities ranging from 30 days to
five years and bear interest at varying rates based on market conditions,
ranging from 3.50% to 8.02% per annum.
There were no brokered deposits at December 31, 1999. Interest expense
on time certificates $100,000 and over for the years ended December 31, 1999,
1998 and 1997 amounted to approximately $12,884,000, $11,200,000 and $3,775,000,
respectively.
The Bank is subject to the provisions of the California Industrial Loan
Law, which limit the amount of deposits which the Bank may have outstanding to
20 times its shareholder's equity. At December 31, 1999, the Bank's deposits are
9.3 times its shareholder's equity.
The Bank is a member of the FDIC and its deposits are insured up
to $100,000 each per insured depositor.
58
<PAGE> 59
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6--DEPOSIT ACCOUNTS (Continued)
As of December 31, 1999, the contractual maturities of time certificate
accounts were as follows:
<TABLE>
<CAPTION>
YEAR OF
MATURITY AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C>
2000 $684,001
2001 82,064
2002 15,717
2003 3,838
2004 1,464
--------
$787,084
========
</TABLE>
NOTE 7--LINES OF CREDIT
As of December 31, 1999 and 1998, the Bank had uncommitted, unsecured
lines of credit with two banks renewable daily in the amount of $30,000,000.
There were no borrowings against these lines at December 31, 1999 and 1998.
59
<PAGE> 60
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8--FHLB ADVANCES
FHLB advances represent collateralized obligations with the FHLB of San
Francisco, and are summarized by contractual maturity as follows:
<TABLE>
<CAPTION>
YEAR OF
MATURITY AMOUNT
--------------- --------------
(IN THOUSANDS)
<S> <C>
Renewable Daily $10,000
2000 45,500
2001 --
2002 --
2003 5,750
2004 6,000
-------
$67,250
=======
</TABLE>
The Company has pledged loans receivable secured by real estate with a
carrying value of $155,933,000 and cash equivalents and investments securities
available for sale with a carrying value of $52,878,000, for a total of
$208,811,000 of assets pledged as collateral for this borrowing facility. The
total borrowing capacity available from the collateral that has been pledged is
approximately $108,966,000, of which $67,250,000 has been utilized as of
December 31, 1999.
The following table represents the maximum month-end balance
outstanding, weighted-average daily balance outstanding, average rates paid
during the year, and the average rates on the balance at year-end for FHLB
advances:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum month-end balance outstanding $ 67,250 $ 61,500
Weighted-average daily balance outstanding $ 37,235 $ 56,542
Average rates paid during the year 5.39% 5.90%
Average rates on balance at year-end 5.61% 5.12%
Balance at year-end $ 67,250 $ 48,500
</TABLE>
60
<PAGE> 61
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9--BENEFIT PLANS
Salary Savings Plan. The Company has a salary savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Savings Plan, participating employees may
defer a portion of their pretax earnings, up to 15% of their compensation. The
Company matches 50% of each employee's salary deferral, up to a maximum 6% of
the employee's salary. Employees vest in employer contributions and their
earnings thereon over a five year period. The Company's matching contributions
to the Savings Plan were $147,000, $181,000 and $174,000 in 1999, 1998 and 1997,
respectively.
Nonqualified Deferred Compensation Plans. The Company also has deferred
compensation plans designed to provide additional retirement benefits for
certain officers and key employees who cannot take full advantage of the Savings
Plan. Costs associated with these deferred compensation plans, primarily
interest expense, amounted to $0, $4,000 and $34,000 in 1999, 1998 and 1997,
respectively.
Long-Term Supplemental Executive Retirement Plan. The Company has
adopted a Long-Term Supplemental Executive Retirement Plan (the "SERP") for
certain officers and key employees which provides for participants to be awarded
shares of common stock of the Company on a tax deferred basis from the current
Recognition and Retention Plan ("RRP") previously approved by the shareholders.
Such shares vest in three year cycles, and once vested, may be distributed to
participants upon a change in control or the participant's death, disability,
retirement date or date of termination of employment. During 1998, the Company
issued shares of common stock, representing the remaining number of unissued
shares authorized to be awarded under the RRP, to a Rabbi Trust managed by a
third-party financial institution. For 1999 and 1998, 58,017 and 29,393 shares,
respectively, were then allocated to designated SERP accounts for the future
benefit of certain Company executives. (The 1999 amount consisted of 28,624
shares allocated for 1999 and an allocation of 29,393 shares for 1997.) No
stock has been actually received by the participants from the SERP/RRP. The
Company recognized $528,000 and $265,000 of compensation expense from the
SERP/RRP in 1999 and 1998 respectively.
Stock Plans. The Company adopted an employee stock incentive plan and
stock option plan for nonemployee directors (collectively, "the Stock Plan")
which provides for the award of up to 1,000,000 shares of common stock to
officers, directors and employees as compensation for future services, not to
exceed a combined 550,000 shares during 1995, the first year of the Stock Plan,
with annual awards thereafter limited to 100,000 additional shares. As of
December 31, 1999, the Company had granted an aggregate of 1,033,000 options
under the Stock Plan, of which 82,916 have been exercised and 160,584 have been
forfeited. The exercise price per share of the options so granted ranges from
$10.00 to $18.00 per share and will generally vest 33-1/3% per year, beginning
with the first anniversary of the date of each individual grant.
61
<PAGE> 62
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9--BENEFIT PLANS (Continued)
The number of options and weighted-average exercise prices of options
for each of the following groups of options, for the periods indicated, are as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICES
------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Options Outstanding at the Beginning of the Year 750,000 569,500 $ 13.05 $ 11.39
Options Granted During the Year 100,000 204,000 $ 14.00 $ 18.00
Options Exercised During the Year (51,000) (8,500) $ 10.64 $ 12.78
Options Forfeited During the Year (9,500) (15,000) $ 17.63 $ 17.22
-------- --------
Options Outstanding at the End of the Year 789,500 750,000 $ 13.26 $ 13.05
======== ========
Options Exercisable at the End of the Year 534,500 457,500 $ 11.99 $ 10.79
======== ========
</TABLE>
The fair value of each option grant was estimated on the date of grant
using an option pricing model with the following weighted-average assumptions
for option grants:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE ASSUMPTIONS FOR OPTION GRANTS
---------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividend Yield 0.0% 0.0% 0.0%
Expected Volatility 31.9% 28.8% 20.3%
Risk-Free Interest Rates 4.72% 5.58% 6.24% to 6.49%
Expected Lives Seven Years Seven Years Seven Years
Weighted-Average Fair Value $ 6.18 $ 7.93 $ 5.87
</TABLE>
The Company accounts for the Stock Plan under APB Opinion No. 25 and,
accordingly, no compensation costs have been recognized in the accompanying
consolidated statements of income for 1999, 1998 or 1997. If compensation costs
for the Stock Plan had been determined under SFAS No. 123 - "Accounting for
Stock-Based Compensation", pro forma net income would have been $15,601,000
$14,175,000 and $12,082,000 and Diluted Earnings Per Share would have been
$2.13, $1.81 and $1.52 for the years ended December 31, 1999, 1998 and 1997,
respectively.
62
<PAGE> 63
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10--INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Allowance for credit losses $ 8,818 $ 7,005
Accrued expenses 2,658 1,029
State income taxes 1,059 958
Other real estate owned 278 300
Permanent impairment on equity security 186 --
Unrealized loss on investment securities available for sale 123 124
-------- --------
Total deferred tax assets 13,122 9,416
-------- --------
Components of the deferred tax liability:
Deferred loan origination costs 1,645 2,050
FHLB stock dividends 1,234 1,014
Unrealized gain on investment securities available for sale 719 --
Other 123 82
-------- --------
Total deferred tax liabilities 3,721 3,146
-------- --------
Net deferred tax asset $ 9,401 $ 6,270
======== ========
</TABLE>
The deferred tax asset is considered fully realizable, as when the
temporary differences associated with the deferred tax asset are recognized for
income tax purposes, those deductions are expected to be fully offset, either by
carryback against previously taxed income or by future taxable income.
Accordingly, the Company has not established a valuation allowance on the
deferred tax asset.
63
<PAGE> 64
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10--INCOME TAXES (Continued)
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 11,362 $ 9,347 $ 7,183
State 3,759 2,898 2,062
-------- -------- --------
15,121 12,245 9,245
-------- -------- --------
Deferred:
Federal (2,841) (1,630) (437)
State (1,010) (311) (153)
-------- -------- --------
(3,851) (1,941) (590)
-------- -------- --------
$ 11,270 $ 10,304 $ 8,655
======== ======== ========
</TABLE>
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 7.0% 7.0% 7.0%
State income tax credits (Enterprise Zone and LARZ)
and other benefits (1.0%) (1.0%) (1.0%)
------ ------ ------
Effective income tax rate 41.0% 41.0% 41.0%
====== ====== ======
</TABLE>
The income tax expense (benefit) component of other comprehensive income
was $595,000, $112,000 and ($12,000) for the years ended December 31, 1999, 1998
and 1997, respectively.
64
<PAGE> 65
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist of commitments to extend credit.
These instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company has exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit.
This exposure is represented by the contractual amount of those instruments as
the Company uses the same lending policies for these instruments as it does for
the loan portfolio. The Company had outstanding unfunded loan commitments,
including the unfunded portion of construction loans, of approximately
$71,693,000 and $112,138,000 at December 31, 1999 and 1998, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases office facilities under noncancelable operating
leases. Estimated future minimum lease payments required under leases with
initial or remaining noncancelable terms in excess of one year at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000 $1,576
2001 1,615
2002 1,521
2003 1,396
2004 1,145
Thereafter 1,649
------
$8,902
======
</TABLE>
Certain leases contain rental escalation clauses based on increases in
the Consumer Price Index, and renewal options of up to ten years which may be
exercised by the Company. The Company incurred rent expense of $1,693,000,
$1,781,000 and $1,588,000 in 1999, 1998 and 1997, respectively.
65
<PAGE> 66
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12--COMMITMENTS AND CONTINGENCIES (Continued)
CONTINGENCIES
The Company is subject to various pending legal actions which arise in
the normal course of business. The Company maintains reserves for losses from
legal actions which are both probable and estimable. Although the amount of the
ultimate exposure, if any, cannot be determined at this time, in management's
opinion, based upon advice of counsel, the disposition of claims currently
pending will not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 13--REGULATORY REQUIREMENTS
The Bank is subject to supervision and regulation by the FDIC and the
Department of Financial Institutions ("DFI") of the State of California under
the provisions of the California Industrial Loan Law. These provisions authorize
the Bank's issuance of certificates of deposit, place limits on the size and
type of loans the Bank can make, and specify that the Bank's allowance for
credit losses be maintained at certain minimum levels.
The Bank is also subject to various capital requirements administered by
the FDIC. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary action by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements and ultimately the consolidated financial statements of the Company.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the following table) of Total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average total assets ("Leverage Ratio"). Management believes,
as of December 31, 1999, that the Bank meets all applicable capital adequacy
requirements.
As of December 31, 1999 the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum Total Risk-Based, Tier 1 Risk-Based and Tier 1 Leverage Ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's category.
66
<PAGE> 67
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13--REGULATORY REQUIREMENTS (Continued)
The Bank's actual regulatory capital amounts and ratios are presented in
the following table:
<TABLE>
<CAPTION>
MINIMUM CAPITAL REQUIRED
REQUIREMENT FOR TO MAINTAIN
CAPITAL ADEQUACY "WELL CAPITALIZED"
ACTUAL PURPOSES DESIGNATION
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
Total capital
(to risk-weighted assets) $110,531 11.37% $ 77,770 8.00% $ 97,213 10.00%
Tier 1 capital
(to risk-weighted assets) $ 98,299 10.11% $ 38,885 4.00% $ 58,328 6.00%
Tier 1 capital
(to average total assets) $ 98,299 9.04% $ 43,485 4.00% $ 54,356 5.00%
AS OF DECEMBER 31, 1998
Total capital
(to risk-weighted assets) $ 99,216 10.60% $ 74,911 8.00% $ 93,639 10.00%
Tier 1 capital
(to risk-weighted assets) $ 87,462 9.34% $ 37,456 4.00% $ 56,183 6.00%
Tier 1 capital
(to average total assets) $ 87,462 8.66% $ 40,381 4.00% $ 50,477 5.00%
</TABLE>
67
<PAGE> 68
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 14--EARNINGS PER SHARE
The following is a reconciliation of the amounts used in the calculation
of Basic Earnings Per Share and Diluted Earnings Per Share.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE PER
NET SHARES SHARE
INCOME OUTSTANDING AMOUNT
-------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Basic Earnings Per Share $ 16,205 7,182 $ 2.26
Dilutive Effect of Stock Options -- 157 (0.05)
-------- -------- --------
Diluted Earnings Per Share $ 16,205 7,339 $ 2.21
======== ======== ========
YEAR ENDED DECEMBER 31, 1998
Basic Earnings Per Share $ 14,823 7,603 $ 1.95
Dilutive Effect of Stock Options -- 232 (0.06)
-------- -------- --------
Diluted Earnings Per Share $ 14,823 7,835 $ 1.89
======== ======== ========
YEAR ENDED DECEMBER 31, 1997
Basic Earnings Per Share $ 12,477 7,748 $ 1.61
Dilutive Effect of Stock Options -- 193 (0.04)
-------- -------- --------
Diluted Earnings Per Share $ 12,477 7,941 $ 1.57
======== ======== ========
</TABLE>
68
<PAGE> 69
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are based on judgments regarding credit risk,
investor expectations of future economic conditions, normal cost of
administration of these instruments and other risk characteristics, including
interest rate risk and prepayment risk. These estimates are subjective in
nature, involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. The fair value estimates presented do not include the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments.
The Company uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate value:
Cash and Cash Equivalents - The carrying values reported in the
balance sheet approximate fair values due to the short-term nature of
the assets.
Investment and Mortgage-Backed Securities - Fair values are based
on bid prices and quotations published and/or received from established
securities dealers.
Stock in Federal Home Loan Bank - The fair value is based on bid
prices quoted from the FHLB.
Loans Held for Investment - The fair value is estimated using the
present value of future cash flows, discounted using the current rate at
which similar loans would be made to borrowers with similar credit
ratings and for the same maturities and giving consideration to
estimated prepayment risk and credit risk.
Loans Held for Sale - The fair value is based on bid prices
received from potential buyers.
Accrued Interest Receivable - The carrying values reported in the
balance sheet approximate the fair values due to the short-term nature
of the asset.
Deposit Accounts - The fair value of money market and passbook
accounts is estimated to be the amount payable on demand. The fair
values for time certificates, both over and under $100,000, are
estimated by discounting the expected cash flows at current market rates
over expected maturities.
Federal Home Loan Bank Advances - The fair value is estimated by
discounting the expected cash flows at current market rates over
contractual maturities.
69
<PAGE> 70
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
COST OR COST OR
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 72,242 $ 72,242 $ 125,602 $ 125,602
Investment securities 58,046 59,247 329 329
Stock in Federal Home Loan Bank 8,894 8,894 12,633 12,633
Loans held for sale, net -- -- 12,188 12,188
Loans held for investment 974,471 974,024 882,461 884,607
Deferred loan origination fees and costs (3,096) -- (3,561) --
Allowance for credit losses (19,895) -- (16,811) --
--------- --------- --------- ---------
Net loans receivable 951,480 974,024 874,277 896,795
--------- --------- --------- ---------
Accrued interest receivable $ 7,383 $ 7,383 $ 6,321 $ 6,321
Financial liabilities:
Deposit accounts $ 913,613 $ 911,531 $ 866,798 $ 869,136
Federal Home Loan Bank advances 67,250 66,598 48,500 48,524
</TABLE>
70
<PAGE> 71
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16---BUSINESS SEGMENT INFORMATION
SFAS No. 131 - "Disclosures About Segments of an Enterprise and Related
Information" requires disclosure of segment information in a manner consistent
with the "management approach". The management approach is based on the way the
chief operating decision-maker organizes segments within a company for making
operating decisions and assessing performance.
The main factors that were used to identify the Company's operating
segments were the specific product and business lines of the various operating
segments of the Company. The Company's various operating segments are organized
separately by legal structure for each product and service offered. As of
December 31, 1999, management has identified one operating segment that meets
the criteria of being a reportable segment in accordance with the provisions of
SFAS No. 131. This reportable segment is real estate lending (funded primarily
by FDIC-insured deposits) which, by its legal form, is identified as operations
of the Bank. This segment derives the majority of its revenue by originating
loans secured by income producing real estate. Other operating segments of the
Company that did not meet the criteria of being a reportable segment in
accordance with SFAS No. 131 have been aggregated and reported as "All Other".
Transactions from all of the Company's operating segments occur in the United
States. The Company has no transactions with a single external customer that
exceeds ten percent of the Company's consolidated revenues.
Transactions between the reportable segment of the Company and its other
operating segments are made at terms which approximate arm's-length transactions
and in accordance with GAAP. There is no significant difference between the
measurement of the reportable segment's assets and profits and losses disclosed
below and the measurement of assets and profits and losses in the Company's
consolidated balance sheet and statement of income. Accounting allocations are
made in the same manner for all operating segments.
71
<PAGE> 72
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16---BUSINESS SEGMENT INFORMATION (Continued)
Required reported segment information for 1999, 1998 and 1997 is
detailed below:
<TABLE>
<CAPTION>
REAL ESTATE
LENDING
(FUNDED
PRIMARILY
BY FDIC-
INSURED ALL
DEPOSITS) OTHER TOTAL
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1999:
Revenues from external customers $ 99,888 $ 2,226 $ 102,114
Total interest income 98,889 2,324 101,213
Total interest expense 48,402 58 48,460
Depreciation and amortization expense 690 297 987
Provision (benefit) for income taxes 11,643 (373) 11,270
Capital expenditures 497 360 857
Deferred income taxes 8,050 1,351 9,401
Total assets 1,087,162 28,661 1,115,823
Income (loss) before provision (benefit) for income taxes 28,392 (917) 27,475
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998:
Revenues from external customers $ 100,312 $ 3,800 $ 104,112
Total interest income 99,419 2,246 101,665
Total interest expense 51,345 42 51,387
Depreciation and amortization expense 900 656 1,556
Provision (benefit) for income taxes 11,927 (1,623) 10,304
Capital expenditures 665 562 1,227
Deferred income taxes 5,775 495 6,270
Total assets 1,010,273 22,374 1,032,647
Income (loss) before provision (benefit) for income taxes 29,098 (3,971) 25,127
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1997:
Revenues from external customers $ 86,538 $ 219 $ 86,757
Total interest income 85,905 (788) 85,117
Total interest expense 43,310 -- 43,310
Depreciation and amortization expense 1,147 16 1,163
Provision (benefit) for income taxes 9,853 (1,198) 8,655
Capital expenditures 538 800 1,338
Deferred income taxes 3,931 259 4,190
Total assets 1,012,666 3,243 1,015,909
Income (loss) before provision (benefit) for income taxes 24,609 (3,477) 21,132
</TABLE>
72
<PAGE> 73
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 17--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,217 $ 17,026
Investment securities available for sale 16,235 135
Investments in wholly-owned subsidiaries:
Imperial Capital Bank 98,338 88,486
ITLA Funding Corporation 653 889
ITLA Commercial Investment Corporation 914 1,006
Other assets 2,571 1,388
-------- --------
Total assets $126,928 $108,930
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 3,233 $ 3,048
Shareholders' equity 123,695 105,882
-------- --------
Total liabilities and shareholders' equity $126,928 $108,930
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income $ 2,263 $ 554 $ 95
General and administrative expense 2,832 1,309 706
-------- -------- --------
Loss before income tax benefit and equity in undistributed net
income of subsidiaries (569) (755) (611)
Income tax benefit (225) (309) (440)
-------- -------- --------
Loss before equity in undistributed net income of subsidiaries (344) (446) (171)
Equity in undistributed net income of subsidiaries 16,549 15,269 12,648
-------- -------- --------
NET INCOME $ 16,205 $ 14,823 $ 12,477
======== ======== ========
</TABLE>
73
<PAGE> 74
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 17--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 16,205 $ 14,823 $ 12,477
Adjustments to net income:
Equity in undistributed net income of subsidiaries (16,549) (15,269) (12,648)
Permanent impairment on investment in equity securities 375 -- --
Increase in other assets (1,010) (1,429) (3,089)
Increase in liabilities 910 234 1,567
-------- -------- --------
Net cash used in operating activities (69) (1,641) (1,693)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (14,776) (375) --
Capital contribution to Imperial Capital Bank (25) -- --
Dividends received from Imperial Capital Bank 6,000 27,000 3,000
Capital contribution to ITLA Commercial Investment Corporation -- (20,025) --
Capital distribution from ITLA Commercial Investment Corporation 25 19,500 --
Other, net 9 (17) --
-------- -------- --------
Net cash (used in) provided by investing activities (8,767) 26,083 3,000
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from common stock issued through exercise of
employee stock options 542 109 318
Cash paid to acquire treasury stock (515) (8,229) (2,284)
-------- -------- --------
Net cash provided by (used in) financing activities 27 (8,120) (1,966)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (8,809) 16,322 (659)
Cash and cash equivalents at beginning of period 17,026 704 1,363
-------- -------- --------
Cash and cash equivalents at end of period $ 8,217 $ 17,026 $ 704
======== ======== ========
</TABLE>
NOTE 18 -- SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1999, the Company acquired 100 percent of the
equity and certain collateralized mortgage bonds (CMOs) of the ICCMAC
Multifamily and Commercial Trust 1999-1 (the "Trust"). As of December 31, 1999,
the Trust held approximately $255 million of assets, comprised of approximately
65 percent and 35 percent of multi-family and commercial loans, respectively,
with over 50 percent of the loans in California. Over two-thirds of the loans
are adjustable rate mortgages. The Trust's assets, liabilities and earnings will
be consolidated in ITLA Capital's financial statements on a prospective basis.
74
<PAGE> 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers of the Registrant are identified below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- ----- --------------------------------------------------
<S> <C> <C>
George W. Haligowski 45 Chairman of the Board, President and Chief
Executive Officer of ITLA Capital, and Chairman of
the Board and Chief Executive Officer Imperial
Capital Bank, Chairman of the Board of ITLA
Funding
Michael A. Sicuro 41 Managing Director and Chief Financial Officer of
ITLA Capital, Imperial Capital Bank, and ITLA
Funding, Director of ITLA Funding
Timothy M. Doyle 43 Managing Director and Chief Administrative Officer
of ITLA Capital and Imperial Capital Bank
Norval L. Bruce 58 Vice Chairman of the Board and Chief Credit
Officer of ITLA Capital and Imperial Capital Bank,
Director of ITLA Funding
Sheryl A. Morehead 47 Chief Operating Officer and President of Imperial
Capital Bank
Steven C. Romelt 50 Senior Vice President and Chief Lending Officer of
Imperial Capital Bank
Anthony A. Rusnak 36 First Vice President, General Counsel and
Corporate Secretary
</TABLE>
George W. Haligowski has served as Chairman of the Board, President and
Chief Executive Officer of ITLA Capital since inception and Imperial Capital
Bank from 1992 until October 1997. He has served as Chairman of the Board and
Chief Executive Officer of Imperial Capital Bank since October 1997. From 1990
to the present, he has also served as President, Chief Executive Officer and
Principal of Halivest International, Ltd., an international finance and asset
management company. He was previously employed as a Vice President by Shearson
Lehman Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to 1988), and
by Avco Financial Services as Regional Director of its Japanese branch
operations (1976 to 1981), as Training Coordinator for Avco Thrift and Loan
(1976) and as a Branch Manager (1974 to 1976).
Michael A. Sicuro is Managing Director and Chief Financial Officer of
ITLA Capital, Imperial Capital Bank and ITLA Funding. He is also a director of
ITLA Funding. Prior to joining Imperial Capital Bank in 1996, he was employed by
Blue Cross of California, most recently as Vice President and Chief Financial
Officer. He was previously employed by U.S. Bancorp Mortgage Company as Senior
Vice President and Chief Financial Officer from 1993 to 1994; Western Federal
Savings and Loan Association as Senior Vice President and Controller from 1992
to 1993; and First Interstate Bancorp as Vice President and Deputy Controller
from 1990 to 1992. He was an Audit Manager with Deloitte and Touche from 1984 to
1990.
Timothy M. Doyle is Managing Director and Chief Administrative Officer
of ITLA Capital and Imperial Capital Bank. Before joining Imperial Capital Bank,
he was the Controller and Director of Operations at Northeastern Plastics from
1995 to 1996; Assistant Controller of Alpha Wire Corporation from 1992 to 1994;
and
75
<PAGE> 76
Vice President and Chief Financial Officer of Halivest International, Ltd. from
1989 to 1991. From 1982 to 1988, he was the Corporate Controller of the Shepaug
Corporation.
Norval L. Bruce has served as Vice Chairman and Chief Credit Officer of
ITLA Capital and Imperial Capital Bank since June of 1999. He was previously
President and Chief Operating Officer of Imperial Capital Bank from October 1997
to June 1999, and previously was the Executive Vice President and Chief Credit
Officer of Imperial Capital Bank from 1990 to October 1997. Mr. Bruce is also a
director of ITLA Capital, Imperial Capital Bank and ITLA Funding. From 1988 to
1989, he served as Executive Vice President and Chief Credit Officer of Security
Pacific Bank, Nevada. He was previously employed by Security Pacific Bank from
1965 to 1988 in a variety of positions including management positions in which
he was responsible for both loan origination and credit quality.
Sheryl A. Morehead has served as President and Chief Operating Officer
of Imperial Capital Bank since June of 1999. She was CEO and President of First
Bank of Beverly Hills from October 1996 to June 1999. Previously, she was
President of First Los Angles Bank from 1993 to 1996, the Chief Credit and
Lending Officer with First Federal Bank from 1990 to 1993, an Executive
Vice-President with the Bank of California from 1987 to 1990 and a Senior
Vice-President with First Interstate Bancorp from 1981 to 1986. Prior to that
she was in the real estate development business.
Steven C. Romelt has served as Senior Vice President and Chief Lending
Officer of Imperial Capital Bank since January 1997. He was Director of Bank
Lending for Imperial Capital Bank from November 1996 to January 1997.
Previously, he was Vice President and Regional Manager for Southern Pacific Bank
from March 1995 to November 1996. He also held various senior level lending
positions for Imperial Capital Bank from December 1990 to March 1995 and held
various lending positions with a number of other financial institutions from
1979 to December 1990.
Anthony A. Rusnak has served as First Vice President, General Counsel
and Corporate Secretary of ITLA Capital since November 1997. Prior to joining
ITLA Capital, he was in private practice for seven years representing financial
institutions, businesses, corporations and individuals in business, real estate
transactions and litigation. Previously, he worked for law firms in the San
Diego area, as well as for San Diego Gas and Electric's in-house counsel.
The directors of the Registrant, excluding Mr. Haligowski and Mr. Bruce,
are identified below.
Jeffrey L. Lipscomb, age 45, is an Investment Advisory Associate with
AXA Advisors and formerly was a Registered Principal and Assistant Manager of
the San Diego office of Equitable Financial Companies since 1986, handling
corporate group benefits and personal financial planning.
Sandor X. Mayuga, age 51, is a member of the State Bar of California,
and has been a member of the law firm of Tisdale & Nicholson since 1994. He
conducted his own law practice from 1983 to 1994 and was a partner in the
Financial Institutions Department of Finley, Kumble, Wagner, Heine, Underberg,
Manly & Casey, a New York-based national law firm, from 1980 to 1983.
Previously, he served as Assistant General Counsel of Hunt-Wesson Foods, Inc., a
subsidiary of Norton Simon, Inc., and was associated with two large regional law
firms in Los Angeles County. Since 1980, Mr. Mayuga's practice has focused on
the representation of financial institutions and other finance-related
businesses in corporate, transactional and regulatory matters.
Hirotaka Oribe, age 65, is a licensed architect with international
experience in real estate development and urban planning. Since 1993, Mr. Oribe
has served as an advisor to Kajima Development Resources, Inc. From 1979 to
1993, Mr. Oribe was Executive Vice President, Chief Operating Officer and a
Director of Kajima Development Corporation, a firm engaged in development and
construction of single-family and multi-family housing, office buildings and
retail space, and land development. Mr. Oribe previously held other positions
with affiliates of Kajima Corporation of Japan from 1973 to 1979 and was a
practicing architect from 1962 to 1973.
76
<PAGE> 77
Robert R. Reed, age 63, is retired from Household International where he
was employed in various positions from 1960 to 1992. Mr. Reed served as Vice
President of Household Bank from 1980 to 1992. Mr. Reed was previously employed
in management positions with Household Financial Corporation from 1962 to 1980.
EMPLOYEES
As of December 31, 1999, ITLA Capital had 114 employees. Management
believes that its relations with employees are satisfactory. ITLA Capital is not
subject to any collective bargaining agreements.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires ITLA
Capital's directors and executive officers, and persons who own more than 10% of
a registered class of ITLA Capital's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of ITLA Capital. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish ITLA Capital
with copies of all Section 16(a) forms they file.
To ITLA Capital's knowledge, based solely on a review of the copies of
such reports furnished to ITLA Capital and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
77
<PAGE> 78
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of the Chief
Executive Officer and the named executive officers of ITLA Capital with salary
and bonus greater than $100,000 for the year ended December 31, 1999.
<TABLE>
<CAPTION>
RESTRICTED ALL
STOCK OTHER
SALARY BONUS OPTIONS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) (1) ($) (9) ($)
--------------------------- ---- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski 1999 $350,013 $402,500(2) 10,000 $114,327 $ 63,123(3)
Chairman of the Board, President 1998 $345,765 $344,144 45,000 $111,717 $ 62,751(3)
and Chief Executive Officer 1997 $299,250 $374,050(8) 20,000 $111,717 $ 59,716(3)
Norval L. Bruce 1999 $181,103 $ 87,500 15,000 $ 35,964 $ 8,991(4)
Vice Chairman of the Board, Chief 1998 $185,832 $ 71,251 30,000 $ 33,849 $ 7,400(4)
Credit Officer 1997 $131,670 $ 75,600(8) 5,000 $ 33,849 $ 7,780(4)
Michael A. Sicuro 1999 $174,894 $ 84,500 20,000 $ 34,641 $ 10,446(5)
Managing Director and Chief 1998 $167,979 $ 78,375 25,000 $ 32,697 $ 6,036(5)
Financial Officer 1997 $156,188 $ 62,327(8) 15,000 $ 32,697 $ 5,933(5)
Steven C. Romelt 1999 $144,975 $ 84,000 10,000 $ 28,764 $ 14,437(6)
Senior Vice President and Chief 1998 $138,750 $ 75,000 15,000 $ 27,081 $ 14,805(6)
Lending Officer of Imperial 1997 $114,583 $ 9,508 25,000 $ 27,081 $ 12,997(6)
Timothy M. Doyle 1999 $131,429 $ 63,500 15,000 $ 26,100 $ 11,169(7)
Managing Director and Chief 1998 $124,917 $ 51,000 15,000 $ 24,570 $ 15,000(7)
Administrative Officer 1997 $104,550 $ 18,579 12,500 $ 24,570 $ 11,333(7)
</TABLE>
- ----------
(1) Options were granted on various dates and vest one-third on each of the
three subsequent anniversary dates of issuance.
(2) $329,513 of the 1999 bonus was deferred at the election of the named
executive officer under ITLA Capital's Nonqualified Deferred Compensation
plan.
(3) Consists of (a) $4,685 in auto related benefits, (b) $30,000 in
supplemental housing payments, (c) $7,553 in life insurance premiums, (d)
$4,800 in employer contributions to ITLA Capital's 401(k) plan and (e)
$16,085 in preferential interest on employee savings accounts in 1999. The
respective amounts were $5,114, $30,000, $7,290, $4,800 and $15,547 in 1998
and $4,288, $26,600, $7,100, $4,800 and $16,928 in 1997.
(4) Consists of (a) $2,139 in auto related benefits, (b) $2,017 in life
insurance premiums, (c) $4,800 in employer contributions to ITLA Capital's
401(k) plan and (d) $35 in preferential interest on employee savings
accounts. The respective amounts were $2,139, $136, $4,800 and $325 in 1998
and $2,296, $144, $4,800 and $540 in 1997.
(5) Consists of (a) $1,236 of auto related benefits, (b) $4,800 in employer
contributions to ITLA Capital's 401(k) plan and (c) $4,410 of life
insurance benefits in 1999. The respective amounts were $1,236, $4,800 and
$0 in 1998 and $1,133, $4,800 and $0 in 1997.
(6) Consists of (a) $9,000 in auto related benefits, (b) $463 in life insurance
premiums, (c) $4,800 in employer contributions to ITLA Capital's 401(k)
plan and (d) $174 in preferential interest on employee savings accounts in
1999. The respective amounts were $9,000, $0, $4,800 and $1,005 in 1998 and
$9,000, $4, $3,993 and $4 in 1997.
(7) Consists of (a) $1,476 in auto related benefits, (b) $4,800 in employer
contributions to ITLA Capital's 401(k) plan and (c) $4,893 in life
insurance benefits in 1999. The respective amounts were $10,200, $4,800,
and $0 in 1998 and $7,650, $3,683 and $0 in 1997.
(8) Includes ITLA Capital stock issued under the Recognition and Retention Plan
in 1997 at a price of $14.50 per share.
(9) Includes ITLA Capital stock granted and allocated to the Long-Term
Supplemental Executive Retirement Plan under the Recognition and Retention
Plan previously approved by the shareholders. No cash or stock has been
distributed to the named officers.
78
<PAGE> 79
EMPLOYMENT AGREEMENT AND CHANGE OF CONTROL AGREEMENTS
ITLA Capital has entered into an employment agreement with Mr.
Haligowski. The employment agreement provides for an initial employment term of
five years, with the agreement automatically extending for an additional
one-year period each year unless either party provides the other with at least
90 days notice of the nonextension or termination. The employment agreement
provides that ITLA Capital may terminate Mr. Haligowski "for cause," as defined
in the employment agreement. In the event Mr. Haligowski is involuntarily
terminated as defined in the employment agreement, including following a change
of control as defined in the employment agreement, Mr. Haligowski will be
entitled to receive during the remaining term of the agreement his base salary
calculated at the highest annual rate during the three years prior to his
involuntary termination and the average amount of cash bonus and incentive
compensation paid for the two years prior to his involuntary termination, if
any, the continuation of all employment related benefits for the 60 months
following the date of termination and the immediate vesting of any stock options
and restricted stock awards previously granted and outstanding. As a result of a
change of control, Mr. Haligowski will also be retained as a consultant for an
eighteen month period following the change in control at a monthly consulting
fee equal to 75% of his base salary and an additional contribution to his
account in ITLA Capital's Supplemental Executive Retirement Plan equal to 3.75
times his base salary. In addition, the terms of the employment agreement shall
be extended 60 months and stock options and restricted stock awards previously
granted and outstanding, salary continuation plans, equity club memberships and
other fringe benefits shall immediately vest following a change of control. The
annual base salary for Mr. Haligowski under the employment agreement is
currently $397,500 (which may be increased from time to time by the Board of
Directors). The employment agreement also provides for, among other things,
annual incentive compensation, disability pay, participation in stock benefit
and salary continuation plans, and other fringe benefits, including a
supplemental housing payment of not less than $2,500 per month, an automobile
allowance of not less than $1,950 per month, and life insurance coverage in an
amount not less than four times Mr. Haligowski's annual salary. In addition ITLA
Capital shall maintain health, dental and life insurance benefits for the 60
months following an involuntary termination and transfer title to the ITLA
Capital owned vehicle currently used by Mr. Haligowski.
CHANGE OF CONTROL AGREEMENTS
ITLA Capital has entered into change of control agreements with Messrs.
Bruce, Sicuro, Doyle and Romelt. The change in control agreements have initial
terms of one year and shall automatically extend for additional one-year periods
upon a change of control, as defined in the agreement, or upon their anniversary
date, unless either party provides the other with at least 90 days notice of
termination. These agreements provide that in the event the officer is
terminated within 24 months following a change of control, as defined in the
agreement, the officer shall be entitled to receive upon such termination an
amount equal to the greater of the annualized salary as in effect on the date of
the change of control or the date of termination for a period of 18 months and a
pro rata portion of his bonus from the previous year. In addition ITLA Capital
shall maintain health, dental and life insurance benefits for the next 18 months
for each officer and transfer title to the ITLA Capital owned vehicle currently
used by the officer or, in the event the officer receives a monthly cash car
allowance in lieu of the ITLA Capital vehicle, ITLA Capital shall pay an amount
equal to 18 times the monthly allowance. Stock options and restricted stock
awards previously granted and outstanding shall also immediately vest. The
annual base salary for Messrs. Bruce, Sicuro, Doyle and Romelt is currently
$193,000, $186,000, $142,000 and $153,000, respectively.
Both Mr. Haligowski's employment agreement and the change of control
agreements also will provide that to the extent any payments made may be
considered excess parachute payments under Section 280G of the Internal Revenue
Code that are subject to excise tax, ITLA Capital shall pay an additional amount
needed to insure that the amount of payments and value of benefits received
equals the same amount in the absence of any excise tax.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)
The SERP provides that the compensation committee may make restricted
stock awards under ITLA Capital's Recognition and Retention Plan (RRP) on a tax
deferred basis through the SERP. The SERP provides that Mr. Haligowski shall
receive an allocation annually, subject to the performance terms of the RRP, a
restricted stock
79
<PAGE> 80
award equal to one-third of his base salary and all other participants shall
receive an award equal to one-fifth of base salary subject to the approval of
the compensation committee, which may also allocate a greater, lesser or no
award in its discretion. For this purpose, each share of common stock has been
valued at $9.00 per share, the fair market value of the common stock on the date
of issuance to the SERP. A participant shall only have a vested right to amounts
allocated to his account if the participant is employed on the last day of a
three year vesting cycle, in the event of a change of control (as defined in the
SERP), or upon normal retirement, death, disability or termination. The last day
of the first vesting cycle for shares allocated to the SERP accounts for the
benefit of the participants for the years 1997, 1998 and 1999 is December 31,
1999. For additional discussion, please see Benefits--Recognition and Retention
Plan.
BENEFITS
Insurance Plans. All full-time employees, after approximately three
months employment with ITLA Capital, are covered under group plans providing
major medical, dental, and vision benefits, and long-term disability, travel
accident, accidental death and dismemberment insurance, and group term life
insurance.
Salary Savings Plan. The ITLA Capital Salary Savings Plan is a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code (the
"Code") designed to provide employees with the opportunity to accumulate
retirement funds (the "401(k) Plan"). Permanent employees age 21 or more are
eligible to participate in the 401(k) Plan as of January 1 or July 1 first
following their hire date. Under the 401(k) Plan, subject to limitations imposed
under Section 401(k) and Section 415 of the Code, a participant may elect to
defer on a monthly basis up to 15% of compensation by directing ITLA Capital to
contribute such amount to the 401(k) Plan on such employee's behalf. ITLA
Capital currently makes matching contributions to the 401(k) Plan equal to 50%
of the first 6% of the participant's monthly contribution. The Board reviews the
match on an annual basis, and ITLA Capital may also make discretionary
contributions to the 401(k) Plan. "Compensation" for purposes of the 401(k) Plan
is defined as a participant's compensation from ITLA Capital as reported
annually on Form W-2, including contributions to the 401(k) Plan by the
employee, and contributions by ITLA Capital in the employee's behalf to any
other pension, insurance, welfare or other employee benefit plan. Under the
401(k) Plan, a separate account is established for each participant.
Participants are always 100% vested in their contributions and the earnings
thereon. Participants become vested in employer contributions and the earnings
thereon at the rate of 20% per year commencing with the first full year of
service (defined as completion of 12 consecutive months of work). Participants
become fully vested in employer contributions and the earnings thereon on their
fifth anniversary of employment, or in the event of death, permanent disability
or attainment of age 65 while employed by ITLA Capital. The 401(k) Plan provides
for in-service hardship distributions of elective deferrals, as well as loans of
a portion of vested account balances. Distributions from the 40l(k) Plan are
made upon termination of service in a lump sum or in annual installments over a
period of years at the election of the participant with the right to take a lump
sum payment at any time during such period.
Nonqualified Deferred Compensation Plans. ITLA Capital Corporation
Supplemental Salary Savings Plan (the "Supplemental Plan") and Nonqualified
Deferred Compensation Plan (the "Deferral Plan") are designed to provide
additional retirement benefits for certain officers and highly compensated
employees. The Supplemental Plan provides participating employees with an
opportunity to make up benefits not available under the 401(k) Plan due to any
application of limitations on compensation and maximum benefits under the 401(k)
Plan. Benefits under the Supplemental Plan are provided at the same time and in
the same form as benefits under the 401(k) Plan, and become taxable to the
participant at that point. The Deferral Plan allows a participant to defer
receipt of, and current taxation upon, designated portions of the participant's
direct cash compensation until a future date specified by the participants. Both
of these plans are unfunded plans, meaning that all benefits payable thereunder
are payable from ITLA Capital's general assets, and funds available to pay
benefits are subject to the claims of ITLA Capital's general creditors. ITLA
Capital has established a Rabbi Trust with a third party FDIC insured financial
institution which holds the contributions to the Supplemental Plan and Deferral
Plan, for the purpose of providing the benefits set forth under the terms of the
plans. Participants only have the rights of unsecured creditors with respect to
the Rabbi Trust assets.
80
<PAGE> 81
Stock Plans. ITLA Capital has adopted the 1995 Employee Stock Incentive
Plan and the 1995 Stock Option Plan for Nonemployee Directors (collectively, the
"Stock Option Plan") pursuant to which officers, directors and employees of ITLA
Capital are eligible to receive options to purchase Common Stock. The purpose of
the Stock Option Plan is to enable ITLA Capital to attract, retain and motivate
employees by providing for or increasing their proprietary interests in ITLA
Capital, and in the case of nonemployee directors, to attract such directors and
further align their interest with those of ITLA Capital. Every employee of ITLA
Capital is eligible to be considered for the grant of awards under the Stock
Option Plan. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the Stock Option Plan is 1,000,000 shares of
which a maximum of 550,000 shares may be awarded during the first year of the
Stock Option Plan, with annual awards thereafter limited to 100,000 additional
shares during each of the next five years of the Stock Option Plan (with the
shares subject to the Stock Option Plan and all grants thereunder being subject
to adjustments to prevent dilution).
The Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, except that grants to nonemployee directors are made by
the Board of Directors pursuant to a predetermined formula, as described below.
The Committee consists of two or more nonemployee directors of ITLA Capital, and
has full and final authority to select the employees to receive awards and to
grant such awards. Subject to provisions of the Stock Option Plan, the Committee
has a wide degree of flexibility in determining the terms and conditions of
awards and the number of shares to be issued pursuant thereto. The expenses of
administering the Stock Option Plan are borne by ITLA Capital.
The Stock Option Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of Common Stock or any other security or benefit with a
value derived from the value of Common Stock. Awards to employees are not
restricted to any specified form or structure. Stock options to purchase 5,000
shares of Common Stock were automatically granted to the nonemployee directors
upon the completion of ITLA Capital's initial public offering and upon their
election to the Board of Directors, and options to purchase an additional 1,000
shares are granted annually thereafter, provided such individuals continue to
serve as directors.
Awards may not be granted under the Stock Option Plan after the tenth
anniversary of the adoption of the Stock Option Plan. ITLA Capital has granted
an aggregate of 1,033,000 options under the Stock Option Plan, of which 360,000
have been granted to Mr. Haligowski, 90,000, 85,000, 55,000 and 50,000 have been
granted to Messrs. Bruce, Sicuro, Doyle and Romelt, respectively, 32,000 have
been granted to nonemployee directors, and 361,000 have been granted to other
employees, of which 82,916 have been exercised and 160,584 have been forfeited.
The exercise price per share of the options so granted ranges from $10.00 to
$18.00 per share and will generally vest 33-1/3% per year, beginning with the
first anniversary of the date of the grant.
Recognition and Retention Plan. ITLA Capital has adopted the Recognition
and Retention Plan ("RRP"), the purpose of which is to promote the long-term
interests of ITLA Capital and its shareholders by providing a means for
attracting and retaining officers and employees of ITLA Capital and its
affiliates. Under the RRP, awards of restricted shares of ITLA Capital's common
stock may be made to employees as additional long-term incentive compensation.
Every employee of ITLA Capital is eligible to be considered for the grant of
awards under the RRP. The maximum number of shares of common stock which may be
issued pursuant to the RRP is 300,000 shares over the ten year life of the plan.
No RRP shares may be granted in any fiscal year in which the Bank fails
to maintain an "adequately capitalized" designation under the FDIC regulations
and ITLA Capital fails to achieve a return on average assets of at least 50
basis points for the fiscal year. The RRP was approved by the shareholders and
is administered by the Compensation Committee of the Board of Directors which
has a wide degree of flexibility, within the provisions of the RRP, in
determining the terms and conditions of awards and the number of shares to be
issued pursuant thereto. The RRP shares granted to date have been allocated
through the Supplemental Executive Retirement Plan as discussed above.
81
<PAGE> 82
DIRECTORS COMPENSATION
Directors Fees. Each nonemployee director was paid a monthly fee during
1999 of $1,800 for serving on ITLA Capital's Board of Directors. Each
nonemployee director is paid $500 for each Board or Committee meeting attended
for service on such committee.
Voluntary Retainer Stock and Deferred Compensation Plan. In 1996, ITLA
Capital adopted the Voluntary Retainer Stock and Deferred Compensation Plan for
Outside Directors (the "Outside Director Plan"). The Outside Director Plan
provides for the deferral of compensation earned by nonemployee directors in the
form of Stock Units ("Stock Units") in a Stock Unit account ("Stock Unit
Account"). Directors may elect to have up to 100% of their fees converted into
stock units.
For dividends paid with respect to ITLA Capital's common stock, each
nonemployee director has credited to his Stock Unit Account an additional number
of Stock Units in an amount determined under the Outside Director Plan. Each
nonemployee director's Stock Unit Account shall be settled by delivering to the
nonemployee director (or his beneficiary) the number of shares of ITLA Capital
common stock equal to the number of whole Stock Units then credited to the
nonemployee director's Stock Unit Account, in either (i) a lump sum or (ii)
substantially equal annual installments over a period not to exceed ten years.
Directors Stock Option Plans. Directors are also eligible to receive
stock option grants as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the Compensation Committee was comprised of Directors
Lipscomb and Oribe.
OPTION GRANTS FOR 1999
The following table sets forth certain information regarding stock
options granted pursuant to the Stock Option Plan for the named executive
officers in 1999. No stock appreciation rights have been granted pursuant to the
Stock Option Plan.
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES OR BASE -------------------------
GRANTED IN FISCAL PRICE EXPIRATION 5% 10%
NAME (#) YEAR ($/SHARE) DATE ($) ($)
- -------------------- ---------- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski 10,000 10.4% $ 14.00 1/31/09 $ 88,045 $223,124
Norval L. Bruce 15,000 15.6% $ 14.00 1/31/09 $132,068 $334,686
Michael A. Sicuro 20,000 20.8% $ 14.00 1/31/09 $176,090 $446,248
Steven C. Romelt 10,000 10.4% $ 14.00 1/31/09 $ 88,045 $223,124
Timothy M. Doyle 15,000 15.6% $ 14.00 1/31/09 $132,068 $334,686
</TABLE>
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1999 held by the named executive
officers.
82
<PAGE> 83
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF "IN-THE-MONEY" OPTIONS
SHARES UNEXERCISED OPTIONS AT FISCAL YEAR-END
ACQUIRED AT FISCAL YEAR-END (1)
ON VALUE --------------------------- ----------------------------
EXERCISE REALIZED (#) ($)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski -- N/A 313,333 46,667 $730,313 $ --
Norval L. Bruce -- N/A 53,333 36,667 $102,500 $ --
Michael A. Sicuro -- N/A 43,333 41,667 $ -- $ --
Steven C. Romelt -- N/A 21,667 28,333 $ -- $ --
Timothy M. Doyle -- N/A 25,833 29,167 $ -- $ --
</TABLE>
(1) The difference between the aggregate option exercise price and the closing
price of $12.563 of the underlying shares at December 31, 1999.
83
<PAGE> 84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 17, 2000, ITLA Capital had 7,126,484 shares of common stock
outstanding.
The following table sets forth, as of March 17, 2000, certain
information as to those persons who were known by management to be beneficial
owners of more than five percent of ITLA Capital common stock outstanding.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
BENEFICIAL OWNER OWNED CLASS
- -------------------------------------- ------------ ---------
<S> <C> <C>
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663 770,800(1) 10.82%
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109 713,100(2) 10.01%
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078 689,000(3) 9.67%
Dimensional Fund Advisors
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 543,100(4) 7.62%
Friedman, Billings, Ramsey Group, Inc.
1001 19th Street North
Arlington, Virginia 22209 471,833(5) 6.62%
</TABLE>
(1) As reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a Schedule
13G/A filed on or about January 2, 2000 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Thomson
reported sole voting power as to 441,000 shares, sole dispositive power as
to 770,800 shares, shared voting power as to 10,700 shares, and shared
dispositive power as to none of the 770,800 shares covered by the report.
(2) As reported by Wellington Management ITLA Capital, LLP ("Wellington") on a
Schedule 13G/A filed on or about February 11, 2000 with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Wellington reported sole voting and dispositive powers as to no shares,
shared voting power as to 333,400 shares, and shared dispositive power as
to 713,100 of the 713,100 shares covered by the report.
(3) As reported by Franklin Resources, Inc. ("Franklin") on a Schedule 13G/A
filed on or about January 18, 2000 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Franklin
reported sole voting and dispositive powers as to 689,000 shares, and
shared voting and dispositive powers as to none of the 689,000 shares
covered by the report.
(4) As reported by Dimensional Fund Advisors ("Dimensional") on a Schedule
13G/A dated on or about February 3, 2000 and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Dimensional reported sole voting and dispositive powers as to 543,100
shares, and shared voting and dispositive powers as to none of the 543,100
shares covered by the report.
(5) As reported by Friedman, Billings, Ramsey Group, Inc. ("FBR") on a Schedule
13G/A filed on or about February 14, 2000 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. FBR
reported sole voting and dispositive powers as to 471,833 shares, and
shared voting and dispositive powers as to none of the 471,833 shares
covered by the report.
84
<PAGE> 85
The following table sets forth, as of December 31, 1999, certain
information as to the shares of common stock beneficially owned by the directors
and named executive officers and by all directors and executive officers of ITLA
Capital as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
OWNED OF
BENEFICIAL OWNER (1) CLASS
- ------------------------------------ ------------ --------
<S> <C> <C>
George W. Haligowski 404,732 5.38%
Norval L. Bruce 83,300 1.15%
Michael A. Sicuro 74,952 1.03%
Steven C. Romelt 47,547 0.66%
Timothy M. Doyle 48,360 0.67%
Sandor X. Mayuga 8,800 0.12%
Hirotaka Oribe 8,200 0.11%
Robert R. Reed 8,200 0.11%
Jeffrey L. Lipscomb 8,000 0.11%
All Directors and Executive Officers
as a Group (12 Persons) 704,071 9.06%
</TABLE>
(1) Includes shares held directly, as well as an aggregate of 583,666 shares
which are subject to immediately exercisable options and options
exercisable within 60 days of December 31, 1999, under ITLA Capital's Stock
Option Plan, vested shares held by the SERP, and shares held in retirement
accounts or by certain members of the named individual's families or
corporations for which an individual is an officer or director or held by
trust of which an individual is trustee or a substantial beneficiary, over
which shares the individual may be deemed to have sole or shared voting
and/or dispositive power. The above named individuals held exercisable
options and options exercisable within 60 days of December 31, 1999 as
follows: Chairman Haligowski - 335,000 shares; Director Lipscomb - 8,000
shares; Director Mayuga - 8,000 shares; Director Oribe - 8,000 shares;
Director Reed - 8,000 shares; Norval L. Bruce - 75,000 shares; Michael A.
Sicuro - 56,666 shares; Timothy M. Doyle - 40,000 shares; and Steven C.
Romelt - 35,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, ITLA Capital utilized the services of Tisdale &
Nicholson. Director Mayuga is a partner in that law firm. During 1999, this law
firm received $3,070 in legal fees from ITLA Capital, which was not in excess of
5% of the firm's total revenues for the year.
During the year, ITLA Capital utilized the services of a public
relations firm which is owned by Director Lipscomb's spouse. During 1999, this
public relations firm received $27,327 in fees from ITLA Capital.
85
<PAGE> 86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
ITLA Capital's consolidated financial statements, and Report of
Independent Public Accountants thereon, are included in this Form
10-K at the pages listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on the
Consolidated Financial Statements as of December 31,
1999 and 1998 and for Each of the Three Years in the
Period Ended December 31, 1999 43
Consolidated Balance Sheets as of December 31, 1999 and 1998 44
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 45
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1997 to December 31, 1999 46
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 47
Notes to Consolidated Financial Statements 48
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the
required information is inapplicable or has been included in the
Notes to Consolidated Financial Statements.
86
<PAGE> 87
(a)(3) EXHIBITS:
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING
REGULATION OR EXHIBIT
S-K NUMBER
EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
- --------- ------------------------------------------------------ ------------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended **
3.2 Bylaws, as amended **
4 Instruments Defining the Rights of Security Holders,
Including Indentures None
9 Voting Trust Agreement None
10.1 1995 Stock Option Plan for Nonemployee Directors *
10.2 1995 Employee Stock Incentive Plan *
10.3 Nonqualified Deferred Compensation Plan 10.3
10.4 Supplemental Salary Savings Plan *
10.5 Glendale Headquarters Lease Agreement *
10.6 Data Processing Agreement *
10.7 Employment Agreement with George W. Haligowski *
10.8 Change of Control Agreements 10.8
10.9 Recognition and Retention Plan **
10.10 Voluntary Retainer Stock and Deferred Compensation
Plan for Outside Directors **
10.11 Supplemental Executive Retirement Plan 10.11
10.12 ITLA Capital Corporation Rabbi Trust Agreement 10.12
11 Statement Regarding Computation of Per Share Earnings None
12 Statement Regarding Computation of Ratios None
13 Annual Report to Security Holders Not required
18 Letter Regarding Change in Accounting Principles None
21 Subsidiaries of the Registrant 21
22 Published Report Regarding Matters Submitted to Vote
of Security Holders None
23 Consent of Independent Certified Public Accountants 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from Reports Furnished to State Insurance
Regulatory Authorities None
</TABLE>
- ----------
* Filed as exhibits to Imperial's Registration Statement on Form S-1 (File
No. 33-96518) filed with the Commission on September 1, 1995, pursuant to
Section 5 of the Securities Act of 1933.
** Filed as exhibits to the Company's Registration Statement on Form S-4 (File
No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
Section 5 of the Securities Act of 1933.
(b) REPORTS ON FORM 8-K:
None.
87
<PAGE> 88
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITLA CAPITAL CORPORATION
Date: March 30, 2000 By: /s/ George W. Haligowski
--------------------------------------
George W. Haligowski
Chairman of the Board, President
and Chief Executive Officer
(Duly Authorized Representative)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George W. Haligowski Chairman of the Board, President and March 30, 2000
- ------------------------------ Chief Executive Officer
George W. Haligowski (Principal Executive Officer)
/s/ Michael A. Sicuro Managing Director and March 30, 2000
- ------------------------------ Chief Financial Officer
Michael A. Sicuro (Principal Financial and Accounting
Officer)
/s/ Norval L. Bruce Director March 30, 2000
- ------------------------------
Norval L. Bruce
/s/ Jeffrey L. Lipscomb Director March 30, 2000
- ------------------------------
Jeffrey L. Lipscomb
/s/ Sandor X. Mayuga Director March 30, 2000
- ------------------------------
Sandor X. Mayuga
/s/ Robert R. Reed Director March 30, 2000
- ------------------------------
Robert R. Reed
/s/ Hirotaka Oribe Director March 30, 2000
- ------------------------------
Hirotaka Oribe
</TABLE>
88
<PAGE> 1
EXHIBIT 10.3
ITLA CAPITAL CORPORATION CONSOLIDATED NONQUALIFIED DEFERRED
COMPENSATION PLAN
(Effective January 1, 1997)
ITLA Capital Corporation, a Delaware business corporation has adopted the ITLA
Capital Corporation Consolidated Nonqualified Deferred Compensation Plan (the
"Plan") effective as of January 1, 1997. The Plan is an unfunded plan, hereby
adopted, established and maintained by ITLA Capital Corporation (the "Company")
for the purpose of providing benefits for certain individuals as provided
herein.
ARTICLE I
ELIGIBILITY TO PARTICIPATE
1.1 Eligibility to Participate. For purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Plan is
limited to a select group of management or highly compensated employees, and
shall at all times remain unfunded.
1.2 Designated Participants. An executive or senior management employee of
the Company is eligible to become a Participant in the Plan provided such
employee is designated as a Participant below or such employee is later
designated by the Compensation Committee of the Board of Directors of the
Company and such designation is attached as a written amendment to the Plan
signed by a duly authorized officer of the Company. Under no circumstance shall
an employee below the level of' First Vice President be eligible to participate
in the Plan. The following individuals shall constitute the eligible
Participants as of the Plan's effective date of January 1, 1997:
George Haligowski
Michael Sicuro
Tim Doyle
Once an employee becomes a Participant, he or she shall remain a Participant
until all benefits to which he or she (or to the individual the Participant
designates as his or her "Designated Beneficiary" in such Participant's
designation of beneficiary form) is entitled to under the Plan have been paid.
To the extent George Haligowski's Employment Agreement dated July 23, 1997
differs from the terms of this Agreement, George Haligowski's Employment
Agreement shall be the controlling document.
1.3 Written Deferral Election. The individuals described in Section 1.2
shall be eligible to participate in the Plan and may do so by filing a written
deferral election with the Company in a form approved by the Company. In the
first year in which a Participant becomes eligible to participate in the Plan,
the newly eligible Participant may make an election to defer
<PAGE> 2
compensation for services to be performed subsequent to the election within
thirty (30) days after the date the person becomes eligible. For all other
years, elections to defer payment of compensation must be made before the
beginning of the calendar year for which the compensation is payable.
1.4 Deferred Compensation Account. For each individual electing to
participate in the Plan, the Company shall establish and maintain a Deferred
Compensation Account. The amount of each Participant's deferred compensation
shall be credited to his or her Deferred Compensation Account no later than the
end of the month following the month in which the compensation would otherwise
have been paid to the Participant. The Participant's Deferred Compensation
Account shall also be credited and debited for deemed earnings and losses
attributable to the investment (or deemed investment) of such Deferred
Compensation Account under Section 2.2 of the Plan. The Deferred Compensation
Account shall also be reduced for any distributions and withdrawals made under
the Plan to a Participant. In general, the Deferred Compensation Accounts will
be valued at the end of each calendar quarter. Any Participant to whom an amount
is credited under the Plan shall be deemed a general, unsecured creditor of the
Company.
1.5 Amount of Deferrals. Each Participant may defer all or any portion of
the compensation otherwise payable to him or her by the Company for the calendar
year beginning after the date of said election (or for the remaining portion of
the first year of participation) as specified in said written election to the
Company, and the amounts so deferred by a Participant by a Participant shall be
paid only as provided in this Plan. In no event shall the amount of compensation
deferred by a Participant exceed the amount needed to satisfy employment tax and
other required payroll withholdings. A Participant may change the amount of, or
suspend, future deferrals with respect to compensation otherwise payable to him
or her for years beginning after the date of change or suspension as specified
by written notice to the Company. If a Participant elects to suspend deferrals,
the Participant may make a new election to again become a Participant in the
Plan. Any new election to defer payment of compensation must be made before the
beginning of the next calendar year for which the compensation is payable. The
election to defer shall be irrevocable as to the deferred compensation for the
calendar year for which the election is made. In no event may a Participant
suspend or change the amount of deferrals for a calendar year once the calendar
year has commenced.
ARTICLE II
DEFERRED COMPENSATION
2.1 Contribution to Trust. Within thirty (30) days after each calendar
month, the Company shall transfer into the ITLA Capital Corporation Rabbi Trust
(the "Trust") an amount in cash or shares of ITLA Capital Corporation common
stock with a fair market value at the date of contribution equal to the total
amount of all Participant deferrals under the Plan for the preceding calendar
month. In addition, within fifteen (15) days of the date of a Change of
2
<PAGE> 3
Control the Company shall deposit in the Trust an amount in cash equal to the
difference between the total value of all Participant's Deferred Compensation
Accounts under the Plan as of the Date of the Change of Control and the total
fair market value of all assets in the Trust as of such date.
2.2 Deemed Investments. All amounts credited under the terms of the Plan to
a Deferred Compensation Account maintained in the name of a Participant by the
Company shall be invested (or deemed invested) in ITLA Capital Corporation stock
and/or various mutual funds selected by the Company. Each Participant may select
the deemed investment for his/her Deferred Compensation Account from the
investment options selected by the Company and may change such deemed
investments at such times and in accordance with the rules adopted by the
Company. In the absence of any investment directions, Deferred Compensation
Accounts will be deemed invested in the Trustee's in-house sweep funds.
Notwithstanding that the earnings or losses on deemed investments used to
determine the value of Participant's Deferred Compensation Accounts are based on
the actual performance of certain specified investments, the Company is not
obligated to invest deferrals in any particular investments. If any investments
are made with deferrals, Participants shall have no right or interest in or with
respect to such investments. Specifically, Participants shall have no voting
rights with respect to any stock or securities held by the Plan. Any actual
investment in shares of ITLA Capital Corporation stock shall comply with federal
and state securities laws.
ARTICLE III
DISTRIBUTION
3.1 Distribution of Deferred Compensation Accounts. On the first day of the
month next following the date on which a Participant's employment with the
Company and all other related employers of the Company (as determined under
Section 414 of the Internal Revenue Code of 1986, as amended (the "Code"))
terminates for any reason including death, distribution of the amount credited
to the Participant's Deferred Compensation Account in accordance with this Plan
shall commence in accordance with one of the alternatives set forth below as
selected by the Participant. Selection of the method of distribution shall be
made at the time the Participant first elects to defer compensation under the
Plan for any given calendar year. The alternative forms of distribution shall
be:
a) lump sum equal to the Participant's total Deferred Compensation
Account at termination of employment; or
b) ten equal annual installments. The amount of each such annual
installment will be calculated based upon the amortization of the
value of the Participant's Deferred Compensation Account balance as
the date of his or her termination of employment at a credited
interest rate equal to 125% of the Company's cost of funds. Interest
credited to a Participant's Deferred Compensation Account as of the
valuation date preceding the date of the next
3
<PAGE> 4
distribution shall be added to the Participant's Deferred Compensation
Account and distributed as a part of the next installment. The final
installment will be the balance of the Participant's Deferred
Compensation Account and interest credited to the Account.
Except as set forth above with respect to interest crediting, a Participant's
Deferred Compensation Account shall not be adjusted for any deemed earnings or
losses after the date of the Participant's termination of employment. If the
Participant fails to select the distribution method at the time of initial
participation in the Plan, distribution shall be made in a single lump sum
payment. The Compensation Committee of the Board of Directors of the Company
shall determine whether the distribution is made in cash or in-kind. Any
distribution of stock, including ITLA Capital Corporation Stock from the Plan
shall comply with all applicable federal and state securities laws. All
distributions under the Plan shall be less applicable tax and other required or
authorized withholdings. Notwithstanding the distribution election made by a
Participant and notwithstanding that distributions have commenced in
installments, the distribution of the Participant's total remaining Deferred
Compensation Account shall be made in a lump sum upon a Change of Control or
terminaton of the Plan.
3.2 Participant's Death. If a Participant should die before distribution of
the full amount of the Deferred Compensation Account described in this Plan has
been made to the Participant, any remaining amounts shall be distributed to the
Participant's Designated Beneficiary by the method designated by the Participant
in writing and delivered to the Company at the time the Participant first
elected to become a Participant in the Plan. If a Participant has no Designated
Beneficiary at the time of death, then, notwithstanding any provision herein to
the contrary, such amounts shall be distributed to such Participant's estate in
a lump sum distribution as soon as administratively feasible following such
Participant's death.
3.3 Advance Distribution for Financial Hardship. In the event a Participant
(or the Participant's Designated Beneficiary, if such Designated Beneficiary is
currently receiving benefits under the Plan) incurs an Unforeseeable Financial
Emergency, such individual may make a written request to the Company for a
hardship withdrawal from his or her Deferred Compensation Account established
under the Plan, provided that the entire amount requested by the Participant is
not reasonably available from other resources. An "Unforeseeable Financial
Emergency" shall mean an unforeseeable, severe financial hardship to such
Participant or Designated Beneficiary resulting from a sudden and unexpected
illness or accident of the Participant or the Designated Beneficiary or a family
member of the Participant or the Designated Beneficiary, loss of property of the
Participant or the Designated Beneficiary due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Participant or the Designated Beneficiary. Withdrawals
of amounts because of an unforeseeable emergency are only permitted to the
extent reasonably needed to satisfy the emergency need. This Section shall be
interpreted in a manner consistent with Section 1.457-2(h)(4) and 1.457-2(h)(5)
of the Treasury Regulations. The Compensation Committee of the Board of
Directors shall determine in its sole discretion whether an advance withdrawal
shall be permitted due to an Unforeseeable Financial Emergency. The
Participant's
4
<PAGE> 5
Deferred Compensation Account shall be reduced by the amount of any advance
distribution for hardship.
3.4 Change of Control. Upon a Change of Control of the Company, as defined
in Section 6.7 of the Plan, the Deferred Compensation Accounts of all
Participants shall be distributed in a lump sum as soon as practicable to the
Participants or to the Designated Beneficiaries of any deceased Participants.
3.5 Distribution for Tax Purposes. Anything herein to the contrary
notwithstanding, if, at any time, a court or the Internal Revenue Service
determines that an amount in a Participant's Deferred Compensation Account is
includable in the gross income of the Participant and subject to tax, the
Compensation Committee of the Board of Directors of the Company may, in its sole
discretion, permit a lump sum distribution of an amount equal to the amount
determined to be includable in the Participant's gross income.
3.6 Limitation on Distribution to Covered Employees. Notwithstanding any
other provision of the Plan, in the event that the Participant is a "covered
employee" as defined in Section 162(m)(3) of the Internal Revenue Code, or would
be a covered employee if the Participant's Deferred Compensation Account were
distributed in accordance with the other provisions of Article III, the maximum
amount which may be distributed from the Participant's Deferred Compensation
Account in any Plan Year shall not exceed one million ($1,000,000) less the
amount of compensation paid by the Company to the Participant in such Plan Year
which is not "performance-based" (as defined in Code Section 162(m)(4)(C)). The
amount of compensation which is not "performance-based" shall be reasonably
determined by the Company at the time of the proposed distribution. Any amount
which is not distributed to the Participant in a Plan Year as a result of the
limitation set forth in Section 3.6 shall be distributed to the Participant in
the next Plan Year, subject to compliance with the foregoing limitations set
forth in this Section 3.6. The provisions of this Section 3.6 shall not apply if
the Compensation Committee of the Board of Directors, upon consultation with
legal counsel, determines that the restrictions of Code Section 162(m) do not
apply to the limit the deductibility of payments made under the Plan (or
otherwise by the Company) to the Participant.
ARTICLE IV
AMENDMENT AND TERMINATION OF PLAN
4.1 Amendment or Termination. The Company intends the Plan to remain in
existence until all Participants in the Plan have received all of their benefits
payable under the Plan. The Company, however, reserves the right to amend or
terminate the Plan when, in the sole opinion of the Company, such amendment or
termination is advisable. Any such amendment or termination shall be made
pursuant to a resolution of the Compensation Committee of the Board of Directors
of the Company. No amendment or termination of the Plan shall reduce the amount
credited to the Participant's Deferred Compensation Account below the
5
<PAGE> 6
balance immediately prior to the effective date of the resolution amending or
terminating the Plan or delay the distribution date for the Participant's
Deferred Compensation Account.
4.2 Distribution on Termination. Upon termination of the Plan, the Deferred
Compensation Accounts of all Participants shall be distributed in a lump sum as
soon as practicable following the effective date of the Plan termination.
ARTICLE V
CLAIMS PROCEDURE
5.1 Claims Procedure. An initial claim for benefits under the Plan must be
made by the Participant or his or her Designated Beneficiary to the Claims
Reviewer which shall be the Compensation Committee of the Board of Directors of
the Company (unless another person or organizational unit is designated by the
Company as Claims Reviewer), in accordance with the terms of this Claims
Procedure. Not later than 90 days after receipt of such a claim, the Claims
Reviewer will render a written decision on the claim to the claimant, unless
special circumstances require the extension of such 90-day period. If such
extension is necessary, the Claims Reviewer shall provide the Participant or his
or her Designated Beneficiary with written notification of such extension before
the expiration of the initial 90-day period. Such notice shall specify the
reason or reasons for such extension and the date by which the final decision
can be expected. In no event shall such extension exceed a period of 90 days
from the end of the initial 90-day period. In the event the Claims Reviewer
denies the claim of a Participant or his or her Designated Beneficiary in whole
or in part, the Claims Reviewer's written notification shall specify, in a
manner calculated to be understood by the claimant, the reason for the denial; a
reference to the Plan or other document or form that is the basis for the
denial; a description of any additional material or information necessary for
the claimant to perfect the claim; an explanation as to why such information or
material is necessary; and an explanation of the applicable claims procedure.
Should the claim be denied in whole or in part and should the claimant be
dissatisfied with the Claim's Reviewer's disposition of the claimant's claim,
the claimant may have a full and fair review of the claim by the Company upon
written request therefor submitted by the claimant or the claimant's duly
authorized representative and received by the Company within 60 days after the
claimant receives written notification that the claimant's claim has been
denied. In connection with such review, the claimant or the claimant's duly
authorized representative shall be entitled to review pertinent documents and
submit the claimant's views as to the issues in writing. The Company shall act
to deny or accept the claim within 60 days after receipt of the claimant's
written request for review unless special circumstances require the extension of
such 60-day period. If such extension is necessary, the Company shall provide
the claimant with written notification of such extension before the expiration
of such initial 60-day period. In all events, the Company shall act to deny or
accept the claim within 120 days of the receipt of the claimant's written
request for review. The action of the Company shall be in the form of a written
notice to the claimant and its contents shall include all of the requirements
for action on the original claim. In no event may a claimant
6
<PAGE> 7
commence legal action for benefits the claimant believes are due the claimant
until the claimant has exhausted all of the remedies and procedures afforded the
claimant by this Article V.
ARTICLE VI
ADMINISTRATION
6.1 Unsecured Claims. The right of a Participant or the Participant's
Designated Beneficiary to receive a distribution hereunder shall be an unsecured
claim against the general assets of the Company, and neither a Participant nor
his or her Designated Beneficiary shall have any rights in or against any amount
credited to any Deferred Compensation Accounts under this Plan or any other
assets of the Company. The Plan at all times shall be considered entirely
unfunded both for tax purposes and for purposes of Title I of ERISA, as amended.
Any funds invested hereunder shall continue for all purposes to be part of the
general assets of the Company and available to its general creditors in the
event of bankruptcy or insolvency. Deferred Compensation Accounts under this
Plan and any benefits which may be payable pursuant to this Plan are not subject
in any manner to anticipation, sale, alienation, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors of the Participant or a
Participant's Designated Beneficiary. The Plan constitutes a mere unsecured
promise by the Company to make benefit payments in the future. No interest or
right to receive a benefit may be taken, either voluntarily or involuntarily,
for the satisfaction of the debts of, or other obligations or claims against,
such person or entity, including claims for alimony, support, separate
maintenance and claims in bankruptcy proceedings.
6.2 Plan Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company, which shall have the
authority, duty and power to interpret and construe the provisions of the Plan
as the Compensation Committee of the Board of Directors deems appropriate
including the authority to determine eligibility for benefits under the Plan.
The Compensation Committee of the Board of Directors shall have the duty and
responsibility of maintaining records, making the requisite calculations and
disbursing the payments hereunder. The interpretations, determinations,
regulations and calculations of the Compensation Committee of the Board of
Directors shall be final and binding on all persons and parties concerned. The
Compensation Committee of the Board of Directors may delegate any of its duties
of Plan Administration to such employees of the Company, the Trustee or other
third-parties as it deems appropriate.
6.3 Expenses. Expenses of administration shall be paid by the Company. The
Compensation Committee of the Board of Directors of the Company shall be
entitled to rely on all tables, valuations, certificates, opinions, data and
reports furnished by any actuary, accountant, controller, counsel or other
person employed or retained by the Company with respect to the Plan.
6.4 Statements. The Compensation Committee of the Board of Directors of the
Company shall furnish individual annual or more frequent statements to each
Participant, or each
7
<PAGE> 8
Designated Beneficiary currently receiving benefits, in such form as determined
by the Compensation Committee of the Board of Directors or as required by law.
The Board of Directors may delegate the duty to provide such statements to the
Trustee.
6.5 No Enlargement of Rights. The sole rights of a Participant or
Designated Beneficiary under this Plan shall be to have this Plan administered
according to its provisions, to receive whatever benefits he or she may be
entitled to hereunder, and nothing in the Plan shall be interpreted as a
guaranty that any funds in any trust which may be established in connection with
the Plan or assets of the Company will be sufficient to pay any benefits
hereunder. Further, the adoption and maintenance of this Plan shall not be
construed as creating any contract of employment between the Company and any
Participant. The Plan shall not affect the right of the Company to deal with any
Participants in employment respects, including their hiring, discharge,
compensation, and conditions of employment.
6.6 Rules and Procedures. The Company may from time to time establish rules
and procedures which it determines to be necessary for the proper administration
of the Plan and the benefits payable to an individual in the event that
individual is declared incompetent and a conservator or other person legally
charged with that individual's care is appointed. Except as otherwise provided
herein, when the Company determines that such individual is unable to manage his
or her financial affairs, the Company may pay such individual's benefits to such
conservator, person legally charged with such individual's care, or institutions
contributing toward or providing for the care and maintenance of such
individual. Any such payment shall constitute a complete discharge of any
liability of the Company and the Plan for such individual.
6.7 Notwithstanding any provision to the contrary, in the event of a
pending Change of Control, as defined herein, Participants shall receive the
value of their Deferred Compensation Accounts in a single lump sum payment as
soon as administratively feasible following the date of the Change of Control.
The term "Change in Control" means the occurrence of any of the following events
with respect to the Company: (1) any person (as the term is used in section
13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") is
or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities of the Company representing 33.33% or
more of the Company's outstanding securities; (2) individuals who are members of
the Board of Directors of the Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least two thirds of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the nominating committee serving under an Incumbent Board, shall
be considered a member of the Incumbent Board; (3) a reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Company or
a similar transaction in which the Company is not the resulting entity (unless
the continuing ownership requirements clause (4) below are met with respect to
the resulting entity); or (4) a merger or consolidation of the Company with any
other corporation other than a merger or consolidation in which the voting
securities of the Company outstanding immediately prior thereto represent at
least 66.67% of the total voting power represented by the voting securities of
the Company or the surviving entity outstanding immediately after such merger or
consolidation.
8
<PAGE> 9
The term "Change in Control" shall not include: (1) an acquisition of securities
by an employee benefit plan of the Company; or (2) any of the above mentioned
events or occurrences which require but do not receive the requisite government
or regulatory approval to bring the event or occurrence to fruition.
6.8 Information. Each Participant shall keep the Company informed of his or
her current address and the current address of his or her Designated
Beneficiary. The Company shall not be obligated to search for any person. If
such person is not located within three (3) years after the date on which
payment of the Participant's benefits payable under this Plan may first be made,
payment may be made as though the Participant or his or her Designated
Beneficiary had died at the end of such three-year period.
6.9 Loss. Notwithstanding any provision herein to the contrary, neither the
Company nor any individual acting as an employee or agent of the Company shall
be liable to any Participant, any Participant's Designated Beneficiary, or any
other person for any claim, loss, liability or expense incurred in connection
with the Plan, unless attributable to fraud or willful misconduct on the part of
the Company or any such employee or agent of the Company.
6.10 Indemnification. The Company shall indemnify and hold harmless the
members of the Board of Directors and any other employees to whom any
responsibility with respect to the Plan is allocated or delegated, from and
against any and all liabilities, costs and expenses, including attorneys' fees,
incurred by such persons as a result of any act, or omission to act, in
connection with the performance of their duties, responsibilities and
obligations under the Plan and under ERISA, other than such liabilities, costs
and expenses as may result from the bad faith, willful misconduct or criminal
acts of such persons or to the extent such indemnification is specifically
prohibited by ERISA. The Company shall have the obligation to conduct the
defense of such persons in any proceeding to which this applies. If any Board
member or any employee covered by this indemnification clause determines that
the defense provided by the Company is inadequate, that member or employee shall
be entitled to retain separate legal counsel for his or her defense and the
Company shall be obligated to pay for all reasonable legal fees and other court
costs incurred in the course of such defense unless a court of competent
jurisdiction finds such person has acted in bad faith or engaged in willful
misconduct or criminal acts.
6.11 Applicable Law. All questions pertaining to the construction, validity
and effect of the Plan shall be determined in accordance with the laws of the
United States and to the extent not preempted by such laws, by the state of
California.
IN WITNESS WHEREOF, ITLA Capital Corporation has caused this Plan to be
executed on this 1st day of January, 1998.
By /s/ GEORGE W. HALIGOWSKI
----------------------------------
On behalf of ITLA Capital Corporation
9
<PAGE> 1
EXHIBIT 10.8
Attached hereto is the form of the change of control agreement provided to the
following executive officers: Norval L. Bruce, Michael A. Sicuro, Steven C.
Romelt and Timothy M. Doyle.
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered
into as of this _______ day of ________, 19____ , by and between ________ (the
"Company"), and _________ (the "Employee").
WHEREAS, the Employee is currently serving as ___________________________
of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Company may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Company and its stockholders;
WHEREAS, the Employee is a party to that certain letter agreement with
Imperial Thrift and Loan Association under which the Employee is entitled to
certain severance benefits under certain conditions (the "Prior Severance
Agreement"), which he or she is willing to terminate in consideration of this
Agreement's becoming effective;
WHEREAS, the Board of Directors believes it is in the best interests of the
Company to enter into this Agreement with the Employee in order to assure
continuity of management of the Company and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means the occurrence of any of the
following events with respect to the Company: (1) any person (as the term is
used in section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the Company
representing 33.33% or more of the Company's outstanding securities; (2)
individuals who are members of the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least two thirds of the
directors comprising the
<PAGE> 2
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the nominating committee serving under an Incumbent Board, shall
be considered a member of the Incumbent Board; (3) a reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Company or
a similar transaction in which the Company is not the resulting entity (unless
the continuing ownership requirements clause (4) below are met with respect to
the resulting entity); or (4) a merger or consolidation of the Company with any
other corporation other than a merger or consolidation in which the voting
securities of the Company outstanding immediately prior thereto represent at
least 66.67% of the total voting power represented by the voting securities of
the Company or the surviving entity outstanding immediately after such merger or
consolidation. The term "Change in Control" shall not include: (1) an
acquisition of securities by an employee benefit plan of the Company; or (2) any
of the above mentioned events or occurrences which require but do not receive
the requisite government or regulatory approval to bring the event or occurrence
to fruition.
(b) The term "Commencement Date" means ____________, 19____ .
(c) The term "Disability" means the Employee's absence from his or her
duties with the Company on a full time basis for six consecutive months as a
result of his or her incapacity due to mental or physical illness, unless within
30 days after the Company gives the Employee written notice of termination of
employment for such reason the Employee shall have returned to full time
performance of his or her duties.
(d) The term "Date of Termination" means the date specified in the Notice
of Termination, given pursuant to Section 4 of this Agreement, provided that if
within 15 days after any Notice of Termination is given or, if later, prior to
the Date of Termination specified in such Notice, the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the Notice of Termination, then the Date of Termination shall be the date on
which the dispute is finally determined, whether by mutual written agreement of
the parties, by a binding arbitration award, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom has expired and no appeal has
been perfected); and provided further that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good faith and
sets forth in reasonable detail the facts and circumstances that are the basis
for the dispute, and the party giving such notice pursues the resolution of such
dispute with reasonable diligence. For purposes of this Section 1(d), a
"dispute" extending the Date of Termination shall be limited to a dispute as to
whether the termination was a "Termination for Cause" if the Notice of
Termination given by the Company states that the termination was a Termination
for Cause or whether the termination was an Involuntary Termination if the
Notice of Termination is given by the Employee. Notwithstanding the pendency of
any such dispute, the Company shall continue to pay the Employee the Employee's
full base salary at the rate in effect when the Notice of Termination was given
and continue the Employee as a participant in all benefit plans in which the
Employee was participating when the Notice of Termination was given (unless
continued employment is a requirement for participation in any such benefit
plan), until the dispute is finally resolved in accordance with this Section
1(d).
<PAGE> 3
(e) The term "Involuntary Termination" means the termination of the
employment of the Employee without the Employee's express written consent or a
material diminution of or interference with the Employee's duties,
responsibilities and benefits as these same duties, responsibilities and
benefits exist the day prior to the Change the Change of Control, including
(without limitation) any of the following actions unless consented to in writing
by the Employee: (1) a requirement that the Employee be based at a place other
than the Employee's work location immediately prior to the Change of Control or
within 35 miles thereof, except for reasonable travel on Company business; (2) a
material demotion of the Employee; (3) a material reduction in the number or
seniority of other Company personnel reporting to the Employee or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Company-wide reduction in staff; (4) a material adverse change in the
Employee's salary, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the
Company; (5) a material permanent increase in the required hours of work or the
workload of the Employee; (6) a material change in the reporting relationship to
which the Employee reports prior to the Change of Control; or (7) a material
increase or decrease in business responsibilities and duties, such that the
Employee's qualifications as utilized prior to the Change of Control are no
longer consistent with the qualifications needed for the revised position. The
term "Involuntary Termination" does not include Termination for Cause,
termination of employment due to retirement on or after the Employee attains age
65, death, or termination of employment by the Company due to Disability.
(f) The term "Notice of Termination" means a notice of termination of the
Employee's employment pursuant to Section 4 of this Agreement.
(g) The terms "Termination for Cause" and "Terminated for Cause" mean
termination by the Company of the employment of the Employee because of (i)
willful and continued failure by the Employee substantially to perform his or
her duties (other than a failure resulting from physical or mental illness)
after a demand for substantial performance is delivered to the Employee by the
Chairman of the Board of Directors or the Chief Executive Officer of the Company
which specifically identifies the manner in which the Employee has not
substantially performed his or her duties, (ii) the Employee's willful
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, regulation, or final cease-and-desist order, relating to the
Employee's employment with the Company or otherwise interfering with the
Employee's ability to carry out the duties of the employment, or material breach
of any provision of this Agreement or any employment agreement between the
Company and the Employee; provided that no act or failure to act shall be
considered "willful" unless done or omitted to be done by the Employee in bad
faith and without reasonable belief that the act or omission was in or not
opposed to the best interests of the Company. Any act or failure to act based
upon authority pursuant to a resolution duly adopted by the Board of Directors
or upon the advice of counsel for the Company shall be conclusively presumed to
be done or omitted to be done in good faith and in the best interests of the
Company. The Employee's attention to matters not directly
<PAGE> 4
related to the business of the Company shall not provide a basis for Termination
for Cause if the Board of Directors or the Chief Executive Officer of the
Company has approved the Employee's engaging in such activities. The Employee
shall not be deemed to have been Terminated for Cause unless and until the
Company has delivered to the Employee a notice containing a resolution adopted
by not less than three-quarters of the entire membership of the Board of
Directors at a meeting called and held for the purpose, after reasonable notice
to the Employee and opportunity for him to appear with counsel before the Board
of Directors, finding that in the good faith opinion of the Board of Directors
the Employee has engaged in conduct described in this Section 1(g) and
specifying the particulars in detail.
2. Term. The term of this Agreement shall be one year from the date first
written above, provided that on each anniversary of such date, the term shall be
extended for an additional year unless at least 90 days prior such anniversary,
either the Company or the Employee gives notice to the other that the term of
this Agreement shall not be extended further, and provided further that
notwithstanding the delivery of any such notice, the term of this Agreement
shall be extended until the expiration of 24 months following the date upon
which a Change in Control shall have occurred during the term of the Agreement
including extensions of the term pursuant to the first proviso of this sentence.
3. Severance Benefits.
(a) In the event of Involuntary Termination in connection with or within 24
months after a Change in Control which occurs during the term of this Agreement,
the Company shall, (1) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to the sum of (i)
the Employee's base salary for a period months at the rate of base salary in
effect on the date of the Change of Control or the Date of Termination,
whichever is greater, and (ii) the amount of the Employee's prior year's annual
bonus multiplied by a fraction with a numerator of the number of days which have
elapsed through the Date of Termination in the fiscal year in which the Date of
Termination occurs and a denominator of 365; (2) provide to the Employee for
months following the Date of Termination, such health, dental and life insurance
benefits as the Company maintained for the Employee at the Date of Termination
on terms as favorable to the Employee as applied at the Date of Termination, or
at the election of the Employee (or, notwithstanding the election of the
Employee at the election of the company if coverage under the Company's group
plan is not available to the Employee) cash in an amount equal to the premium
cost being paid by the company with respect to the Employee for such benefits
immediately prior to the Date of Termination); (3) transfer to Employee title to
the Company owned vehicle currently used by the Employee, if any, with the
Company paying all costs, licensing fees and taxes (excluding income taxes)
associated with the transfer of title, or in the event the Employee receives a
monthly cash car allowance in lieu of use of a Company vehicle, the Company
shall pay to the Employee pursuant to this paragraph an additional sum equal to
times the greater of the monthly car allowance in effect on the date of the
Change of Control of the Date of Termination; (4) and vesting of all of
Employee's outstanding stock options and/or restricted stock awards with the
Company or its affiliates. The provision of any medical benefits under this
Section 3(a) shall not extend to the period for the continuation of group health
benefits under the COBRA
<PAGE> 5
health care continuation provisions of Section 601 of the Employee Retirement
Income Security Act of 1974 ("ERISA") or other applicable state laws.
(b) In the event that any payments of benefits provided or to be provided
to the Employee pursuant to this Agreement in combination with payments or
benefits, if any, from other plans or arrangements maintained by the Company or
any of its affiliates, constitute "excess parachute payments" under Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") that are subject
to excise tax under Section 4999 of the Code, the Company shall pay to the
Employee in cash an additional amount equal to the amount of the Gross Up
Payment (as hereinafter defined). The "Gross Up Payment" shall be the amount
needed to ensure that the amount of such payments and the value of such benefits
received by the Employee (net of such excise tax and any federal, state and
local tax on the Company's payment to the Employee attributable to such excise
tax) equals the amount of such payments and value of such benefits as the
Employee would receive in the absence of such excise tax and any federal, state
and local tax on the Company's payment to the Employee attributable to such
excise tax. The Company shall pay the Gross Up Payment within 60 business days
after the Date of Termination. For purposes of determining the amount of the
Gross Up Payment, the value of any non-cash benefits and deferred payments or
benefits shall be determined by the Company's independent auditors in accordance
with the principles of Section 280G of the Code. In the event that, after the
Gross Up Payment is made, the amount of the excise tax is determined to be less
than the amount calculated in the determination of the actual Gross Up Payment
made by the Company, the Employee shall repay to the Company, at the time that
such reduction in the amount of excise tax is finally determined, the portion of
the Gross Up Payment attributable to such reduction, plus interest on the amount
of such repayment at the applicable federal rate under Section 1274 of the Code
from the date of the Gross Up Payment to the date of the repayment. The amount
of the reduction of the Gross Up Payment shall reflect any subsequent reduction
in excise taxes resulting from such repayment. In the event that, after the
Gross Up Payment is made, the amount of the excise tax is determined to exceed
the amount anticipated at the time the Gross Up Payment was made, the Company
shall pay to the Employee, in immediately available funds, at the time that such
additional amount of excise tax is finally determined, an additional payment
("Additional Gross Up Payment") equal to such additional amount of excise tax
and any federal, state and local taxes thereon, plus all interest and penalties,
if any, owed by the Employee with respect to such additional amount of excise
and other tax. The Employee shall have the right to challenge any excise tax
assessment against him or her as to which the Employee is entitled to (or would
be entitled if such assessment is finally determined to be proper) a Gross Up
Payment or Additional Gross Up Payment, provided that all costs and expenses
incurred in such a challenge shall be borne by the Company and the Company shall
indemnify the Employee and hold the Employee harmless, on an after-tax-basis,
from any excise or other tax (including interest and penalties with respect
thereto) imposed as a result of such payment of costs and expenses by the
Company.
(c) Any payments made to the Employee pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 U.S.C.ss.1828(k) and
any regulations promulgated thereunder.
<PAGE> 6
4. Notice of Termination. In the event that the Company desires to
terminate the employment of the Employee without his consent during the term of
this Agreement in connection with or after a Change in Control has occurred, the
Company shall deliver to the Employee a written notice of termination, stating
(i) whether such termination constitutes Termination for Cause, and, if so,
setting forth in reasonable detail the facts and circumstances that are the
basis for the Termination for Cause, and (ii) specifying the Date of
Termination. In the event that the Employee determines in good faith that he or
she has suffered Involuntary Termination of his employment, the Employee shall
send a written notice to the Company stating the circumstances that constitute
Involuntary Termination and the Date of Termination. No provision of this
Agreement shall be construed as providing to the Employee any right to be
retained as an employee of the Company.
5. No Mitigation. The Employee shall not be required to mitigate the amount
of any salary or other payment or benefit provided for in this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise, except as expressly set
forth herein.
6. Attorneys and/or Fees. If the Employee is purportedly Terminated for
Cause or Involuntarily Terminated and the Company denies payments and/or
benefits under Section 3 of this Agreement on the basis that the Employee
experienced Termination for Cause rather than Involuntary Termination, but it is
determined by a court of competent jurisdiction or by an arbitrator pursuant to
Section 14 that cause as contemplated by Section 1(g) of this Agreement did not
exist for termination of the Employee's employment, or if in any event it is
determined by any such court or arbitrator that the Company has failed to make
timely payment of any amounts or provision of any benefits owed to the Employee
under this Agreement, the Employee shall be entitled to reimbursement for all
reasonable costs, including attorneys' fees, incurred in challenging such
termination of employment or collecting such amounts or benefits. Such
reimbursement shall be in addition to all rights which the Employee is otherwise
entitled under this Agreement.
7. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and neither
party may assign or delegate any of its rights or obligations hereunder without
first obtaining the written consent of the other party; provided, however, that
the Company shall require any successor or assign (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by an assumption agreement in form
and substance satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such an assumption agreement prior
to the effectiveness of any such succession or assignment shall be a breach of
this Agreement and shall entitle the Employee to compensation from the Company
in the same amount and on the same terms as the compensation pursuant to Section
3 hereof. For purposes of
<PAGE> 7
implementing the provisions of this Section 7, the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure to
the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
8. Termination of Prior Severance Agreement. Upon execution of this
agreement by the Employee, the Prior Severance Agreement shall terminate and
have no further force and effect. Regardless of whether any benefits are paid to
the Employee under this Agreement, no benefits shall be paid to the Employee
under the Prior Severance Agreement.
9. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Company, or, it to the Employee, to such home or other address as the
Employee has most recently provided in writing to the Company.
10. Amendments. No amendments or additions to this Agreement hall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
11. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
12. Severablility. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceablity of the other provisions hereof.
13. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
California.
14. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by non-binding arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction, and shall include an award of attorneys fees and costs to the
prevailing party.
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A NON-BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
COMPANY
By:
--------------------------------------
Its:
EMPLOYEE
------------------------------------------
<PAGE> 1
EXHIBIT 10.11
ITLA CAPITAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective January 1, 1997)
Amended January 28, 2000
Preamble
ITLA Capital Corporation, a Delaware business corporation and its subsidiaries,
have adopted the ITLA Capital Corporation Supplemental Executive Retirement
Plan, effective January 1, 1997, and amended as of January 28, 2000, for a
select group of executives and senior management personnel to ensure that the
overall effectiveness of the Company's executive compensation program will
attract, retain and motivate qualified executives and senior management
personnel.
ARTICLE I
DEFINITIONS
When used herein, the following words shall have the meanings below unless
the context clearly indicates otherwise:
1.1 The term "Change in Control" means the occurrence of any of the
following events with respect to the Company: (1) any person (as the term is
used in section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the Company
representing 33.33% or more of the Company's outstanding securities; (2)
individuals who are members of the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least two thirds of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the nominating committee serving
under an Incumbent Board, shall be considered a member of the Incumbent Board;
(3) a reorganization, merger, consolidation, sale of all or substantially all of
the assets of the Company or a similar transaction in which the Company is not
the resulting entity (unless the continuing ownership requirements clause (4)
below are met with respect to the resulting entity); or (4) a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation in which the voting securities of the Company outstanding
immediately prior thereto represent at least 66.67% of the total voting power
represented by the voting securities of the Company or the surviving entity
outstanding immediately after such merger or consolidation. The term "Change in
Control" shall not include: (1) an acquisition of securities by an employee
benefit plan of the Company; or (2) any of the above mentioned events or
occurrences which
<PAGE> 2
require but do not receive the requisite government or regulatory approval to
bring the event or occurrence to fruition.
1.2 "Claims Reviewer" means the Compensation Committee of the Board of
Directors of the Company, unless another person or organizational unit is
designated by the Company as Claims Reviewer.
1.3 "Company" means ITLA Capital Corporation and any successor thereto. For
purposes of determining whether a Participant is employed by the Company at any
particular time, the term "Company" shall also include any entity that would be
treated as a single employer with the Company under Section 414 of the Internal
Revenue Code.
1.4 "Designated Beneficiary" means the individual the Participant
designates as his or her Beneficiary in such Participant's ITLA Capital
Corporation Supplemental Executive Retirement Plan designation of beneficiary
form.
1.5 "Disability" means total and permanent disability as defined in the
Company's long term disability plan.
1.6 "Earnings" means the Participant's base annual salary from the Company
(without regard to any deferral election made by the Participant and/or any
bonuses paid to the Participant).
1.7 "ITLA Capital Corporation Stock" means the Company's designated
Recognition and Retention Plan Shares, treasury shares and publicly traded
common stock.
1.8 "Participant" means any employee of the Company who meets the
eligibility requirements of Article II and is designated and approved for
participation in the Plan as set forth in Article II.
1.9 "Participant Account" or "Account" means the account held under the
Plan for each Participant pursuant to Article IV.
1.10 "Plan" means the ITLA Capital Corporation Supplemental Executive
Retirement Plan, as set forth herein and as amended from time-to-time.
1.11 "Plan Year" means the calendar year.
1.12 "Retirement Date" means the later of the date a Participant leaves the
employ of the Company or the date upon which the Participant attains the age of
62.
1.13 "Trust" means the Trust Under the ITLA Capital Corporation Rabbi Trust
Agreement.
1.14 "Trustee" means Union Bank of California or any other person or
corporation selected by the Company to serve in such capacity of the Trust.
2
<PAGE> 3
1.15 "Vesting Cycle" means one the following of seven consecutive three
calendar year periods: (1) January 1, 1997 through December 31, 1999; (2)
January 1, 2000 through December 31, 2002; (3) January 1, 2003 through December
31, 2005; (4) January 1, 2006 through December 31, 2008; (5) January 1, 2009
through December 31, 2011; (6) January 1, 2012 through December 31, 2014 and (7)
January 1, 2015 through December 31, 2017.
ARTICLE II
ELIGIBILITY TO PARTICIPATE
2.1 Eligibility to Participate. For purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Plan is
limited to a select group of management and highly compensated employees.
2.2 Designated Participants. An executive or senior management employee of
the Company is eligible to become a Participant in the Plan; provided such
employee is designated as a Participant below or, such employee is later
designated as a Participant by the Compensation Committee of the Board of
Directors of the Company and, such designation is attached as a written
amendment to the Plan signed by a duly authorized officer of the Company. Under
no circumstance shall an employee below the level of Managing Director or Senior
Vice President be eligible to participate in the Plan. The following individuals
shall constitute the eligible Participants as of the Plan's effective date of
January 1, 1997, or as of the amendment date of January 28, 2000.
-----------------
-----------------
Once an employee becomes a Participant, he or she shall remain a Participant
until all benefits to which he or she (or his or her Designated Beneficiary) is
entitled under the Plan have been paid. To the extent George Haligowski's
Employment Agreement dated July 23, 1997, or as later amended, differs from the
terms of this Agreement, George Haligowski's Employment Agreement shall be the
controlling document.
ARTICLE III
ELIGIBILITY FOR AND PAYMENT
OF BENEFITS
3.1 Eligibility of Benefits. Each Participant shall be eligible to receive
the vested balance of his or her Account under the Plan beginning on the earlier
of a Change of Control or the Participant's death, Disability, Retirement Date
or date of termination of employment. Except upon a Change of Control or as set
forth in Section 3.8 below, no benefits shall be payable from the Plan to a
Participant while such Participant is employed with the Company.
3
<PAGE> 4
3.2 Calculation of Benefit. A Participant's benefit under the Plan will be
calculated as of the earlier of Participant's death, Disability, Retirement
Date, date of termination of employment or date of occurrence of a Change of
Control. The benefit payable to a Participant will be equal to the fair market
value of the vested ITLA Capital Corporation Stock credited to the Participant's
Account as of the time of such calculation of benefit.
3.3 Incidents of Ownership. Notwithstanding the above, a Participant shall
have no incidents of ownership with respect to the ITLA Capital Corporation
Stock held under the Plan. A Participant shall not have any right to vote shares
of ITLA Capital Corporation Stock credited to the Participant's Account under
the Plan.
3.4 Form of Payment. A Participant's vested benefit calculated pursuant to
Section 3.2 and payable pursuant to Section 3.1 shall be paid at the
Participant's election in a lump sum in the form of cash or awarded ITLA Capital
Corporation Stock. If a Participant elects payment in cash, the Participant may,
subject to the restrictions below, elect to receive payment in the form of ten
equal annual installments in lieu of a lump sum payment. The amount of such
annual installments will be calculated based upon the amortization of the value
of the Participant's Account as of the time of the calculation of benefit under
Section 3.2 at a credited interest rate equal to 125% of the Company's cost of
funds. Interest credited to a Participant's Account during a Plan Year shall be
distributed as part of the next year's installment. The final installment shall
include the balance of the Participant's Account. The election of the form of
distribution shall be made no later than the end of the first Vesting Cycle
after the Participant commences participation in the Plan. In the event the
Participant fails to make a timely election as to the method of distribution,
the method of distribution shall be determined by the Compensation Committee of
the Board of Directors of the Company in its sole discretion. Notwithstanding
any election of the Participant and notwithstanding that installment
distributions may have already commenced, distribution of the Participant's
benefit (or remaining benefit) shall be made in a single lump sum payment in the
event of a Change of Control or termination of the Plan. All distributions under
the Plan shall be less applicable tax and other required or authorized
withholdings. All distributions of ITLA Capital Corporation Stock shall comply
with federal and state securities laws.
3.5 Termination of Employment. If a Participant's employment with the
Company is terminated other than as a result of death or Disability or after
attainment of Retirement Date, the Participant shall be entitled to receive only
the vested portion of the Participant's Account as of the date of termination.
If the Participant is not vested in any portion of the Account, the Participant
shall not have any right to any benefit from the Plan.
3.6 Participant's Death. If a Participant dies while employed by the
Company and prior to receiving the benefits to which the Participant is entitled
to under the Plan, the Participant's Designated Beneficiary shall receive the
benefits the Participant would otherwise receive under the Plan. If a
Participant survives his or her Designated Beneficiary or the Participant fails
to name a Designated Beneficiary prior to receipt of the entire distribution to
which the Participant is entitled hereunder, then all of the distribution to
which the Participant is
4
<PAGE> 5
entitled under the Plan and which has not been distributed to such Participant
at the date of death shall be payable to the Participant's estate.
3.7 Commencement of Benefit. A Participant's benefit payable on account of
the occurrence of a Change of Control or the Participant's death, Disability,
Retirement Date or termination of employment shall be payable commencing on the
first day of the calendar month next following the occurrence of the event
giving rise to the payment.
3.8 Advance Distribution for Financial Hardship. With the consent of the
Compensation Committee of the Board of Directors, a Participant may withdraw up
to one hundred percent (100%) of the vested amount credited to his or her
Account prior to termination of employment as may be required to meet a
Participant's Unforeseeable Financial Emergency (as defined herein), provided
that the entire amount requested by the Participant is not reasonably available
from other resources of the Participant. An "Unforeseeable Financial Emergency"
shall mean an unforeseeable, severe financial condition resulting from (1) a
sudden and unexpected illness or accident of the Participation or an immediate
family member of the Participant; (2) loss of the Participant's property due to
casualty; or (3) other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the Participant. The
withdrawal must be necessary to satisfy the Unforeseeable Financial Emergency
and no more may be withdrawn from the Participant's vested Account than is
required to relieve the financial need after taking into account other resources
that are reasonably available to the Participant for this purpose. The
Participant must certify that the financial need cannot be relieved through any
other reasonable sources, including but not limited to, reimbursement or
compensation by insurance or otherwise, liquidation of the Participant's assets,
to the extent such liquidation would not itself cause an immediate and heavy
financial need or by borrowing from commercial sources on reasonable commercial
terms. This Section 3.8 shall be interpreted in a manner consistent with Section
1.457-2(h)(4), (5) of the Treasury Regulations. The Participant's Account shall
be reduced by the amount of any advance distribution for financial hardship.
3.9 Limitation on Distribution to Covered Employees. Notwithstanding any
other provision of the Plan, in the event that the Participant is a "covered
employee" as defined in Section 162(m)(3) of the Internal Revenue Code, or would
be a covered employee if the benefits were distributed in accordance with the
other provisions of Article III, the maximum amount which may be distributed
from the Participant's Account in any Plan Year shall not exceed one million
dollars ($1,000,000) less the amount of compensation paid by the Company to the
Participant in such Plan Year which is not "performance-based" (as defined in
Internal Revenue Code Section 162(m)(4)(C)). The amount of compensation which is
not "performance-based" shall be reasonably determined by the Company at the
time of the proposed distribution. Any amount which is not distributed to the
Participant in a Plan Year as a result of the limitation set forth in this
Section 3.9 shall be distributed to the Participant in the next Plan Year,
subject to compliance with the foregoing limitation set forth in this Section
3.9. The provisions of this Section 3.9 shall not apply if the Compensation
Committee of the Board of Directors, upon consultation with legal counsel,
determines that the restrictions of Code Section 162(m) do not apply to limit
the deductibility of payments made under the Plan (or otherwise by the Company)
to the Participant.
5
<PAGE> 6
ARTICLE IV
ALLOCATION AND FUNDING OF BENEFITS
4.1 Allocation of Benefits. Benefits under the Plan are allocated to a
Participant's Account on an annual basis on or within ninety (90) days of the
last day of the Plan Year. In order to receive an Allocation of Benefits, a
Participant must be employed by the Company as of the last day of the Plan Year.
The amount of ITLA Capital Corporation Stock allocated to a Participant's
Account pursuant to this Section 4.1 and Section 4.2 shall be determined using
the fair market value of the ITLA Capital Corporation Stock as of October 8,
1998, of nine dollars ($9.00) a share.
4.2 Allocation Amounts. The annual amount allocated to a Participant
pursuant to Section 4.1 shall be calculated as follows, subject to approval of
the allocation by the Compensation Committee of the Board of Directors of the
Company and award of sufficient shares of ITLA Capital Corporation Stock to fund
the annual allocation:
o For George Haligowski, the annual amount shall be equal to
33 1/3% of his Earnings for the Plan Year.
o For all other Participants, the annual amount shall be equal to
20% of each such Participant's Earnings for the Plan Year.
Notwithstanding the preceding sentences, the Compensation Committee of the Board
of Directors may approve a greater or lesser award for any Participant or
determine that no award is appropriate for a Participant. In no event, however,
shall the total amount of benefits allocated under the Plan exceed the issued
Recognition and Retention Plan shares of ITLA Capital Corporation Stock.
4.3 Contribution to Trust. The Company shall contribute shares of ITLA
Capital Corporation Stock to the Trust on an annual basis in an amount equal to
the total annual allocation for all Participants for the Plan Year as determined
under Section 4.2 to the extent that the Compensation Committee of the Board of
Directors approves such funding. The contributed shares shall come from the
issued Recognition and Retention Plan shares of ITLA Capital Corporation Stock
approved for such use by the shareholders in the Company's Recognition and
Retention Plan. All Recognition and Retention Plan terms pertaining to the
granting of the shares shall remain in full force and effect. The Plan shall be
funded with Recognition and Retention Plan Shares only to the extent that shares
are available and the shares are awarded by the Company's Compensation Committee
of the Board of Directors.
The number of shares of ITLA Capital Corporation Stock allocated to each
Participant's Account under the Plan for Plan Year shall be determined by
dividing the Participant's allocation amount for such Plan Year as determined in
Section 4.2 above by the fair market value of the ITLA Capital Corporation Stock
on October 8, 1999, of nine dollars ($9.00) a share. If the
6
<PAGE> 7
available Recognition and Retention Plan Shares should be insufficient to cover
the allocation amounts for all Participants for any Plan Year as determined
under Section 4.2 above, the allocation amounts shall be reduced for each
Participant on a pro rata basis.
4.4 Benefits Upon Change of Control. In the event of a pending Change of
Control as defined in Section 1.1, the Company shall immediately credit the
Account of each Participant in the employ of the Company at the date of the
Change of Control (or who has been terminated involuntarily by action of the
Company within the three months preceding the Change of Control, unless such
termination is for cause as defined in the Company's Change of Control Severance
Agreements) as follows:
o For George Haligowski, the Company shall credit his Account with
a number of shares of ITLA Capital Corporation Stock, based upon
the fair market value of such stock on the date of the Change of
Control such that the additional shares in total value equal 3.95
times his Earnings for the prior Plan Year.
o For all other Participants, the Company shall credit each such
Participant's Account with a number of shares of ITLA Capital
Corporation Stock, based upon the fair market value of such stock
on the date of the Change of Control such that the additional
shares in total value equal 60% of the Participant's Earnings for
the prior Plan Year.
The contribution and allocation of shares under this Section 4.4 is subject to
and expressly conditioned upon the occurrence of the Change of Control and is
subject to the limitations of Section 4.5 below.
4.5 Funding Benefits Upon Change of Control. All benefits payable because
of a Change of Control shall be funded by the Company immediately contributing
the necessary shares to the Participants' Accounts. If the available Recognition
and Retention Plan Shares, as described in Section 4.3, are insufficient to fund
the benefits payable upon a Change of Control, such benefits shall be reduced
for each Participant on a pro rata basis.
4.6 Vesting. A Participant shall only have a vested right to amounts
allocated to his or her Account for a Vesting Cycle if such Participant is
employed by the Company on the last day of the Vesting Cycle. Notwithstanding
the preceding sentence, a Participant shall be 100% vested in all amounts
credited to his or her Accounts in the event of a Change of Control or
termination of employment due to death, Disability or after Retirement Date. A
Participant employed by the Company on the date of termination of the Plan shall
also be 100% vested upon Plan termination.
4.7 Forfeiture. In the event a Participant leaves the employ of the Company
prior to the end of a Vesting Cycle for reasons other than death, Disability or
after Retirement Date, all amounts contributed to the Trust on the Participant's
behalf for that Vesting Cycle shall be forfeited. The forfeited amounts shall be
retained in the Trust and used to reduce future funding described in Section 4.3
above.
7
<PAGE> 8
ARTICLE V
AMENDMENT AND TERMINATION
5.1 Amendment or Termination. The Company intends the Plan to remain in
existence until all Participants in the Plan have received all of their benefits
payable under the Plan. The Company, however, reserves the right to amend or
terminate the Plan when, in the sole opinion of the Company, such amendment or
termination is advisable. Any such amendment or termination shall be made
pursuant to a resolution of the Compensation Committee of the Board of Directors
of the Company. No amendment or termination of the Plan shall directly or
indirectly reduce any Participant's Account below the balance of such Account
immediately prior to the effective date of the resolution amending or
terminating the Plan; nor shall any amendment or termination of the Plan delay
the distribution date for the Participant's Account. Upon termination of the
Plan, the Accounts of all Participants shall become fully vested and all
Accounts shall be distributed is a single lump sum to Participants, regardless
of the distribution elections made by the Participants.
ARTICLE VI
ADMINISTRATION
6.1 Termination of Benefits. Notwithstanding any other provision of the
Plan, rights to payment of a benefit hereunder to a Participant or his or her
Designated Beneficiary will, at the discretion of the Compensation Committee of
Board of Directors, be terminated, and the Company will have no further
obligation hereunder to such Participant or his or her Designated Beneficiary,
if such Participant is discharged from employment from the Company for cause as
defined in the Company's Change of Control Severance Agreements.
6.2 Unsecured Claims. The right of a Participant or his or her Designated
Beneficiary to receive a benefit hereunder shall be an unsecured claim against
the general assets of the Company, and neither a Participant nor his or her
Designated Beneficiary shall have any rights in or against any amount credited
to any Accounts under this Plan or any other assets of the Company.
Notwithstanding any other provisions to the contrary, the Plan at all times
shall be considered entirely unfunded both for tax purposes and for purposes of
Title I of ERISA as amended. Any funds invested hereunder shall continue for all
purposes to be part of the general assets of the Company and available to its
general creditors in the event of bankruptcy or insolvency. Accounts under this
Plan and any benefits which may be payable pursuant to this Plan are not subject
in any manner to anticipation, sale, alienation, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors of a Participant or his or
her Designated Beneficiary. The Plan constitutes a mere unsecured promise by the
Company to make benefit payments in the future. No interest or right to receive
a benefit may be taken, either voluntarily of involuntarily, for the
satisfaction of the debts of, or other obligations or claims against, such
8
<PAGE> 9
person or entity, including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
6.3 Plan Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company, which shall have the
authority, duty and power to interpret and construe the provisions of the Plan
as the Compensation Committee of the Board of Directors deems appropriate
including the authority to determine eligibility for benefits under the Plan.
The Compensation Committee of the Board of Directors shall have the duty and
responsibility of maintaining records, making the requisite calculations and
disbursing the payments hereunder. The interpretations, determinations,
regulations and calculations of the Compensation Committee of the Board of
Directors shall be final and binding on all persons and parties concerned. The
Compensation Committee may delegate any of its duties to the Trustee, to an
employee or employees of the Company or other persons as it deems appropriate.
6.4 Expenses. Expenses of administration shall be paid by the Company. The
Compensation Committee of the Board of Directors of the Company shall be
entitled to rely on all tables, valuations, certificates, opinions, data and
reports furnished by any actuary, accountant, controller, counsel or other
person employed or retained by the Company with respect to the Plan.
6.5 Statements. The Compensation Committee of the Board of Directors of the
Company (or the Trustee if such duty is delegated to the Trustee) shall furnish
individual annual or more frequent statements of accrued benefits to each
Participant (or if the Participant's Designated Beneficiary is currently
receiving benefits under the Plan, to such Participant's Designated Beneficiary)
in such form as determined by the Compensation Committee of the Board of
Directors or as required by the law.
6.6 No Enlargement of Rights. The sole rights of a Participant or his or
her Designated Beneficiary under this Plan shall be to have this Plan
administered according to its provisions, to receive whatever benefits he or she
may be entitled to hereunder, and nothing in the Plan shall be interpreted as a
guaranty that any funds in any trust which may be established in connection with
the Plan or assets of the Company will be sufficient to pay any benefit
hereunder. Further, the adoption and maintenance of this Plan shall not be
construed as creating any contract of employment between the Company and the
Participant. The Plan shall not affect the right of the Company to deal with any
Participants in employment respects, including their hiring, discharge,
compensation and conditions of employment.
6.7 Rules and Procedures. The Company may from time to time establish rules
and procedures which it determines to be necessary for the proper administration
of the Plan and the benefits payable to an individual in the event that
individual is declared incompetent and a conservator or other person legally
charged with that individual's care is appointed. Except as otherwise provided
herein, when the Company determines that such individual is unable to manage his
or her financial affairs, the Company may pay such individual's benefits to such
conservator, person legally charged with such individual's care, or institution
then contributing
9
<PAGE> 10
toward or providing for the care and maintenance of such individual. Any such
payment shall constitute a complete discharge of any liability of the Company
and the Plan for such individual.
6.8 Information. Each Participant shall keep the Company informed of his or
her current address and the current address of his or her Designated
Beneficiary. The Company shall not be obligated to search for any person. If
such person(s) is (are) not located within three (3) years after the date on
which payment of the Participant's benefits payable under this Plan may first be
made, payment may be made as though the Participant or his or her Designated
Beneficiary had died at the end of such three-year period.
6.9 Loss. Notwithstanding any provision herein to the contrary, neither the
Company nor any individual acting as an employee or agent of the Company shall
be liable to any Participant, his or her Designated Beneficiary, or any other
person for any claim, loss, liability or expense incurred in connection with the
Plan, unless attributable to fraud or willful misconduct on the part of the
Company or any such employee or agent of the Company.
6.10 Indemnification. The Company shall indemnify and hold harmless the
members of the Board of Directors, and any other employees to whom any
responsibility with respect to the Plan is allocated or delegated, from and
against any and all liabilities, costs and expenses, including attorneys' fees,
incurred by such persons as a result of any act, or omission to act, in
connection with the performance of their duties, responsibilities and
obligations under the Plan and under ERISA, other than such liabilities, costs
and expenses as may result from the bad faith, willful misconduct or criminal
acts of such persons or to the extent such indemnification is specifically
prohibited by ERISA. The Company shall have the obligation to conduct the
defense of such persons in any proceeding to which this Section applies. If any
Board member or any employee covered by this indemnification clause determines
that the defense provided by the Company is inadequate, that member or employee
shall be entitled to retain separate legal counsel for his or her defense and
the Company shall be obligated to pay for all reasonable legal fees and other
court costs incurred in the course of such defense unless a court of competent
jurisdiction finds such person has acted in bad faith or engaged in willful
misconduct or criminal acts.
6.11 Applicable Law. All questions pertaining to the construction, validity
and effect of the Plan shall be determined in accordance with the laws of the
United States and the extent not preempted by such laws, by the laws of the
State of California.
ARTICLE VII
CLAIMS PROCEDURE
7.1 Claims Procedure. An initial claim for benefits under the Plan must be
made by the Participant or his or her Designated Beneficiary in accordance with
the terms of the Plan through which the benefits are provided. Not later than 90
days after receipt of such a claim, the Claims Reviewer will render a written
decision on the claim to the claimant, unless special
10
<PAGE> 11
circumstances require the extension of such 90-day period. If such extension is
necessary, the Claims Reviewer shall provide the Participant or his or her
Designated Beneficiary with written notification of such extension before the
expiration of the initial 90-day period. Such notice shall specify the reason or
reasons for such extension and the date by which the final decision can be
expected. In no event shall such extension exceed a period of 90 days from the
end of the initial 90-day period. In the event the Claims Reviewer denies the
claim of a Participant or his or her Designated Beneficiary in whole or in part,
the Claims Reviewer's written notification shall specify, in a manner calculated
to be understood by the claimant, the reason for the denial; a reference to the
Plan or other document or form that is the basis for the denial; a description
of any additional material or information necessary for the claimant to perfect
the claim; an explanation as to why such information or material is necessary;
and an explanation of the applicable claims procedure. Should the claim be
denied in whole or in part and should the claimant be dissatisfied with the
Claim's Reviewer's disposition of the claimant's claim, the claimant may have a
full and fair review of the claim by the Company upon written request therefore
submitted by the claimant or the claimant's duly authorized representative and
received by the Company within 60 days after the claimant receives written
notification that the claimant's claim has been denied. In connection with such
review, the claimant or the claimant's duly authorized representative shall be
entitled to review pertinent documents and submit the claimant's views as to the
issues, in writing. The Company shall act to deny or accept the claim within 60
days after receipt of the claimant's written request for review unless special
circumstances require the extension of such 60-day period. If such extension is
necessary, the Company shall provide the claimant with written notification of
such extension before the expiration of such initial 60-day period. In all
events, the Company shall act to deny or accept the claim within 120 days of the
receipt of the claimant's written request for review. The action of the Company
shall be in the form of a written notice to the claimant and its contents shall
include all of the requirements for action on the original claim. In no event
may a claimant commerce legal action for benefits the claimant believes are due
the claimant until the claimant has exhausted all of the remedies and procedures
afforded the claimant by this Article VII.
IN WITNESS WHEREOF, ITLA Capital Corporation has caused this Plan to be executed
on this 28th day of January, 2000.
By /s/ GEORGE W. HALIGOWSKI
--------------------------------------
George W. Haligowski
On behalf of ITLA Capital Corporation
11
<PAGE> 1
EXHIBIT 10.12
ITLA CAPITAL CORPORATION RABBI TRUST AGREEMENT
<PAGE> 2
ITLA CAPITAL CORPORATION RABBI TRUST AGREEMENT
This Trust Agreement (the "Trust Agreement") is made and dated this
28th day of February, 1998 by and between ITLA Capital Corporation, a Delaware
corporation (the "Employer") and UNION BANK OF CALIFORNIA, N.A. (the "Trustee").
PURPOSE
(a) WHEREAS, Employer has adopted the plan or plans attached as Exhibit A
or which subsequently may be designated in writing by Employer (the "Plans")
pursuant to which Employer expects to incur unfunded deferred compensation
liabilities with respect to certain employees of Employer.
(b) WHEREAS, Employer wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Employer's creditors in the event of Employer's
Insolvency, as herein defined, until paid to Plan participants in such manner
and at such times as specified in the Plan(s);
(c) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;
(d) WHEREAS, it is the intention of Employer to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
ARTICLE I
ESTABLISHMENT OF TRUST
1.1 Establishment of Trust. Employer hereby deposits with the Trustee in
Trust one share of ITLA Capital Corporation common stock, which shall become the
principal of the Trust to be held, administered and disposed of by the Trustee
as provided in the Trust Agreement.
1.2 Revocability of Trust. The Trust hereby established is revocable by
Employer; it shall become irrevocable upon a Change of Control, as defined
herein.
1.3 Grantor Trust. The Trust is intended to be a grantor trust, of which
Employer is the grantor, within the meaning of Subpart E, Part I, Subchapter J,
Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and
shall be construed accordingly.
1.4 Purpose of Trust. The principal of the Trust, and any earnings thereon
shall be held separate and apart from other funds of Employer and shall be used
exclusively for the uses
1
<PAGE> 3
and purposes of Participants and Employer's general creditors as herein set
forth. Plan participants and beneficiaries of deceased participants (hereinafter
called "Participants") shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created under the
Plan(s) and this Trust Agreement shall be mere unsecured contractual rights of
Participants against Employer. Any assets held by the Trust will be subject to
the claims of Employer's general creditors under federal and state law in the
event of Insolvency, as defined in Article XI herein.
1.5 Payments to Employer. Except as provided in Section 1.2 hereof, after
the Trust has become irrevocable, Employer shall have no right or power to
direct the Trustee to return to Employer or to divert to others any of the Trust
assets before all payment(s) of benefits have been made to Participants pursuant
to the terms of the Plan(s).
1.6 Signing Authority; Administrator. Employer shall certify in writing to
the Trustee the names and specimen signatures of all those who are authorized to
act as or on behalf of Employer, and those names and specimen signatures shall
be updated as necessary by a duly authorized official of Employer. Employer
shall promptly notify the Trustee if any person so designated is no longer
authorized to act on behalf of Employer. Until the Trustee receives written
notice that a person is no longer authorized to act on behalf of Employer, the
Trustee may continue to rely on Employer's designation of such person.
1.7 Acceptance of Assets; Trust Composition. All contributions or transfers
shall be received by the Trustee in cash or in any other property acceptable to
the Trustee. The Trust shall consist of the contributions and transfers received
by the Trustee, together with the income and earnings from them and any
increments to them. The Trustee shall hold, manage and administer the Trust in
accordance with this Trust Agreement without distinction between principal and
income.
1.8 Contributions. Employer holds certain assets which have been
accumulated by Employer to assist in its obligation to pay nonqualified
retirement benefits to select employees. Such assets shall be transferred to the
Trust and invested in accordance with the terms of this Trust Agreement.
Employer, in its sole discretion, may at any time, or from time to time, make
additional deposits of cash or other property in trust with the Trustee to
augment the principal to be held, administered and disposed of by the Trustee as
provided in this Trust Agreement. In addition, upon a Change of Control,
Employer shall, as soon as possible but in no event longer than fifteen (15)
days following the Change of Control, as defined herein, make an irrevocable
contribution to the Trust in an amount that is sufficient to pay each
Participant the benefit to which such Participant would be entitled pursuant to
the terms of the Plan(s) as of the date on which the Change of Control occurred.
1.9 No Duty of the Trustee to Enforce Collection. Notwithstanding anything
herein to the contrary, the Trustee shall have no authority or obligation to
enforce the collection of any contribution or transfer to the Trust.
1.10 Plan Administration. Employer and not the Trustee shall be responsible
for administering the Plans (including without limitation determining the rights
of Employer's
2
<PAGE> 4
employees to participate in a Plan, determining any Participant's right to
benefits under such Plan), and issuing statements to Participants of their
interest in the Trust and Plan; provided, however, that the Trustee may
specifically agree in writing to provide administrative services with respect to
one or more Plan(s). In addition, upon a Change of Control, the Trustee shall
maintain Participant Accounts as provided in Section 1.12 of this Trust
Agreement and shall make payments to Participants as provided in Section 4.2 of
the Trust Agreement.
1.11 Change of Control. The occurrence of any of the following events with
respect to the Company: (1) any person (as the term is used in section 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly of securities of the Company representing 33.33% or more of the
Company's outstanding securities; (2) individuals who are members of the Board
of Directors of the Company on the date hereof (the "Incumbent Board") cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least two thirds of the directors comprising the Incumbent Board,
or whose nomination for election by the Company's stockholders was approved by
the nominating committee serving under an Incumbent Board, shall be considered a
member of the Incumbent Board; (3) a reorganization, merger, consolidation, sale
of all or substantially all of the assets of the Company or a similar
transaction in which the Company is not the resulting entity (unless the
continuing ownership requirements clause (4) below are met with respect to the
resulting entity); or (4) a merger or consolidation of the Company with any
other corporation other than a merger or consolidation in which the voting
securities of the Company outstanding immediately prior thereto represent at
least 66.67% of the total voting power represented by the voting securities of
the Company or the surviving entity outstanding immediately after such merger or
consolidation. The term "Change in Control" shall not include: (1) an
acquisition of securities by an employee benefit plan of the Company; or (2) any
of the above mentioned events or occurrences which require but do not receive
the requisite government or regulatory approval to bring the event or occurrence
to fruition.
The Trustee shall have no independent duty to determine that a Change in
Control has occurred and shall not be required to take any action or refrain
from taking any actions hereunder which are based on a Change in Control having
occurred prior to the time it receives written notice from Employer or a
Participant that a Change in Control has occurred or will occur and has had a
reasonable opportunity to determine whether a Change in Control, in fact, has
occurred.
At the Trustee's request, Employer shall furnish such evidence as may be
necessary to enable the Trustee to determine whether a Change in Control has
occurred. In taking or refraining from any action under this Trust Agreement,
the Trustee may rely on its determination, including an opinion of counsel (who
may be counsel to Employer or the Trustee), that a Change in Control has
occurred. The Trustee's determination as to whether a Change in Control has
occurred shall be binding and conclusive on all persons.
3
<PAGE> 5
1.12 Participant Accounts. Employer shall maintain in an equitable manner a
separate bookkeeping account for each Participant under a Plan ("Account") in
which it shall keep a record of the benefit of such Participant under such Plan.
Employer may appoint a third-party administrator to maintain such Accounts. If
the Trustee is directed by Employer to segregate the Trust into separate
bookkeeping Accounts for each Participant, then, at the time it makes a
contribution to the Trust, Employer shall certify to the Trustee the amount of
such contribution being made in respect of each Participant under each Plan.
Notwithstanding the preceding sentence, upon a Change of Control, the Trustee
shall be responsible for maintaining a separate Account under each Plan and the
Trust based upon segregating the Accounts using Employer's latest statement of
value for each Participant's Account. The Trustee shall thereafter adjust such
Accounts pursuant to the procedures described in the Plan. The Trustee may
appoint a third-party administrator to assist the Trustee in the maintenance of
the Accounts. The reasonable expenses incurred by the Trustee in maintaining
such Accounts shall be paid by Employer within thirty (30) days of submission of
invoices to Employer by the Trustee, or if not so paid, reimbursed to the
Trustee from the Trust. Employer shall reimburse the Trust for such expense, but
the Trustee shall have no duty to enforce Employer's obligation for such
reimbursement.
The Trustee may rely on information provided to the Trustee by Employer and
the Trustee's and Employer's determination of Account values shall be conclusive
and binding on all interested parties.
1.13 Tax Reporting. Employer and not the Trustee shall be responsible for
all income tax reporting and calculation and payment of any wage withholding or
other tax requirements in connection with the Trust and any contributions
thereto, and any income earned thereby, and payments or distributions therefrom,
and Employer agrees to indemnify and defend the Trustee against any liability
for any such taxes, interest or penalties resulting from or relating to the
Trust.
ARTICLE II
INVESTMENTS
2.1 Employer is Investment Manager. Employer shall have the power over and
responsibility for the management and investment of Trust assets. Employer may
appoint an Investment Manager to direct the investment of Trust assets, provided
the Trustee is notified in writing prior to such appointment.
Except as set forth in Section 2.4 below, the Trustee shall have no duty to
make recommendations regarding Trust assets and shall retain assets until
directed in writing by Employer or Investment Manager to dispose of them.
2.2 Funding Policy and Investment Guidelines. Employer shall have the
responsibility for establishing and carrying out a funding policy and method,
consistent with the objectives of the Plans, taking into consideration the
Plans' short-term and long-term financial needs. The Trustee's responsibility
for investment and diversification of the assets in the portion
4
<PAGE> 6
of the Trust for which the Trustee has investment discretion, if any, shall be
subject to, and is limited by, the investment guidelines issued to it by
Employer. It is understood that, unless otherwise agreed in writing, Employer,
rather than the Trustee, shall be responsible for the overall diversification of
Trust assets.
2.3 Disposition of Income. During the term of this Trust, all income
received by the Trust, net of expenses and taxes, shall be accumulated and
reinvested.
2.4 Effect of Change of Control. Upon and following a Change of Control,
the Trustee shall have full responsibility for the investment and reinvestment
of all Trust assets except for amounts invested in Employer Securities and
insurance contracts, and Employer's powers to invest, manage and control Trust
assets, including the power to appoint Investment Managers and issue investment
guidelines with respect to the Trust, shall be limited to amounts invested in
Employer Securities and insurance contracts as of the date of the Change of
Control. The Trustee may, in its sole discretion, appoint one or more Investment
Managers with respect to the Trust or any part thereof and may establish and
issue to such Investment Managers investment guidelines.
2.5 Employer Securities. The Trustee may invest in Employer Securities
(including stock or rights to acquire stock) or other obligations issued by
Employer. Employer shall retain sole investment management authority and
responsibility for any Employer Securities. In no event shall the Trustee have
any authority to sell Employer Securities held in the Trust except upon the
written approval of Employer.
Employer shall have the right at any time prior to a Change of Control, and
from time to time in its sole discretion, to substitute assets of equal fair
market value for any asset held by the Trust. This right is exercisable by
Employer in a non-fiduciary capacity without the approval or consent of any
person in a fiduciary capacity. Upon a Change of Control, Employer's right to
substitute assets shall only extend to Employer Securities held in the Trust.
Employer shall not direct the investment of Trust funds in Employer
Securities unless Employer is satisfied that the Employer Securities are exempt
from registration under the Federal Securities Act of 1933, as amended, and are
exempt from qualification under the California Corporate Securities Law of 1968,
as amended, and from any other applicable blue sky law, or in the alternative
that the Employer Securities have been so registered and/or qualified. Employer
shall also specify what restrictive legend on transfer, if any, is required to
be set forth on the certificates for the Employer Securities and the procedure
to be followed by the Trustee to effectuate a resale of such Employer
Securities. Employer shall only direct the investment of funds into Employer
Securities (i) if those securities are traded on an exchange permitting a
readily ascertainable fair market value, or (ii) if Employer shall have obtained
a current valuation by an independent appraiser, and periodically supplies
updated valuations while the Employer Securities remain in the Trust. In
determining the value of Employer Securities on a periodic basis, the Trustee
may conclusively rely on the certified appraisal or other form of valuation
submitted to it by Employer or the Investment Manager, if any. The Trustee shall
vote Employer Securities or sell pursuant to a tender offer as directed by
written instructions of Employer. Employer shall indemnify and hold harmless the
Trustee with respect to any action taken or
5
<PAGE> 7
refrained from with regard to voting or tendering Employer Securities, it being
expressly understood that the Trustee shall have no discretion with respect to
such action unless required by law.
The Trustee shall not be liable under the Plan or the Trust for any
investment in or retention of Employer Securities held as Trust assets, whether
retention is due to instructions to retain, or inability to sell due to any
Federal or State securities law restrictions, or the unmarketable or illiquid
nature of the investment.
ARTICLE III
TRUSTEE'S POWERS
3.1 General Trustee's Powers. The Trustee shall have, without exclusion,
all powers conferred on Trustees by applicable law, unless expressly provided
otherwise in this Trust Agreement, provided, however, that if an insurance
policy is held as an asset of the Trust, the Trustee shall have no power to name
a beneficiary of the policy other than the Trust, to assign the policy (as
distinct from conversion of the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of any borrowing
against such policy.
(a) To invest and reinvest the Trust or any part thereof in any one or more
kind, type, class, item or parcel of property, real, personal or mixed, tangible
or intangible; or in any one or more kind, type, class, item or issue of
investment or security; or in any one or more kind, type class or item of
obligation, secured or unsecured; or in any combination of them;
(b) To acquire, sell and exercise options to buy securities ("call"
options) and to acquire, sell and exercise options to sell securities ("put"
options);
(c) To buy, sell, assign, transfer, acquire, loan, lease (for any purpose,
including beyond the life of this Trust), exchange and in any other manner to
acquire, manage, deal with and dispose of all or any part of the Trust property,
for cash or credit;
(d) To make deposits with any bank or savings and loan institution,
including any such facility of the Trustee or an affiliate thereof, provided
that the deposit bears a reasonable rate of interest;
(e) To retain all or any portion of the Trust in cash temporarily awaiting
investment or for the purpose of making distributions or other payments, without
liability for interest thereon, notwithstanding trustee's receipt of float;
(f) To borrow money for the purposes of the Trust from any source other
than a party in interest of the Plans, with or without giving security; to pay
interest; to issue promissory notes and to secure the repayment thereof by
pledging all or any part of the Trust assets;
(g) To take all of the following actions: to vote proxies of any stocks,
bonds or other securities; to give general or special proxies or powers of
attorney with or without power of substitution; to exercise any conversion
privileges, subscription rights or other options, and to
6
<PAGE> 8
make any payments incidental thereto; to consent to or otherwise participate in
corporate reorganizations or other changes affecting corporate securities and to
delegate discretionary powers and to pay any assessments or charges in
connection therewith; and generally to exercise any of the powers of an owner
with respect to stocks, bonds, securities or other property held in the Trust;
(h) To make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted;
(i) To raze or move existing buildings; to make ordinary or extraordinary
repairs, alterations or additions in and to buildings; to construct buildings
and other structures and to install fixtures and equipment therein;
(j) To pay or cause to be paid from the Trust any and all real or personal
property taxes, income taxes or other taxes or assessments of any or all kinds
levied or assessed upon or with respect to the Trust or the Plans;
(k) Subject to the limitations of 3.1, to hold term or ordinary life
insurance contracts or to acquire annuity contracts on the lives of Participants
(but in the case of conflict between any such contract and a Plan, the terms of
the Plan shall prevail); to pay from the Trust the premiums on such contracts;
to distribute, surrender or otherwise dispose of such contracts; to pay the
proceeds, if any, of such contracts to the proper persons in the event of the
death of the insured Participant; to enter into, modify, renew and terminate
annuity contracts of deposit administration, of immediate participation or other
group or individual type with one or more insurance companies and to pay or
deposit all or any part of the Trust thereunder; to provide in any such contract
for the investment of all or any part of funds so deposited with the insurance
company in securities under separate accounts; to exercise and claim all rights
and benefits granted to the contract holder by any such contracts. All payments
and exercise of all powers with respect to insurance contracts shall be solely
on the direction of Employer;
(l) To exercise all the further rights, powers, options and privileges
granted, provided for, or vested in trustees generally under applicable federal
or state laws, as amended from time to time, it being intended that, except as
otherwise provided in this Trust, the powers conferred upon the Trustee herein
shall not be construed as being in limitation of any authority conferred by law,
but shall be construed as in addition thereto.
(m) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
3.2 Additional Powers. In addition to the other powers enumerated above and
subject to the limitations of Article II of this Trust Agreement, the Trustee is
authorized and empowered:
7
<PAGE> 9
(a) To invest funds in any type of interest-bearing account including,
without limitation, time certificates of deposit or interest-bearing accounts
issued by UNION BANK OF CALIFORNIA, N.A. To use other services or facilities
provided by the UnionBanCal Corporation (UNBC), its subsidiaries or affiliates
including Union Bank of California, N.A. (Bank), to the extent allowed by
applicable law and regulation. Such services may include but are not limited to
(1) the placing of orders for the purchase, exchange, investment or reinvestment
of securities through any brokerage service conducted by, and (2) the purchase
of units of any registered investment company managed or advised by Bank, UNBC,
or their subsidiaries or affiliates and/or for which Bank, UNBC or their
subsidiaries or affiliates act as custodian or provide other services for a fee,
including, without limitation, the HighMark Group of mutual funds or the
Stepstone Funds. The parties hereby acknowledge that the Bank may receive fees
for such services in addition to the fees payable under this Agreement. Fee
schedules for additional services shall be delivered to the appropriate party in
advance of the provision of such services. Independent fiduciary approval of
compensation being paid to the Bank will be sought in advance to the extent
required under applicable law and regulation.
If Union Bank of California, N.A. does not have investment discretion, the
services referred to above, as well as any additional services, shall be
utilized only upon the appropriate direction of an authorized party.
(b) To cause all or any part of the Trust to be held in the name of the
Trustee (which in such instance need not disclose its fiduciary capacity) or, as
permitted by law, in the name of any nominee, including the nominee name of any
depository, and to acquire for the Trust any investment in bearer form; but the
books and records of the Trust shall at all times show that all such investments
are a part of the Trust and the Trustee shall hold evidences of title to all
such investments as are available;
(c) To serve as custodian with respect to the Trust assets, to hold assets
or to hold eligible assets at the Depository Trust Company or other depository;
(d) To employ such agents and counsel as may be reasonably necessary in
administration and protection of the Trust assets and to pay them reasonable
compensation; to employ any broker-dealer covered in the self-dealing section,
and pay to such broker-dealer its standard commissions; to settle, compromise or
abandon all claims and demands in favor of or against the Trust; and to charge
any premium on bonds purchased at par value to the principal of the Trust
without amortization from the Trust, regardless of any law relating thereto;
(e) To abandon, compromise, contest, arbitrate or settle claims or demands;
to prosecute, compromise and defend lawsuits, but without obligation to do so,
all at the risk and expense of the Trust;
(f) To permit such inspections of documents at the principal office of the
Trustee as are required by law, subpoena or demand by United States or state
agency during normal business hours of the Trustee;
(g) To comply with all requirements imposed by law;
8
<PAGE> 10
(h) To seek written instructions from Employer on any matter and await
written instructions without incurring any liability. If at any time Employer
should fail to give directions to the Trustee, the Trustee may act in the manner
that in its discretion it deems advisable under the circumstances for carrying
out the purposes of this Trust. Such actions shall be conclusive on Employer and
the Participants on any matter if written notice of the proposed action is given
to Employer five (5) days prior to the action being taken, and the Trustee
receives no response;
(i) To compensate such executive, consultant, actuarial, accounting,
investment, appraisal, administrative, clerical, secretarial, custodial,
depository and legal firms, personnel and other employees or assistants as are
engaged by Employer in connection with the administration of the Plans and to
pay from the Trust the necessary expenses of such firms, personnel and
assistants, to the extent not paid by Employer;
(j) To impose a reasonable charge to cover the cost of furnishing to
Participants statements or documents;
(k) To act upon proper written directions of Employer or any Participant
including directions given by photostatic teletransmission using facsimile
signature. If oral instructions are given, to act upon those in the Trustee's
discretion prior to receipt of written instructions. The Trustee's recording or
lack of recording of any such oral instructions taken in the Trustee's ordinary
course of business shall constitute conclusive proof of the Trustee's receipt or
non-receipt of the oral instructions;
(l) To pay from the Trust the expenses reasonably incurred in the
administration of the Trust;
(m) To maintain insurance for such purposes, in such amounts and with such
companies as Employer shall elect, including insurance to cover liability or
losses occurring by reason of the acts or omissions of fiduciaries (but only if
such insurance permits recourse by the insurer against the fiduciary in the case
of a breach of a fiduciary obligation by such fiduciary);
(n) As directed by Employer prior to a Change of Control, and by Employer
or by a Participant upon or following a Change of Control, to cause the benefits
provided under the Plans to be paid directly to the persons entitled thereto
under the Plans, and in the amounts and at the times and in the manner specified
by the Plans, and to charge such payments against the Trust and Accounts with
respect to which such benefits are payable;
(o) To exercise and perform any and all of the other powers and duties
specified in this Trust Agreement or the Plans; and in addition to the powers
listed herein, to do all other acts necessary or desirable for the proper
administration of the Trust, as though the absolute owner thereof.
9
<PAGE> 11
ARTICLE IV
TRUSTEE AND EMPLOYER DUTIES
4.1 Legal Duties. The Trustee and Employer shall exercise any of the
foregoing powers from time to time as required by law.
4.2 Payments to Participants
(a) Employer shall deliver to the Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Participant,
that provides a formula or other instructions acceptable to the Trustee for
determining the amount so payable, the form in which such amount is to be paid
(as provided for or available under the Plan(s)), and the time of commencement
for payment of such amounts. Except as otherwise provided herein, the Trustee
shall make payments to the Participants in accordance with such Payment
Schedule. As directed by Employer, the Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Employer.
(b) The entitlement of a Participant to benefits under the Plan(s) shall be
determined by Employer or such party as it shall designate under the Plan(s),
and any claim for such benefits shall be considered and reviewed under the
procedures set out in the Plan(s).
(c) Employer may make payment of benefits directly to Participants as they
become due under the terms of the Plan(s). Employer shall notify the Trustee of
its decision to make payment of benefits directly prior to the time amounts are
payable to Participants. In addition, if the principal of the Trust, and
earnings thereon, are not sufficient to make payments of benefits in accordance
with the terms of the Plan(s), Employer shall make the balance of each such
payment as it falls due. The Trustee shall notify Employer where principal and
earnings are not sufficient. The Trustee shall have no duty or obligation to
enforce or compel Employer to make payments hereunder. Employer may direct the
Trustee to reimburse Employer for payments made directly by Employer to
Participants.
(1) In the event payments are made by Employer directly to Participants,
Employer shall have sole responsibility for the reporting and withholding of any
federal, state, or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms of the Plan(s) and shall pay
amounts withheld to the appropriate taxing authority.
(2) Trustee shall have no duty or responsibility with respect to the above
stated reporting, withholding or payment of taxes and shall have no
responsibility to determine that Employer has provided for such reporting,
withholding or payment of such taxes.
10
<PAGE> 12
(3) Employer shall indemnify and hold the Trustee harmless from any and all
losses, claims, penalties or damages which may occur as a result of the Trustee
following in good faith the written direction of Employer to reimburse Employer
for payments made hereunder to Participants and arising from Employer's tax
reporting, withholding and payment obligations hereunder.
(d) Upon the satisfaction of all liabilities of Employer under all Plans to
all Participants the Trustee shall hold or distribute the Trust in accordance
with the written instructions of Employer. Except as provided in (c) above, at
no time prior to Employer's Insolvency, as defined in Article XI, or the
satisfaction of all liabilities of Employer under the Plans in respect of all
Participants having Accounts hereunder shall any part of the Trust revert to
Employer.
4.3 Accounts and Records. The Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements and all other transactions
required to be done, including such specific records as shall be agreed upon in
writing between Employer and the Trustee. All such accounts, books and records
shall be open to inspection and audit at all reasonable times by Employer and by
the Participants. Within sixty (60) days after the close of each quarter and
Plan year and within sixty (60) days after the resignation or removal of the
Trustee as provided in Article VI hereof, the Trustee shall render to Employer a
written account showing in reasonable summary the investments, receipts,
disbursements and other transactions engaged in by the Trustee during the
preceding Plan Year or accounting period with respect to the Trust. Such
accounting shall set forth the assets, liabilities and transactions of the
Trust. Employer shall have sixty (60) days after the Trustee's mailing of each
such quarterly or final account within which to file with the Trustee written
objections to such account. Upon the expiration of each such period, the Trustee
shall be forever released and discharged from all liability and accountability
to Employer with respect to the propriety of its acts and transactions shown in
such accounting except with respect to any such acts or transactions as to which
Employer files written objections within such sixty-day period with the Trustee.
Notwithstanding anything herein to the contrary, the Trustee shall have no
duty or responsibility to obtain valuations of any assets of the Trust Fund, the
value of which is not readily determinable on an established market. Employer
shall bear sole responsibility for determining said valuations and shall be
responsible for providing said valuations to the Trustee in a timely manner. The
Trustee may conclusively rely on such valuations provided by Employer and shall
be indemnified and held harmless by Employer with respect to such reliance.
4.4 Reports. The Trustee shall file such descriptions and reports and shall
furnish such information and make such other publications, disclosures,
registrations and other filings as are required of the Trustee by law. The
Trustee shall have no responsibility to file reports or descriptions, publish
information or make disclosures, registrations or other filings unless directed
by Employer.
4.5 Follow Employer Direction. The Trustee shall have the power and duty to
comply promptly with all proper directions of Employer.
11
<PAGE> 13
4.6 Information to be Provided to the Trustee. Employer shall maintain and
furnish the Trustee with all reports, documents and information as shall be
required by the Trustee to perform its duties and discharge its responsibilities
under this Trust Agreement, including without limitation a certified copy of
each of the Plans and all amendments thereto. In addition, upon a Change of
Control, Employer shall promptly provide the Trustee with written reports
setting forth the name, address, date of birth and social security number of
each Participant, a listing of each Participant's Account as of the last
valuation prior to the Change of Control and a listing of each Participant's
benefit under each Plan as of the most recent valuation date prior to the Change
of Control. Notwithstanding the foregoing, at any time after a Change of
Control, the Trustee may rely on information provided to the Trustee by a
Participant if Employer fails to provide such information.
The Trustee shall be entitled to rely on the most recent reports, documents
and information furnished to it by Employer. Employer shall be required to
notify the Trustee as to the termination of employment of any Participant by
death, disability, retirement or otherwise.
Employer shall arrange for each Investment Manager if appointed pursuant to
Section 2.1, and each insurance company issuing contracts held by the Trustee
pursuant to Section 3.1(k), to furnish the Trustee with such valuations and
reports as are necessary to enable the Trustee to fulfill its obligations under
this Trust Agreement, and the Trustee shall be fully protected in relying upon
such valuations and reports.
4.7 Payments to Participants and Recording Upon Change of Control.
(a) Following a Change of Control, the Trustee shall not be subject to the
provisions of Section 4.2(a) (regarding payments to Participants directed by
Employer), but rather shall commence distributions from the separate Account of
a Participant upon the receipt of written notification by Employer or by the
Participant that such Participant has become entitled to receive benefit
payments under a Plan. Such notification shall include the amount of such
payments, the form and method of payment, the basis for the Participant's claim
and the Participant's name, address and social security number.
The Trustee may take any reasonable steps it deems necessary to verify that
the Participant is entitled to receive the benefits claimed under the Plans. If
the Trustee determines in good faith that a Participant is entitled to receive
benefits under one or more of the Plans, the Trustee shall distribute to the
Participant assets from the Trust in an amount equal to the benefit due
Participant (less applicable withholdings). The Trustee shall have no
responsibility for and shall incur no liability with respect to any payment made
pursuant to a direction received in accordance with this Section 4.7 or with
respect to the Trustee's good faith determination that a Participant is or is
not entitled to the payments claimed hereunder.
(b) Upon a Change of Control, the Trustee shall maintain all records
regarding the Trust and its investments and such other Participant records
specified in this Trust Agreement, including the maintenance of the separate
Accounts of each Participant as provided in Section 1.12. All such records shall
be made available promptly on the request of Employer.
12
<PAGE> 14
The Trustee shall also prepare and distribute annual or more frequent statements
to the Participants.
ARTICLE V
RESTRICTIONS ON TRANSFER
5.1 Persons to Receive Payment.
(a) The Trustee shall, except as otherwise provided in Article XI, Section
4.2(d) and Subsection (b) hereunder, pay all amounts payable hereunder only to
the person or persons designated under the Plans or deposit such amounts to the
Participant's checking or savings account as directed by Employer and not to any
other person or corporation, and only to the extent of assets held in the Trust,
and shall follow written instructions by Employer. Prior to a Change of Control,
Employer's written instructions, to the Trustee to make distributions or not to
make distributions, and the amount thereof, shall be conclusive on all
Participants. Upon and following a Change of Control, distributions shall be
made in accordance with Section 4.7 of this Trust Agreement.
(b) Should any controversy arise as to the person or persons to whom any
distribution or payment is to be made by the Trustee, or as to any other matter
arising in the administration of the Plans or Trust, the Trustee may retain the
amount in controversy pending resolution of the controversy or the Trustee may
file an action seeking declaratory relief and/or may interplead the Trust assets
in issue, and name as necessary parties Employer, the Participants and/or any or
all persons making conflicting demands.
(c) The Trustee shall not be liable for the payment of any interest or
income, except for that earned as a Trust investment, on any amount withheld or
interpleaded under subsection (b).
(d) The reasonable expenses of the Trustee for taking any action under
subsection (b) shall be paid to the Trustee by Employer, but if Employer fails
to pay such expenses within thirty (30) days of receipt of an invoice from the
Trustee, then such expenses shall be paid to the Trustee from the Trust.
5.2 Assignment and Alienation Prohibited. Benefits payable to Participants
under this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process. Notwithstanding the
foregoing, the Trust shall at all times remain subject to the claims of
creditors of Employer in the event Employer becomes Insolvent as provided in
Article XI.
13
<PAGE> 15
ARTICLE VI
RESIGNATION, REMOVAL AND SUCCESSION
6.1 Resignation or Removal of the Trustee. The Trustee may resign at any
time by written notice to Employer, which shall be effective ten (10) days after
receipt of such notice unless Employer and the Trustee agree otherwise. Prior to
a Change of Control, Employer may remove the Trustee upon ten (10) days' written
notice to the Trustee (which notice may be waived by the Trustee). Upon and
after the occurrence of a Change of Control, the Trustee may be removed only (i)
by Employer with the written consent of a majority of Participants; or (ii) by
the written notice of a majority of Participants. The Trustee may conclusively
rely on Employer's certification that a majority of Participants has consented
to the removal of the Trustee.
6.2 Designation of Successor. Upon notice of the Trustee's resignation or
removal, Employer shall immediately designate a successor Trustee who will
accept transfer of the assets of the Trust unless otherwise agreed to by the
Trustee; provided that, upon and after the occurrence of a Change of Control,
such appointment shall be effected only (i) by Employer with the written consent
of a majority of the Participants; or (ii) by the written notice of a majority
of the Participants. The Trustee may conclusively rely on Employer's
certification that a majority of Participants has consented.
Notwithstanding the preceding paragraph, if a successor Trustee is not
designated within ten (10) days of notice of the Trustee's resignation or
removal, then the President and Chief Financial Officer of Employer are hereby
designated as the successor Co-Trustees. If such individuals are Participants in
the Plan, then the highest ranking officer or executive of Employer who is not a
Participant in the Plan shall be the successor Trustee.
6.3 Transfer of Assets. Upon resignation or removal of the Trustee and
appointment of a successor Trustee, all assets shall subsequently be transferred
to the successor Trustee. The transfer shall be completed as soon as
administratively feasible after receipt of notice of resignation, removal or
transfer and appointment of and acceptance by successor Trustee, unless Employer
extends the time limit.
6.4 Court Appointment of Successor. If the Trustee resigns or is removed, a
successor shall be appointed, in accordance with Section 6.2 hereof, by the
effective date of resignation or removal under paragraph 6.1 of this Article VI.
If no such appointment has been made after a Change of Control, the Trustee may
apply to a court of competent jurisdiction for appointment of a successor or for
instructions. All reasonable expenses of the Trustee in connection with the
proceeding shall be paid by Employer within thirty (30) days of receipt from the
Trustee of an invoice for such expenses, or if not so paid, shall be allowed as
administrative expenses of the Trust. Until a successor Trustee is appointed,
the Trustee shall be entitled to be compensated for its services according to
its published fee schedule then in effect for acting as Trustee.
14
<PAGE> 16
6.5 Successor's Powers. A successor Trustee shall have the same powers and
duties as those conferred upon the original Trustee hereunder. A resigning
Trustee shall transfer the Trust assets and shall deliver the assets of the
Trust to the successor Trustee as soon as practicable. The resigning Trustee is
authorized, however, to reserve such amount as may be necessary for the payment
of its fees and expenses incurred prior to its resignation, and the Trust assets
shall remain liable to reimburse the resigning Trustee for all fees and costs,
expenses or attorneys' fees or losses incurred, whether before or after
resignation, due solely to the Trustee's holding title to and administration of
Trust assets.
6.6 Successor's Duties. A successor Trustee shall have no duty to audit or
otherwise inquire into the acts and transactions of its predecessor.
ARTICLE VII
AMENDMENT
7.1 Power to Amend. This Trust Agreement may be amended by a written
instrument executed by the Trustee and Employer. No such amendment shall
conflict with the terms of the Plan(s) nor shall it make the Trust revocable
after it has become irrevocable in accordance with Section 1.2.
7.2 Limitation on Amendments Following a Change of Control. Following a
Change of Control, no amendment signed by Employer and the Trustee shall become
effective without the written consent of a two-thirds majority of the
Participants then participating in the Plan. The Trustee may conclusively rely
on Employer's certification that two-thirds majority has voted in favor of
amendment.
ARTICLE VIII
LIABILITIES
8.1 Declaration of Intent. To the full extent permitted by law, it is the
intent of this Article to relieve each fiduciary from all liability for any acts
or omissions of any other fiduciary or any other person and to declare the
absence of liabilities of all persons referred to in this Article to the extent
not imposed by law or by provisions of this Trust Agreement. Each of the
following Sections, in declaring such limitation, is set forth without limiting
the generality of this Section but in each case shall be subject to the
provisions, limitations and policies set forth in this Section.
8.2 Liability of the Trustee.
(a) The Trustee shall have no powers, duties or responsibilities with
regard to the administration of the Plans or to determine the rights or benefits
of any person having or claiming an interest under the Plans or in the Trust or
under this Trust Agreement or to examine or control any disposition of the Trust
or part thereof which is directed by Employer, as applicable.
15
<PAGE> 17
(b) The Trustee shall have no liability for the adequacy of contributions
for the purposes of the Plans or for enforcement of the payment thereof.
(c) The Trustee shall have no liability for the acts or omissions of
Employer or Fiduciaries.
(d) The Trustee shall have no liability for following proper directions of
Employer or Employer's designated Fiduciaries, or any Participant when such
directions are made in accordance with this Trust Agreement and the Plans.
(e) During such period or periods of time, if any, as Employer or
Investment Manager (collectively, "Fiduciary") is directing the investment and
management of Trust assets, the Trustee shall have no obligation to determine
the existence of any conversion, redemption, exchange, subscription or other
right relating to any securities purchased on the directions of such Fiduciary
if notice of any such right was given prior to the purchase of such securities.
If such notice is given after the purchase of such securities, the Trustee shall
notify such Fiduciary. The Trustee shall have no obligation to exercise any such
right unless it is instructed to exercise such right, in writing, by the
Fiduciary within a reasonable time prior to the expiration of such right.
(f) During such period or periods of time, if any, as a Fiduciary is
directing the investment and management of Trust assets, if such Fiduciary
directs the Trustee to purchase securities issued by any foreign government or
agency thereof, or by any corporation domiciled outside of the United States, it
shall be the responsibility of the Fiduciary to advise the Trustee in writing
with respect to any laws or regulations of any foreign countries or any United
States territories or possessions which shall apply, in any manner whatsoever,
to such securities, including, but not limited to, receipt of dividends or
interest by the Trustee for such securities.
8.3 Indemnification.
(a) Employer hereby agrees to indemnify and hold harmless the Trustee, its
officers, directors, employees or agents, from and against any and all
liabilities, claims for breach of fiduciary duty or otherwise, demands, damages,
costs and expenses, including reasonable attorney's fees, arising from (i) any
act taken or omitted by the Trustee in good faith in accordance with or due to
the absence of directions from Employer, its agents, or any Plan Participant,
(ii) any act taken or omitted by a Fiduciary other than the Trustee in breach of
such Fiduciary responsibilities under the Plan or this Agreement, and (iii) any
action taken by the Trustee pursuant to a notification of an order to purchase
or sell securities issued by Employer directly to a broker or dealer.
(b) If the Trustee is named as a defendant in any lawsuit or other
proceeding involving the Plan or the Trust for any reason including, without
limitation, an alleged breach by the Trustee of its responsibilities under this
Agreement, Employer hereby agrees to indemnify the Trustee against all
liabilities, costs, and expenses, including reasonable attorneys' fees, incurred
by the Trustee unless the final judgment entered in the lawsuit or proceeding
holds the Trustee guilty of negligence, willful misconduct, or a breach of
fiduciary responsibility. If the final
16
<PAGE> 18
judgment holds the Trustee guilty of negligence, willful misconduct or a breach
of fiduciary responsibility, Employer hereby agrees to indemnify the Trustee
only against liability in excess of the Trustee's allocable share of such
liability.
(c) Employer shall have the right, but not the obligation, to conduct the
defense of the Trustee in any legal proceeding covered by this section. However,
any legal counsel selected to defend the Trustee must be acceptable to the
Trustee, and the Trustee may elect to choose counsel, including in-house
counsel, other than that selected by Employer. Employer may satisfy all or any
part of its obligations under this section through insurance arrangements
acceptable to the Trustee.
ARTICLE IX
DURATION, TERMINATION AND REPAYMENTS TO EMPLOYER
9.1 Revocation and Termination. The Trust shall not terminate until the
date on which Participants are no longer entitled to benefits pursuant to the
terms of the Plan(s) unless sooner revoked in accordance with Section 1.2
hereof. Upon termination of the Trust any assets remaining in the Trust shall be
returned to Employer. In the event the Trust is terminated following the
distribution of all payments and benefits called for herein, from the date of
such termination of the Trust and until the final distribution of the remaining
Trust assets, if any, the Trustee shall continue to have all the powers provided
under this Trust Agreement that are necessary or desirable for the orderly
liquidation and distribution of the Trust.
9.2 Duration. This Trust shall continue in full force and effect for the
maximum period of time permitted by law and in any event until the expiration of
twenty-one years after the death of the last surviving person who was living at
the time of execution hereof who at any time becomes a Participant in a Plan,
unless this Trust is sooner terminated in accordance with this Trust Agreement.
9.3 Payments to Employer Prior to Termination. No part of the Trust shall
revert to Employer at any time prior to the earlier of Employer's Insolvency, as
defined in Article XI, or the satisfaction of all liabilities under the Plans,
as described in Section 9.1.
9.4 Revocation by All Participants. Unless the Trust is revocable, upon
written approval of all Participants entitled to payment of benefits pursuant to
the terms of the Plan(s), Employer may terminate this Trust prior to the time
all benefit payments under the Plan(s) have been made. All assets in the Trust
at termination shall be returned to Employer. The Trustee may rely conclusively
on Employer's directive that all Participants have consented to such revocation
and termination.
17
<PAGE> 19
ARTICLE X
MISCELLANEOUS
10.1 Emergencies and Delegation.
(a) In case of an emergency, the Trustee may act in the absence of
directions from any other person having the power and duty to direct the Trustee
with respect to the matter involved and shall incur no liability in so acting.
(b) By written notice to the Trustee, Employer may authorize the Trustee to
act on matters in the ordinary course of the business of the Trust or on
specific matters upon the signature of its delegate.
10.2 Expenses and Taxes.
(a) Employer, or at its option, the Trust, shall quarterly pay the Trustee
its expenses in administering the Trust and reasonable compensation for its
services as the Trustee at a rate to be agreed upon by the parties to this Trust
Agreement, based upon the Trustee's published fee schedule. However, the Trustee
reserves the right to alter this rate of compensation at any time by providing
Employer with notice of such change at least thirty (30) days prior to its
effective date. Reasonable compensation shall include compensation for any
extraordinary services or computations required, such as determination of
valuation of assets when current market values are not published and interest on
funds to cover overdrafts. The Trustee shall have a lien on the Trust for
compensation and for any reasonable expenses including counsel, appraisal, or
accounting fees, and these shall be withdrawn from the Trust and may be
reimbursed by Employer.
(b) Reasonable counsel fees, reasonable costs, expenses and charges of the
Trustee incurred or made in the performance of its duties, expenses relating to
investment of the Trust such as broker's commissions, stamp taxes, and similar
items and all taxes of any and all kinds that may be levied or assessed under
existing or future laws upon or in respect to the Trust or the income thereof,
and the Trustee's charges for issuing distribution checks to Participants or
their representatives shall be paid from, and shall constitute a charge upon the
Trust.
(c) Employer shall pay any federal, state or local taxes on the Trust, or
any part thereof, and/or the income therefrom. In the event any Participant is
determined to be subject to federal income tax on any amount under this Trust
Agreement prior to the time of payment hereunder, the entire amount determined
to be so taxable shall, at Employer's direction, be distributed by the Trustee
to such Participant from the Trust. For the above purposes, a Participant shall
be determined to be subject to federal income tax with respect to the Trust upon
the earlier of: (a) a final determination by the United States Internal Revenue
Service ("IRS") addressed to the Participant which is not appealed to the
courts; (b) an opinion of legal counsel designated in writing by Employer,
addressed to Employer and the Trustee, that, by reason of
18
<PAGE> 20
Treasury Regulations, amendments to the Code, published IRS rulings, court
decisions or other substantial precedent, amounts hereunder subject the
Participant to federal income tax prior to payment. Employer shall undertake at
its discretion and at its sole expense to defend any tax claims described herein
which are asserted by the IRS against any Participant, including attorney fees
and costs of appeal, and shall have the sole authority to determine whether or
not to appeal any determination made by the IRS or by a lower court. Employer
also agrees to reimburse any Participant under this Section for any interest or
penalties in respect of tax claims hereunder upon receipt of documentation
thereof.
10.3 Third Parties.
(a) No person dealing with the Trustee shall be required to follow the
application of purchase money paid or money loaned to the Trustee nor inquire as
to whether the Trustee has complied with the requirements hereof.
(b) In any judicial or administrative proceedings, only Employer and the
Trustee shall be necessary parties and no Participant or other person having or
claiming any interest in the Trust shall be entitled to any notice or service of
process (except as required by law). Any judgment, decision or award entered in
any such proceeding or action shall be conclusive upon all interested persons.
10.4 Adoption by Affiliated Employer. Any affiliate of Employer (an
"Affiliated Employer") may adopt one or more of Employer's Plans with the
approval of Employer, and the Affiliated Employer shall concurrently become a
party to this Trust Agreement by giving written notice of its adoption of the
Plans and this Trust Agreement to the Trustee. Upon such written notice, the
Affiliated Employer shall become a signatory to this Trust Agreement.
10.5 Binding Effect; Successor Employer. This Trust Agreement shall be
binding upon and inure to the benefit of any successor to Employer or its
business as the result of merger, consolidation, reorganization, transfer of
assets or otherwise and any subsequent successor thereto. In the event of any
such merger, consolidation, reorganization, transfer of assets or other similar
transaction, the successor to Employer or its business or any subsequent
successor thereto shall promptly notify the Trustee in writing of its
successorship and shall promptly supply information required by the Trustee.
10.6 Relation to Plans. All words and phrases used herein shall have the
same meaning as in the Plans, and this Trust Agreement and the Plans shall be
read and construed together. Whenever in the Plans it is provided that the
Trustee shall act as therein prescribed, the Trustee shall be and is hereby
authorized and empowered to do so for all purposes as fully as though
specifically so provided herein or so directed by Employer.
10.7 Mediation and Arbitration of Disputes. If a dispute arises under this
Trust Agreement between or among Employer and the Trustee or any Participant,
except as provided in Sections 5.1(b) and 6.4, the parties agree first to try in
good faith to settle the dispute by mediation under the Commercial Mediation
Rules of the American Arbitration Association. Thereafter, any remaining
unresolved controversy or claim arising out of or relating to this
19
<PAGE> 21
Agreement, or the performance or breach thereof, shall be decided by non-binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of California Code of Civil Procedure
Sections 1280 et seq. The sole arbitrator shall be a retired or former Judge
associated with the American Arbitration Association. Each party shall bear its
own costs, attorney's fees and its share of arbitration fees. The Alternate
Dispute Resolution Agreement in this Agreement does not constitute a waiver of
the parties' rights to a judicial forum in instances where arbitration would be
void under applicable law, and does not preclude Bank from exercising it's
rights to interplead the funds of the Account at the cost of the Account.
10.8 Partial Invalidity. Any provision of this Trust Agreement prohibited
by law shall be ineffective to the extent of any such prohibition, without
invalidating the remaining provisions hereof. In the event of any such holding,
Employer and the Trustee and, if applicable, Participants, will immediately
amend this Trust Agreement as necessary to remedy any such defect.
10.9 Construction. This Trust Agreement shall be governed by and construed
in accordance with the laws of California.
10.10 Notices. Any notice, report, demand or waiver required or permitted
hereunder shall be in writing, shall be deemed received upon the date of
delivery if given personally or, if given by mail, upon the receipt thereof, and
shall be given personally or by prepaid registered or certified mail, return
receipt requested, addressed to Employer and the Trustee as listed below in
Article XII; if to a Participant, to the last mailing address provided to the
Trustee with respect to such individual, provided, however, that if any party or
his or its successor shall have designated a different address by written notice
to the other parties, then to the last address so designated.
ARTICLE XI
DISTRIBUTIONS IN THE EVENT OF INSOLVENCY OF EMPLOYER
11.1 Trustee and Employer Responsibility upon notice of Employer's
Insolvency:
(a) Insolvency. The Trustee shall cease payment of benefits to Participants
if Employer is Insolvent. Employer shall be considered "Insolvent" for purposes
of this Trust Agreement if (i) Employer is unable to pay its debts as they
become due, or (ii) Employer is subject to a pending proceeding as a debtor
under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1.4 hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Employer under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Employer
shall have the duty to inform the Trustee in writing of Employer's Insolvency.
If a person claiming to be a creditor of Employer alleges in writing to the
Trustee that Employer has become Insolvent, the Trustee shall determine whether
Employer is Insolvent and, pending such determination, the
20
<PAGE> 22
Trustee shall discontinue payment of benefits to Participants. If Trustee is
unable to obtain information sufficient to ascertain Insolvency, the Trustee may
seek instructions of a court of law or submit the matter for arbitration before
the American Arbitration Association in accordance with paragraph (c) below or
interplead the Trust Assets at the expense of the Trust.
(2) Unless the Trustee has actual knowledge of Employer's Insolvency, or
has received written notice from Employer or a person claiming to be a creditor
alleging that Employer is Insolvent, the Trustee shall have no duty to inquire
whether Employer is Insolvent. The Trustee may in all events rely on such
evidence concerning Employer's solvency as may be furnished to the Trustee and
that provides the Trustee with a reasonable basis for making a determination
concerning Employer's solvency.
(3) If at any time the Trustee has determined that Employer is Insolvent,
the Trustee shall discontinue payments to Participants and shall hold the assets
of the Trust for the benefit of Employer's general creditors. Nothing in this
Trust Agreement shall in any way diminish any rights of Participants to pursue
their rights as general creditors of Employer with respect to benefits due under
the Plan(s) or otherwise.
(4) The Trustee shall resume the payment of benefits to Participants in
accordance with Section 4.2 of this Trust Agreement only after the Trustee has
determined that Employer is not Insolvent (or is no longer Insolvent).
(c) Determination of Insolvency. Upon receipt of the aforesaid written
notice of Employer's Insolvency and if the Trustee is not able to determine
Employer's solvency or Insolvency, the Trustee shall notify Employer, and
Employer, within thirty (30) days of receipt of such notice, shall engage an
arbitrator (the "Arbitrator") acceptable to the Trustee, from the American
Arbitration Association to determine Employer's solvency or Insolvency. Employer
shall cooperate fully and assist the Arbitrator, as may be requested by the
Arbitrator, in such determination and shall pay all costs relating to such
determination. The Arbitrator shall notify Employer and the Trustee separately
by registered mail of its findings. If the Arbitrator determines that Employer
is solvent or if once found Insolvent Employer is no longer Insolvent, the
Trustee shall resume holding the Trust assets for the benefit of the
Participants and may make any distributions called for under this Trust
Agreement, including any amounts which should have been distributed during the
period when the Trustee suspended distributions in response to a notice of
Employer's Insolvency, including earnings (or losses) on such suspended
distributions. If the Arbitrator determines that Employer is Insolvent or is
unable to make a conclusive determination of Employer's Insolvency, the Trustee
shall continue to retain the assets of the Trust until Employer's status of
solvency or Insolvency is decided by a court of competent jurisdiction or it
distributes all or a portion of the Trust assets to any duly appointed receiver,
trustee in bankruptcy, custodian or to Employer's general creditors, but only as
such distribution is ordered by a court of competent jurisdiction.
The Trustee shall have no liability for relying upon the determination of
the Arbitrator as to Employer's solvency or Insolvency.
21
<PAGE> 23
(d) If a court of competent jurisdiction orders distribution of only part
of the Trust assets and does not specify the manner in which Trust assets are to
be liquidated, the Trustee shall liquidate Trust assets as follows:
(i) If such liquidation is ordered prior to a Change in Control, as
directed by Employer; or
(ii) If such liquidation is ordered after a Change in Control or upon
Insolvency of Employer, as determined by the Trustee in its sole and absolute
discretion.
If Employer fails to provide instructions under subparagraph (i) above, as
to the manner of liquidation within five (5) business days prior to the date the
Trustee is required to comply with the court's order, the Trustee shall
liquidate and shall have the authority to order any Investment Manager to
liquidate the Trust assets in such manner as the Trustee shall determine in its
sole and absolute discretion. The Trustee shall not be liable for any damages
resulting from the Trustee's exercise in good faith of its power to liquidate
assets as provided in this paragraph.
(e) Provided that there are sufficient assets, if the Trustee discontinues
the payment of benefits from the Trust pursuant to subsection (b)(3) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
Participants under the terms of the Plan(s) for the period of such
discontinuance, less the aggregate amount of any payments made to Participants
by Employer in lieu of the payments provided for hereunder during any such
period of discontinuance of which the Trustee has actual knowledge.
Nothing in this Trust Agreement shall in any manner diminish any right of a
Participant to pursue his or her rights as a general creditor of Employer with
regard to payments under the Trust or otherwise.
22
<PAGE> 24
ARTICLE XII
EFFECTIVE DATE
The effective date of this Trust Agreement shall be _________________,
1998. Executed at San Diego, California.
"Trustee" "Employer"
UNION BANK OF CALIFORNIA, N.A. ITLA CAPITAL CORPORATION
Address: ______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
By: /s/ CHARLES F. BEVIN By: /s/ MICHAEL A. SICURO
----------------------- -------------------------
Charles F. Bevin Michael A. Sicuro
----------------------- -----------------------------
(typed or printed name) (typed or printed name)
Dated: February 28, 1998 Dated: February 28, 1998
----------------------- -----------------------
By: /s/ JOY A. HOLLMAN By: /s/ ANTHONY RUSNAK
----------------------- -------------------------
Joy A. Hollman Anthony Rusnak
----------------------- -----------------------------
(typed or printed name) (typed or printed name)
Dated: February 28, 1998 Dated: February 28, 1998
----------------------- -----------------------
23
<PAGE> 25
EXHIBIT A
The following nonqualified deferred compensation plans (the "Plans")
maintained by ITLA Capital Corporation and funds held pursuant to the Trust
Agreement are intended to be used to pay benefits under such Plans:
o The ITLA Capital Corporation Supplemental Executive
Retirement Plan
o The ITLA Capital Corporation Consolidated Nonqualified
Deferred Compensation Plan
24
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
PERCENTAGE INCORPORATION
OF OR
PARENT SUBSIDIARY OWNERSHIP ORGANIZATION
- -------------------------- ----------------------------------------- --------- -------------
<S> <C> <C> <C>
ITLA Capital Corporation Imperial Capital Bank 100% California
ITLA Capital Corporation ITLA Funding Corporation 100% Delaware
ITLA Funding Corporation ITLA Servicing Corporation 100% Delaware
ITLA Funding Corporation ITLA Commercial Warehouse Corporation 100% Delaware
ITLA Capital Corporation ITLA Management Corporation 100% Delaware
ITLA Management Corporation ITLA Commercial Investment Corporation 100% Maryland
Imperial Capital Bank ITLA Commercial Securitization Corporation 100% Delaware
</TABLE>
89
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 File Nos. 333-28899, 333-28901, 333-28905,
333-28931.
/s/ Arthur Andersen LLP
Los Angeles, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,495
<INT-BEARING-DEPOSITS> 64,747
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,247
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 971,375
<ALLOWANCE> 19,895
<TOTAL-ASSETS> 1,115,823
<DEPOSITS> 913,613
<SHORT-TERM> 55,500
<LIABILITIES-OTHER> 11,265
<LONG-TERM> 11,750
0
0
<COMMON> 57,184
<OTHER-SE> 66,511
<TOTAL-LIABILITIES-AND-EQUITY> 1,115,823
<INTEREST-LOAN> 95,303
<INTEREST-INVEST> 5,910
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 101,213
<INTEREST-DEPOSIT> 46,452
<INTEREST-EXPENSE> 48,460
<INTEREST-INCOME-NET> 52,753
<LOAN-LOSSES> 4,950
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,229
<INCOME-PRETAX> 27,475
<INCOME-PRE-EXTRAORDINARY> 27,475
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,205
<EPS-BASIC> 2.26
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 5.11
<LOANS-NON> 7,977
<LOANS-PAST> 0
<LOANS-TROUBLED> 13,996
<LOANS-PROBLEM> 38,900
<ALLOWANCE-OPEN> 16,811
<CHARGE-OFFS> 2,088
<RECOVERIES> 222
<ALLOWANCE-CLOSE> 19,895
<ALLOWANCE-DOMESTIC> 19,895
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
