UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the Fiscal Year Ended December 31, 2006
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Transition Period From __________________ To
__________________
Commission
File Number 1-33199
ITLA
CAPITAL CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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95-4596322
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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888
Prospect Street, Suite 110, La Jolla, California
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92037
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (858)
551-0511
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Exchange on Which Registered
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Common
Stock, $.01 Par Value
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ]
Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As
of
March 5, 2007, there were issued and outstanding 5,527,651 shares of the
Registrant’s Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant as of June 30, 2006, computed by reference
to the closing price of such stock as of June 30, 2006, was $290.8 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.)
ITLA
CAPITAL CORPORATION
FORM
10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
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Page
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PART
I
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3
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12
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16
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17
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17
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17
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PART
II
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18
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20
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22
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40
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42
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70
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70
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70
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PART
III
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71
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73
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92
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94
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95
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PART
IV
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96
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97
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Certifications
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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
our market areas, changes in policies by regulatory agencies, the impact of
competitive loan products, loan demand risks, the quality or composition of
our
loan or investment portfolios, increased costs from pursuing the national
expansion of our lending platform and operational challenges inherent in
implementing this expansion strategy, fluctuations in interest rates, and
changes in the relative differences between short- and long-term interest rates,
levels of non-performing assets and other loans of concern, and operating
results, the economic impact of any terrorist actions and other risks detailed
from time to time in our filings with the Securities and Exchange Commission.
We
caution readers not to place undue reliance on any forward-looking statements.
We do not undertake and specifically disclaim 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 our actual results for 2007 and beyond to differ materially
from those expressed in any forward-looking statements by, or on behalf of,
us.
As
used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
ITLA Capital Corporation and its consolidated subsidiaries.
PART
I
General
ITLA
Capital Corporation (“ITLA Capital”) is a diversified bank holding company
headquartered in San Diego County, California with consolidated assets of $3.4
billion, consolidated net loans of $3.0 billion, consolidated deposits of $2.1
billion and consolidated shareholders’ equity of $221.3 million as of December
31, 2006. We conduct and manage our business principally through our
wholly-owned subsidiary, Imperial Capital Bank (the “Bank”), an institution with
$3.4 billion in assets, with six retail branches located in California, (Beverly
Hills, Costa Mesa, Encino, Glendale, San Diego, and San Francisco), and one
branch located in Carson City, Nevada. Our branch offices are primarily used
for
our deposit services and lending business. Additionally, the Bank has 23 loan
origination offices serving the Western United States, the Southeast region,
the
Mid-Atlantic region, the Ohio Valley, the Metro New York area and New England.
The Bank has been in business for 32 years.
We
are
primarily engaged in:
• Originating
and purchasing real estate loans secured by income producing properties for
retention in its loan portfolio;
• Originating
entertainment finance loans; and
• Accepting
customer deposits through the following products: certificates of deposits,
money market, passbook and demand deposit accounts. Our deposit accounts are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the legal
limits.
We
continuously evaluate business expansion opportunities, including acquisitions
or joint ventures with companies that originate or purchase commercial and
multi-family real estate loans, as well as other types of secured commercial
loans. In connection with this activity, we periodically have discussions with
and receive financial information about other companies that may or may not
lead
to the acquisition of the company, a segment or division of that company, or
a
joint venture opportunity.
Our
executive offices are located at 888 Prospect Street, Suite 110, La Jolla,
California 92037 and our telephone number at that address is (858)
551-0511.
Lending
Activities
General.
During
2006, our core lending activities were as follows:
• Originating
and purchasing real estate loans secured by income producing properties, or
properties under construction; and
• Originating
entertainment finance loans.
Income
Producing Property Loans. We
originate and purchase real estate loans secured by first trust deeds or first
mortgages on commercial and multi-family real estate. Our collateral consists
primarily of the following types of properties:
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At
December 31, 2006, we had $2.5 billion of income producing property loans
outstanding, representing 85.8% of our total real estate loans, and 82.5% of
our
gross loan portfolio. Most of our real estate borrowers are business owners,
individual investors, investment partnerships or limited liability corporations.
The income producing property lending that we engage in typically involves
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, because repayment
of
the loan generally is dependent, in large part, on the successful operation
of
the property securing the loan or the business conducted on the property
securing the loan. During 2006, we continued the national expansion of our
real
estate lending platform, and as of December 31, 2006, we had 17 real estate
loan
origination offices located outside of California. In 2005, we opened our
eastern area headquarters in Times Square in New York City. This office manages
and supports our eastern seaboard real estate lending efforts.
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, such as:
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We
originate real estate loans through our retail branches and loan origination
offices. These offices are staffed by a total of 56 loan officers. Loan officers
solicit mortgage loan brokers for loan applications that meet our underwriting
criteria, and also accept applications directly from borrowers. A majority
of
the real estate loans funded by us are originated through mortgage loan brokers.
Mortgage loan brokers act as intermediaries between us and the property owner
in
arranging real estate loans and earn a fee based upon the principal amount
of
each loan funded.
Income
producing property loans are generally made in amounts up to 75% of the
appraised value of the property; however, multi-family loan originations may
be
made at a loan to value ratio of up to 80%. Loans are generally made for terms
of between ten and 30 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.
The
average yield on our real estate loan portfolio was 7.74% in 2006 compared
to
6.99% in 2005. Our real estate loan portfolio is primarily composed of
adjustable rate mortgages indexed to either six month LIBOR or the Prime Rate
with interest rate floors, below which the loan’s contractual interest rate may
not adjust. Approximately 51.3% of our loan portfolio was comprised of
adjustable rate loans at December 31, 2006, and approximately 45.5% of the
loan
portfolio was comprised of hybrid loans, which, after an initial fixed rate
period of three or five years, will convert to an adjustable interest rate
for
the remaining term of the loan. Our adjustable rate loans generally re-price
on
a quarterly or semi-annual basis with increases generally limited to maximum
adjustments of 2% per year up to 5% for the life of the loan. As of December
31,
2006, approximately $2.7 billion, or 90.5%, of our adjustable rate loan
portfolio contained interest rate floors, below which the loans’ contractual
interest rate may not adjust. The inability of our loans to adjust downward
can
contribute to increased income in periods of declining interest rates, and
also
assists us in our efforts to limit the risks to earnings resulting from changes
in interest rates, subject to the risk that borrowers may refinance these loans
during periods of declining interest rates. At December 31, 2006, the weighted
average floor interest rate of our adjustable rate loan portfolio was 6.03%.
At
that date, approximately $95.0 million, or 3.2%, of our adjustable rate loan
portfolio was at the floor interest rate. At December 31, 2006, 52.0% of the
adjustable rate loans outstanding had a lifetime interest rate cap. The
weighted-average lifetime interest rate cap on our adjustable rate loan
portfolio was 11.60%. At December 31, 2006, none of the loans in our adjustable
rate loan portfolio were at their cap rate.
In
2006,
2005, and 2004, we purchased income producing real estate loans totaling $497.8
million, $595.3 million, and $136.5 million, respectively. In our real estate
loan purchases, we generally apply the same underwriting criteria as loans
internally originated and reserve the right to reject particular loans from
a
loan pool being purchased that do not meet our underwriting criteria. In
addition to our loan purchases, our internal loan originations during 2006
consisted of $693.1 million of commercial real estate loans, $293.7 million
of
small balance multi-family real estate loans, and $102.7 million of
entertainment finance loans.
Construction
Loans. We
originate construction loans for income producing properties, as well as for
single-family residential tract and condominium construction. At December 31,
2006, we had $347.8 million of construction loans outstanding, representing
11.5% of our gross loans receivable. In addition to the lending risks previously
discussed, construction loans also present risks associated with changes in
values and market conditions between the time the construction loan is closed
and the project is completed and stabilized, the timely completion of
construction activities for their allotted costs and the time needed to
stabilize income properties. 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.
Entertainment
Finance Loans.
We
conduct our entertainment finance operations through ICB Entertainment Finance
(“ICBEF”), a division of the Bank. Typically, ICBEF lends to independent
producers of film and television on a senior secured basis. Collateral documents
include a mortgage of copyright, security agreements and assigned sales
contracts. Credit decisions are based in part on the creditworthiness and
reputation of the producer, the sales agent and distributors who have contracted
to distribute the films. ICBEF provides loans (with a typical term of 12 to
18
months) and letters of credit for the production of motion pictures and
television shows or series that have a predictable market worldwide, and
therefore, a predictable level of revenue arising from licensing of the
worldwide distribution rights.
ICBEF
lends to independent producers of film and television, many of which are located
in California. To a lesser extent, ICBEF also has borrowing clients outside
of
the United States; however, all loans are denominated in United States dollars.
Independent producers tend to be those producers that do not have major studio
distribution outlets for their product. Large film and television studios
generally maintain their own distribution outlets and finance their projects
with internally generated financing. In addition to funding production loans
against a number of distribution contracts, ICBEF may permit an advance,
generally not to exceed 20% of the budget amount, against its valuation of
unsold rights. ICBEF uses industry standards in the valuation of unsold rights.
ICBEF’s lending officers review the quality of the distributors and their
contracts, the budget, the producer’s track record, the script, the genre,
talent elements, the schedule of advances, and valuation of all distribution
rights when considering a new lending opportunity. Generally, ICBEF loans
require the borrower to provide a completion bond that guarantees the completion
of the film or the payoff of the outstanding balance of the loan in the event
the film is not completed. After closing, each requested advance is approved
by
the bonding company on a regular basis to ensure that ICBEF is not advancing
ahead of an agreed-upon cash flow schedule. The loan documentation grants ICBEF
the right to impose certain penalties on the borrower and exercise certain
other
rights, including replacing the sales agent, if sales are not consummated within
the appropriate time. Loans are repaid principally from revenue received from
distribution contracts. In many instances, the distribution contracts provide
for multiple payments payable at certain milestones (such as execution of
contract, commencement of principal photography or completion of principal
photography). The maturity date of the loan is generally six to nine months
after completion of the production. Delivery of the completed production is
typically made to the various distributors upon or after their minimum
guarantees have been paid in full. To the extent a distributor fails to make
payment upon completion of the film, or the predicted level of revenue is less
than expected, we may incur a loss if rights cannot be resold for the same
amount or other loan collateral cannot cover required loan
payments.
ICBEF
typically charges its customers an interest rate of three month LIBOR plus
a
margin (exclusive of loan fees) on the outstanding balance of the loan. Loan
fees range from 1.00% to 2.25% with an additional fee up to 7.00% depending
on
the unsecured amount of the production budget being financed.
At
December 31, 2006 and 2005, our entertainment finance portfolio totaled $74.2
million and $66.5 million, respectively, representing 2.5% and 2.6% of our
gross
loan portfolio as of these dates. Of these amounts, approximately $10.3 million
and $3.6 million, respectively, were issued to producers domiciled outside
of
the United States. The foreign loans outstanding at December 31, 2006 were
primarily issued to producers located in Canada. Approximately $5.6 million,
$7.7 million and $7.0 million of interest income was earned during 2006, 2005
and 2004, respectively, in connection with our entertainment finance portfolio.
Franchise
Loans.
During
2005, we closed our franchise lending operations and sold approximately $110.0
million, or 89.0%, of the remaining loans within this portfolio. We do not
currently anticipate originating or purchasing franchise loans in the future.
Prior to the closure, we operated our franchise lending operations through
a
division of the Bank, Imperial Franchise Finance, based in Tempe, Arizona.
Franchise loans are loans to owners of businesses, both franchisors and
franchisees, such as fast food restaurants or gasoline retailers that are
affiliated with nationally or regionally recognized chains and brand names.
Various combinations of land, building, business equipment and fixtures may
secure these loans, or they may be a general obligation of the borrower based
on
an evaluation of the borrower’s business and debt service ability. These loans
may be viewed as riskier than our real estate secured loans, as in each case,
the primary source of repayment of a franchise loan is the cash flow of the
business and not the underlying value of the collateral. In addition, in certain
cases, the success of the borrower’s business depends on the management talents
and efforts of one or two persons or a small group of persons, and the death,
disability or resignation of one or more of these persons could have a material
adverse impact on the business. Many of these borrowers have smaller market
shares than their competition, may be more vulnerable to economic downturns,
often need additional capital to expand or compete and may experience
substantial variations in operating results, any of which might impair the
borrower’s ability to repay a loan. As of December 31, 2006 and 2005, our
franchise loan portfolio was $9.3 million and $13.7 million, respectively,
which
represented 0.3% and 0.5%, respectively, of our gross loan portfolio as of
those
dates.
Loan
Underwriting. A
significant portion of our loans are made to lower credit grade borrowers or
where the property securing the loan has other factors, such as debt-to-income
ratios or property location, that prevent the borrower from obtaining a prime
interest rate. We attempt to mitigate the risk associated with these loans
by
charging higher interest rates and through our loan approval and loan purchasing
process. Initial loan review for potential applications is performed by the
Regional Directors and Area Manager of our loan origination offices, in
consultation with the Chief Lending Officer, the Chief of Lending Operations,
the Director of Loan Operations, and the Vice Chairman/Chief Credit Officer.
Our
loan underwriters are responsible for detailed reviews of borrowers, collateral,
and loan terms, and prepare a written presentation for every loan application
submitted to the real estate loan committee, which is comprised of the following
Bank officers:
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•Chairman,
President, and Chief Executive Officer
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•Managing
Director/Credit Risk Management
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•Vice
Chairman and Chief Credit Officer
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•Deputy
Managing Director/Eastern Area Manager
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•Executive
Managing Director/Chief Operating Officer
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•Deputy
Managing Director/Loan Underwriting
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•Senior
Managing Director/Chief Lending Officer
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•First
Vice President/East Coast Credit Executive
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•Senior
Managing Director/Chief of Lending Operations
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•First
Vice President/Chief Underwriter-Express Loan
Operations
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The
underwriting standards for loans secured by income producing real estate
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.
All
real
estate secured loans over $3.0 million must be submitted to the loan committee
for approval. At least one loan committee member or designee must personally
conduct on-site inspections of any property involved in connection with a real
estate loan recommendation of $2.0 million or more. Loans up to $750,000 may
be
approved by any loan committee member. Loans of $750,000 to $2.0 million require
approval by any two members of the Bank’s loan committee, while loans in excess
of $2.0 million require approval of three loan committee members, one of whom
must be the Chief of Lending Operations or the Director of Loan Operations,
and
only one of whom may be from the Loan Production Unit. Additionally, loans
over
$3.0 million require the approval of the Chief of Lending Operations, and loans
over $4.0 million require the additional approval of the Vice Chairman and
Chief
Credit Officer; and individual loans over $7.5 million, loans resulting in
an
aggregate borrowing relationship to one borrower in excess of $10.0 million,
and
all purchased loan pools must be approved by the Executive Committee of the
Bank’s Board of Directors.
All
entertainment finance loans over $1.0 million are submitted to the business
lending loan committee for approval. All loans must be approved by the Managing
Director/Credit Risk Management and loans over $3.0 million must be approved
by
the Vice Chairman and Chief Credit Officer. Individual loans over $7.5 million,
loans resulting in an aggregate borrowing relationship to one borrower in excess
of $10.0 million, and all purchased loan pools must be approved by the executive
committee of the Bank’s Board of Directors.
Our
loans
are originated on both a non-recourse and full recourse basis and we generally
seek to obtain personal guarantees from the principals of borrowers which are
single asset or limited liability entities (such as partnerships, corporations
or trusts).
The
maximum size of a single loan made by the Bank is limited by California law
to
25% of the Bank’s equity capital. At December 31, 2006, that limit was
approximately $70.0 million. Our largest combined credit extension to related
borrowers was $32.6 million at December 31, 2006. At December 31, 2006, we
had a
total of 164 extensions of credit, with a combined outstanding principal balance
of $701.8 million that were over $5.0 million to a single borrower or related
borrowers. All combined extensions of credit over $5.0 million were performing
in accordance with their repayment terms, with the exception of one credit
relationship that is on nonaccrual status and has a combined outstanding
principal balance of $10.1 million. At December 31, 2006, we had 3,296 real
estate loans outstanding, with an average balance per loan of approximately
$878,000.
Servicing
and Collections. Our
loan
portfolio is predominantly serviced by our 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. We monitor
our
loans to ensure that projects are performing as underwritten. This monitoring
allows us 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 fifteenth 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 reviewed more
closely by our asset management department which is responsible for implementing
a collection or restructuring plan, or a disposition strategy, and evaluates
any
potential loss exposure on the asset.
Competition.
Our
competition in originating real estate, construction, and entertainment finance
loans is principally from community banks, savings and loan associations,
industrial banks, real estate financing conduits, specialty finance companies,
small insurance companies, and larger banks. Many of these entities enjoy
competitive advantages over us 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. We attempt 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.
Imperial Capital Real Estate Investment Trust
During
2000, we acquired all of the equity and certain collateralized mortgage
obligations (“CMOs”) of the ICCMAC Multi-family and Commercial Trust 1999-1
(“ICCMAC Trust”) through our real estate investment trust subsidiary, Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”). During 2004, the
CMOs were retired and the ICCMAC Trust was dissolved. The remaining outstanding
loans were contributed to Imperial Capital REIT. At December 31, 2006, Imperial
Capital REIT held net real estate loans of $2.1 million. The cash flow from
Imperial Capital REIT loan pool provides cash flow on a monthly basis to ITLA
Capital. ITLA Capital recognized $170,000 of interest income from the loans
held
in the Imperial Capital REIT during the year ended December 31,
2006.
Non-performing
Assets and Other Loans of Concern
At
December 31, 2006, non-performing assets totaled $33.0 million or 0.97% of
total
assets. Non-performing assets consisted of $26.3 million of non-accrual loans
and $6.7 million of other real estate owned consisting of four properties.
For
additional information regarding non-performing assets see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Credit Risk Elements”.
As
of
December 31, 2006, we had loans with an aggregate outstanding balance of $67.0
million with respect to which known information concerning possible credit
problems with the borrowers or the cash flows of the properties securing the
respective loans has caused management to be concerned about the ability of
the
borrowers to comply with present loan repayment terms. This may result in the
future inclusion of such loans in the non-accrual loan category. All of these
loans are classified as substandard pursuant to the regulatory guidelines
discussed below.
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”, “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 coverage of the
underlying collateral. Underlying collateral values for real estate dependent
loans are supported by property appraisals or evaluations. We review our loan
classifications on at least a quarterly basis. At December 31, 2006, we
classified $85.7 million of loans as “substandard”, $7.6 million as “doubtful”
and none as “loss” of which, $26.3 million of these classified loans were
included in the non-performing assets table in “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Credit Risk
Elements”.
Funding
Sources
The
primary source of funding for our lending operations and investments are
deposits. Our deposits are federally insured by the FDIC to the maximum extent
permitted by law. Approximately 87.5% of our deposits are term deposits that
pay
fixed rates of interest for periods ranging from 90 days to five years, 10.3%
of
our deposits are adjustable rate passbook accounts and adjustable rate money
market accounts with limited checking features, and 2.2% are customer demand
deposit accounts.
Our
retail checking account balance was $47.7 million at December 31, 2006. We
generally accumulate deposits by relying on renewals of term accounts by
existing depositors, participating in deposit rate surveys which promote the
rates offered by us on our deposit products, and periodically advertising in
various local market newspapers and other media. Management believes that our
deposits are a reliable funding source and that the cost of funds resulting
from
our deposit gathering strategy is comparable to those of other banks pursuing
a
similar strategy. However, because we compete for deposits primarily on the
basis of rates, we could experience difficulties in attracting deposits if
we
could not continue to offer deposit rates at levels above those of other
financial institutions. Management also believes that any efforts to
significantly increase the size of our deposit base may require greater
marketing efforts and/or increases in deposit rates. At December 31, 2006,
we
had $332.8 million of brokered deposits.
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”.
The
Bank
also uses advances from the FHLB of San Francisco and borrowings from other
unaffiliated financial institutions as funding sources. FHLB advances are
collateralized by pledges of qualifying cash equivalents, investment securities,
mortgage-backed securities and loans. At December 31, 2006, FHLB advances
outstanding totaled $980.0 million, and the remaining available borrowing
capacity, based on the loans and securities pledged as collateral, totaled
$310.3 million, net of the $12.2 million of additional FHLB Stock that we would
be required to purchase to support the additional borrowings. Additionally,
the
Bank has a $30.0 million repurchase agreement borrowing from an unaffiliated
financial institution that is secured by mortgage-backed securities. The Bank
also has uncommitted, unsecured lines of credit with other banks renewable
daily
in the amount of $128.0 million and ITLA Capital has a $25.0 million revolving
credit facility with an unaffiliated financial institution. This revolving
credit facility matures on April 30, 2007, which we intend on renewing upon
maturity. See “Item 8. Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements — Notes 7, 8, and 9”.
Regulation
As
a bank
holding company, ITLA Capital is regulated by the Board of Governors of the
Federal Reserve System (the “Federal Reserve Board” or “FRB”). As a
California-chartered commercial bank, the Bank is regulated by the California
Department of Financial Institutions (the “DFI”) and the Federal Deposit
Insurance Corporation (the “FDIC”).
Holding
Company Regulation
Bank
holding companies are subject to comprehensive regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, and the regulations of the
Federal Reserve Board. As a bank holding company, ITLA Capital is required
to
file reports with the Federal Reserve Board and provide such additional
information as the Federal Reserve Board may require. ITLA Capital and its
non-bank subsidiaries are also subject to examination by the Federal Reserve
Board. The Federal Reserve Board has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to require
that
a bank holding company divest subsidiaries, including its bank subsidiaries.
In
general, enforcement actions may be initiated for violations of law and
regulation as well as unsafe or unsound practices.
Under
Federal Reserve Board policy, a bank holding company must serve as a source
of
strength for its subsidiary banks. Under this policy, the Federal Reserve Board
may require, and has required in the past, bank holding companies to contribute
additional capital to undercapitalized subsidiary banks.
Under
the
Bank Holding Company Act of 1956, a bank holding company must obtain Federal
Reserve Board approval before, among other matters:
• acquiring,
directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after the acquisition, it would own or control
more than 5% of these shares (unless it already owns or controls a majority
of
these shares);
• acquiring
all or substantially all of the assets of another bank or bank holding company;
or
• merging
or consolidating with another bank holding company.
This
statute also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries.
The
principal exceptions to these prohibitions involve certain non-bank activities
which have been identified as activities closely related to the business of
banking or managing or controlling banks. Companies that qualify as financial
holding companies may also engage in securities, insurance and merchant banking
activities.
Dividends.
The
Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board’s
view that a bank holding company should pay cash dividends only to the extent
that its net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the bank
holding company’s capital needs, asset quality and overall financial condition.
Furthermore, under its source of strength doctrine, the Federal Reserve Board
expects a bank holding company to serve as a source of financial strength for
its bank subsidiaries, which could limit the ability of a holding company to
pay
dividends if a bank subsidiary did not have sufficient capital.
Repurchase
or Redemption of Equity Securities. A
bank
holding company is required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if
the
gross consideration for the purchase or redemption, when combined with the
net
consideration paid for all such purchases or redemptions during the preceding
12
months, is equal to 10% or more of its consolidated net worth. The Federal
Reserve Board may disapprove such a purchase or redemption if it determines
that
the proposal would constitute an unsafe or unsound practice or would violate
any
law, regulation, Federal Reserve Board order, or any condition imposed by,
or
written agreement with, the Federal Reserve Board. This notification requirement
does not apply to any company that meets the well-capitalized standard for
bank
holding companies, has a safety and soundness examination rating of at least
a
“2” and is not subject to any unresolved supervisory issues.
Regulatory
Capital Requirements.
The
Federal Reserve has established risk-based measures and a leverage measure
of
capital adequacy for bank holding companies.
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The
minimum ratio of total capital to risk-weighted assets is 8.0%. Total capital
consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital
generally consists of common shareholders’ equity, including retained earnings,
noncumulative perpetual preferred stock, certain trust preferred securities
and
minority interest in equity accounts of fully consolidated subsidiaries, less
goodwill and other specified intangible assets. Tier 1 capital must equal at
least 4.0% of risk-weighted assets. Tier 2 capital generally consists of
subordinated debt and other hybrid capital instruments, other preferred stock,
a
limited amount of loan loss reserves and a limited amount of unrealized holding
gains on equity securities. The total amount of Tier 2 capital is limited to
100% of Tier 1 capital. At December 31, 2006, our ratio of total capital to
risk-weighted assets was 11.9% and our ratio of Tier 1 capital to risk-weighted
assets was 10.2%.
In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum ratio of
Tier
1 capital to average assets, less goodwill and other specified intangible
assets, of 3.0% for certain bank holding companies that meet specified criteria,
including having the highest regulatory rating and implementing the Federal
Reserve’s risk-based capital measure for market risk. All other bank holding
companies generally are required to maintain a leverage ratio of at least 4.0%.
At December 31, 2006, ITLA Capital’s required leverage ratio was 4.0% and
its actual leverage ratio was 9.0%.
ITLA
Capital currently is deemed “well capitalized” under the Federal Reserve Board
capital requirements. To be well capitalized, a bank holding company must have
a
ratio of total capital to risk weighted assets of at least 10% and a ratio
of
Tier 1 capital to risk weighted assets of at least 6.0%.
Failure
to meet capital guidelines could subject a bank or bank holding company to
a
variety of enforcement remedies, including issuance of a capital directive,
the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. As described below,
significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.
Bank
Regulation — California Law
The
regulations of the DFI govern most aspects of the Bank’s businesses and
operations, including, but not limited to, the scope of its business,
investments, the nature and amount of any collateral for loans, the issuance
of
securities, the payment of dividends, bank expansion and bank activities. The
DFI’s supervision of the Bank includes comprehensive reviews of all aspects of
the Bank’s business and condition, and the DFI possesses broad remedial
enforcement authority to influence the Bank’s operations, both formally and
informally.
Bank
Regulation — Federal Law
The
FDIC,
in addition to the DFI, broadly regulates the Bank. 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 the Bank. Insured depository institutions, and their
institution-affiliated parties, may be subject to potential enforcement actions
by the FDIC and the DFI 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
the Bank.
Regulatory
Capital Requirements. Federally-insured,
state-chartered banks such as the 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.
The
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.
At December 31, 2006, the Bank’s required minimum tier 1 capital ratio was 4.0%
and its actual tier 1 capital ratio was 9.1%.
Risk-Based
Capital Requirements. The
risk-based capital requirements generally require the Bank to maintain a minimum
ratio of tier 1 capital to risk-weighted assets of at least 4.0% and a minimum
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.
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 and
certain 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, the allowance for loan losses up to a maximum of 1.25% of
risk-weighted assets and a limited amount of unrealized holding gains on
securities. At December 31, 2006 the Bank’s required minimum tier 1 risk-based
and total capital ratios were 4.0% and 8.0% respectively and its actual was
10.3% and 11.5%, respectively.
The
federal banking agencies have adopted regulations specifying that the agencies
will include, in their evaluation 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 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 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.
Prompt
Corrective Action Requirements. The
FDIC
has implemented a system requiring regulatory sanctions against state-chartered
banks 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. The Bank exceeded these
requirements at December 31, 2006.
The
FDIC
is authorized and, under certain circumstances, required to take certain actions
against institutions that are not at least adequately capitalized. 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. The capital restoration plan must include a limited
guaranty by the institution’s holding company. 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”.
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.
Community
Reinvestment Act and Fair Lending Requirements. 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 its most recent examination, the FDIC rated
the Bank “satisfactory” in complying with its Community Reinvestment Act
obligations. The Bank is also subject to certain fair lending
(nondiscrimination) requirements. In addition to substantial penalties and
corrective measures that may be required for a violation of certain fair lending
laws, the federal banking agencies take compliance with such laws into account
when regulating and supervising other activities such as mergers and
acquisitions.
Fiscal
and Monetary Policies. Our
business and earnings are affected significantly by the fiscal and monetary
policies of the federal government and its agencies. We are particularly
affected by the policies of the Federal Reserve Board, which regulates the
supply of money and credit in the United States. Among the instruments of
monetary policy available to the Federal Reserve Board are (a) conducting open
market operations in United States government securities; (b) changing the
discount rates of borrowings of depository institutions, (c) imposing or
changing reserve requirements against depository institutions’ deposits, and (d)
imposing or changing reserve requirements against certain borrowings by banks
and their affiliates. These methods are used in varying degrees and combinations
to directly affect the availability of bank loans and deposits, as well as
the
interest rates charged on loans and paid on deposits. The policies of the
Federal Reserve Board may have a material effect on our business, results of
operations and financial condition.
Federal
Reserve Board regulations require the Bank to maintain non-interest earning
reserves against the Bank’s transaction deposit accounts. Currently, the first
$8.5 million of otherwise reservable balances are exempt from the reserve
requirement, a 3% reserve requirement applies to balances over $8.5 million
up
to $45.8 million and a 10% reserve requirement applies to balances over $45.8
million. The Bank was in compliance with these requirements as of December
31,
2006.
Privacy
Provisions.
Banking regulators, as required under the Gramm-Leach-Bliley Act (“GLB Act”),
have adopted rules limiting the ability of banks and other financial
institutions to disclose nonpublic information about consumers to nonaffiliated
third parties. The rules generally require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure
of
certain personal information to nonaffiliated third parties. The privacy
provisions of the GLB Act affect how consumer information is transmitted through
diversified financial services companies and conveyed to outside
vendors.
The
State
of California has adopted The California Financial Information Privacy Act
(“CFPA”), which took effect in 2004. The CFPA requires a financial institution
to provide specific information to a consumer related to the sharing of that
consumer’s nonpublic personal information. A consumer may direct the financial
institution not to share his or her nonpublic personal information with
affiliated or nonaffiliated companies with which a financial institution has
contracted to provide financial products and services, and requires that
permission from the consumer be obtained by a financial institution prior to
sharing such information. These provisions are more restrictive than the privacy
provisions of the GLB Act.
In
December 2003, the U.S. Congress adopted, and President Bush signed, the Fair
and Accurate Transactions Act (the “FACT Act”). In 2005, federal courts
determined that the provisions of the CFPA limiting shared information with
affiliates are preempted by provisions of the GLB Act, the FACT Act and the
Fair
Credit Reporting Act.
International
Money Laundering Abatement and Financial Anti-Terrorism Act of
2001.
President Bush signed the USA Patriot Act of 2001 into law in October 2001.
This act contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadened
existing anti-money laundering legislation and the extraterritorial jurisdiction
of the United States, imposes new compliance and due diligence obligations,
creates new crimes and penalties, compels the production of documents located
both inside and outside the United States, and clarifies the safe harbor from
civil liability to customers. The U.S. Treasury Department has issued a number
of regulations implementing the USA Patriot Act that apply certain of its
requirements to financial institutions such as the Bank. The regulations impose
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing. The increased obligations of financial institutions,
including us, to identify their customers, watch for and report suspicious
transactions, respond to requests for information by regulatory authorities
and
law enforcement agencies, and share information with other financial
institutions, requires the implementation and maintenance of internal
procedures, practices and controls which have increased, and may continue to
increase, our costs and may subject us to liability.
Enforcement
and compliance-related activity by government agencies has increased. Money
laundering and anti-terrorism compliance are among the areas receiving a high
level of focus in the present environment.
Future
Legislation. Various
legislation, including proposals to change substantially the financial
institution regulatory system, is from time to time introduced in Congress.
This
legislation may change banking statutes and our operating environment in
substantial and unpredictable ways. If enacted, this legislation could increase
or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit
unions, and other financial institutions. We cannot predict whether any of
this
potential legislation will be enacted and, if enacted, the effect that it,
or
any implementing regulations, would have on our business, results of operations
or financial condition.
Employees
As
of
December 31, 2006, we had 263 employees. Management believes that its relations
with employees are satisfactory. We are not subject to any collective bargaining
agreements.
Segment
Reporting
Financial
and other information regarding our operating segments is contained in Note
18
to our audited consolidated financial statements included in Item 8 of this
report.
Internet
Website
We
maintain a website with the address www.itlacapital.com. The information
contained on our website is not included as a part of, or incorporated by
reference into, this Annual Report on Form 10-K. Other than an investor’s own
Internet access charges, we make available free of charge through our website
our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished
such material to, the Securities and Exchange Commission.
An
investment in our common stock is subject to risks inherent in our business.
Before making an investment decision, you should carefully consider the risks
and uncertainties described below together with all of the other information
included in this report. In addition to the risks and uncertainties described
below, other risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial
condition and results of operations. The
value or market price of our common stock could decline due to any of these
identified or other risks, and you could lose all or part of your
investment.
Fluctuations
in interest rates could reduce our profitability and affect the value of our
assets.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits
and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products may
not change to the same degree over a given time period. In any event, if market
interest rates should move contrary to our position, our earnings may be
negatively affected. In addition, loan volume and quality and deposit volume
and
mix can be affected by market interest rates. Changes in levels of market
interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.
Interest
rates have recently been at historically low levels. However, since June 30,
2004, the U.S. Federal Reserve has increased its target for the federal funds
rate seventeen times, from 1.00% to 5.25%. While these short-term market
interest rates (which we use as a guide to price our deposits) have increased,
longer-term market interest rates (which we use as a guide to price our
longer-term loans) have not. This “flattening” of the market yield curve has had
a negative impact on our interest rate spread and net interest margin to date.
If short-term interest rates continue to rise, and if rates on our deposits
and
borrowings continue to reprice upwards faster than the rates on our long-term
loans and investments, we would experience further compression of our interest
rate spread and net interest margin, which would have a negative effect on
our
profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results
of
operations could be materially harmed.
Changes
in the level of interest rates also may negatively affect our ability to
originate real estate loans, the value of our assets and our ability to realize
gains from the sale of our assets, all of which ultimately affect our
earnings.
An
increase in loan prepayments may adversely affect our profitability.
Prepayment
rates are affected by consumer behavior, conditions in the real estate and
other
financial markets, general economic conditions and the relative interest rates
on our fixed-rate and adjustable-rate mortgage loans and mortgage-backed
securities. Changes in prepayment rates are therefore difficult for us to
predict.
We
recognize our deferred loan origination costs and premiums paid in originating
these loans by adjusting our interest income over the contractual life of the
individual loans. As prepayments occur, the rate at which net deferred loan
origination costs and premiums are expensed accelerates. The effect of the
acceleration of deferred costs and premium amortization may be mitigated by
prepayment penalties paid by the borrower when the loan is paid in full within
a
certain period of time which varies between loans. If prepayment occurs after
the period of time when the loan is subject to a prepayment penalty, the effect
of the acceleration of premium and deferred cost amortization is no longer
mitigated.
We
may
not be able to reinvest prepayments on loans or mortgage-backed securities
at
rates comparable to the prepaid instrument particularly in periods of declining
interest rates.
An
inadequate allowance for loan losses would reduce our earnings.
We
are
exposed to the risk that our borrowers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to assure full repayment. Credit losses are
inherent in the lending business and could have a material adverse effect on
our
operating results. Volatility and deterioration in the economy may also increase
our risk for credit losses. We evaluate the collectibility of our loan portfolio
and provide an allowance for loan losses that we believe is adequate based
upon
such factors as:
|
•
|
|
the
risk characteristics of various classifications of loans;
|
|
•
|
|
general
portfolio trends relative to asset and portfolio size;
|
|
•
|
|
potential
credit and geographic concentrations;
|
|
•
|
|
delinquency
trends and nonaccrual levels;
|
|
•
|
|
historical
loss and recovery experience and risks associated with changes in
economic, social and business conditions;
|
|
•
|
|
the
amount and quality of the collateral;
|
|
•
|
|
the
views of our regulators; and
|
|
•
|
|
the
underwriting standards in effect when the loan is made.
|
If
our
evaluation is incorrect and borrower defaults cause losses exceeding our
allowance for loan losses, our earnings could be materially and adversely
affected. We cannot assure you that our allowance will be adequate to cover
loan
losses inherent in our portfolio. We may experience losses in our loan portfolio
or perceive adverse trends that require us to significantly increase our
allowance for loan losses in the future, which would also reduce our earnings.
In addition, the Bank’s regulators, as an integral part of their examination
process, may require us to make additional provisions for loan
losses.
Our
income producing property loans involve higher principal amounts and expose
us
to a greater risk of loss than one-to-four family residential
loans.
At
December 31, 2006, we had $2.5 billion of loans secured by commercial and
multi-family real estate, representing 85.8% of our total real estate loans
and
82.5% of our gross loan portfolio. The income generated from the operation
of
the property securing the loan is generally considered by us to be the principal
source of repayment on this type of loan. A significant portion of the income
producing property lending in which we engage typically involves larger loans
to
a single borrower and is generally viewed as exposing the lender to a greater
risk of loss than one-four family residential lending because these loans
generally are not fully amortizing over the loan period, but have a balloon
payment due at maturity. A borrower’s ability to make a balloon payment
typically will depend on being able to either refinance the loan or timely
sell
the underlying property. 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, such as:
| • |
changes
or continued weakness in general or local economic
conditions;
|
| • |
changes
or continued weakness in specific industry
segments;
|
| • |
declines
in real estate values;
|
| • |
declines
in rental, room or occupancy rates in hotels, apartment complexes
or
commercial properties;
|
| • |
increases
in other operating expenses (including energy
costs);
|
| • |
the
availability of refinancing at lower interest rates or better loan
terms;
|
| • |
changes
in governmental rules, regulations and fiscal policies, including
rent
control ordinances, environmental legislation and
taxation;
|
| • |
increases
in interest rates, real estate and personal property tax rates,
and
|
| • |
other
factors beyond the control of the borrower or the
lender.
|
We
generally originate and acquire income producing property loans primarily to
be
held in our portfolio to maturity. Because the resale market for this type
of
loan is less liquid than the well-established secondary market for residential
loans, should we decide to sell our income producing property loans, we may
incur losses on any sale.
The
unseasoned nature of many of the loans we originated as part of our small
balance multi-family real estate loan platform, along with our limited
experience in originating loans nationwide, may lead to additional provisions
for loan losses or charge-offs, which would hurt our
profits.
The
national expansion of our real estate loan platform and, in particular, our
small balance multi-family real estate loans has led to an increase in the
number of these types of loans in our portfolio. Many of these loans are
unseasoned and have not been subjected to unfavorable economic conditions.
We
have limited experience in originating loans outside the State of California
and
as a result do not have a significant payment history pattern with which to
judge future collectibility. At December 31, 2006, $1.3 billion, or 45.6%,
of
our real estate secured loans were secured by properties located outside the
state of California. As a result, it is difficult to predict the future
performance of this portion of our real estate loan portfolio. These loans
may
have delinquency or charge-off levels above our historical experience, which
could adversely affect our profitability.
Our
construction loans are based upon estimates of costs and value associated with
the complete project. These estimates may be inaccurate.
We
originate construction loans for income producing properties, as well as for
single family home construction. At December 31, 2006, construction loans
totaled $347.8 million, or 11.7% of gross loans receivable. Construction lending
involves additional risks because funds are advanced upon the security of the
project, which is of uncertain value prior to its completion. There are also
risks associated with the timely completion of the construction activities
for
their allotted costs, as a number of factors can result in delays and cost
overruns, and the time needed to stabilize income producing properties or to
sell residential tract developments. Because of the uncertainties inherent
in
estimating construction costs, as well as the market value of the completed
project and the effects of governmental regulation of real property, it is
relatively difficult to evaluate accurately the total funds required to complete
a project and the related loan-to-value ratio. As a result, construction loans
often involve the disbursement of substantial funds with repayment dependent,
in
part, on the success of the ultimate project and the ability of the borrower
to
sell or lease the property or refinance the indebtedness, rather than the
ability of the borrower or guarantor to repay principal and interest. If our
appraisal of the value of the completed project proves to be overstated, we
may
have inadequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss.
Our
real estate lending also exposes us to the risk of environmental
liabilities.
In
the
course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties.
We may be held liable to a governmental entity or to third persons for property
damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required
to
investigate or clean up hazardous or toxic substances, or chemical releases
at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, as the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties
based
on damages and costs resulting from environmental contamination emanating from
the property. If we ever become subject to significant environmental
liabilities, our business, financial condition and results of operations could
be materially and adversely affected.
Repayment
of our entertainment finance loans is primarily dependent on revenues from
distribution contracts.
Through
ICBEF, a division of the Bank, we originate entertainment finance loans to
independent producers of film and television on a senior secured basis. Although
these loans are typically collateralized by a mortgage of copyright, security
agreements and assigned sales contracts, the primary source of repayment is
the
revenue received by the borrower from the licensing of distribution rights.
For
this reason, our credit decisions are based in part on the creditworthiness
and
reputation of the producer, sales agent and distributors who have contracted
to
distribute the films. In many instances, the distribution contracts provide
for
multiple payments payable at certain milestones (such as execution of contract,
commencement of principal photography or completion of principal photography).
The maturity date of the loan is generally six to nine months after completion
of the production. To the extent a distributor fails to make payment upon
completion of the film, or the predicted level of revenue is less than expected,
we may incur a loss if rights cannot be resold for the same amount or other
loan
collateral cannot cover required loan payments.
Negative
events in certain geographic areas, particularly California, could adversely
affect us.
Although
we have significantly increased the geographic diversification of our loan
portfolio since commencing our national expansion, our real estate loans remain
heavily concentrated in the State of California, with approximately 54.4% of
our
real estate loans as of December 31, 2006 secured by collateral and made to
borrowers in that state. In addition, as of that date, approximately 7.0% and
8.1% of our real estate loans were secured by collateral and made to borrowers
in the States of Arizona and Texas, respectively. We have no other state
geographic concentration of loans in excess of three percent of our total gross
loan portfolio. A worsening of economic conditions in California or in any
other
state in which we have a significant concentration of borrowers could have
a
material adverse effect on our business, by reducing demand for new financings,
limiting the ability of customers to repay existing loans, and impairing the
value of our real estate collateral and real estate owned properties. Real
estate values are affected by various other factors, including changes in
general or regional economic conditions, governmental rules or policies and
natural disasters such as earthquakes, tornados and hurricanes.
Our
wholesale funding sources may prove insufficient to replace deposits and support
our future growth.
We
must
maintain sufficient funds to respond to the needs of depositors and borrowers.
As a part of our liquidity management, we use a number of funding sources in
addition to core deposit growth and repayments and maturities of loans and
investments. As we continue to grow, we are likely to become more dependent
on
these sources, which include brokered certificates of deposit, repurchase
agreements, federal funds purchased and Federal Home Loan Bank advances. Adverse
operating results or changes in industry conditions could lead to an inability
to replace these additional funding sources at maturity. Our financial
flexibility will be severely constrained if we are unable to maintain our access
to funding or if adequate financing is not available to accommodate future
growth at acceptable interest rates. Finally, if we are required to rely more
heavily on more expensive funding sources to support future growth, our revenues
may not increase proportionately to cover our costs. In this case, our
profitability would be adversely affected.
Competition
with other financial institutions could adversely affect our profitability.
The
banking and financial services industry is very competitive. Legal and
regulatory developments have made it easier for new and sometimes unregulated
competitors to compete with us. Consolidation among financial service providers
has resulted in fewer very large national and regional banking and financial
institutions holding a large accumulation of assets. These institutions
generally have significantly greater resources, a wider geographic presence
or
greater accessibility. Our competitors sometimes are also able to offer more
services, more favorable pricing or greater customer convenience than we do.
In
addition, our competition has grown from new banks and other financial services
providers that target our existing or potential customers. As consolidation
continues among large banks, we expect additional institutions to try to exploit
our market.
Technological
developments have allowed competitors including some non-depository
institutions, to compete more effectively in local markets and have expanded
the
range of financial products, services and capital available to our target
customers. If we are unable to implement, maintain and use such technologies
effectively, we may not be able to offer products or achieve cost-efficiencies
necessary to compete in our industry. In addition, some of these competitors
have fewer regulatory constraints and lower cost structures.
We
rely heavily on the proper functioning of our technology.
We
rely
on our computer systems, and outside sources providing technology, for much
of
our business, including recording our assets and liabilities. If our computer
systems or outside technology sources fail, are not reliable or there is a
breach of security, our ability to maintain accurate financial records may
be
impaired, which could materially affect our operations and financial condition.
We
are dependent upon the services of our management team.
We
are
dependent upon the ability and experience of a number of our key management
personnel who have substantial experience with our operations, the financial
services industry and the markets in which we offer our services. It is possible
that the loss of the services of one or more of our senior executives or key
managers would have an adverse effect on our operations. Our success also
depends on our ability to continue to attract, manage and retain other qualified
personnel as we grow. We cannot assure you that we will continue to attract
or
retain such personnel.
Terrorist
activities could cause reductions in investor confidence and substantial
volatility in real estate and securities markets.
It
is
impossible to predict the extent to which terrorist activities may occur in
the
United States or other regions, or their effect on a particular security issue.
It is also uncertain what effects any past or future terrorist activities and/or
any consequent actions on the part of the United States government and others
will have on the United States and world financial markets, local, regional
and
national economics, and real estate markets across the United States. Among
other things, reduced investor confidence could result in substantial volatility
in securities markets, a decline in general economic conditions and real estate
related investments and an increase in loan defaults. Such unexpected losses
and
events could materially affect our results of operations.
We
are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our business.
Bank
holding companies and California-charted commercial banks operate in a highly
regulated environment and are subject to supervision and examination by federal
and state regulatory agencies. We are subject to the Bank Holding Company Act
of
1956, as amended, and to regulation and supervision by the FRB. Imperial Capital
Bank is subject to regulation and supervision by the FDIC, and DFI. The cost
of
compliance with regulatory requirements may adversely affect our results of
operations or financial condition. Federal and state laws and regulations govern
numerous matters including: changes in the ownership or control of banks and
bank holding companies; maintenance of adequate capital and the financial
condition of a financial institution; permissible types, amounts and terms
of
extensions of credit and investments; permissible non-banking activities; the
level of reserves against deposits; and restrictions on dividend payments.
The
FDIC
and DFI possess cease and desist powers to prevent or remedy unsafe or unsound
practices or violations of law by banks subject to their regulation, and the
FRB
possesses similar powers with respect to bank holding companies. These and
other
restrictions limit the manner in which we may conduct our business and obtain
financing.
Item
1B. Unresolved Staff Comments
None.
The
following sets forth our material facilities as of December 31,
2006.
|
Locations
|
Office
Uses
|
Square
Footage
|
Year
Current Lease Term
Expires
|
|
La
Jolla, CA
|
Corporate
Headquarters
|
21,903
|
2008
|
|
Glendale,
CA
|
Loan
Operations Division/Loan Administration/Asset
Management/Operations Support
|
28,467
|
2012
|
|
New
York, NY
|
East
Coast Corporate Headquarters
|
3,810
|
2009
|
|
Century
City, CA
|
ICB
Entertainment Finance
|
7,003
|
2008
|
|
Glendale,
CA
|
Bank
Branch
|
4,791
|
2012
|
|
Encino,
CA
|
Bank
Branch
|
5,145
|
2009
|
|
San
Francisco, CA
|
Bank
Branch
|
5,005
|
2014
|
|
Costa
Mesa, CA
|
Bank
Branch
|
3,609
|
2011
|
|
San
Diego, CA
|
Bank
Branch
|
3,046
|
2011
|
|
Beverly
Hills, CA
|
Bank
Branch
|
2,218
|
2010
|
|
Carson
City, NV
|
Bank
Branch
|
3,000
|
2008
|
|
Walnut
Creek, CA
|
Loan
Origination Office
|
2,220
|
2009
|
|
Boston,
MA
|
Loan
Origination Office
|
3,309
|
2009
|
|
Atlanta,
GA
|
Loan
Origination Office
|
3,148
|
2008
|
|
Fairfield,
CT
|
Loan
Origination Office
|
1,992
|
2007
|
|
Redbank,
NJ
|
Loan
Origination Office
|
1,800
|
2009
|
|
Houston,
TX
|
Loan
Origination Office
|
3,420
|
2011
|
For
additional information regarding our premises, see “Item 8. Financial Statements
and Supplementary Data — Notes to Consolidated Financial Statements - Note 5”.
Management
believes that our present facilities are adequate for its current needs, and
that alternative or additional space, if necessary, will be available on
reasonable terms.
We
are
party to certain legal proceedings incidental to our business. Management
believes that the outcome of such proceedings, in the aggregate, will not have
a
material effect on our business, financial condition or results of
operations.
No
matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the quarter ended December 31, 2006.
PART
II
Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters,
and
Issuer Purchases of Equity Securities
In
December 2006, we filed an application and received approval to list our common
stock on the New York Stock Exchange (“NYSE”). Our common stock began trading on
the NYSE on December 29, 2006 under the symbol “IMP”. Prior to trading on the
NYSE, our common stock traded on the NASDAQ Global Select Market under the
symbol “ITLA”. As of March 5, 2007, there were 102 holders of record of ITLA
Capital’s common stock representing an estimated 4,171 beneficial shareholders
with a total of 5,527,651 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 and the cash dividends declared per
share. Stock price data reflects inter-dealer prices, without retail mark-up,
mark-down or commission.
|
Market
Price
|
Average
Daily
|
||||||||||||
|
|
High
|
Low
|
Close
|
Closing
Price
|
|||||||||
|
2006
4th
Quarter
|
$
|
58.96
|
$
|
50.75
|
$
|
57.91
|
$
|
54.91
|
|||||
|
3rd
Quarter
|
55.15
|
49.10
|
53.76
|
51.76
|
|||||||||
|
2nd
Quarter
|
52.93
|
46.14
|
52.58
|
49.55
|
|||||||||
|
1st
Quarter
|
50.20
|
44.65
|
48.22
|
47.28
|
|||||||||
|
2005
4th
Quarter
|
$
|
53.55
|
$
|
47.35
|
$
|
48.85
|
$
|
50.53
|
|||||
|
3rd
Quarter
|
59.30
|
50.50
|
52.49
|
54.30
|
|||||||||
|
2nd
Quarter
|
56.95
|
43.36
|
53.90
|
49.62
|
|||||||||
|
1st
Quarter
|
58.31
|
49.37
|
49.96
|
53.89
|
|||||||||
|
Cash
dividends declared per share
|
2006
|
2005
|
|||||
|
1st
Quarter
|
$
|
0.15
|
$
|
—
|
|||
|
2nd
Quarter
|
0.15
|
—
|
|||||
|
3rd
Quarter
|
0.15
|
—
|
|||||
|
4th
Quarter
|
0.15
|
—
|
|||||
|
Total
|
$
|
0.60
|
$
|
—
|
|||
As
a bank
holding company, ITLA Capital’s ability to pay dividends may be affected by
regulations, including those governing the payment of dividends by the Bank
to
ITLA Capital, which could be a source of funds for any dividends paid by ITLA
Capital, as well as by the policies of the Federal Reserve Board. Under federal
regulations, the dollar amount of dividends the Bank may pay depends upon its
capital position and recent net income. Generally, if the Bank satisfies its
regulatory capital requirements, it may make dividend payments up to the limits
prescribed under state law and FDIC regulations.
Payments
of the distributions on our trust preferred securities from the special purpose
subsidiary trusts we sponsored are fully and unconditionally guaranteed by
us.
The junior subordinated debentures that we have issued to our subsidiary trusts
are senior to our shares of common stock. As a result, we must make required
payments on the junior subordinated debentures before any dividends can be
paid
on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the interest and principal obligations under the junior
subordinated debentures must be satisfied before any distributions can be made
on our common stock. We may defer the payment of interest on each of the junior
subordinated debentures for a period not to exceed 20 consecutive quarters,
provided that the deferral period does not extend beyond the stated maturity.
During such deferral period, distributions on the corresponding trust preferred
securities will also be deferred and we may not pay cash dividends to the
holders of shares of our common stock.
We
expect
to pay a cash dividend of $0.16 per share for each quarter in 2007; however,
there can be no assurance as to future dividends because they are dependent
on
our future earnings, capital requirements and financial condition. See “Item 1.
Business—Regulation” and Note 16 to our consolidated financial statements
included in Item 8 of this report.
Stock
Repurchases
The
following table sets forth the repurchases of our common stock for the fiscal
quarter ended December 31, 2006.
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or Programs
(1)
|
|||||||||
|
October
1, 2006 to October
31, 2006
|
30,000
|
$
|
54.80
|
30,000
|
307,011
|
||||||||
|
November
1, 2006 to November
30, 2006
|
—
|
—
|
—
|
307,011
|
|||||||||
|
December
1, 2006 to December
31, 2006
|
9,050
|
55.52
|
9,050
|
297,961
|
|||||||||
|
Total
|
39,050
|
$
|
54.97
|
39,050
|
297,961
|
||||||||
____________
(1)
The repurchases during the three months ended December 31, 2006 were made under
the eleventh extension of our stock repurchase program, which was announced
on
October 18, 2005. On March 14, 2006, the twelfth extension of our stock
repurchase program was announced. The extensions authorized the repurchase
of an
additional 5% of the outstanding shares as of their respective authorization
dates. At December 31, 2006, a total of 297,961 shares remained available for
repurchase under the eleventh and twelfth extensions.
Performance
Graph
The
following graph, prepared by SNL Securities, L.C., compares the performance
of
our Common Stock with that of the NASDAQ Composite Index (U.S. Companies) and
the SNL Bank Index over a five year period through December 31, 2006. The
comparison assumes $100 was invested on December 31, 2001 in our Common Stock
and in each of the foregoing indices and assumes the reinvestment of all
dividends. Historical stock price performance is not necessarily indicative
of
future stock price performance.
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|
|
ITLA
Capital Corporation
|
100.00
|
158.54
|
239.03
|
280.49
|
233.06
|
279.48
|
|
NASDAQ
Composite (1)
|
100.00
|
68.76
|
103.67
|
113.16
|
115.57
|
127.58
|
|
SNL
Bank Index
|
100.00
|
91.69
|
123.69
|
138.61
|
140.50
|
164.35
|
____________
(1)
The NASDAQ Composite index has been used rather than a New York Stock Exchange
related index because we believe it is more relevant since we traded only for
one day on the New York Stock Exchange in 2006.
Item
6. Selected Financial Data
The
following condensed consolidated statements of operations and financial
condition and selected performance ratios as of December 31, 2006, 2005, 2004,
2003, and 2002 and for the years then ended have been derived from our audited
consolidated financial statements. The information below 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” and “Item 8. Financial Statements and
Supplementary Data.”
|
|
For
the years ended December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(in
thousands, except per share amount)
|
||||||||||||||||
|
Condensed
Consolidated Statements of Operations
Total
interest income
|
$
|
226,501
|
$
|
178,158
|
$
|
124,954
|
$
|
115,977
|
$
|
110,608
|
||||||
|
Total
interest expense
|
132,075
|
86,486
|
41,418
|
30,867
|
37,322
|
|||||||||||
|
Net
interest income before provision for loan losses
|
94,426
|
91,672
|
83,536
|
85,110
|
73,286
|
|||||||||||
|
Provision
for loan losses
|
5,000
|
10,250
|
4,725
|
7,760
|
9,030
|
|||||||||||
|
Net
interest income after provision for loan losses
|
89,426
|
81,422
|
78,811
|
77,350
|
64,256
|
|||||||||||
|
Non-interest
income (1)
|
2,772
|
6,574
|
14,508
|
15,240
|
373
|
|||||||||||
|
Non-interest
expense:
|
||||||||||||||||
|
Compensation
and benefits
|
21,265
|
21,737
|
21,444
|
18,870
|
13,954
|
|||||||||||
|
Occupancy
and equipment
|
7,439
|
7,177
|
5,924
|
4,839
|
3,165
|
|||||||||||
|
Other
general and administrative expenses
|
17,743
|
17,344
|
14,666
|
13,006
|
9,913
|
|||||||||||
|
Real
estate owned expense, net
|
369
|
193
|
712
|
1,212
|
1,323
|
|||||||||||
|
Total
non-interest expense
|
46,816
|
46,451
|
42,746
|
37,927
|
28,355
|
|||||||||||
|
Income
before provision for income taxes and minority interest in income
of
subsidiary
|
45,382
|
41,545
|
50,573
|
54,663
|
36,274
|
|||||||||||
|
Minority
interest in income of subsidiary (2)(3)
|
—
|
—
|
—
|
6,083
|
3,481
|
|||||||||||
|
Income
before provision for income taxes
|
45,382
|
41,545
|
50,573
|
48,580
|
32,793
|
|||||||||||
|
Provision
for income taxes
|
18,493
|
17,482
|
19,948
|
18,946
|
12,788
|
|||||||||||
|
NET
INCOME
|
$
|
26,889
|
$
|
24,063
|
$
|
30,625
|
$
|
29,634
|
$
|
20,005
|
||||||
|
BASIC
EARNINGS PER SHARE
|
$
|
4.83
|
$
|
4.19
|
$
|
5.04
|
$
|
4.91
|
$
|
3.35
|
||||||
|
DILUTED
EARNINGS PER SHARE
|
$
|
4.71
|
$
|
4.04
|
$
|
4.75
|
$
|
4.55
|
$
|
3.16
|
||||||
|
|
As
of December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(in
thousands, except per share amount)
|
||||||||||||||||
|
Condensed
Consolidated Statements of Financial Condition
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
30,448
|
$
|
93,747
|
$
|
87,580
|
$
|
178,318
|
$
|
160,848
|
||||||
|
Investment
securities available-for-sale, at fair value
|
99,527
|
92,563
|
66,845
|
53,093
|
54,677
|
|||||||||||
|
Investment
securities held-to-maturity, at amortized cost
|
193,512
|
233,880
|
296,028
|
—
|
—
|
|||||||||||
|
Stock
in Federal Home Loan Bank
|
48,984
|
43,802
|
23,200
|
17,966
|
16,934
|
|||||||||||
|
Loans,
net
|
2,973,368
|
2,523,480
|
1,793,815
|
1,505,424
|
1,438,234
|
|||||||||||
|
Interest
receivable
|
20,753
|
16,287
|
10,695
|
8,958
|
9,158
|
|||||||||||
|
Other
real estate owned, net
|
6,729
|
3,960
|
—
|
7,048
|
12,593
|
|||||||||||
|
Premises
and equipment, net
|
7,851
|
6,718
|
6,645
|
5,766
|
4,197
|
|||||||||||
|
Deferred
income taxes
|
11,513
|
12,717
|
10,468
|
11,609
|
13,822
|
|||||||||||
|
Goodwill
|
3,118
|
3,118
|
3,118
|
3,118
|
3,118
|
|||||||||||
|
Other
assets
|
19,707
|
20,924
|
19,677
|
26,915
|
8,384
|
|||||||||||
|
Total
Assets
|
$
|
3,415,510
|
$
|
3,051,196
|
$
|
2,318,071
|
$
|
1,818,215
|
$
|
1,721,965
|
||||||
|
Deposit
accounts
|
$
|
2,059,405
|
$
|
1,735,428
|
$
|
1,432,032
|
$
|
1,147,017
|
$
|
1,065,911
|
||||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,010,000
|
992,557
|
584,224
|
378,003
|
407,762
|
|||||||||||
|
Account
payable and other liabilities
|
38,168
|
32,130
|
20,491
|
19,696
|
10,006
|
|||||||||||
|
Junior
subordinated debentures (3)
|
86,600
|
86,600
|
86,600
|
86,600
|
—
|
|||||||||||
|
Guaranteed
preferred beneficial interests in the Company’s junior subordinated
deferrable interest debentures (3)
|
—
|
—
|
—
|
—
|
81,595
|
|||||||||||
|
Shareholders’
equity
|
221,337
|
204,481
|
194,724
|
186,899
|
156,691
|
|||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
3,415,510
|
$
|
3,051,196
|
$
|
2,318,071
|
$
|
1,818,215
|
$
|
1,721,965
|
||||||
|
Book
value per share
|
$
|
42.07
|
$
|
37.85
|
$
|
35.09
|
$
|
31.30
|
$
|
27.11
|
||||||
____________
(1) For
2004 and 2003, includes fee income earned in connection with the tax refund
lending program pursuant to our strategic alliance with various subsidiaries
of
Household International, Inc. (“Household”), a wholly owned subsidiary of HSBC
Holdings plc (NYSE-HBC). This program was terminated by Household in 2004
subsequent to the tax filing season.
(2) Represents
distributions on our trust preferred securities.
(3) As
a
result of our adoption of FASB Interpretation No. 46 (revised) issued by the
Financial Accounting Standards Board effective December 31, 2003, we
de-consolidated the trusts which issued our trust preferred securities. The
effect of this was to recognize investments in the trusts in other assets,
to
report the amount of junior subordinated debentures we issued to these trusts
as
a liability in our consolidated balance sheets and, beginning on the date of
adoption, to recognize the interest expense on the junior subordinated
debentures in our consolidated statements of income. Prior to the
de-consolidation, we reported our trust preferred securities in the mezzanine
section of our balance sheet as “guaranteed preferred beneficial interests in
the Company’s junior subordinated deferrable interest debentures” and recognized
distributions paid to the holders of the trust preferred securities as “minority
interest in income of subsidiary” in our consolidated statement of income.
|
|
As
of and for the years ended December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Selected
Performance Ratios
Return
on average assets
|
0.86
|
%
|
0.90
|
%
|
1.47
|
%
|
1.71
|
%
|
1.41
|
%
|
||||||
|
Return
on average shareholders’ equity
|
12.75
|
%
|
12.12
|
%
|
15.44
|
%
|
16.88
|
%
|
13.56
|
%
|
||||||
|
Net
interest margin (1)
|
3.06
|
%
|
3.43
|
%
|
4.12
|
%
|
5.03
|
%
|
5.30
|
%
|
||||||
|
Average
interest earning assets to average interest bearing
liabilities
|
108.21
|
%
|
109.32
|
%
|
127.50
|
%
|
135.03
|
%
|
113.94
|
%
|
||||||
|
Efficiency
ratio (2)
|
47.79
|
%
|
47.08
|
%
|
42.87
|
%
|
36.59
|
%
|
36.40
|
%
|
||||||
|
Total
general and administrative expense to average assets
|
1.49
|
%
|
1.73
|
%
|
2.02
|
%
|
2.29
|
%
|
1.90
|
%
|
||||||
|
Average
shareholders’ equity to average assets
|
6.78
|
%
|
7.39
|
%
|
9.51
|
%
|
11.16
|
%
|
10.36
|
%
|
||||||
|
Dividend
payout ratio (3)
|
12.74
|
%
|
—
|
—
|
—
|
—
|
||||||||||
|
Nonperforming
assets to total assets
|
0.97
|
%
|
0.92
|
%
|
0.63
|
%
|
0.86
|
%
|
1.08
|
%
|
||||||
|
Allowance
for loan losses to loans held for investment, net (4)
|
1.53
|
%
|
1.71
|
%
|
1.94
|
%
|
2.14
|
%
|
2.31
|
%
|
||||||
|
Allowance
for loan loss to nonaccrual loans
|
175.40
|
%
|
180.59
|
%
|
242.17
|
%
|
392.26
|
%
|
555.61
|
%
|
||||||
|
Net
charge-offs to average loans held for investment, net
|
0.10
|
%
|
0.09
|
%
|
0.16
|
%
|
0.52
|
%
|
0.36
|
%
|
||||||
____________
(1) Net
interest margin represents net interest income divided by total average interest
earning assets.
(2) Efficiency
ratio represents general and administrative expenses divided by non-interest
income and net interest income before provision for loan
losses.
(3) Dividends
declared per common share as a percentage of net income per diluted
share.
(4) Loans
held for investment, net, represent loans before allowance for loan
losses.
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)
|
For
the Quarters Ended
|
|||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
|
(in
thousands, except per share amounts)
|
|||||||||||||
|
2006
|
|||||||||||||
|
Interest
income
|
$
|
51,428
|
$
|
55,760
|
$
|
59,130
|
$
|
60,183
|
|||||
|
Interest
expense
|
28,518
|
31,776
|
34,840
|
36,941
|
|||||||||
|
Net
interest income before provision for loan losses
|
22,910
|
23,984
|
24,290
|
23,242
|
|||||||||
|
Provision
for loan losses
|
750
|
1,500
|
1,500
|
1,250
|
|||||||||
|
Non-interest
income
|
717
|
607
|
578
|
870
|
|||||||||
|
General
and administrative expense
|
12,037
|
11,833
|
11,474
|
11,103
|
|||||||||
|
Total
real estate owned expense, net
|
106
|
(177
|
)
|
287
|
153
|
||||||||
|
Provision
for income taxes
|
4,402
|
4,689
|
4,759
|
4,643
|
|||||||||
|
Net
income
|
6,332
|
6,746
|
6,848
|
6,963
|
|||||||||
|
Basic
earnings per share
|
$
|
1.13
|
$
|
1.22
|
$
|
1.24
|
$
|
1.26
|
|||||
|
Diluted
earnings per share
|
$
|
1.10
|
$
|
1.18
|
$
|
1.20
|
$
|
1.22
|
|||||
|
2005
|
|||||||||||||
|
Interest
income
|
$
|
36,752
|
$
|
41,680
|
$
|
48,830
|
$
|
50,896
|
|||||
|
Interest
expense
|
15,010
|
19,551
|
24,991
|
26,934
|
|||||||||
|
Net
interest income before provision for loan losses
|
21,742
|
22,129
|
23,839
|
23,962
|
|||||||||
|
Provision
for loan losses
|
750
|
1,500
|
1,500
|
6,500
|
|||||||||
|
Non-interest
income
|
(20
|
)
|
509
|
485
|
5,600
|
||||||||
|
General
and administrative expense
|
11,230
|
11,069
|
11,973
|
11,986
|
|||||||||
|
Total
real estate owned expense, net
|
(11
|
)
|
—
|
—
|
204
|
||||||||
|
Provision
for income taxes
|
4,102
|
4,230
|
4,583
|
4,567
|
|||||||||
|
Net
income
|
5,651
|
5,839
|
6,268
|
6,305
|
|||||||||
|
Basic
earnings per share
|
$
|
0.97
|
$
|
1.01
|
$
|
1.09
|
$
|
1.11
|
|||||
|
Diluted
earnings per share
|
$
|
0.93
|
$
|
0.98
|
$
|
1.06
|
$
|
1.08
|
|||||
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of
Operations
Application
of Critical Accounting Policies and Accounting Estimates
The
accounting and reporting policies followed by us conform, in all material
respects, to accounting principles generally accepted in the United States
and
to general practices within the financial services industry. The preparation
of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying
notes.
While we base our estimates on historical experience, current information
and
other factors deemed to be relevant, actual results could differ from those
estimates.
We
consider accounting estimates to be critical to reported financial results
if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that
management reasonably could have used for the accounting estimate in the current
period, or changes in the accounting estimate that are reasonably likely to
occur from period to period, could have a material impact on our financial
statements. Accounting polices related to the allowance for loan losses are
considered to be critical, as these policies involve considerable subjective
judgment and estimation by management. We also consider our accounting polices
related to other real estate owned to be critical due to the potential
significance of these activities and the estimates involved. Critical accounting
policies, and our procedures related to these policies, are described in detail
below. Also see Note 1 — Organization and Summary of Significant Accounting
Policies in the accompanying notes to the consolidated financial statements
included elsewhere in this report.
Allowance
for Loan Losses (“ALL”).
Our
management assesses the adequacy of the ALL prior to the end of each calendar
quarter. This assessment includes procedures to estimate the allowance and
test
the adequacy and appropriateness of the resulting balance.
We
establish the ALL amount separately for two different risk groups (1) individual
loans (loans with specifically identifiable risks); and (2) homogeneous
loans (groups of loan with similar characteristics). We base the allocation
for
individual loans primarily on risk rating grades assigned to each of these
loans
as a result of our loan management and review processes. We then assign each
risk-rating grade a loss ratio, which is determined based on the experience
of
management and our independent loan review process. We estimate losses on
impaired loans based on estimated cash flows discounted at the loan’s original
effective interest rate or based on the underlying collateral value. Based
on
management’s experience, we also assign loss ratios to groups of loans. These
loss ratios are assigned to the various homogenous categories of the portfolio.
The
level
of the allowance also reflects management’s continuing evaluation of geographic
and credit concentrations, specific credit risks, loan loss experience, current
loan portfolio quality, present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. While management
utilizes its best judgment and information available, the ultimate adequacy
of
the allowance is dependent upon a variety of factors beyond our control,
including the performance of our loan portfolio, the economy, changes in
interest rates and the view of the regulatory authorities toward loan
classifications.
We
test
the ALL balance by comparing the balance in the ALL to historical trends and
peer information. Our management team then evaluates the result of the
procedures performed, including the result of our testing, and concludes on
the
appropriateness of the balance of the ALL in its entirety. See the section
captioned “Allowance for Loan Losses and Nonperforming Assets” elsewhere in this
discussion for further details of the risk factors considered by management
in
estimating the necessary level of the allowance for loan losses.
Other
Real Estate Owned.
Properties acquired through foreclosure, or in lieu of foreclosure, are
transferred to the other real estate owned portfolio and initially recorded
at
estimated fair value less the estimated costs to sell the property. Subsequent
to foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of cost or estimated fair value less the
estimated costs of disposition. The fair value of other real estate owned is
generally determined from appraisals obtained from independent
appraisers.
Adoption
and Pending Adoption of Recent Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment”, which is a revision of SFAS No. 123. SFAS No. 123(R)
supersedes APB Opinion No. 25. Generally, the approach to accounting for
share-based payments in SFAS No. 123(R) is similar to the approach described
in
SFAS No. 123. However, SFAS No. 123(R) requires share-based payments to
employees, including grants of employee stock options, to be recognized in
the
financial statements based on their grant date fair values (i.e., pro forma
disclosure is no longer an alternative to financial statement recognition).
We
adopted SFAS No. 123(R) on January 1, 2006 using a modified version of
prospective application (“modified prospective application”). Under modified
prospective application, as it is applicable to us, SFAS No. 123(R) applies
to
new awards and to awards modified, repurchased, or cancelled after January
1,
2006. Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered (generally referring to non-vested
awards) that are outstanding as of January 1, 2006 must be recognized as the
remaining requisite service is rendered over periods after the adoption of
SFAS
No. 123(R). The attribution of compensation cost for those earlier awards will
be based on the same method and on the same grant-date fair values previously
determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee
compensation.
Total
stock-based compensation expense included in our consolidated statement of
income for the year ended December 31, 2006 was approximately $266,000
($165,000, net of tax, or $0.03 per diluted share). No stock-based compensation
expense was included in the consolidated statements of income for the years
ended December 31, 2005 and 2004. Unrecognized stock-based compensation expense
related to unvested stock options was approximately $66,000 at December 31,
2006. At that date, the weighted-average period over which the unrecognized
expense was expected to be recognized was 2.22 years.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”— an amendment of SFAS Nos. 133 and 140. SFAS No. 155
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for us on January 1, 2007. Management does not expect
the
adoption of SFAS No. 155 to have a material impact on our financial condition
or
results of operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities”, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires companies to recognize a servicing asset
or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract. The statement permits a company
to
choose either the amortized cost method or fair value measurement method for
each class of separately recognized servicing assets. This statement is
effective for us on January 1, 2007. Management does not expect the adoption
of
SFAS No. 156 to have a material impact on our financial condition or results
of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for us on January 1, 2008.
Management is currently evaluating the impact of the adoption of SFAS No. 157
on
our financial condition and results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
establishes a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for uncertainty in income taxes
by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected
to be
taken, in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition requirements. FIN 48 is effective for us
on
January 1, 2007. Management does not expect the adoption of FIN 48 to have
a
material impact on our financial condition or results of
operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
which is a replacement of APB Opinion No. 20, “Accounting Changes”, and SFAS No.
3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of
the
period of the change the cumulative effect of changing to the new accounting
principle. The adoption of SFAS No. 154 on January 1, 2006 did not have a
material impact on our financial condition or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 provides companies
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS No. 159 is effective for us on
January 1, 2008. Management does not expect the adoption of SFAS No. 159 to
have
a material impact on our financial condition or results of
operations.
General
The
following discussion and analysis reviews the financial condition and results
of
our consolidated operations, including our significant consolidated
subsidiaries: Imperial Capital Bank and Imperial Capital Real Estate Investment
Trust.
The
following discussion and analysis is intended to identify the major factors
that
influenced our financial condition as of December 31, 2006 and 2005 and our
results of operations for the years ended December 31, 2006, 2005 and 2004.
Our
primary business involves the acceptance of customer deposits and the
origination and purchase of loans secured by income producing real estate and,
to a lesser extent, the origination of entertainment finance loans.
Consolidated
net income in 2006 was $26.9 million, or $4.71 per diluted share, compared
to
$24.1 million, or $4.04 per diluted share in 2005 and $30.6 million, or $4.75
per diluted share in 2004. The increase in net income in 2006 was primarily
due
to an increase in net interest income before provision for loan losses, which
increased 3.0% to $94.4 million during the year ended December 31, 2006,
compared to $91.7 million for the prior year. This increase was primarily due
to
the growth in the average balance of our loan portfolio, and adjustable rate
loans repricing to higher current market interest rates, partially offset by
additional interest expense incurred due to the growth in the average balance
of
interest bearing liabilities, deposits and other interest bearing liabilities
repricing to higher current market interest rates, and the addition of new
borrowings. Net income was further augmented by a $5.3 million decrease in
the
provision for loan losses recorded during 2006 compared to the prior year.
The
provision recorded during 2005 reflected the impact of a $29.3 million increase
in our other loans of concern and a $9.6 million increase in non-performing
loans during the year. Despite the increase in our overall loan portfolio during
2006, the level of other loans of concern and non-performing loans stabilized
in
2006 compared to the prior year. Other loans of concern were $67.0 million
and
$66.4 million, respectively, at December 31, 2006 and 2005. Other loans of
concern consist of performing loans which have known information that have
caused management to be concerned about the borrowers ability to comply with
present loan repayment terms. Non-performing loans totaled $26.3 million and
$24.3 million, respectively, at December 31, 2006 and 2005. As a percentage
of
our total loan portfolio, the amount of other loans of concern and
non-performing loans decreased to 2.22% and 0.88%, respectively, at December
31,
2006, compared to 2.32% and 0.95%, respectively, at December 31, 2005. Net
income was also impacted by a $3.8 million decline in non-interest income earned
during the year as compared to the prior year, as a result of a gain recorded
during 2005 in connection with the sale of substantially all of our franchise
loan portfolio. There were no comparable loan sales in 2006.
The
decrease in net income in 2005 as compared to 2004, was primarily due to the
absence of interest and fee income earned in connection with the Bank’s tax
refund lending (“RAL”) program, which terminated at the conclusion of the 2004
tax season. Despite the termination of the RAL program, net interest income
before provision for loan losses increased 9.7% to $91.7 million for the year
ended December 31, 2005, compared to $83.5 million for the year ended December
31, 2004. This increase was due to the growth in the average balance of our
loan
portfolio, a decrease in the average balance of low yielding short-term and
overnight investments, and an increase in the average balance of higher yielding
investment securities held-to-maturity as compared to 2004. The decline in
the
average balance of short-term and overnight investment securities was a result
of the termination of the RAL program, which generated a substantial level
of
liquidity during the quarter ended March 31, 2004. We invested this additional
liquidity in short-term and overnight investments, which earned a lower yield
than we generally earn on our investment portfolio. The increase in interest
income was partially offset by additional interest expense incurred due to
the
growth in the average balance of our interest bearing liabilities as compared
to
2004, deposits repricing to higher market interest rates, and the addition
of
borrowings at higher market interest rates. Our earnings were negatively
impacted by a $5.5 million increase in provision for loan losses recorded during
2005, as well as a $3.7 million increase in non-interest expense. Non-interest
expense increased due to the investment in the national expansion of our real
estate lending platform.
Total
loan production, including the unfunded portion of loans, was $1.6 billion
for
the year ended December 31, 2006, as compared to $1.6 billion and $1.0 billion,
respectively, for the years ended December 31, 2005 and 2004. Loan production
in
2006 consisted of the origination of $693.1 million of commercial real estate
loans, $293.7 million of small balance multi-family real estate loans and $102.7
million of entertainment finance loans, and the acquisition of $497.8 million
of
commercial and multi-family real estate loans by our wholesale loan
operations.
Our
average total assets increased approximately 15.9% during 2006 to $3.1 billion.
Average cash and investment securities totaled $419.8 million in 2006 compared
to $432.8 million in 2005, a decrease of $13.0 million, or 3.0%. Average loans
receivable totaled $2.7 billion in 2006 compared to $2.2 billion in 2005, an
increase of $429.0 million, or 19.2%. Average interest bearing deposit accounts
totaled $1.8 billion in 2006 compared to $1.7 billion in 2005, an increase
of
$189.9 million, or 11.5%. FHLB advances and other borrowings averaged $926.9
million in 2006, compared to $707.4 million in 2005, an increase of $219.5
million, or 31.0%.
The
allowance for loan losses as a percentage of our total loans was 1.5% at
December 31, 2006, as compared to 1.7% at December 31, 2005. During the year
ended December 31, 2006, we had net charge-offs of $2.8 million, compared to
$1.9 million during the prior year.
At
December 31, 2006, shareholders' equity totaled $221.3 million, or 6.5% of
total
assets. During 2006, we announced our first regular quarterly cash dividend
of
$0.15 per share. During the year, we declared total dividends of $0.60 per
share, or approximately
$3.2 million in total. For the year ended December 31, 2006, we repurchased
228,781 shares at an average price of $49.19 per share. Since beginning share
repurchases in April 1997, a total of 3.5 million shares have been repurchased,
returning approximately $101.1 million of capital to our shareholders at an
average price of $28.64 per share. Through our stock repurchase program, all
of
our contributed capital has been returned to shareholders. ITLA Capital’s book
value per share of common stock was $42.07 as of December 31, 2006, an increase
of 11.1% from $37.85 per share as of December 31, 2005.
Results
of Operations
The
following table presents, for the periods indicated, our condensed average
balance sheet information, 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.
|
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
|
|
|
Average
Balance
|
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
|||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Assets
Cash
and investment securities
|
$
|
419,762
|
$
|
19,181
|
4.57
|
%
|
$
|
432,774
|
$
|
18,438
|
4.26
|
%
|
$
|
419,452
|
$
|
9,291
|
2.22
|
%
|
||||||||||
|
Real
estate loans (1)
|
2,588,452
|
200,322
|
7.74
|
%
|
2,016,691
|
141,061
|
6.99
|
%
|
1,368,384
|
96,460
|
7.05
|
%
|
||||||||||||||||
|
Franchise
loans (1)
|
11,578
|
475
|
4.10
|
%
|
121,768
|
9,972
|
8.19
|
%
|
125,280
|
8,608
|
6.87
|
%
|
||||||||||||||||
|
Entertainment
finance loans (1)
|
59,262
|
5,620
|
9.48
|
%
|
89,420
|
7,724
|
8.64
|
%
|
96,227
|
7,040
|
7.32
|
%
|
||||||||||||||||
|
Commercial
and other loans (1)
|
8,962
|
903
|
10.08
|
%
|
11,382
|
963
|
8.46
|
%
|
16,234
|
3,555
|
21.90
|
%
|
||||||||||||||||
|
Total
loans receivable
|
2,668,254
|
207,320
|
7.77
|
%
|
2,239,261
|
159,720
|
7.13
|
%
|
1,606,125
|
115,663
|
7.20
|
%
|
||||||||||||||||
|
Total
interest earning assets
|
3,088,016
|
$
|
226,501
|
7.33
|
%
|
2,672,035
|
$
|
178,158
|
6.67
|
%
|
2,025,577
|
$
|
124,954
|
6.17
|
%
|
|||||||||||||
|
Non-interest
earning assets
|
70,936
|
51,549
|
94,739
|
|||||||||||||||||||||||||
|
Allowance
for loan losses
|
(46,366
|
)
|
(37,978
|
)
|
(35,214
|
)
|
||||||||||||||||||||||
|
Total
assets
|
$
|
3,112,586
|
$
|
2,685,606
|
$
|
2,085,102
|
||||||||||||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||||||
|
Interest
bearing demand accounts
|
$
|
29,047
|
$
|
836
|
2.88
|
%
|
$
|
51,684
|
$
|
1,236
|
2.39
|
%
|
$
|
80,052
|
$
|
1,409
|
1.76
|
%
|
||||||||||
|
Money
market and passbook accounts
|
207,962
|
9,379
|
4.51
|
%
|
177,213
|
5,308
|
3.00
|
%
|
140,637
|
2,680
|
1.91
|
%
|
||||||||||||||||
|
Time
certificates
|
1,603,210
|
74,941
|
4.67
|
%
|
1,421,415
|
47,263
|
3.33
|
%
|
1,003,555
|
23,827
|
2.37
|
%
|
||||||||||||||||
|
Total
interest bearing deposit accounts
|
1,840,219
|
85,156
|
4.63
|
%
|
1,650,312
|
53,807
|
3.26
|
%
|
1,224,244
|
27,916
|
2.28
|
%
|
||||||||||||||||
|
FHLB
advances and other borrowings
|
926,916
|
38,722
|
4.18
|
%
|
707,391
|
25,508
|
3.61
|
%
|
277,828
|
7,343
|
2.64
|
%
|
||||||||||||||||
|
Junior
subordinated debentures
|
86,600
|
8,197
|
9.47
|
%
|
86,600
|
7,171
|
8.28
|
%
|
86,600
|
6,159
|
7.11
|
%
|
||||||||||||||||
|
Total
interest bearing liabilities
|
2,853,735
|
$
|
132,075
|
4.63
|
%
|
2,444,303
|
$
|
86,486
|
3.54
|
%
|
1,588,672
|
$
|
41,418
|
2.61
|
%
|
|||||||||||||
|
Non-interest
bearing demand accounts
|
12,738
|
27,671
|
8,023
|
|||||||||||||||||||||||||
|
Other
non-interest bearing liabilities
|
35,173
|
15,086
|
290,077
|
|||||||||||||||||||||||||
|
Shareholders’
equity
|
210,940
|
198,546
|
198,330
|
|||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
3,112,586
|
$
|
2,685,606
|
$
|
2,085,102
|
||||||||||||||||||||||
|
Net
interest spread (2)
|
2.70
|
%
|
3.13
|
%
|
3.56
|
%
|
||||||||||||||||||||||
|
Net
interest income before provisions for loan losses
|
$
|
94,426
|
$
|
91,672
|
$
|
83,536
|
||||||||||||||||||||||
|
Net
interest margin (3)
|
3.06
|
%
|
3.43
|
%
|
4.12
|
%
|
||||||||||||||||||||||
____________
(1) Before
allowance for loan losses and net of deferred loan fees and costs. Net loan
fee
accretion of $2.8 million, $2.9 million and $1.8 million was included in net
interest income for 2006, 2005 and 2004, 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.
Our
primary source of revenue is net interest income. Our net interest income is
affected by (a) the difference between the yields earned on interest earning
assets, including loans and investments, and the interest rates paid on interest
bearing liabilities, including deposits and borrowings, which is referred to
as
“net interest spread”, and (b) the relative amounts of interest earning assets
and interest bearing liabilities. As of December 31, 2006, 2005 and 2004, our
ratio of average interest earning assets to average interest bearing liabilities
was 108.2%, 109.3% and 127.5%, 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 the absolute dollar
amounts of each.
|
2006
vs. 2005
|
2005
vs. 2004
|
||||||||||||||||||
|
Increase
(Decrease) Due to:
|
Increase
(Decrease) Due to:
|
||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Interest
and fees earned on:
|
|||||||||||||||||||
|
Loans,
net
|
$
|
32,413
|
$
|
15,187
|
$
|
47,600
|
$
|
45,191
|
$
|
(1,134
|
)
|
$
|
44,057
|
||||||
|
Cash
and investment securities
|
(567
|
)
|
1,310
|
743
|
306
|
8,841
|
9,147
|
||||||||||||
|
Total
increase in interest income
|
31,846
|
16,497
|
48,343
|
45,497
|
7,707
|
53,204
|
|||||||||||||
|
Interest
paid on:
|
|||||||||||||||||||
|
Deposit
accounts
|
6,739
|
24,610
|
31,349
|
11,584
|
14,307
|
25,891
|
|||||||||||||
|
FHLB
advances and other borrowings
|
8,758
|
4,456
|
13,214
|
14,677
|
3,488
|
18,165
|
|||||||||||||
|
Junior
subordinated debentures
|
—
|
1,026
|
1,026
|
—
|
1,012
|
1,012
|
|||||||||||||
|
Total
increase in interest expense
|
15,497
|
30,092
|
45,589
|
26,261
|
18,807
|
45,068
|
|||||||||||||
|
Increase
(decrease) in net interest income
|
$
|
16,349
|
$
|
(13,595
|
)
|
$
|
2,754
|
$
|
19,236
|
$
|
(11,100
|
)
|
$
|
8,136
|
|||||
2006
Compared to 2005
Net
Interest Income
Net
interest income before provision for loan losses increased to $94.4 million
for
the year ended December 31, 2006, compared to $91.7 million for the prior year,
an increase of 3.0%. The increase was primarily caused by an increase in
interest income, attributable to the significant growth in the average balance
of our loan portfolio and adjustable rate loans repricing to higher current
market interest rates. The increase in interest income was partially offset
by
additional interest expense incurred due to the likewise significant growth
in
the average balance of our interest bearing liabilities as compared to the
prior
year, deposits and other interest bearing liabilities repricing to higher
current market interest rates, and the addition of new borrowings.
The
average yield on our total loan portfolio was 7.77% in 2006 compared to 7.13%
in
2005. The average yield on our real estate loan portfolio was 7.74% in 2006
compared to 6.99% in 2005. Our adjustable rate mortgages are primarily indexed
to either six month LIBOR or the Prime Rate with interest rate floors, below
which the loan’s contractual interest rate may not adjust. Approximately 51.3%
of our loan portfolio was comprised of adjustable rate loans at December 31,
2006, and approximately 45.5% of the loan portfolio was comprised of hybrid
loans, which, after an initial fixed rate period of three or five years, will
convert to an adjustable interest rate for the remaining term of the loan.
Our
adjustable rate loans generally re-price on a quarterly or semi-annual basis
with increases generally limited to maximum adjustments of 2% per year up to
5%
for the life of the loan. As of December 31, 2006, approximately $2.7 billion,
or 90.5% of our adjustable rate loan portfolio contained interest rate floors,
below which the loans’ contractual interest rate may not adjust. The inability
of our loans to adjust downward can contribute to increased income in periods
of
declining interest rates, and also assists us in our efforts to limit the risks
to earnings resulting from changes in interest rates, subject to the risk that
borrowers may refinance these loans during periods of declining interest rates.
At December 31, 2006, the weighted average floor interest rate of our adjustable
rate loan portfolio was 6.03%. At that date, approximately $95.0 million or
3.2%
of our adjustable rate loan portfolio was at the floor interest rate. At
December 31, 2006, 52.0% of the adjustable rate loans outstanding had a lifetime
interest rate cap. The weighted-average lifetime interest rate cap on our
adjustable rate loan portfolio was 11.60%. At December 31, 2006, none of the
loans in our adjustable rate loan portfolio were at the cap rate.
Interest
expense on interest bearing liabilities increased $45.6 million, or 52.7%,
to
$132.1 million in 2006 compared to $86.5 million in 2005. The increase was
primarily due to an increase in interest expense on deposits and FHLB advances
and other borrowings. Interest expense from deposit accounts increased $31.3
million, or 58.3%, to $85.2 million in 2006 compared to $53.8 million in 2005
due to the growth in interest bearing deposits during 2006 and the increase
in
the average rate paid on deposits as a result of higher current market interest
rates as compared to the prior year. The average rate paid on deposits was
4.63%
in 2006 compared to 3.26% in 2005.
Interest
expense on FHLB advances and other borrowings increased $13.2 million, or 51.8%,
to $38.7 million in 2006 compared to $25.5 million in 2005. This increase was
primarily caused by additional borrowings utilized to finance lending activities
during the year. The average balance of FHLB advances and other borrowings
increased $219.5 million, or 31.0%, to $926.9 million in 2006 compared to $707.4
million in 2005. The increase was further caused by an increase in the rate
paid
on FHLB advances and other borrowings, which was 4.18% in 2006 as compared
to
3.61% in 2005.
Provision
for Loan Losses
The
provision for loan losses was $5.0 million for the year ended December 31,
2006,
compared to $10.3 million for the prior year. These provisions for loan losses
were recorded to provide reserves adequate to support known and inherent losses
in our loan portfolio and for specific reserves as of December 31, 2006 and
2005, respectively. The provision recorded during 2005 reflected the impact
of a
$29.3 million increase in our other loans of concern, a $9.6 million increase
in
non-performing loans during the year and a 40.3% increase in our loan portfolio.
Despite the significant continued growth in the size of our overall loan
portfolio during 2006, the level of other loans of concern and non-performing
loans remained relatively flat in 2006 compared to the prior year. Other loans
of concern were $67.0 million and $66.4 million, respectively, at December
31,
2006 and 2005. Non-performing loans totaled $26.3 million and $24.3 million,
respectively, at December 31, 2006 and 2005. As a percentage of our total loan
portfolio, the amount of other loans of concern and non-performing loans
decreased to 2.22% and 0.88%, respectively, at December 31, 2006, compared
to
2.32% and 0.95%, respectively, at December 31, 2005. See also “Credit Risk
Elements - Allowance for Loan Losses and Nonperforming Assets”.
Non-interest
Income
Non-interest
income was $2.8 million for the year ended December 31, 2006, compared to $6.6
million for the prior year. In 2005, we recorded a $4.9 million gain in
connection with the sale of substantially all of our franchise loan portfolio.
There were no comparable loan sales in 2006.
Non-interest
Expense
General
and Administrative Expense
General
and administrative expenses increased to $46.4 million for the year ended
December 31, 2006, compared to $46.3 million for the prior year. Our efficiency
ratio (defined as general and administrative expenses as percentage of net
revenue) was 47.8% for the year ended December 31, 2006, compared to 47.1%
for
the same period last year. Full time equivalent associates averaged 259 in
2006
compared to 244 in 2005.
Income
Taxes
Provision
for income taxes increased to $18.5 million in 2006 compared to $17.5 million
in
2005. The increase in provision for income taxes was due to the increase in
taxable income earned in 2006, partially offset by a decline in our effective
tax rate. The effective tax rate was 40.75% and 42.08%, respectively, for 2006
and 2005.
At
December 31, 2006, we had a net deferred tax asset of $11.5 million. The
deferred tax asset related primarily to loan loss provisions recognized on
our
financial statements that have not yet been recognized on our income tax
returns. During 2006 and 2005, we had no deferred tax assets relating to net
operating loss carryforward deductions. The deferred tax assets were considered
fully realizable. Accordingly, no valuation allowance on the deferred tax assets
was established in 2006 and 2005.
2005
Compared to 2004
Net
Interest Income
Net
interest income before provision for loan losses increased to $91.7 million
for
the year ended December 31, 2005, compared to $83.5 million for 2004, an
increase of 9.7%. The increase was primarily caused by the growth in the average
balance of our loan portfolio, a decrease in the average balance of low yielding
short-term and overnight investments, and an increase in the average balance
of
higher yielding investment securities held-to-maturity as compared to 2004.
The
decline in the average balance of short-term and overnight investment securities
was a result of the termination of the RAL program, which generated a
substantial level of liquidity during the quarter ended March 31, 2004. We
invested this additional liquidity in short-term and overnight investments,
which earned a lower yield than we generally earn on our current investment
portfolio. The increase in net interest income was partially offset by
additional interest expense incurred due to the growth in the average balance
of
our interest bearing liabilities as compared to the prior year, deposits
repricing to higher market interest rates, and the addition of new borrowings
at
higher market interest rates.
The
average yield on our total loan portfolio was 7.13% in 2005 compared to 7.20%
in
2004. The average yield on our real estate loan portfolio was 6.99% in 2005
compared to 7.05% in 2004. Approximately 61.8% of our loan portfolio was
comprised of adjustable rate loans at December 31, 2005, and approximately
35.8%
of the loan portfolio was comprised of hybrid loans. As of December 31, 2005,
approximately $2.3 billion or 92.7% of our adjustable rate loan portfolio
contained interest rate floors, below which the loans’ contractual interest rate
may not adjust. At December 31, 2005, the weighted average floor interest rate
of our adjustable rate loan portfolio was 6.13%. At that date, approximately
$172.0 million or 7.1% of our adjustable rate loan portfolio was at the floor
interest rate. At December 31, 2005, 68.2% of the adjustable rate loans
outstanding had a lifetime interest rate cap. The weighted-average lifetime
interest rate cap on our adjustable rate loan portfolio was 11.33%. At December
31, 2005, none of the loans in our adjustable rate loan portfolio were at the
cap rate.
Interest
expense on interest bearing liabilities increased $45.1 million, or 108.8%,
to
$86.5 million in 2005 compared to $41.4 million in 2004. The increase was
primarily due to an increase in interest expense on deposits and FHLB advances
and other borrowings. Interest expense from deposit accounts increased $25.9
million, or 92.7%, to $53.8 million in 2005 compared to $27.9 million in 2004
due to the growth in interest bearing deposits during 2005 and the increase
in
the average rate paid on deposits as a result of higher current market interest
rates as compared to the prior year. The average rate paid on deposits was
3.26%
in 2005 compared to 2.28% in 2004.
Interest
expense on FHLB advances and other borrowings increased $18.2 million, or
247.4%, to $25.5 million in 2005 compared to $7.3 million in 2004. This increase
was primarily caused by additional borrowings utilized to finance lending and
investment activities during 2005. The average balance of FHLB advances and
other borrowings increased $429.6 million, or 154.6%, to $707.4 million in
2005
compared to $277.8 million in 2004. The increase was further impacted by an
increase in the rate paid on FHLB advances and other borrowings, which was
3.61%
in 2005 as compared to 2.64% in 2004.
Provision
for Loan Losses
Provision
for loan losses increased to $10.3 million in 2005 compared to $4.7 million
in
2004. The provision for loan losses was recorded to provide reserves adequate
to
support the known and inherent risk of loss in the loan portfolio, and for
specific reserves required at December 31, 2005. The provision increased during
2005 due to an increase in our other loans of concern, a 40.3% increase in
our
loan portfolio, and the increase in non-performing loans. Non-performing loans
totaled $24.3 million and $14.7 million, respectively, at December 31, 2005
and
2004. This increase in non-performing loans was primarily attributable to the
migration of three loans to non-performing status during 2005.
Non-interest
Income
Non-interest
income decreased $7.9 million to $6.6 million in 2005 compared to $14.5 million
in 2004. Non-interest income for 2005 consisted primarily of a $4.9 million
gain
recorded in connection with the sale of franchise loans. During 2004,
non-interest income primarily consisted of fee income earned in connection
with
the Bank’s RAL program. During 2004, we earned $9.3 million of net premiums on
the sale of RAL loans and $4.6 million of processing and administrative fees.
Because the RAL program related to the filing of income tax returns, transaction
activity was concentrated during the tax season. This resulted in our earning
substantially all of our RAL program income in the first quarter of
2004.
Non-interest
Expense
General
and Administrative Expense
General
and administrative expenses increased to $46.3 million for the year ended
December 31, 2005, compared to $42.0 million for the prior year. The increase
in
general and administrative expenses was caused by the additional overhead
expenses incurred in connection with the national expansion of our loan
production platform compared to 2004. This increase was primarily the result
of
a full year of overhead expenses incurred during 2005 for offices that were
opened throughout 2004. Our efficiency ratio (defined as general and
administrative expenses as percentage of net revenue) was 47.1% for the year
ended December 31, 2005, compared to 42.9% for the year ended December 31,
2004.
The variance in our efficiency ratio was primarily due to the decline in net
revenue earned as a result of the termination of the RAL program and the
continued national expansion of our small balance multi-family lending platform.
Full time equivalent associates averaged 244 in 2005 compared to 236 in
2004.
Income
Taxes
Provision
for income taxes decreased to $17.5 million in 2005 compared to $19.9 million
in
2004. The decrease in provision for income taxes was due to the decline in
taxable income earned in 2005. The effective tax rate was 42.08% and 39.44%,
respectively, for 2005 and 2004. The increase in the effective tax rate was
principally due to a reduction in the allowable deduction on tax exempt income
earned on loans located in designated redevelopment and enterprise
zones.
At
December 31, 2005, we had a net deferred tax asset of $12.7 million. The
deferred tax asset related primarily to loan loss provisions recognized on
our
financial statements that have not yet been recognized on our income tax
returns. During 2005 and 2004, we had no deferred tax assets relating to net
operating loss carry forward deductions. The deferred tax asset was considered
fully realizable. Accordingly, no valuation allowance on the deferred tax asset
was established in 2005 and 2004.
Financial
Condition
At
December 31, 2006 Compared with December 31, 2005
Total
assets increased by $364.3 million, or 11.9%, to $3.4 billion at December 31,
2006 compared to $3.1 billion at December 31, 2005. The increase in total assets
was primarily due to a $452.1 million increase in our loan portfolio, partially
offset by a $63.3 million decrease in cash and cash equivalents and a $40.4
million decline in investment securities held-to-maturity. The increase in
the
loan portfolio was primarily due to our significant loan production, partially
offset by loan repayments, as well as loan prepayments, received during the
year. The growth in assets was primarily funded by the increase in deposits
of
$324.0 million and an increase in FHLB advances and other borrowings of $17.4
million. The increase in shareholders’ equity was primarily due to the retention
of net income and a $3.7 million increase in contributed capital, which was
primarily related to the exercise of stock options, partially offset by treasury
stock purchases of $11.3 million and cash dividends of $3.2
million.
At
December 31, 2005 Compared with December 31, 2004
Total
assets increased by $733.1 million, or 31.6%, to $3.1 billion at December 31,
2005 compared to $2.3 billion at December 31, 2004. The increase in total assets
was primarily due to a $738.0 million increase in our loan portfolio, a $25.7
million increase in investment securities available-for-sale, and a $20.6
million increase in FHLB stock, partially offset by a $62.1 million decline in
investment securities held-to-maturity and an $8.3 million increase in the
allowance for loan losses. The increase in the loan portfolio was primarily
due
to our loan production, partially offset by loan repayements, as well as loan
prepayments, received during the year. The growth in assets was primarily funded
by the increase in deposits of $303.4 million and an increase in FHLB advances
and other borrowings of $408.3 million. The increase in shareholders’ equity was
primarily due to the retention of net income and an $8.7 million increase in
contributed capital, which is primarily related to the exercise of stock
options, partially offset by treasury stock purchases of $22.6
million.
Loans
Receivable, Net
The
following table shows the comparison of our loan portfolio by major categories
as of the dates indicated.
|
|
December
31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Real
estate loans
|
$
|
2,546,904
|
$
|
2,154,372
|
$
|
1,387,973
|
$
|
1,196,729
|
$
|
1,189,258
|
||||||
|
Construction
loans
|
347,751
|
302,932
|
183,207
|
129,540
|
101,422
|
|||||||||||
|
Total
real estate loans
|
2,894,655
|
2,457,304
|
1,571,180
|
1,326,269
|
1,290,680
|
|||||||||||
|
Entertainment
finance loans
|
74,204
|
66,514
|
99,729
|
98,630
|
119,283
|
|||||||||||
|
Franchise
loans
|
9,334
|
13,705
|
137,477
|
102,128
|
54,672
|
|||||||||||
|
Commercial
and other loans
|
9,346
|
7,264
|
11,931
|
6,869
|
4,314
|
|||||||||||
|
2,987,539
|
2,544,787
|
1,820,317
|
1,533,896
|
1,468,949
|
||||||||||||
|
Unamortized
premium
|
18,138
|
14,582
|
6,346
|
5,429
|
7,898
|
|||||||||||
|
Deferred
loan origination costs (fees), net
|
13,740
|
7,928
|
2,635
|
(500
|
)
|
(5,604
|
)
|
|||||||||
|
3,019,417
|
2,567,297
|
1,829,298
|
1,538,825
|
1,471,243
|
||||||||||||
|
Allowance
for loan losses
|
(46,049
|
)
|
(43,817
|
)
|
(35,483
|
)
|
(33,401
|
)
|
(33,009
|
)
|
||||||
|
$
|
2,973,368
|
$
|
2,523,480
|
$
|
1,793,815
|
$
|
1,505,424
|
$
|
1,438,234
|
|||||||
The
contractual maturities of our loan portfolio at December 31, 2006 are as
follows:
|
|
Loans
Maturing in
|
|
|||||||||||
|
|
Less
Than
One
Year
|
Between
One
and
Five
Years
|
Greater
Than
Five
Years
|
Total
|
|||||||||
|
(dollars
in thousands)
|
|||||||||||||
|
Real
estate loans
|
$
|
83,393
|
$
|
277,568
|
$
|
2,185,943
|
$
|
2,546,904
|
|||||
|
Construction
loans
|
217,368
|
130,383
|
—
|
347,751
|
|||||||||
|
Entertainment
finance loans
|
60,165
|
14,039
|
—
|
74,204
|
|||||||||
|
Franchise
loans
|
4,372
|
223
|
4,739
|
9,334
|
|||||||||
|
Commercial
and other loans
|
4,812
|
4,534
|
—
|
9,346
|
|||||||||
|
$
|
370,110
|
$
|
426,747
|
$
|
2,190,682
|
$
|
2,987,539
|
||||||
|
Loans
with fixed interest rates
|
$
|
369
|
$
|
19,903
|
$
|
32,595
|
$
|
52,867
|
|||||
|
Loans
with adjustable interest rates
|
369,741
|
406,844
|
2,158,087
|
2,934,672
|
|||||||||
|
$
|
370,110
|
$
|
426,747
|
$
|
2,190,682
|
$
|
2,987,539
|
||||||
|
Percentage
with adjustable interest rates
|
99.9
|
%
|
95.3
|
%
|
98.5
|
%
|
98.2
|
%
|
|||||
The
table
above should not be regarded as a forecast of future cash collections because
a
substantial portion of loans may be renewed or repaid prior to contractual
maturity and have adjustable interest rates.
The
following table sets forth certain information regarding the real property
collateral securing our real estate loan portfolio as of December 31,
2006.
|
Number
of
|
Gross
Loan
|
Percent
of
|
Range
of Principal Balance
|
Non-Accrual
|
|||||||||||||||||||
|
Loans
|
Amount
|
Total
|
Min
|
Max
|
Average
|
Loans
|
|||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Income
Producing Property Loans:
|
|||||||||||||||||||||||
|
Multi-family
(5 or more units)
|
2,565
|
$
|
1,865,992
|
64.47
|
%
|
$
|
2
|
$
|
11,944
|
$
|
727
|
$
|
8,897
|
||||||||||
|
Retail
|
117
|
139,955
|
4.83
|
%
|
12
|
10,010
|
1,196
|
965
|
|||||||||||||||
|
Office
|
82
|
113,215
|
3.91
|
%
|
12
|
13,500
|
1,381
|
—
|
|||||||||||||||
|
Hotel
|
15
|
38,115
|
1.32
|
%
|
66
|
6,886
|
2,541
|
878
|
|||||||||||||||
|
Industrial/warehouse
|
48
|
60,799
|
2.10
|
%
|
79
|
7,000
|
1,267
|
—
|
|||||||||||||||
|
Mixed-use
|
75
|
75,928
|
2.62
|
%
|
7
|
9,697
|
1,012
|
1,041
|
|||||||||||||||
|
Mobile
home parks
|
42
|
29,751
|
1.03
|
%
|
253
|
2,171
|
708
|
—
|
|||||||||||||||
|
Assisted
living
|
5
|
21,885
|
0.76
|
%
|
1,462
|
7,328
|
4,377
|
—
|
|||||||||||||||
|
Storage
|
10
|
34,718
|
1.20
|
%
|
684
|
5,950
|
3,472
|
—
|
|||||||||||||||
|
Other
|
153
|
102,868
|
3.55
|
%
|
2
|
10,069
|
672
|
1,900
|
|||||||||||||||
|
Total
income producing
|
3,112
|
2,483,226
|
85.79
|
%
|
13,681
|
||||||||||||||||||
|
Construction
and Land:
|
|||||||||||||||||||||||
|
Construction
|
78
|
347,751
|
12.02
|
%
|
282
|
23,763
|
4,458
|
—
|
|||||||||||||||
|
Land
|
9
|
22,722
|
0.78
|
%
|
368
|
7,565
|
2,525
|
—
|
|||||||||||||||
|
Total
construction and land
|
87
|
370,473
|
12.80
|
%
|
—
|
||||||||||||||||||
|
Single-family
mortgages:
|
|||||||||||||||||||||||
|
Single-family
(1-4 units)
|
97
|
40,956
|
1.41
|
%
|
7
|
942
|
422
|
410
|
|||||||||||||||
|
3,296
|
$
|
2,894,655
|
100.00
|
%
|
$
|
14,091
|
|||||||||||||||||
The
following table sets forth the location of the collateral for our real estate
loan portfolios as of December 31, 2006.
|
|
Number
of
Loans
|
Gross
Loan Amount
|
Percent
of
Total
|
|||||||
|
(dollars
in thousands)
|
||||||||||
|
Southern
California:
|
||||||||||
|
Los
Angeles County
|
805
|
$
|
643,344
|
22.23
|
%
|
|||||
|
Riverside
County
|
48
|
120,311
|
4.16
|
%
|
||||||
|
Orange
County
|
56
|
83,354
|
2.88
|
%
|
||||||
|
San
Diego County
|
66
|
66,201
|
2.29
|
%
|
||||||
|
San
Bernardino County
|
59
|
50,863
|
1.76
|
%
|
||||||
|
All
other Southern California Counties
|
5
|
4,223
|
0.15
|
%
|
||||||
|
Total
Southern California
|
1,039
|
968,296
|
33.47
|
%
|
||||||
|
Northern
California:
|
||||||||||
|
San
Francisco County
|
85
|
109,903
|
3.80
|
%
|
||||||
|
Alameda
County
|
110
|
102,407
|
3.54
|
%
|
||||||
|
Fresno
County
|
60
|
56,386
|
1.95
|
%
|
||||||
|
Contra
Costa County
|
45
|
50,260
|
1.74
|
%
|
||||||
|
Santa
Clara County
|
45
|
35,255
|
1.22
|
%
|
||||||
|
San
Mateo County
|
25
|
35,127
|
1.21
|
%
|
||||||
|
Kern
County
|
39
|
27,775
|
0.96
|
%
|
||||||
|
San
Joaquin
|
34
|
25,244
|
0.87
|
%
|
||||||
|
Sacramento
|
32
|
24,970
|
0.86
|
%
|
||||||
|
All
other Northern California Counties
|
116
|
138,499
|
4.78
|
%
|
||||||
|
Total
Northern California
|
591
|
605,826
|
20.93
|
%
|
||||||
|
Outside
California:
|
||||||||||
|
Texas
|
228
|
241,136
|
8.33
|
%
|
||||||
|
Arizona
|
197
|
208,323
|
7.20
|
%
|
||||||
|
Georgia
|
56
|
84,915
|
2.93
|
%
|
||||||
|
Florida
|
91
|
79,035
|
2.73
|
%
|
||||||
|
New
York
|
109
|
69,306
|
2.39
|
%
|
||||||
|
Nevada
|
74
|
57,834
|
2.00
|
%
|
||||||
|
Massachusetts
|
95
|
56,402
|
1.95
|
%
|
||||||
|
Colorado
|
69
|
44,306
|
1.53
|
%
|
||||||
|
Connecticut
|
95
|
39,225
|
1.36
|
%
|
||||||
|
Oklahoma
|
38
|
34,250
|
1.18
|
%
|
||||||
|
Ohio
|
61
|
34,171
|
1.18
|
%
|
||||||
|
Oregon
|
55
|
33,326
|
1.15
|
%
|
||||||
|
New
Jersey
|
58
|
30,044
|
1.04
|
%
|
||||||
|
Tennessee
|
32
|
29,085
|
1.00
|
%
|
||||||
|
Washington
|
38
|
25,899
|
0.89
|
%
|
||||||
|
Other
U.S. states
|
370
|
253,276
|
8.74
|
%
|
||||||
|
Total
Outside California
|
1,666
|
1,320,533
|
45.60
|
%
|
||||||
|
3,296
|
$
|
2,894,655
|
100.00
|
%
|
||||||
Although
we generally seek to limit risks associated with our portfolio of real estate
and construction loans by limiting the geographic concentration and by varying
the types of underlying collateral, significant concentration risks still
remain. Concentrations of loans in certain geographic regions, for example,
cause our 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, possible terrorist activities 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 our loan
originations and purchases. Fundings related to the tax refund lending programs
terminated in 2004, and premiums paid and discounts taken on loans purchased
in
the secondary market are not included below.
|
|
As
of and for the Years Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(dollars
in thousands)
|
||||||||||
|
Gross
real estate loans originated
|
$
|
960,187
|
$
|
846,685
|
$
|
721,090
|
||||
|
Gross
entertainment finance loans originated
|
102,703
|
68,687
|
92,179
|
|||||||
|
Gross
franchise loans originated
|
—
|
2,352
|
52,145
|
|||||||
|
Gross
commercial and other loans originated
|
26,662
|
1,863
|
58,342
|
|||||||
|
Gross
real estate loans purchased
|
498,785
|
723,822
|
136,452
|
|||||||
|
Total
loan production
|
$
|
1,588,337
|
$
|
1,643,409
|
$
|
1,060,208
|
||||
|
Gross
loans at end of period
|
$
|
2,987,539
|
$
|
2,544,787
|
$
|
1,820,317
|
||||
|
Gross
loans weighted-average portfolio yield
|
7.68
|
%
|
7.13
|
%
|
7.20
|
%
|
||||
|
Average
size of loans retained in the Company’s portfolio
|
$
|
1,110
|
$
|
803
|
$
|
919
|
||||
Investment
Securities
At
December 31, 2006, our investment securities totaled $293.0 million, or
8.6% of our total assets. Our investment securities, including the
mortgage-backed securities portfolio, are managed in accordance with a written
investment policy adopted by the Board of Directors. It is our general policy
to
purchase U.S. Government securities and federal agency obligations and other
investment grade securities. At December 31, 2006, our entire mortgage-backed
securities and collateralized mortgage obligations portfolios consisted of
investment grade securities issued by Fannie Mae and Freddie Mac. Our investment
securities portfolio at December 31, 2006, contained neither securities of
any issuer nor tax-exempt securities with an aggregate book value in excess
of
10% of stockholders’ equity, excluding those issued by United States agencies
including Fannie Mae, Freddie Mac and the Federal Home Loan Bank. See
“Item 8. Financial Statements and Supplementary Data-Notes to Consolidated
Financial Statements-Note 2”.
The
following table shows the amortized cost and approximate fair value of
investment securities at the dates indicated.
|
|
December
31,
|
||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Investment
securities available-for-sale
|
|||||||||||||||||||
|
U.S.
agency securities
|
$
|
62,554
|
$
|
62,184
|
$
|
89,897
|
$
|
88,829
|
$
|
61,637
|
$
|
61,347
|
|||||||
|
Collateralized
mortgage obligations
|
34,991
|
35,127
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Residual
interest in securitized loans
|
1,911
|
2,039
|
3,257
|
3,570
|
5,055
|
5,368
|
|||||||||||||
|
Equity
securities
|
13
|
177
|
16
|
164
|
25
|
130
|
|||||||||||||
|
Total
investment securities available-for-sale
|
$
|
99,469
|
$
|
99,527
|
$
|
93,170
|
$
|
92,563
|
$
|
66,717
|
$
|
66,845
|
|||||||
|
Investment
securities held-to-maturity
Mortgage-backed
securities
|
$
|
193,512
|
$
|
190,475
|
$
|
233,880
|
$
|
229,025
|
$
|
296,028
|
$
|
295,226
|
|||||||
During
the first quarter of 2002, we formed a limited liability company to issue $86.3
million of asset-backed notes in a securitization of substantially all of our
residential loan portfolio, and we recorded a residual interest of $5.6 million,
which represented the present value of future cash flows (spread and fees)
that
were anticipated to be received over the life of the loans. The residual
interest is recorded on the consolidated balance sheets in the “Investment
securities available-for-sale, at fair value”. The value of the residual
interest is subject to substantial credit, prepayment, and interest rate risk
on
the sold residential loans. In accordance with the provisions of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”, the residual
interest is classified as “available-for-sale” and, as such, recorded at fair
value with the resultant changes in fair value recorded as unrealized gain
or
loss in a separate component of shareholders’ equity in “accumulated other
comprehensive income or loss”, until realized. Fair value is determined on a
monthly basis based on a discounted cash flow analysis. These cash flows are
projected over the lives of the receivables using prepayment, default, and
interest rate assumptions that we believe market participants would use for
similar financial instruments.
During
2005, we recognized an other than temporary impairment of $250,000, in
connection with the residual interest. Impairments that are deemed to be other
than temporary are charged to non-interest income. In evaluating impairments
as
other than temporary we consider credit risk, as well as the magnitude and
trend
of default rates and prepayment speeds of the underlying residential loans.
No
other than temporary impairment was recognized during 2006.
At
December 31, 2006 and 2005, key assumptions used to estimate the fair value
of
the residual interest based on projected cash flows, and the sensitivity of
the
value to immediate adverse changes in those assumptions were as
follows:
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
(dollars
in thousands)
|
|||||||
|
Fair
value of retained interest
|
$
|
2,039
|
$
|
3,570
|
|||
|
Weighted
average life (in years) - securities
|
0.55
|
0.56
|
|||||
|
Weighted
average life (in years) - residual interest
|
2.74
|
2.92
|
|||||
|
Weighted
average annual prepayment speed
|
40.0
|
%
|
40.0
|
%
|
|||
|
Impact
of 10% adverse change
|
$
|
(6
|
)
|
$
|
(22
|
)
|
|
|
Impact
of 25% adverse change
|
$
|
(10
|
)
|
$
|
(34
|
)
|
|
|
Weighted
average annual discount rate
|
13.0
|
%
|
13.0
|
%
|
|||
|
Impact
of 10% adverse change
|
$
|
(65
|
)
|
$
|
(117
|
)
|
|
|
Impact
of 25% adverse change
|
$
|
(156
|
)
|
$
|
(284
|
)
|
|
|
Weighted
average lifetime credit losses
|
20.2
|
%
|
14.3
|
%
|
|||
|
Impact
of 10% adverse change
|
$
|
(86
|
)
|
$
|
(79
|
)
|
|
|
Impact
of 25% adverse change
|
$
|
(224
|
)
|
$
|
(211
|
)
|
|
These
sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in the fair value of the residual are based on a variation
in
assumptions and generally cannot be extrapolated because the relationship of
the
change in assumption to the change in fair value may not be linear. Also, in
the
above table, the effect of a variation in a particular assumption on the fair
value of the residual interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
but increased credit losses), which might magnify or counteract the
sensitivities, and depending on the severity of such changes, the results of
operations may be materially affected.
The
following table indicates the composition of the investment security portfolio
assuming these securities are held-to-maturity based on the final maturity
of
each investment as of December 31, 2006. Mortgage-backed securities and
collateralized mortgage obligations are included in maturity categories based
on
their stated maturity date. Expected maturities may differ from contractual
maturities because issuers may have the right to prepay obligations. Equity
securities classified as available-for-sale have no maturity and are included
in
the due in one year or less column.
|
|
Due
in One
Year
or Less
|
Due
after One
Year
through
Five
Years
|
Due
after Five
Years
through
Ten
Years
|
Due
after
Ten
Years
|
|||||||||||||||||||||
|
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
Balance
|
Weighted
Average
Yield
|
|||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||
|
Investment
securities available-for-sale
U.S.
agency securities
|
$
|
52,285
|
3.84
|
%
|
$
|
9,899
|
4.58
|
%
|
$
|
—
|
—
|
$
|
—
|
—
|
|||||||||||
|
Collateralized
mortgage obligations
|
—
|
—
|
—
|
—
|
14,899
|
5.57
|
%
|
20,228
|
5.98
|
%
|
|||||||||||||||
|
Equity
securities
|
177
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Residual
interest in securitized loans
|
—
|
—
|
2,039
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Total
investment securities available-for-sale
|
$
|
52,462
|
$
|
11,938
|
$
|
14,899
|
$
|
20,228
|
|||||||||||||||||
|
Investment
securities held-to-maturity
Mortgage-backed
securities
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
193,512
|
4.25
|
%
|
||||||||||||
Liquidity
and Deposit Accounts
Liquidity
refers to our 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. We maintain
a
cash and investment securities portfolio designed to satisfy operating and
regulatory liquidity requirements while preserving capital and maximizing yield.
As of December 31, 2006 and 2005, the Bank’s liquidity ratios (defined as the
Bank’s current assets divided by its current liabilities) were 6.4% and 10.5%,
respectively, exceeding the DFI regulatory requirement of 1.5%. In addition,
the
Bank’s liquidity position is supported by a credit facility with the FHLB of San
Francisco. As of December 31, 2006, the Bank had remaining available borrowing
capacity under this credit facility of $310.3 million, net of the $12.2 million
of additional FHLB Stock that we would be required to purchase to support those
additional borrowings, and $128.0 million of unused federal funds credit
facilities under established lines of credit with four other banks.
Additionally, we have a $25.0 million revolving credit facility with an
unaffiliated bank that expires on April 30, 2007. We intend on renewing this
revolving credit facility when it matures.
Total
deposit accounts increased approximately $324.0 million to $2.1 billion at
December 31, 2006 from $1.7 billion at December 31, 2005. The increase in
deposits in 2006 was primarily related to an increase in time certificate of
deposits of $304.4 million and an increase in money market and passbook accounts
of $23.8 million, partially offset by a decrease in demand deposit accounts
of
$4.2 million. Brokered deposits totaled $332.8 million and $152.7 million at
December 31, 2006 and 2005, respectively. Total deposit accounts increased
approximately $303.4 million to $1.7 billion at December 31, 2005 from $1.4
billion at December 31, 2004. In both 2006 and 2005, the funds provided from
deposits were used primarily to fund the growth in our loan portfolio. Although
we compete for deposits primarily on the basis of rates, based on our historical
experience regarding retention of deposits, management believes that a
significant portion of deposits will remain with us upon maturity on an ongoing
basis.
The
following table sets forth information regarding deposits outstanding at the
dates indicated.
|
|
December
31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Non-interest
demand accounts
|
$
|
23,171
|
$
|
13,660
|
$
|
13,108
|
||||
|
Interest
demand accounts
|
24,523
|
38,197
|
72,832
|
|||||||
|
Money
market and passbook accounts
|
210,236
|
186,453
|
172,092
|
|||||||
|
Time
certificates under $100,000
|
784,732
|
763,701
|
703,493
|
|||||||
|
Time
certificates $100,000 and over
|
1,016,743
|
733,417
|
470,507
|
|||||||
|
$
|
2,059,405
|
$
|
1,735,428
|
$
|
1,432,032
|
|||||
The
following table sets forth the maturities of certificates of deposit $100,000
and over at December 31, 2006 (in thousands):
|
Certificates
of deposit $100,000 and over:
|
||||
|
Maturing
within three months
|
$
|
373,451
|
||
|
After
three but within six months
|
294,938
|
|||
|
After
six but within twelve months
|
226,063
|
|||
|
After
twelve months
|
122,291
|
|||
|
$
|
1,016,743
|
|||
Off-Balance
Sheet Arrangements
In
the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles are not
recorded in the financial statements. These transactions involve, to varying
degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used by us to meet the financing needs of our
customers.
Our
off-balance sheet arrangements, which principally include lending commitments,
are described below. At December 31, 2006, we also had a residual interest
of
$2.0 million in a qualified special purpose entity formed in 2002 to issue
$86.3
million of asset-backed notes in a securitization of substantially all of our
residential loan portfolio, and a $2.6 million equity interest in our
deconsolidated trusts through which we have issued trust preferred securities.
See Notes 8 and 10 of our consolidated financial statements included in Item
8
of this report.
Lending
Commitments.
Lending
commitments include loan commitments and unused lines of credit. The instruments
are not recorded in the consolidated balance sheet until funds are advanced
under the commitments. We provide these lending commitments to customers in
the
normal course of business.
At
December 31, 2006, our approved loan origination commitments outstanding totaled
$256.7 million. Unfunded commercial lines of credit totaled $1.1 million. These
lines of credit are commitments for possible future extension of credit to
existing customers. These lines of credit are typically uncollateralized and
usually do not contain a specified maturity date.
We
apply
essentially the same credit policies and standards as we do in the lending
process when making these commitments. See Note 13 to the consolidated financial
statements included in Item 8 of this report for additional information
regarding lending commitments.
Contractual
Obligations
The
following table shows our contractual obligations by expected payment period,
as
of December 31, 2006. Further discussion of these commitments is included in
Notes 6, 8, 9, and 14 to the consolidated financial statements included in
Item
8 of this report.
|
Contractual
Obligations
|
Total
|
Less
Than
One
Year
|
One
Through
Three
Years
|
Three
Through
Five
Years
|
More
Than
Five
Years
|
|||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Long-term
FHLB advances and other
borrowings
|
$
|
832,502
|
$
|
257,267
|
$
|
248,248
|
$
|
282,917
|
$
|
44,070
|
||||||
|
Junior
subordinated debentures
|
86,600
|
—
|
—
|
—
|
86,600
|
|||||||||||
|
Operating
lease obligations
|
13,042
|
3,640
|
5,382
|
2,867
|
1,153
|
|||||||||||
|
Deposits
with stated maturity dates
|
1,801,475
|
1,636,998
|
83,432
|
81,045
|
—
|
|||||||||||
|
Purchase
obligations
|
2,849
|
1,000
|
922
|
927
|
—
|
|||||||||||
|
$
|
2,736,468
|
$
|
1,898,905
|
$
|
337,984
|
$
|
367,756
|
$
|
131,823
|
|||||||
FHLB
advances and other borrowings have defined terms and under certain circumstances
are callable at the option of the lender. The junior subordinated debentures
are
callable by us under the circumstances and at the times described in Note 8
to
the consolidated financial statements included in Item 8 of this
report.
Operating
leases represent obligations entered into by us for office facilities. Certain
of these noncancelable operating leases contain rental escalation clauses based
on increases in the consumer price index. At the end of the lease obligations,
renewal options may be exercised by us for up to an additional ten
years.
Purchase
obligations represent our contractual service and other operating and marketing
obligations.
Capital
Resources
ITLA
Capital, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk based and
total risk-based capital ratios at December 31, 2006 of 9.0%, 10.2%, 11.9%,
respectively, which, in the case of the Tier 1 risk-based and total risk-based
capital ratios, represents $120.3 million and $53.5 million, respectively,
of
capital in excess of the amount required to be “well capitalized” for bank
holding company regulatory purposes. These ratios were 9.1%, 11.0%, 13.0%,
respectively, at December 31, 2005. Portions of our trust preferred securities
presently qualify as Tier 1 and total risk-based capital. See Note 8 and Note
15
to our consolidated financial statements included in Item 8 of this report.
The
Bank
had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios
at
December 31, 2006 of 9.1%, 10.3% and 11.5%,
respectively, which represents $130.0 million, $120.3 million and $42.6 million,
respectively, of capital in excess of the amount required for the Bank to be
“well capitalized” for regulatory purposes. These ratios were 9.1%, 11.0% and
12.2%, respectively, as of December 31, 2005.
Shareholders’
equity increased to $221.3 million at December 31, 2006 from $204.5 million
at
December 31, 2005. The change was primarily due to the increase in retained
earnings as a result of $26.9 million of net income earned during the year
and a
$3.7
million
increase in contributed capital, which was primarily related to the exercise
of
employee stock options, partially offset by the purchase of $11.3 million of
our
common stock currently held as treasury stock and cash dividends of $3.2
million.
Credit
Risk Elements
Allowance
for Loan Losses and Nonperforming Assets
The
following table provides certain information with respect to our total allowance
for loan losses, including charge-offs, recoveries and selected ratios, for
the
periods indicated.
|
|
As
of and for the Years Ended December 31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Balance
at beginning of year
|
$
|
43,817
|
$
|
35,483
|
$
|
33,401
|
$
|
33,009
|
$
|
26,650
|
||||||
|
Provision
for loan losses
|
5,000
|
10,250
|
4,725
|
7,760
|
9,030
|
|||||||||||
|
Additions
due to acquisitions
|
—
|
—
|
—
|
—
|
2,048
|
|||||||||||
|
Charge-offs:
|
||||||||||||||||
|
Real
estate loans
|
(1,634
|
)
|
(1,584
|
)
|
(189
|
)
|
(5,286
|
)
|
(4,730
|
)
|
||||||
|
Entertainment
finance loans
|
(2,500
|
)
|
(395
|
)
|
(2,180
|
)
|
(800
|
)
|
—
|
|||||||
|
Franchise
loans
|
—
|
(451
|
)
|
—
|
(661
|
)
|
—
|
|||||||||
|
Commercial
and other loans
|
—
|
—
|
(1,121
|
)
|
(700
|
)
|
—
|
|||||||||
|
Total
charge-offs
|
(4,134
|
)
|
(2,430
|
)
|
(3,490
|
)
|
(7,447
|
)
|
(4,730
|
)
|
||||||
|
Recoveries:
|
||||||||||||||||
|
Real
estate loans
|
894
|
88
|
89
|
14
|
11
|
|||||||||||
|
Entertainment
finance loans
|
472
|
426
|
—
|
—
|
—
|
|||||||||||
|
Commercial
and other loans
|
—
|
—
|
758
|
65
|
—
|
|||||||||||
|
Total
recoveries
|
1,366
|
514
|
847
|
79
|
11
|
|||||||||||
|
Net
charge-offs
|
(2,768
|
)
|
(1,916
|
)
|
(2,643
|
)
|
(7,368
|
)
|
(4,719
|
)
|
||||||
|
Balance
at end of the year
|
$
|
46,049
|
$
|
43,817
|
$
|
35,483
|
$
|
33,401
|
$
|
33,009
|
||||||
|
Average
loans outstanding during the year
|
$
|
2,668,254
|
$
|
2,239,261
|
$
|
1,606,125
|
$
|
1,415,812
|
$
|
1,305,902
|
||||||
|
Loans,
net, at end of the year (1)
|
$
|
3,019,417
|
$
|
2,567,297
|
$
|
1,829,298
|
$
|
1,538,825
|
$
|
1,471,243
|
||||||
|
Selected
Ratios:
|
||||||||||||||||
|
Net
charge-offs to average loans outstanding
|
0.10
|
%
|
0.09
|
%
|
0.16
|
%
|
0.52
|
%
|
0.36
|
%
|
||||||
|
Net
charge-offs to loans, net (1)
|
0.09
|
%
|
0.07
|
%
|
0.14
|
%
|
0.48
|
%
|
0.32
|
%
|
||||||
|
Allowance
for loan losses to loans, net (1)
|
1.53
|
%
|
1.71
|
%
|
1.94
|
%
|
2.14
|
%
|
2.31
|
%
|
||||||
|
Allowance
for loan losses to nonaccrual loans
|
175.40
|
%
|
180.59
|
%
|
242.17
|
%
|
392.26
|
%
|
555.61
|
%
|
||||||
____________
(1) Loans,
before allowance for loan losses and net of premium, deferred loan origination
costs and deferred loan fees.
The
allowance for loan losses increased to $46.0 million or 1.53% of our total
loan
portfolio at December 31, 2006 from $43.8 million or 1.71% of our total loan
portfolio at December 31, 2005. The increase in the allowance was due primarily
to the provision for loan losses of $5.0 million, less net charge-offs of $2.8
million. The current period provision for loan losses was recorded to provide
reserves adequate to support the known and inherent risk of loss in the loan
portfolio, and for specific reserves required as of December 31, 2006. The
decrease in the percentage of the allowance for loan losses to loans, net,
primarily reflects the significant growth in our total loan portfolio during
the
year, which increased by 17.6% compared to the prior year, as well as the
continuing decline in our overall risk profile due to a broader geographic
diversification of our real estate loan portfolio. As of December 31, 2006,
over
46% of our real estate loans were secured by properties located outside of
the
state of California compared to 41% in 2005. In addition, the overall level
of
our other loans of concern and non-performing loans remained relatively stable
during 2006 as compared to 2005.
The
allowance for loan losses increased to $43.8 million or 1.71% of our total
loan
portfolio at December 31, 2005 from $35.5 million or 1.94% of our total loan
portfolio at December 31, 2004. The increase in the allowance was due primarily
to the provision for loan losses of $10.3 million, less net charge-offs of
$1.9
million. The 2005 provision for loan losses was recorded to provide reserves
adequate to support the known and inherent risk of loss in the loan portfolio,
and for specific reserves required as of December 31, 2005. The increase in
the
provision for loan losses in 2005 as compared to 2004 was primarily caused
by
the growth in our loan portfolio and the increase in non-performing and other
loans of concern during the year. During 2005, our loan portfolio increased
$738.0 million, non-performing loans increased $9.6 million, and other loans
of
concern increased $29.3 million. Other loans of concern consist of performing
loans which have known information that have caused management to be concerned
about the borrowers ability to comply with present loan repayment terms. The
decrease in the percentage of the allowance for loan losses to loans, net,
primarily reflects the decline in our overall risk profile due to a broader
geographic diversification of our real estate loan portfolio.
The
following table sets forth management’s historical allocation of the allowance
for loan losses by loan or contract category and the percentage of gross loans
in each category to total gross loans at the dates indicated.
|
|
December
31,
|
||||||||||||||||||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||||||||||
|
Loan
Category:
|
Allowance
for
loan losses
|
%
of loans (1)
|
Allowance
for
loan
losses
|
%
of loans (1)
|
Allowance
for
loan
losses
|
%
of loans (1)
|
Allowance
for
loan
losses
|
%
of loans (1)
|
Allowance
for
loan
losses
|
%
of loans (1)
|
|||||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||||||||||
|
Secured
by real estate
|
$
|
38,284
|
96
|
%
|
$
|
34,222
|
96
|
%
|
$
|
23,543
|
86
|
%
|
$
|
25,522
|
87
|
%
|
$
|
28,348
|
88
|
%
|
|||||||||||
|
Entertainment
finance
|
5,616
|
3
|
%
|
6,770
|
3
|
%
|
7,828
|
5
|
%
|
4,354
|
6
|
%
|
2,961
|
8
|
%
|
||||||||||||||||
|
Franchise
|
1,833
|
—
|
2,685
|
1
|
%
|
4,032
|
8
|
%
|
3,185
|
7
|
%
|
1,490
|
4
|
%
|
|||||||||||||||||
|
Commercial
and other
|
316
|
1
|
%
|
140
|
—
|
80
|
1
|
%
|
340
|
—
|
210
|
—
|
|||||||||||||||||||
|
Total
|
$
|
46,049
|
100
|
%
|
$
|
43,817
|
100
|
%
|
$
|
35,483
|
100
|
%
|
$
|
33,401
|
100
|
%
|
$
|
33,009
|
100
|
%
|
|||||||||||
____________
(1) Percentage
represents gross loans in category to total gross loans.
Management
believes the allowance for loan losses accounting policy is critical to the
portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this “critical accounting
policy” involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood.
Management
periodically assesses the adequacy of the allowance for loan losses by reference
to many quantitative and qualitative factors that may be weighted differently
at
various times depending on prevailing conditions. These factors include, among
other elements:
| • |
the
risk characteristics of various classifications of loans;
|
| • |
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; and
|
| • |
the
underwriting standards in effect when the loan was made.
|
Accordingly,
the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of nonperforming assets. The quantitative factors, included
above, are utilized by our management to identify two different risk groups
(1)
individual loans (loans with specifically identifiable risks); and (2)
homogeneous loans (groups of loan with similar characteristics). We base the
allocation for individual loans primarily on risk rating grades assigned to
each
of these loans as a result of our loan management and review processes. We
then
assign each risk-rating grade a loss ratio, which is determined based on the
experience of management and our independent loan review process. We estimate
losses on impaired loans based on estimated cash flows discounted at the loan’s
original effective interest rate or based on the underlying collateral value.
Based on management’s experience, we also assign loss ratios to groups of loans.
These loss ratios are assigned to the various homogenous categories of the
portfolio.
The
qualitative factors, included above, are generally utilized to identify other
risks inherent in the portfolio and to determine whether the estimated credit
losses associated with the current portfolio might differ from historical loss
trends. We estimate a range of exposure for each qualitative factor and evaluate
the current condition and trend of each factor. Based on this evaluation, we
assign a positive, negative or neutral grade to each factor to determine whether
the portion of the qualitative reserve is in the high, middle or low end of
the
range for each factor. Because of the subjective nature of these factors and
the
judgments required to determine the estimated ranges, the actual losses incurred
can vary significantly from the estimated amounts.
Management
believes that our allowance for loan losses as of December 31, 2006 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 our financial condition and results of operations.
In
addition, the determination of the amount of the Bank’s allowance for loan
losses is subject to review by bank 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 our loan portfolios at
each
of the dates indicated.
|
|
December
31,
|
||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
Amount
|
Percent
of
Gross
Portfolio
|
|||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
Period
of Delinquency
30
- 59 days
|
$
|
10,120
|
0.34
|
%
|
$
|
5,060
|
0.20
|
%
|
$
|
16,684
|
0.92
|
%
|
|||||||
|
60
- 89 days
|
15,170
|
0.51
|
%
|
3,678
|
0.14
|
%
|
6,018
|
0.33
|
%
|
||||||||||
|
90
days or more
|
23,937
|
0.80
|
%
|
22,533
|
0.89
|
%
|
9,401
|
0.52
|
%
|
||||||||||
|
Total
loans delinquent
|
$
|
49,227
|
1.65
|
%
|
$
|
31,271
|
1.23
|
%
|
$
|
32,103
|
1.77
|
%
|
|||||||
The
increase in total delinquent loans in 2006 was due primarily to an increase
of
$26.7 million of past due real estate loans, partially offset by a $6.6 million
decrease in past due entertainment finance loans and a $2.2 million decrease
in
past due franchise loans.
We
have
established a policy that all loans greater than $2.5 million are reviewed
annually. This review usually involves obtaining updated information about
the
collateral and source of repayment. In addition, independent outside consultants
periodically review our loan portfolio and report findings to management and
the
audit committee of the Board of Directors. Loans considered to warrant special
attention are presented to the review and reserve committee, which 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 our executive committee of the Board of Directors
the level of allowance for loan 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, 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 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 our recorded value plus costs of disposition,
the
loss is recognized by a charge to allowance for other real estate owned
losses.
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, unless the loan is considered well secured and in the process
of
collection. 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.
The
following table sets forth our nonperforming assets by category and troubled
debt restructurings as of the dates indicated:
|
|
December
31,
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(dollars
in thousands)
|
||||||||||||||||
|
Nonaccrual
loans:(1)
|
||||||||||||||||
|
Real
estate
|
$
|
14,091
|
$
|
6,117
|
$
|
7,057
|
$
|
4,686
|
$
|
3,913
|
||||||
|
Franchise
|
4,549
|
7,366
|
3,874
|
799
|
1,986
|
|||||||||||
|
Entertainment
finance
|
7,614
|
10,780
|
3,721
|
3,030
|
—
|
|||||||||||
|
Total
nonaccrual loans
|
26,254
|
24,263
|
14,652
|
8,515
|
5,899
|
|||||||||||
|
Other
real estate owned, net
|
6,729
|
3,960
|
—
|
7,048
|
12,593
|
|||||||||||
|
Total
nonperforming assets
|
32,983
|
28,223
|
14,652
|
15,563
|
18,492
|
|||||||||||
|
Accruing
loans past-due 90 days or more with respect to principal or
interest
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Performing
troubled debt restructurings
|
7,994
|
10,758
|
3,096
|
4,709
|
7,858
|
|||||||||||
|
$
|
40,977
|
$
|
38,981
|
$
|
17,748
|
$
|
20,272
|
$
|
26,350
|
|||||||
|
Nonaccrual
loans to total gross loans
|
0.88
|
%
|
0.95
|
%
|
0.80
|
%
|
0.55
|
%
|
0.40
|
%
|
||||||
|
Allowance
for loan losses to nonaccrual loans
|
175.40
|
%
|
180.59
|
%
|
242.17
|
%
|
392.26
|
%
|
555.61
|
%
|
||||||
|
Nonperforming
assets to total assets
|
0.97
|
%
|
0.92
|
%
|
0.63
|
%
|
0.86
|
%
|
1.08
|
%
|
||||||
________________
(1)
Includes five loans with a net book balance of $5.4 million that were
nonperforming troubled debt restructurings in 2006, six loans with a net book
balance of $8.5 million that were nonperforming troubled debt restructurings
in
2005, four loans with a net book balance of $5.7 million that were nonperforming
troubled debt restructurings in 2004, and three loans with a net book balance
of
$3.8 million that were nonperforming troubled debt restructurings in 2003.
There
were no nonperforming troubled debt restructurings in 2002.
Gross
interest income that would have been recorded on nonaccrual loans had they
been
current in accordance with original terms was $1.5 million and $1.6 million
for
the years ended December 31, 2006 and 2005, respectively. The amount of interest
income on such nonaccrual loans included in net income for the years ended
December 31, 2006 and 2005 was none and $340,000, respectively. For the years
ended December 31, 2006 and 2005, $1.5 million and $1.9 million, respectively,
of gross interest income would have been recorded had the restructured loans
been current in accordance with their original terms compared to $720,000 and
$1.4 million, respectively, of interest income that was included in net income
for the same periods.
In
2006,
$3.5 million of new other real estate owned was acquired, and $730,000 of other
real estate owned was sold, resulting in $6.7 million of other real estate
owned
at December 31, 2006.
As
of
December 31, 2006 and 2005, we had loans with an aggregate outstanding balance
of $67.0 million and $66.4 million, respectively, with respect to which known
information concerning possible credit problems with the borrowers or the cash
flows of the properties securing the respective loans has 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
non-accrual loan category.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
We
realize 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
our
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 our sensitivity to future changes in interest rates.
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, our 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. See “Item 1. Business
- Nonperforming Assets and Other Loans of Concern”.
In
evaluating our exposure to changes in interest rates, certain risks inherent
in
the method of analysis presented in the following tables 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 adjustable
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 our adjustable
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
5%
over the life of the loan. These loans may also be subject to prepayment
penalties. At December 31, 2006, 3.2% of our adjustable rate loan portfolio
could not adjust downward below the floor rate and the weighted-average minimum
interest rate for these loans was 8.56%. At December 31, 2006, 52.0% of the
total loans outstanding had a lifetime interest rate cap, with a
weighted-average lifetime interest rate cap of 11.60%. The anticipated effects
of these various factors are considered by management in implementing interest
rate risk management activities.
We
use 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 and prepayment penalties associated with each financial instrument.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net 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.
The
following table shows our estimated earnings sensitivity profile to immediate,
parallel shifts in interest rates as of December 31, 2006:
|
Changes
in
Interest
rates
(Basis
Points)
|
Percentage
Change in
Net
Interest Income
(12
Months)
|
|||
|
+
200 Over One Year
|
0.61%
|
|
||
|
+
100 Over One Year
|
1.53%
|
|
||
|
-
100 Over One Year
|
-1.62%
|
|
||
|
-
200 Over One Year
|
-2.03%
|
|
||
Another
tool used to identify and manage our 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.
The following table presents an estimate of our static GAP analysis as of
December 31, 2006.
|
|
Maturing
or Repricing in
|
||||||||||||||||||
|
|
3
Months
or
less
|
After
3
Months
But
Within
1 Year
|
After
1 Year
But
Within
5
Years
|
After
5
Years
|
Non-Interest
Sensitive
|
Total
|
|||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Loans
(1)
|
$
|
1,184,139
|
$
|
777,643
|
$
|
1,028,047
|
$
|
29,588
|
$
|
—
|
$
|
3,019,417
|
|||||||
|
Cash
and cash equivalents
|
28,964
|
—
|
—
|
—
|
1,484
|
30,448
|
|||||||||||||
|
Investment
securities available-for-sale
|
13,152
|
48,366
|
32,681
|
5,151
|
177
|
99,527
|
|||||||||||||
|
Investment
securities held-to-maturity
|
7,243
|
29,125
|
130,782
|
26,362
|
—
|
193,512
|
|||||||||||||
|
Non-interest
earning assets less allowance for loan losses
|
—
|
—
|
—
|
—
|
72,606
|
72,606
|
|||||||||||||
|
Total
assets
|
$
|
1,233,498
|
$
|
855,134
|
$
|
1,191,510
|
$
|
61,101
|
$
|
74,267
|
$
|
3,415,510
|
|||||||
|
Liabilities
and Shareholders’ Equity
|
|||||||||||||||||||
|
Time
certificates under $100,000
|
$
|
251,006
|
$
|
491,506
|
$
|
42,220
|
$
|
—
|
$
|
—
|
$
|
784,732
|
|||||||
|
Time
certificates $100,000 and more
|
373,451
|
521,001
|
122,291
|
—
|
—
|
1,016,743
|
|||||||||||||
|
Money
market and passbook accounts
|
210,236
|
—
|
—
|
—
|
—
|
210,236
|
|||||||||||||
|
Demand
deposit accounts
|
24,523
|
—
|
—
|
—
|
23,171
|
47,694
|
|||||||||||||
|
FHLB
advances and other borrowings
|
215,497
|
219,268
|
531,165
|
44,070
|
—
|
1,010,000
|
|||||||||||||
|
Other
liabilities
|
—
|
—
|
—
|
—
|
38,168
|
38,168
|
|||||||||||||
|
Junior
subordinated debentures
|
25,800
|
30,900
|
—
|
29,900
|
86,600
|
||||||||||||||
|
Shareholders’
equity
|
—
|
—
|
—
|
—
|
221,337
|
221,337
|
|||||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,100,513
|
$
|
1,262,675
|
$
|
695,676
|
$
|
73,970
|
$
|
282,676
|
$
|
3,415,510
|
|||||||
|
Net
repricing assets over (under) repricing liabilities equals interest
rate
sensitivity GAP
|
$
|
132,985
|
$
|
(407,541
|
)
|
$
|
495,834
|
$
|
(12,869
|
)
|
$
|
(208,409
|
)
|
||||||
|
Cumulative
interest rate sensitivity GAP
|
$
|
132,985
|
$
|
(274,556
|
)
|
$
|
221,278
|
$
|
208,409
|
$
|
—
|
||||||||
|
Cumulative
GAP as a percentage of total assets
|
3.89
|
%
|
-8.04
|
%
|
6.48
|
%
|
6.10
|
%
|
0.00
|
%
|
|||||||||
____________
(1) Approximately
51.3% of our loan portfolio was comprised of adjustable rate loans at December
31, 2006, and approximately 45.5% of the loan portfolio was comprised of hybrid
loans, which become adjustable rate loans after an initial fixed rate period
of
three or five years. Our adjustable rate loans generally re-price on a quarterly
or semi-annual basis with increases generally limited to maximum adjustments
of
2% per year up to 5% for the life of the loan. Nonaccrual loans of approximately
$26.3 million are assumed to reprice after five years.
Certain
shortcomings are inherent in a gap analysis. For example, although certain
assets and liabilities may have similar maturities or periods of repricing,
they
may react in different degrees to changes in market rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of some borrowers to service their debt may decrease in the event of a severe
interest rate increase.
Item
8. Financial Statements and Supplementary
Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
43
|
|
|
44
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
49
|
|
|
50
|
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation
of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
the
effectiveness of our internal control over financial reporting as of December
31, 2006 based on the framework in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2006.
Management's
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which
is included elsewhere herein.
/s/
George W. Haligowski
George
W.
Haligowski
Chairman
of the Board, President and
Chief
Executive Officer
/s/
Timothy M. Doyle
Timothy
M. Doyle
Executive
Managing Director and
Chief
Financial Officer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Board of Directors and Shareholders of ITLA Capital Corporation:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that ITLA Capital
Corporation and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). ITLA
Capital Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that ITLA Capital Corporation maintained
effective internal control over financial reporting as of December 31, 2006,
is
fairly stated, in all material respects, based on the COSO criteria. Also,
in
our opinion, ITLA Capital Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of ITLA Capital
Corporation and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in shareholders’ equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2006 and our report dated March 14, 2007 expressed an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
Los
Angeles, California
March
14,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and the Shareholders of ITLA Capital
Corporation:
We
have
audited the accompanying consolidated balance sheets of ITLA Capital Corporation
and subsidiaries (the “Company”), a Delaware corporation, as of
December 31, 2006 and 2005, and the related consolidated statements of
income, changes in shareholders’ equity and comprehensive income, and cash flows
for each of the three years in the period ended December 31, 2006. 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 the standards of the Public Company
Accounting Oversight Board (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 consolidated financial position of ITLA Capital
Corporation and subsidiaries at December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of ITLA Capital Corporation
and subsidiaries’ internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2007 expressed an unqualified opinion
thereon.
/s/
Ernst
& Young LLP
Los
Angeles, California
March
14,
2007
ITLA
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands, except share
amounts)
|
|||||||
|
|
|||||||
|
Assets
Cash
and cash equivalents
|
$
|
30,448
|
$
|
93,747
|
|||
|
Investment
securities available-for-sale, at fair value
|
99,527
|
92,563
|
|||||
|
Investment
securities held-to-maturity, at amortized cost (fair value approximates
$190,475 and $229,025 in 2006 and 2005, respectively)
|
193,512
|
233,880
|
|||||
|
Stock
in Federal Home Loan Bank
|
48,984
|
43,802
|
|||||
|
Loans,
net (net of allowance for loan losses of $46,049 and $43,817 in 2006
and
2005, respectively)
|
2,973,368
|
2,523,480
|
|||||
|
Interest
receivable
|
20,753
|
16,287
|
|||||
|
Other
real estate owned, net
|
6,729
|
3,960
|
|||||
|
Premises
and equipment, net
|
7,851
|
6,718
|
|||||
|
Deferred
income taxes
|
11,513
|
12,717
|
|||||
|
Goodwill
|
3,118
|
3,118
|
|||||
|
Other
assets
|
19,707
|
20,924
|
|||||
|
Total
assets
|
$
|
3,415,510
|
$
|
3,051,196
|
|||
|
Liabilities
and Shareholders’ Equity
|
|||||||
|
Liabilities:
|
|||||||
|
Deposit
accounts
|
$
|
2,059,405
|
$
|
1,735,428
|
|||
|
Federal
Home Loan Bank advances and other borrowings
|
1,010,000
|
992,557
|
|||||
|
Accounts
payable and other liabilities
|
38,168
|
32,130
|
|||||
|
Junior
subordinated debentures
|
86,600
|
86,600
|
|||||
|
Total
liabilities
|
3,194,173
|
2,846,715
|
|||||
|
Commitments
and contingencies (Note 14)
|
|||||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock, 5,000,000 shares authorized, none issued
|
—
|
—
|
|||||
|
Contributed
capital - common stock, $.01 par value; 20,000,000 shares authorized,
9,065,672 and 8,978,998 issued in 2006 and 2005,
respectively
|
82,073
|
78,004
|
|||||
|
Retained
earnings
|
243,823
|
220,095
|
|||||
|
Accumulated
other comprehensive income (loss), net
|
35
|
(364
|
)
|
||||
|
325,931
|
297,735
|
||||||
|
Less
treasury stock, at cost - 3,803,969 and 3,576,695 shares in 2006
and 2005,
respectively
|
(104,594
|
)
|
(93,254
|
)
|
|||
|
Total
shareholders’ equity
|
221,337
|
204,481
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
3,415,510
|
$
|
3,051,196
|
|||
See
accompanying notes to the consolidated financial statements.
ITLA
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands, except per share
amounts)
|
||||||||||
|
|
||||||||||
|
Interest
income:
|
||||||||||
|
Loans
receivable, including fees
|
$
|
207,320
|
$
|
159,720
|
$
|
115,663
|
||||
|
Cash,
cash equivalents and investment securities
|
19,181
|
18,438
|
9,291
|
|||||||
|
Total
interest income
|
226,501
|
178,158
|
124,954
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposit
accounts
|
85,156
|
53,807
|
27,916
|
|||||||
|
Federal
Home Loan Bank advances and other borrowings
|
38,722
|
25,508
|
7,343
|
|||||||
|
Junior
subordinated debentures
|
8,197
|
7,171
|
6,159
|
|||||||
|
Total
interest expense
|
132,075
|
86,486
|
41,418
|
|||||||
|
Net
interest income before provision for loan losses
|
94,426
|
91,672
|
83,536
|
|||||||
|
Provision
for loan losses
|
5,000
|
10,250
|
4,725
|
|||||||
|
Net
interest income after provision for loan losses
|
89,426
|
81,422
|
78,811
|
|||||||
|
Non-interest
income:
|
||||||||||
|
Gain
on sale of loans, net
|
—
|
4,911
|
9,284
|
|||||||
|
Late
and collection fees
|
970
|
536
|
338
|
|||||||
|
Other
|
1,802
|
1,127
|
4,886
|
|||||||
|
Total
non-interest income
|
2,772
|
6,574
|
14,508
|
|||||||
|
Non-interest
expense:
|
||||||||||
|
Compensation
and benefits
|
21,265
|
21,737
|
21,444
|
|||||||
|
Occupancy
and equipment
|
7,439
|
7,177
|
5,924
|
|||||||
|
Other
|
17,743
|
17,344
|
14,666
|
|||||||
|
Total
general and administrative
|
46,447
|
46,258
|
42,034
|
|||||||
|
Real
estate owned expense, net
|
334
|
204
|
127
|
|||||||
|
Provision
for losses on other real estate owned
|
—
|
—
|
1,000
|
|||||||
|
Loss
(gain) on sale of other real estate owned
|
35
|
(11
|
)
|
(415
|
)
|
|||||
|
Total
real estate owned expense
|
369
|
193
|
712
|
|||||||
|
Total
non-interest expense
|
46,816
|
46,451
|
42,746
|
|||||||
|
Income
before provision for income taxes
|
45,382
|
41,545
|
50,573
|
|||||||
|
Provision
for income taxes
|
18,493
|
17,482
|
19,948
|
|||||||
|
NET
INCOME
|
$
|
26,889
|
$
|
24,063
|
$
|
30,625
|
||||
|
BASIC
EARNINGS PER SHARE
|
$
|
4.83
|
$
|
4.19
|
$
|
5.04
|
||||
|
DILUTED
EARNINGS PER SHARE
|
$
|
4.71
|
$
|
4.04
|
$
|
4.75
|
||||
See
accompanying notes to the consolidated financial statements.
ITLA
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
|
Comprehensive
Income
|
|||||||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Reclassification
of
|
||||||||||||||||||||||||||||||||||||||||||
|
Number
of shares
|
Shareholders’
Equity
|
Realized
Gains
|
|||||||||||||||||||||||||||||||||||||||||
|
Gross
|
Net
|
Contributed
Capital
|
Accumulated
|
Unrealized
|
Previously
|
||||||||||||||||||||||||||||||||||||||
|
Shares
|
Shares
|
Total
|
Other
|
Treasury
|
Gain
(Loss)
|
Recognized
in
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Issued
and
|
Treasury
|
Issued
and
|
Share
|
Earned
|
Contributed
|
Retained
|
Comprehensive
|
Stock,
|
Net
|
on
Securities,
|
Comprehensive
|
Comprehensive
|
|||||||||||||||||||||||||||||||
|
Outstanding
|
Shares
|
Outstanding
|
Capital
|
Compensation
|
Capital
|
Earnings
|
Income
(Loss)
|
At
Cost
|
Total
|
Income
|
Net
of Tax
|
Income,
Net of Tax
|
Income
|
||||||||||||||||||||||||||||||
|
(in
thousands except share amounts)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Balance
at January 1, 2004
|
8,447,294
|
(2,475,689
|
)
|
5,971,605
|
$
|
59,650
|
$
|
2,054
|
$
|
61,704
|
$
|
165,407
|
$
|
155
|
$
|
(40,367
|
)
|
$
|
186,899
|
||||||||||||||||||||||||
|
Issuance
of common stock - employee stock options
|
256,600
|
—
|
256,600
|
7,477
|
—
|
7,477
|
—
|
—
|
—
|
7,477
|
|||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan /Recognition
and
Retention Plan, net
|
—
|
—
|
—
|
—
|
146
|
146
|
—
|
—
|
—
|
146
|
|||||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
—
|
(678,601
|
)
|
(678,601
|
)
|
—
|
—
|
—
|
—
|
—
|
(30,346
|
)
|
(30,346
|
)
|
|||||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
30,625
|
—
|
—
|
30,625
|
|||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(77
|
)
|
—
|
(77
|
)
|
$
|
30,625
|
$
|
(77
|
)
|
$
|
—
|
$
|
30,548
|
||||||||||||||||||||||
|
Balance
at December 31, 2004
|
8,703,894
|
(3,154,290
|
)
|
5,549,604
|
$
|
67,127
|
$
|
2,200
|
$
|
69,327
|
$
|
196,032
|
$
|
78
|
$
|
(70,713
|
)
|
$
|
194,724
|
||||||||||||||||||||||||
|
Issuance
of common stock-employee stock options, net
|
275,104
|
—
|
275,104
|
8,656
|
—
|
8,656
|
—
|
—
|
—
|
8,656
|
|||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan / Recognition
and
Retention Plan, net
|
—
|
9,333
|
9,333
|
—
|
21
|
21
|
—
|
—
|
84
|
105
|
|||||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
—
|
(431,738
|
)
|
(431,738
|
)
|
—
|
—
|
—
|
—
|
—
|
(22,625
|
)
|
(22,625
|
)
|
|||||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
24,063
|
—
|
—
|
24,063
|
|||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(442
|
)
|
—
|
(442
|
)
|
$
|
24,063
|
$
|
(442
|
)
|
$
|
—
|
$
|
23,621
|
||||||||||||||||||||||
|
Balance
at December 31, 2005
|
8,978,998
|
(3,576,695
|
)
|
5,402,303
|
$
|
75,783
|
$
|
2,221
|
$
|
78,004
|
$
|
220,095
|
$
|
(364
|
)
|
$
|
(93,254
|
)
|
$
|
204,481
|
|||||||||||||||||||||||
|
Issuance
of common stock- employee stock options, net
|
86,674
|
—
|
86,674
|
3,692
|
—
|
3,692
|
—
|
—
|
—
|
3,692
|
|||||||||||||||||||||||||||||||||
|
Earned
compensation from Supplemental Executive Retirement Plan / Recognition
and
Retention Plan, net
|
—
|
1,735
|
1,735
|
—
|
111
|
111
|
—
|
—
|
(75
|
)
|
36
|
||||||||||||||||||||||||||||||||
|
Common
stock repurchased
|
—
|
(229,009
|
)
|
(229,009
|
)
|
—
|
—
|
—
|
—
|
—
|
(11,265
|
)
|
(11,265
|
)
|
|||||||||||||||||||||||||||||
|
Cash
dividends declared ($0.60 per common share)
|
—
|
—
|
—
|
—
|
—
|
—
|
(3,161
|
)
|
—
|
—
|
(3,161
|
)
|
|||||||||||||||||||||||||||||||
|
Stock
compensation expense recognized in earnings
|
—
|
—
|
—
|
—
|
266
|
266
|
—
|
—
|
—
|
266
|
|||||||||||||||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
26,889
|
—
|
—
|
26,889
|
|||||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
399
|
—
|
399
|
$
|
26,889
|
$
|
399
|
$
|
—
|
$
|
27,288
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
9,065,672
|
(3,803,969
|
)
|
5,261,703
|
$
|
79,475
|
$
|
2,598
|
$
|
82,073
|
$
|
243,823
|
$
|
35
|
$
|
(104,594
|
)
|
$
|
221,337
|
||||||||||||||||||||||||
See
accompanying notes to the consolidated financial statements.
ITLA
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||
|
Net
Income
|
$
|
26,889
|
$
|
24,063
|
$
|
30,625
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization of premises and equipment
|
2,690
|
2,682
|
2,086
|
|||||||
|
Amortization
of premium on purchased loans
|
4,732
|
3,114
|
2,196
|
|||||||
|
Accretion
of deferred loan origination fees, net of costs
|
(2,846
|
)
|
(2,897
|
)
|
(1,794
|
)
|
||||
|
Provision
for loan losses
|
5,000
|
10,250
|
4,725
|
|||||||
|
Provision
for losses on other real estate owned
|
—
|
—
|
1,000
|
|||||||
|
Gain
on sale of loans, net
|
—
|
(4,911
|
)
|
(9,284
|
)
|
|||||
|
Deferred
income tax expense (benefit)
|
926
|
(1,940
|
)
|
1,198
|
||||||
|
Other,
net
|
(2,020
|
)
|
2,928
|
2,565
|
||||||
|
(Increase)
decrease in interest receivable
|
(4,466
|
)
|
(5,592
|
)
|
(1,737
|
)
|
||||
|
Decrease
(increase) in other assets
|
1,198
|
(1,247
|
)
|
7,238
|
||||||
|
Increase
in accounts payable and other liabilities
|
5,231
|
11,639
|
795
|
|||||||
|
Net
cash provided by operating activities
|
37,334
|
38,089
|
39,613
|
|||||||
|
Cash
Flows From Investing Activities:
|
||||||||||
|
Purchases
of investment securities available-for-sale
|
(44,331
|
)
|
(42,770
|
)
|
(45,269
|
)
|
||||
|
Proceeds
from the maturity and calls of investment securities
available-for-sale
|
38,159
|
16,238
|
31,048
|
|||||||
|
Purchases
of investment securities held-to-maturity
|
(7,771
|
)
|
—
|
(306,047
|
)
|
|||||
|
Proceeds
from the maturity and redemption of investment securities
held-to-maturity
|
48,019
|
62,033
|
10,066
|
|||||||
|
Purchase
of stock in Federal Home Loan Bank
|
(2,675
|
)
|
(19,252
|
)
|
(4,462
|
)
|
||||
|
Purchase
of loans
|
(497,785
|
)
|
(723,822
|
)
|
(139,486
|
)
|
||||
|
Origination
of RAL loans
|
—
|
—
|
(12,949,433
|
)
|
||||||
|
Proceeds
from the participation in RAL loans
|
—
|
—
|
12,958,717
|
|||||||
|
Proceeds
from the sale of franchise loans
|
—
|
115,508
|
—
|
|||||||
|
Decrease
(increase) in loans, net
|
38,072
|
(130,937
|
)
|
(155,887
|
)
|
|||||
|
Proceeds
from sale of other real estate owned
|
135
|
81
|
8,318
|
|||||||
|
Cash
paid for capital expenditures
|
(3,823
|
)
|
(2,755
|
)
|
(2,965
|
)
|
||||
|
Net
cash used in investing activities
|
(432,000
|
)
|
(725,676
|
)
|
(595,400
|
)
|
||||
|
Cash
Flows From Financing Activities:
|
||||||||||
|
Proceeds
from exercise of employee stock options
|
3,692
|
4,650
|
4,159
|
|||||||
|
Cash
paid to acquire treasury stock
|
(11,374
|
)
|
(22,625
|
)
|
(30,346
|
)
|
||||
|
Cash
dividends paid
|
(2,371
|
)
|
—
|
—
|
||||||
|
Principal
payments on collateralized mortgage obligations
|
—
|
—
|
(15,868
|
)
|
||||||
|
Increase
in deposit accounts
|
323,977
|
303,396
|
285,015
|
|||||||
|
Net
proceeds from (repayments of) short-term borrowings
|
89,293
|
(77,795
|
)
|
(85,000
|
)
|
|||||
|
Proceeds
from long-term borrowings
|
89,869
|
586,215
|
363,689
|
|||||||
|
Repayments
of long-term borrowings
|
(161,719
|
)
|
(100,087
|
)
|
(56,600
|
)
|
||||
|
Net
cash provided by financing activities
|
331,367
|
693,754
|
465,049
|
|||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(63,299
|
)
|
6,167
|
(90,738
|
)
|
|||||
|
Cash
and cash equivalents, beginning of period
|
93,747
|
87,580
|
178,318
|
|||||||
|
Cash
and cash equivalents, end of period
|
$
|
30,448
|
$
|
93,747
|
$
|
87,580
|
||||
|
Supplemental
Cash Flow Information:
|
||||||||||
|
Cash
paid during the period for interest
|
$
|
124,755
|
$
|
82,326
|
$
|
40,759
|
||||
|
Cash
paid during the period for income taxes
|
$
|
16,668
|
$
|
10,033
|
$
|
14,329
|
||||
|
Non-cash
Investing Transactions:
|
||||||||||
|
Loans
transferred to other real estate owned
|
$
|
3,499
|
$
|
4,030
|
$
|
1,855
|
||||
|
Loans
to facilitate the sale of other real estate owned
|
$
|
560
|
$
|
—
|
$
|
1,759
|
||||
|
Cash
dividends declared but not yet paid
|
$
|
790
|
$
|
—
|
$
|
—
|
||||
See
accompanying notes to the consolidated financial
statements.
ITLA
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
NOTE
1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
-
ITLA
Capital Corporation and subsidiaries (“ITLA Capital” or “the Company”) is
primarily engaged in the origination of real estate loans secured by income
producing real estate and, to a lesser extent, the origination of entertainment
finance loans. 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 loan
production. The Company also holds certain multi-family and commercial real
estate loans through its subsidiary, Imperial Capital Real Estate Investment
Trust (“Imperial Capital REIT”).
In
November 2002, the Company entered into a strategic business relationship with
various subsidiaries of Household International, Inc. (“Household”) relating to
certain tax refund products. In connection with this relationship, the Bank
originated tax refund anticipation loans (“RAL”) and sold Household a
non-recourse participation interest representing substantially all of the
outstanding loan balance. Under the agreement, Household supported the Bank’s
credit administration, compliance, treasury, and accounting functions with
a
range of services relating to the administration of this program. Household
also
serviced the loans on behalf of the Bank. The Company also entered into an
agreement in December 2002 with Household pursuant to which the Bank originated
private label commercial revolving credit loans to small businesses. This
agreement was for a two-year term. These loans were used primarily to fund
purchases from major retailers. Pursuant to this agreement, the Bank sold
Household a non-recourse participation interest representing substantially
all
of the outstanding loan balance. During 2004, Household and its affiliates
terminated their RAL and private label commercial credit loan programs with
the
Bank.
As
of
December 31, 2006 and 2005, the Bank had no tax refund anticipation loans
outstanding and no private label commercial revolving loans outstanding. For
the
year ended December 31, 2004, fee income earned in connection with the RAL
program consisted of approximately $9.3 million of net premiums on the sale
of
RAL loans and $4.6 million of processing and administrative fees. Because the
RAL program related to the filing of income tax returns, transaction activity
was concentrated during the tax season. This resulted in the Company earning
substantially all of its RAL program income in the first quarter of each year
during the program. For the years ended December 31, 2006 and 2005, no income
was earned in connection with these programs.
Imperial
began operating as a California industrial bank in 1974, and became a publicly
traded company in October 1995, when its shares were sold in an initial public
offering. Imperial operates six retail branches in California and one branch
in
Nevada, along with 23 loan origination offices serving the Western United
States, the Southeast region, the Mid-Atlantic region, the Ohio Valley, the
Metro New York area and New England.
In
December 2002, the Bank received regulatory approval to convert to a California
state chartered commercial bank from a California industrial bank. In addition,
ITLA Capital was approved by the Federal Reserve Bank to become a bank holding
company. The Bank began operating as a commercial bank and ITLA Capital became
a
bank holding company in January 2003.
Financial
Statement Presentation —The
accounting and reporting policies of the Company conform to accounting
principles generally accepted 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 its wholly-owned
subsidiaries. All material 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 —We
consider all highly liquid investments with original maturities of three months
or less to be cash equivalents.
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 accumulated other comprehensive
income (loss) until realized. Realized gains and losses are determined using
the
specific identification method. Investment securities held-to-maturity represent
investments that the Company has the ability and intent to hold to maturity.
These investments are reported at cost and are adjusted for the accretion and
amortization of premiums and discounts on the effective interest method.
Loans
—
Loans,
which include real estate loans, franchise loans, entertainment finance loans,
and commercial and other loans, are generally carried at principal amounts
outstanding plus purchase premiums and the net deferred loan origination costs,
less charge-offs. Deferred loan origination costs include deferred unamortized
loan origination costs net of loan fees and other unearned income collected
in
connection with the origination of a loan. Interest income is accrued as earned.
Net purchase premiums or discounts and deferred loan origination costs are
amortized or accreted into interest income using the interest
method.
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 as a
reduction of principal.
Loans
are
considered impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all principal and interest
amounts due according to the original contractual terms of the loan agreement
on
a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once
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 value or the
fair value of the collateral if the loan is collateral dependent.
When
the
measurement of an impaired loan is less than the recorded amount of the loan,
a
valuation allowance is established by recording a charge to the provision for
loan losses. Subsequent increases or decreases in the valuation allowance for
impaired loans are recorded by adjusting the existing valuation allowance for
the impaired loan with a corresponding charge or credit to the provision for
loan losses.
Our
policy for recognizing interest income on impaired loans is the same as that
for
nonaccrual loans.
Allowance
for Loan Losses —
We
maintain an allowance for loan losses at a level considered adequate to cover
probable losses on loans. In evaluating the adequacy of the allowance for loan
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 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
loan 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
less
estimated costs of disposition 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 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 contractual lease term, which does not generally include renewal
options.
Goodwill
—The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”, on January 1, 2002. The adoption of SFAS
No. 142 ceased the amortization of goodwill and requires an annual assessment
for impairment by applying a fair-value-based test. In accordance with SFAS
No.
142, the Company assesses the goodwill for impairment on an annual basis, or
on
an interim basis if events or circumstances indicate the fair value of the
goodwill has decreased below its carrying value. As of December 31, 2006 and
2005, the Company evaluated its goodwill, and determined that no impairment
was
required.
Income
Taxes —Provision
for income taxes is the amount of estimated tax due reported on our 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 carrying amounts for financial
reporting purposes and the amounts used for tax purposes.
Earnings
Per Share —
Earnings per share (“EPS”) for all periods presented in the consolidated
statements of income are computed in accordance with the provisions of SFAS
No.
128, “Earnings Per Share”, and are based on the weighted-average number of
shares outstanding during each year. Basic EPS excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted EPS 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 EPS and Diluted EPS is presented in Note 16 — Earnings Per
Share.
Stock-Based
Compensation — Prior
to
January 1, 2006, the Company’s stock-based compensation plans were accounted for
in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Under APB Opinion No. 25, no
compensation expense was recognized for a stock option grant if the exercise
price of the stock option at measurement date was equal to or greater than
the
fair market value of the common stock on the date of grant. The Company also
applied SFAS No. 123, “Accounting for Stock-Based Compensation”, for disclosure
purposes only. SFAS No. 123 disclosures include pro forma net income and
earnings per share as if the fair value-based method of accounting had been
used.
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment”, which requires the recognition of the expense related to the fair
value of stock-based compensation awards within the consolidated statement
of
income. The Company elected the modified prospective transition method as
permitted by SFAS No. 123(R), and accordingly, results from prior periods have
not been restated. Under this transition method, stock-based compensation
expense for the year ended December 31, 2006 includes compensation expense
for
unvested stock-based compensation awards that were outstanding as of January
1,
2006, for which the requisite service was rendered during the year. The
stock-based compensation costs for these awards granted prior to January 1,
2006
were based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123. Compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006 were based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123(R).
Total
stock-based compensation expense included in our consolidated statement of
income for the year ended December 31, 2006 was approximately $266,000
($160,000, net of tax, or $0.03 per diluted share). No stock-based compensation
expense was included in the consolidated statements of income for the years
ended December 31, 2005 and 2004. Unrecognized stock-based compensation expense
related to unvested stock options was approximately $66,000 at December 31,
2006. At that date, the weighted-average period over which the unrecognized
expense was expected to be recognized was 2.22 years.
Prior
to
the adoption of SFAS No. 123(R), we reported all tax benefits resulting from
the
exercise of stock options as operating cash flows in our consolidated statements
of cash flows. In accordance with SFAS No. 123(R), for the year ended December
31, 2006, the presentation of our statement of cash flows has changed from
prior
periods to report the excess tax benefits from the exercise of stock options
as
financing cash flows. For the year ended December 31, 2006, $627,000 of excess
tax benefits was reported as financing cash flows.
The
table
below illustrates the effect on net earnings and earnings per share as if we
had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation during the years ended December 31, 2005 and 2004.
|
For
the Years Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
(in
thousands, except per share data)
|
|||||||
|
Net
income, as reported
|
$
|
24,063
|
$
|
30,625
|
|||
|
Less:
Stock-based employee compensation expense determined under the
fair value
method, net of tax
|
(4,189
|
)
|
(775
|
)
|
|||
|
Pro
forma net income
|
$
|
19,874
|
$
|
29,850
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
4.19
|
$
|
5.04
|
|||
|
Basic
- pro forma
|
$
|
3.46
|
$
|
4.91
|
|||
|
Diluted
- as reported
|
$
|
4.04
|
$
|
4.75
|
|||
|
Diluted
- pro forma
|
$
|
3.33
|
$
|
4.63
|
|||
Effective
December 8, 2005, the Company accelerated the vesting of all unvested stock
options previously awarded to employees and officers under the Company’s stock
option plans. The decision to accelerate the vesting of these options as of
that
date was made primarily to reduce non-cash compensation expense that would
otherwise have been recorded in the Company’s income statement on January 1,
2006 upon the adoption of SFAS No. 123 (R). The stock based compensation expense
for the year ended December 31, 2005 determined under the fair value method,
net
of related tax effects, shown above includes the effect of acceleration of
the
vesting of the options outstanding. The impact on the stock based compensation
expense disclosure above for fiscal year 2005 was an additional $0.2 million,
or
$0.04 per fully diluted weighted average share.
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:
|
|
Weighted-Average
Assumptions for Option Grants
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Dividend
Yield
|
1.17
|
%
|
0.00
|
%
|
0.00
|
%
|
||||
|
Expected
Volatility
|
22.86
|
%
|
37.59
|
%
|
36.17
|
%
|
||||
|
Risk-Free
Interest Rates
|
4.94
|
%
|
4.33
|
%
|
4.12
|
%
|
||||
|
Expected
Lives
|
5
Years
|
5.5
Years
|
7
Years
|
|||||||
|
Weighted-Average
Fair Value
|
$
|
13.68
|
$
|
20.69
|
$
|
18.44
|
||||
Other
Comprehensive Income —
Other
comprehensive income is displayed in the Consolidated Statements of Changes
in
Shareholders’ Equity and Comprehensive Income and consists 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
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB Opinion No. 25. Generally, the approach to
accounting for share-based payments in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their grant date fair
values (i.e., pro forma disclosure is no longer an alternative to financial
statement recognition). The Company adopted SFAS No. 123(R) on January 1, 2006
using a modified version of prospective application (“modified prospective
application”). Under modified prospective application, as it is applicable to
the Company, SFAS No. 123(R) applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost
for the portion of awards for which the requisite service has not been rendered
(generally referring to non-vested awards) that are outstanding as of January
1,
2006 must be recognized as the remaining requisite service is rendered over
periods after the adoption of SFAS No. 123(R). The attribution of compensation
cost for those earlier awards will be based on the same method and on the same
grant-date fair values previously determined for the pro forma disclosures
required for companies that did not adopt the fair value accounting method
for
stock-based employee compensation.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”— an amendment of SFAS Nos. 133 and 140. SFAS No. 155
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for the Company on January 1, 2007. Management does
not
expect the adoption of SFAS No. 155 to have a material impact on the Company’s
financial condition or results of operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities”, with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires companies to recognize a servicing asset
or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract. The statement permits a company
to
choose either the amortized cost method or fair value measurement method for
each class of separately recognized servicing assets. This statement is
effective for the Company on January 1, 2007. Management does not expect the
adoption of SFAS No. 156 to have a material impact on the Company’s financial
condition or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for the Company on January 1,
2008. Management is currently evaluating the impact of the adoption of SFAS
No.
157 on the Company’s financial condition and results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
establishes a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for uncertainty in income taxes
by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected
to be
taken, in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition requirements. FIN 48 is effective for the
Company on January 1, 2007. Management does not expect the adoption of FIN
48 to
have a material impact on the Company’s financial condition or results of
operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
which is a replacement of APB Opinion No. 20, “Accounting Changes”, and SFAS No.
3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
is
impracticable. APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of
the
period of the change the cumulative effect of changing to the new accounting
principle. The adoption of SFAS No. 154 on January 1, 2006 did not have a
material impact on the Company’s financial condition or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 provides companies
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS No. 159 is effective for us on
January 1, 2008. Management does not expect the adoption of SFAS No. 159 to
have
a material impact on the Company’s financial condition or results of
operations.
NOTE
2—INVESTMENT SECURITIES
The
amortized cost and fair value of investment securities as of December 31, 2006
and 2005 are as follows:
|
Amortized
|
Fair
|
Gross
Unrealized
|
|||||||||||
|
Cost
|
Value
|
Gains
|
Losses
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
December
31, 2006:
|
|||||||||||||
|
Investment
securities available-for-sale:
|
|||||||||||||
|
U.S.
agency securities
|
$
|
62,554
|
$
|
62,184
|
$
|
3
|
$
|
373
|
|||||
|
Collateralized
mortgage obligations
|
34,991
|
35,127
|
163
|
27
|
|||||||||
|
Residual
interest in securitized loans
|
1,911
|
2,039
|
128
|
—
|
|||||||||
|
Equity
securities
|
13
|
177
|
170
|
6
|
|||||||||
|
Total
investment securities available-for-sale
|
$
|
99,469
|
$
|
99,527
|
$
|
464
|
$
|
406
|
|||||
|
Investment
securities held-to-maturity:
|
|||||||||||||
|
Mortgage-backed
securities
|
$
|
193,512
|
$
|
190,475
|
$
|
105
|
$
|
3,142
|
|||||
|
December
31, 2005:
|
|||||||||||||
|
Investment
securities available-for-sale:
|
|||||||||||||
|
U.S.
agency securities
|
$
|
89,897
|
$
|
88,829
|
$
|
—
|
$
|
1,068
|
|||||
|
Residual
interest in securitized loans
|
3,257
|
3,570
|
313
|
—
|
|||||||||
|
Equity
securities
|
16
|
164
|
149
|
1
|
|||||||||
|
Total
investment securities available-for-sale
|
$
|
93,170
|
$
|
92,563
|
$
|
462
|
$
|
1,069
|
|||||
|
Investment
securities held-to-maturity:
|
|||||||||||||
|
Mortgage-backed
securities
|
$
|
233,880
|
$
|
229,025
|
$
|
—
|
$
|
4,855
|
|||||
The
amortized cost and approximate fair value of securities at December 31, 2006
are
presented below by contractual maturity. Mortgage-backed securities and
collateralized mortgage obligations are included in maturity categories based
on
their stated maturity date. Expected maturities may differ from contractual
maturities because issuers may have the right to prepay obligations. Equity
securities classified as available-for-sale have no maturity and are included
in
the due in one year or less column.
|
Available-for-Sale
|
Held-to-Maturity
|
||||||||||||
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Due
in one year or less
|
$
|
52,600
|
$
|
52,462
|
$
|
—
|
$
|
—
|
|||||
|
Due
after one year through five years
|
11,878
|
11,938
|
—
|
—
|
|||||||||
|
Due
after five years through ten years
|
14,903
|
14,899
|
—
|
—
|
|||||||||
|
Due
after ten years
|
20,088
|
20,228
|
193,512
|
190,475
|
|||||||||
|
$
|
99,469
|
$
|
99,527
|
$
|
193,512
|
$
|
190,475
|
||||||
At
December 31, 2006, the remaining contractual maturity and weighted average
life
of the mortgage-backed securities held-to-maturity was approximately 27.6 and
3.2 years, respectively. Additionally, the remaining contractual maturity and
weighted average life of the collateralized mortgage obligations was
approximately 17.4 and 2.3 years, at December 31, 2006. The weighted average
life of mortgage-backed securities and collateralized mortgage obligations
differs from the contractual maturity due to anticipated principal
prepayments.
A
total
of 25 securities had unrealized losses at December 31, 2006. These
securities, with unrealized losses segregated by length of impairment, were
as
follows:
|
|
Less
than 12 months
|
More
than 12 months
|
Total
|
||||||||||||||||
|
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Investment
securities available-for-sale
|
|||||||||||||||||||
|
U.S.
agency securities
|
$
|
—
|
$
|
—
|
$
|
56,214
|
$
|
373
|
$
|
56,214
|
$
|
373
|
|||||||
|
Collateralized
mortgage obligations
|
9,022
|
27
|
—
|
—
|
9,022
|
27
|
|||||||||||||
|
Equity
securities
|
—
|
—
|
4
|
6
|
4
|
6
|
|||||||||||||
|
Total
investment securities available-for-sale
|
$
|
9,022
|
$
|
27
|
$
|
56,218
|
$
|
379
|
$
|
65,240
|
$
|
406
|
|||||||
|
Investment
securities held-to-maturity
Mortgage-backed
securities
|
$
|
—
|
$
|
—
|
$
|
182,953
|
$
|
3,142
|
$
|
182,953
|
$
|
3,142
|
|||||||
A
total
of 31 securities had unrealized losses at December 31, 2005. These securities,
with unrealized losses segregated by length of impairment, were as
follows:
|
|
Less
than 12 months
|
More
than 12 months
|
Total
|
||||||||||||||||
|
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Investment
securities available-for-sale
|
|||||||||||||||||||
|
U.S.
agency securities
|
$
|
56,819
|
$
|
582
|
$
|
32,010
|
$
|
486
|
$
|
88,829
|
$
|
1,068
|
|||||||
|
Investment
securities held-to-maturity
Mortgage-backed
securities
|
$
|
111,168
|
$
|
2,115
|
$
|
117,857
|
$
|
2,740
|
$
|
229,025
|
$
|
4,855
|
|||||||
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a period
of
time sufficient to allow for any anticipated recovery in fair
value.
Management
has the ability and intent to hold the securities classified as held-to-maturity
until they mature, at which time the Company expects to receive the face or
par
value of the securities. Furthermore, as of December 31, 2006, management
also had the ability and intent to hold the securities classified as
available-for-sale for a period of time sufficient for a recovery of cost.
The
unrealized losses are largely due to increases in market interest rates over
the
yields available at the time the underlying securities were purchased. The
fair
value is expected to recover as the bonds approach their maturity date or
repricing date or if market yields for such investments decline. Management
does
not believe any of the securities are impaired due to reasons of credit quality.
Accordingly, as of December 31, 2006, management believes the impairments
detailed in the table above are temporary and no other-than-temporary impairment
loss has been realized in the Company’s consolidated statements of
income.
During
2006 and 2005, no securities were sold prior to their maturity or call date.
There were no realized gains or losses on investment securities for the years
ended December 31, 2006, 2005 and 2004.
NOTE
3—LOANS
Loans
consisted of the following:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Real
estate loans
|
$
|
2,546,904
|
$
|
2,154,372
|
|||
|
Construction
loans
|
347,751
|
302,932
|
|||||
|
Entertainment
finance loans
|
74,204
|
66,514
|
|||||
|
Franchise
loans
|
9,334
|
13,705
|
|||||
|
Commercial
and other loans
|
9,346
|
7,264
|
|||||
|
2,987,539
|
2,544,787
|
||||||
|
Unamortized
premium
|
18,138
|
14,582
|
|||||
|
Deferred
loan origination costs, net
|
13,740
|
7,928
|
|||||
|
3,019,417
|
2,567,297
|
||||||
|
Allowance
for loan losses
|
(46,049
|
)
|
(43,817
|
)
|
|||
|
$
|
2,973,368
|
$
|
2,523,480
|
||||
At
December 31, 2006, approximately 85.8%, 12.8% and 1.4% of the Bank’s loans
collateralized by real estate were secured by income producing properties,
properties under development and residential one-to-four family properties,
respectively. At December 31, 2006, approximately 54.4% of our loans secured
by
real estate were collateralized by properties located in
California.
At
December 31, 2005, approximately 83.1%, 12.7% and 4.2% of the Bank’s loans
collateralized by real estate were secured by income producing properties,
properties under development and residential one-to-four family properties,
respectively. At December 31, 2005, approximately 59.2% of our loans secured
by
real estate were collateralized by properties located in
California.
At
December 31, 2006 and 2005, approximately $2.0 billion and $1.8 billion,
respectively, of loans were pledged to secure a borrowing facility at the
Federal Home Loan Bank (“FHLB”) of San Francisco.
The
following is the activity in the allowance for loan losses on loans for the
periods indicated.
|
|
As
of and for the Years
Ended
December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
43,817
|
$
|
35,483
|
$
|
33,401
|
||||
|
Provision
for loan losses
|
5,000
|
10,250
|
4,725
|
|||||||
|
Charge-offs:
|
||||||||||
|
Real
estate loans
|
(1,634
|
)
|
(1,584
|
)
|
(189
|
)
|
||||
|
Entertainment
finance loans
|
(2,500
|
)
|
(395
|
)
|
(2,180
|
)
|
||||
|
Franchise
loans
|
—
|
(451
|
)
|
—
|
||||||
|
Commercial
and other loans
|
—
|
—
|
(1,121
|
)
|
||||||
|
Total
charge-offs
|
(4,134
|
)
|
(2,430
|
)
|
(3,490
|
)
|
||||
|
Recoveries:
|
||||||||||
|
Real
estate loans
|
894
|
88
|
89
|
|||||||
|
Entertainment
finance loans
|
472
|
426
|
—
|
|||||||
|
Commercial
and other loans
|
—
|
—
|
758
|
|||||||
|
Total
recoveries
|
1,366
|
514
|
847
|
|||||||
|
Net
charge-offs
|
(2,768
|
)
|
(1,916
|
)
|
(2,643
|
)
|
||||
|
Balance
at end of year
|
$
|
46,049
|
$
|
43,817
|
$
|
35,483
|
||||
As
of
December 31, 2006 and 2005, there were $61,000 and ($395,000), respectively,
of
entertainment finance loan recoveries, (charge-offs) related to borrowers
domiciled outside of the United States.
As
of
December 31, 2006 and 2005, the accrual of income had been suspended on
approximately $26.3 million and $24.3 million, respectively, of loans. Interest
income that was contractually due on loans that were on nonaccrual status that
was not recognized during the years ended December 31, 2006, 2005 and 2004
was
approximately $1.5 million, $1.6 million, and $784,000,
respectively.
As
of
December 31, 2006 and 2005, restructured loans totaled $13.4 million and $19.3
million, respectively. There were no related commitments to lend additional
funds on restructured loans. For the years ended December 31, 2006, 2005 and
2004, $1.5 million, $1.9 million, and $1.1 million, respectively, of gross
interest income would have been recorded had the loans been current in
accordance with their original terms compared to $720,000, $1.4 million, and
$734,000, respectively, of interest income that was included in net income
for
the same periods. The average yield on restructured loans was 9.15% and 7.37%,
respectively, at December 31, 2006 and 2005.
As
of
December 31, 2006 and 2005, impaired loans totaled $35.5 million and $36.3
million, respectively, with a valuation allowance provided for these loans
of
$8.5 million and $10.4 million, respectively. As of December 31, 2006 and 2005,
impaired loans on nonaccrual status were $26.3 million and $24.1 million,
respectively. There were no impaired loans without a valuation allowance as
of
December 31, 2006 and 2005. The average recorded investment in impaired loans
for the years ended December 31, 2006, 2005 and 2004 was $32.3 million, $28.7
million, and $19.5 million, respectively. Interest income recognized on impaired
loans for the years ended December 31, 2006, 2005 and 2004 was $826,000,
$945,000, and $430,000, respectively.
Loans
having carrying values of $3.5 million and $4.0 million were transferred to
OREO
in 2006 and 2005, respectively.
During
2005, the Bank sold approximately $110.0 million, or 89.0%, of its franchise
loan portfolio resulting in a gain of $4.9 million
recorded in other non-interest income within the consolidated statement of
income.
NOTE
4—OTHER REAL ESTATE OWNED
Other
real estate owned was stated as follows:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Other
real estate owned held for sale
|
$
|
6,729
|
$
|
3,960
|
|||
|
Less:
valuation allowance
|
—
|
—
|
|||||
|
Other
real estate owned, net
|
$
|
6,729
|
$
|
3,960
|
|||
The
activity in the valuation allowance for other real estate owned was as
follows:
|
|
As
of and for the Years
Ended
December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
—
|
$
|
—
|
$
|
500
|
||||
|
Provision
for losses on other real estate owned
|
—
|
—
|
1,000
|
|||||||
|
Charge-offs
on other real estate owned
|
—
|
—
|
(1,500
|
)
|
||||||
|
Balance
at end of year
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
NOTE
5—PREMISES AND EQUIPMENT
Premises
and equipment are stated at cost less accumulated depreciation and amortization
and consist of the following:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Furniture,
fixtures and equipment
|
$
|
16,876
|
$
|
13,361
|
|||
|
Leasehold
improvements
|
6,327
|
6,556
|
|||||
|
Automobiles
|
1,476
|
986
|
|||||
|
24,679
|
20,903
|
||||||
|
Accumulated
depreciation and amortization
|
(16,828
|
)
|
(14,185
|
)
|
|||
|
$
|
7,851
|
$
|
6,718
|
||||
Depreciation
and amortization expense on premises and equipment for the years ended December
31, 2006, 2005 and 2004 was $2.7 million, $2.7 million, and $2.1 million,
respectively.
NOTE
6—DEPOSIT ACCOUNTS
Deposit
accounts consist of the following:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Non-interest
demand accounts
|
$
|
23,171
|
$
|
13,660
|
|||
|
Interest
demand accounts
|
24,523
|
38,197
|
|||||
|
Money
market and passbook accounts
|
210,236
|
186,453
|
|||||
|
Time
certificates under $100,000
|
784,732
|
763,701
|
|||||
|
Time
certificates $100,000 and over
|
1,016,743
|
733,417
|
|||||
|
$
|
2,059,405
|
$
|
1,735,428
|
||||
Demand
deposit accounts have no contractual maturity. Interest bearing demand accounts
paid interest at rates ranging from 2.57% to 2.96% per annum in 2006. The
weighted average contractual interest rate of the Bank’s interest-bearing demand
deposit accounts was 2.96% and 2.75% at December 31, 2006 and 2005,
respectively. Money market and passbook accounts have no contractual maturity
and paid interest at rates ranging from 1.25% to 5.08% per annum in 2006. The
weighted average contractual interest rate of the Bank’s money market and
passbook accounts was 4.90% and 3.77% at December 31, 2006 and 2005,
respectively. Additionally, some money market accounts have limited checking
features which allow three check withdrawals per month. Time certificates have
maturities primarily ranging from 3 months to five years and bear interest
at
varying rates based on market conditions, ranging from 3.88% to 5.60% per annum
in 2006. The weighted average contractual interest rate of the Bank’s time
certificate accounts was 5.16% and 3.93% at December 31, 2006 and 2005,
respectively.
Interest
expense on time certificates $100,000 and over for the years ended December
31,
2006, 2005 and 2004 amounted to approximately $40.1 million, $22.7 million,
and
$10.0 million, respectively.
The
Bank
is a member of the FDIC and its deposits are insured up to $100,000 each per
insured depositor. In addition, insurance coverage of up to $250,000 are
available for “self-directed” retirement accounts.
As
of
December 31, 2006, the contractual maturities of time certificate accounts
were
as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2007
|
$
|
1,636,998
|
||
|
2008
|
66,783
|
|||
|
2009
|
16,649
|
|||
|
2010
|
38,888
|
|||
|
2011
and thereafter
|
42,157
|
|||
|
$
|
1,801,475
|
|||
NOTE
7 — LINES OF CREDIT
As
of
December 31, 2006, the Bank had uncommitted, unsecured lines of credit of $128.0
million with four unaffiliated financial institutions renewable daily. As of
December 31, 2005, the Bank had uncommitted, unsecured lines of credit of $80.0
million with three unaffiliated financial institutions renewable daily. There
were no borrowings on these lines at December 31, 2006 and 2005.
The
Company also has a $25.0 million revolving credit facility with an unaffiliated
financial institution. The facility matures on April 30, 2007. There were no
borrowings on this line of credit at December 31, 2006.
NOTE
8 — JUNIOR SUBORDINATED
DEBENTURES
The
Company has created five trusts, Trust I, Trust II, Trust III, Trust IV, and
Trust V. Trust I issued $14.0 million of 10.60% cumulative trust preferred
securities in September 2000, Trust II issued $15.0 million of 10.20% cumulative
trust preferred securities in February 2001, Trust III issued $20.0 million
of
variable rate cumulative trust preferred securities in October 2002, Trust
IV
issued $10.0 million of variable rate cumulative trust preferred securities
in
December 2002, and Trust V issued $25.0 million of variable rate cumulative
trust preferred securities in December 2002 (referred to collectively as the
“Trust Preferred securities”). ITLA Capital has fully and unconditionally
guaranteed the Trust Preferred securities along with all obligations of each
trust under their respective trust agreements. Each trust was formed for the
exclusive purpose of issuing their respective Trust Preferred securities and
common securities and using the proceeds to acquire ITLA Capital’s junior
subordinated deferrable interest debentures. Trust I acquired an aggregate
principal amount of $14.4 million of ITLA Capital’s 10.60% junior subordinated
deferrable interest debentures due September 7, 2030 that pay interest each
March 7 and September 7 during the term of this security. Trust II acquired
an
aggregate principal amount of $15.5 million of ITLA Capital’s 10.20% junior
subordinated deferrable interest debentures due February 22, 2031 that pays
interest each February 22 and August 22 during the term of this security. Trust
III acquired an aggregate principal amount of $20.6 million of ITLA Capital’s
variable rate junior subordinated deferrable interest debentures due October
30,
2032 that pays interest on each April 30 and October 30 during the term of
the
security. Trust IV acquired an aggregate principal amount of $10.3 million
of
ITLA Capital’s variable rate junior subordinated deferrable interest debentures
due December 10, 2032 that pays interest each June 15 and December 15 during
the
term of the security. Trust V acquired an aggregate principal amount of $25.8
million of ITLA Capital’s variable rate junior subordinated deferrable interest
debentures due December 26, 2032 that pays interest quarterly on March 26,
June
26, September 26, and December 26 during the term of the security. The sole
assets of each trust are the debentures it holds. Each of the debentures is
redeemable, in whole or in part, at ITLA Capital’s option on or after ten years
after issuance for Trust I and Trust II (at declining premiums during the 11th
through the 20th year after issuance and at par during the 21st year and
thereafter until maturity), and five years after issuance for Trust III, Trust
IV, and Trust V (at par until maturity). Each of the debentures is also
redeemable, in whole and not in part, at ITLA Capital’s option any time prior to
maturity, upon the occurrence of certain special events, which include, among
others, a determination by the Federal Reserve Board that the Trust Preferred
securities do not qualify as Tier 1 capital (discussed below).
The
Company used the proceeds from the debentures for general corporate purposes,
including an aggregate of $81.3 million in capital contributions to the Bank
to
support future growth. The costs associated with the Trust Preferred securities
issuance were netted with proceeds and are being amortized using a method that
approximates the interest method over a period of five to ten years.
The
trust
preferred securities qualify as Tier 1 capital for ITLA Capital to the extent
permitted under Federal Reserve Board regulations. See “Note 15 - Regulatory
Requirements.”
NOTE
9 — FHLB ADVANCES AND
OTHER BORROWINGS
FHLB
advances represent $980.0 million of collateralized obligations with the FHLB
of
San Francisco. Other borrowings consist of $30.0 million of securities sold
under agreements to repurchase, which mature within one year. FHLB Advances
and
other borrowings are summarized by contractual maturity as follows:
|
Year
of Maturity
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2007
|
$
|
434,765
|
||
|
2008
|
188,602
|
|||
|
2009
|
59,646
|
|||
|
2010
|
222,915
|
|||
|
2011
|
60,002
|
|||
|
Thereafter
|
44,070
|
|||
|
$
|
1,010,000
|
|||
The
Company has pledged real estate loans with a carrying value of $2.0 billion
and
investment securities held-to-maturity with a carrying and fair value of $44.9
million and $44.5 million, respectively, to secure FHLB Advances. The total
FHLB
borrowing capacity available from the collateral that has been pledged is
approximately $1.3 billion, of which $310.3 million remained available to borrow
as of December 31, 2006, net of the $12.2 million of additional FHLB stock
that
we would be required to purchase to support the additional borrowing.
Additionally, the Company has pledged investment securities held-to-maturity
with a carrying and fair value of $31.6 million to secure securities sold under
agreements to repurchase.
The
following table represents a summary of short and long-term borrowings for
the
periods indicated. Short-term borrowings consist entirely of FHLB
advances.
|
|
December
31,
|
|||||||||||
|
|
2006
|
2005
|
2004
|
|||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Short-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$
|
177,498
|
$
|
112,000
|
$
|
199,000
|
||||||
|
Weighted-average
daily balance outstanding
|
$
|
15,094
|
$
|
38,566
|
$
|
91,316
|
||||||
|
Weighted-average
rate paid during the year
|
4.96
|
%
|
3.19
|
%
|
1.53
|
%
|
||||||
|
Weighted-average
rate on balance at year-end
|
5.40
|
%
|
4.18
|
%
|
2.37
|
%
|
||||||
|
Balance
at year-end
|
$
|
177,498
|
$
|
88,205
|
$
|
166,000
|
||||||
|
Interest
expense
|
$
|
749
|
$
|
1,230
|
$
|
1,664
|
||||||
|
Long-Term
Borrowings:
|
||||||||||||
|
Maximum
amount outstanding at any month-end during the year
|
$
|
973,571
|
$
|
906,457
|
$
|
418,224
|
||||||
|
Weighted-average
daily balance outstanding
|
$
|
911,822
|
$
|
668,825
|
$
|
170,906
|
||||||
|
Weighted-average
rate paid during the year
|
4.17
|
%
|
3.63
|
%
|
3.28
|
%
|
||||||
|
Weighted-average
rate on balance at year-end
|
4.25
|
%
|
4.00
|
%
|
3.16
|
%
|
||||||
|
Balance
at year-end
|
$
|
832,502
|
$
|
904,352
|
$
|
418,224
|
||||||
|
Interest
expense
|
$
|
37,973
|
$
|
24,278
|
$
|
5,608
|
||||||
NOTE
10 - RESIDUAL INTEREST IN SECURITIZED LOANS
During
the first quarter of 2002, the Company formed a qualified special purpose entity
(“QSPE”) to issue $86.3 million of asset-backed notes in a securitization of
substantially all of the Company’s residential loan portfolio. Concurrent with
recognizing the sale, the Company recorded a residual interest with an estimated
fair value of $5.6 million, which represented the present value of future cash
flows (spread and fees) that were estimated to be received over the life of
the
loans. The residual interest is recorded on the consolidated balance sheets
in
“Investment securities available-for-sale, at fair value”. The value of the
residual interest is subject to substantial credit, prepayment, and interest
rate risk on the sold residential loans. The residual interest is classified
as
“available-for-sale” and, as such, recorded at fair value with the resulting
changes in fair value recorded as accumulated unrealized gain or loss in a
separate component of shareholders’ equity until realized. Fair value is
estimated on a monthly basis using a discounted cash flow analysis. These cash
flows are estimated over the lives of the receivables using prepayment, default,
and interest rate assumptions that management believes market participants
would
use for similar financial instruments.
During
2005, the Company recognized an other-than-temporary impairment of $250,000,
on
the residual interest. Impairments that are deemed to be other-than-temporary
are charged to non-interest income. In evaluating impairments as
other-than-temporary the Company considers credit risk, as well as the magnitude
and trend of default rates and prepayment speeds of the underlying residential
loans.
At
December 31, 2006 and 2005, key economic assumptions and the sensitivity of
the
current fair value of the residual interest based on projected cash flows to
immediate adverse changes in those assumptions are as follows:
|
December
31,
|
||||||||
|
|
2006
|
2005
|
||||||
|
(dollars
in thousands)
|
||||||||
|
Fair
value of retained interest
|
$
|
2,039
|
$
|
3,570
|
||||
|
Weighted
average life (in years) - securities
|
0.55
|
0.56
|
||||||
|
Weighted
average life (in years) - residual interest
|
2.74
|
2.92
|
||||||
|
Weighted
average annual prepayment speed
|
40.0
|
%
|
40.0
|
%
|
||||
|
Impact
of 10% adverse change
|
$
|
(6
|
)
|
$
|
(22
|
)
|
||
|
Impact
of 25% adverse change
|
$
|
(10
|
)
|
$
|
(34
|
)
|
||
|
Weighted
average annual discount rate
|
13.0
|
%
|
13.0
|
%
|
||||
|
Impact
of 10% adverse change
|
$
|
(65
|
)
|
$
|
(117
|
)
|
||
|
Impact
of 25% adverse change
|
$
|
(156
|
)
|
$
|
(284
|
)
|
||
|
Weighted
average lifetime credit losses
|
20.2
|
%
|
14.3
|
%
|
||||
|
Impact
of 10% adverse change
|
$
|
(86
|
)
|
$
|
(79
|
)
|
||
|
Impact
of 25% adverse change
|
$
|
(224
|
)
|
$
|
(211
|
)
|
||
These
sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in the fair value of the residual interest are based on a
variation in assumptions and generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not
be
linear. Also, in the above table, the effect of a variation in a particular
assumption on the fair value of the residual interest is calculated without
changing any other assumption; in reality, changes in one factor may result
in
changes in another (for example, increases in market interest rates may result
in lower prepayments but increased credit losses), which might magnify or
counteract the sensitivities, and depending on the severity of such changes,
the
results of operations may be materially affected.
NOTE
11 — 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 contribute a portion of
their pretax earnings, not to exceed the annual limits established by the
Internal Revenue Service. We match 50% of each employee’s salary deferral, up to
a maximum 6% of the employee’s salary. Employees vest in employer contributions
and the earnings thereon over a five-year period. Matching contributions to
the
Savings Plan were $478,000, $452,000, and $458,000, in 2006, 2005 and 2004,
respectively.
Nonqualified
Deferred Compensation Plans.
The
Company 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. The costs associated with these deferred
compensation plans were approximately $36,000 in 2006, 2005 and
2004.
Supplemental
Executive Retirement Plan.
The
Company has adopted a 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
Recognition and Retention Plan (“RRP”) previously approved by the shareholders.
Such shares vest in three-year cycles or earlier at the discretion of the
Compensation Committee of the Board of Directors, 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. As of December 31, 2005, all of the
shares granted under the RRP had been awarded and were fully vested. For 2005
and 2004, 15,055 and 23,198 shares, respectively, were allocated to designated
SERP accounts for the future benefit of certain Company executives. The Company
recognized none, $106,000, and $144,000 of compensation expense from the vesting
of allocated SERP/RRP shares in 2006, 2005 and 2004, respectively.
Stock
Plans.
The
Company adopted an employee stock incentive plan and stock option plan for
nonemployee directors (collectively, “the Stock Plan”) which together provide
for the award of up to 1,631,000 shares of common stock to officers, directors
and employees as compensation for future services. An amendment to the Stock
Plan increasing the number of shares authorized for award under the Stock Plan
by 320,000 shares and 311,000 shares, respectively, were approved by the
Company’s shareholders on July 27, 2005 and June 29, 2001. As of December 31,
2006, the Company has granted an aggregate of 1,897,750 options under the Stock
Plan, of which 945,672 have been exercised and 406,094 have been forfeited.
The
exercise price per share of the options granted ranges from $10.00 to $58.00
per
share and generally vest 33-1/3% per year, beginning with the first anniversary
of the date of each individual grant.
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:
|
|
Number
of Options
|
Weighted-Average
Exercise
Price
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Options
outstanding at the beginning of the year
|
630,818
|
592,339
|
$
|
35.61
|
$
|
19.41
|
|||||||
|
Options
granted during the year
|
7,250
|
322,250
|
$
|
51.10
|
$
|
49.53
|
|||||||
|
Options
exercised during the year
|
(86,674
|
)
|
(275,104
|
)
|
$
|
35.36
|
$
|
16.90
|
|||||
|
Options
forfeited during the year
|
(5,410
|
)
|
(8,667
|
)
|
$
|
48.11
|
$
|
39.94
|
|||||
|
Options
outstanding at the end of the year
|
545,984
|
630,818
|
$
|
35.73
|
$
|
35.61
|
|||||||
|
Options
exercisable at the end of the year
|
538,484
|
617,318
|
$
|
35.50
|
$
|
35.30
|
|||||||
NOTE
12 — 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 our deferred tax assets and liabilities are as
follows:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Components
of the deferred tax asset:
|
|||||||
|
Allowance
for loan losses
|
$
|
18,933
|
$
|
17,995
|
|||
|
Accrued
expenses
|
3,462
|
2,857
|
|||||
|
State
income taxes
|
1,314
|
1,061
|
|||||
|
Unrealized
loss on investment securities available-for-sale
|
—
|
255
|
|||||
|
Other
|
939
|
904
|
|||||
|
Total
deferred tax assets
|
24,648
|
23,072
|
|||||
|
Components
of the deferred tax liability:
|
|||||||
|
Deferred
loan origination costs
|
9,167
|
7,445
|
|||||
|
FHLB
stock dividends
|
3,945
|
2,910
|
|||||
|
Unrealized
gain on investment securities available-for-sale
|
23
|
—
|
|||||
|
Total
deferred tax liabilities
|
13,135
|
10,355
|
|||||
|
Net
deferred tax asset
|
$
|
11,513
|
$
|
12,717
|
|||
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 reducing future taxable income.
Accordingly, we have not established a valuation allowance on the deferred
tax
asset.
A
summary
of the provision for income taxes follows:
|
|
Years
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Current
provision:
|
||||||||||
|
Federal
|
$
|
13,678
|
$
|
14,709
|
$
|
13,945
|
||||
|
State
|
3,889
|
4,713
|
4,805
|
|||||||
|
17,567
|
19,422
|
18,750
|
||||||||
|
Deferred
provision (benefit):
|
||||||||||
|
Federal
|
540
|
(1,448
|
)
|
902
|
||||||
|
State
|
386
|
(492
|
)
|
296
|
||||||
|
926
|
(1,940
|
)
|
1,198
|
|||||||
|
$
|
18,493
|
$
|
17,482
|
$
|
19,948
|
|||||
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate is as follows:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
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 credit and other benefits
|
(1.3
|
)%
|
—
|
(2.6
|
)%
|
|||||
|
Effective
income tax rate
|
40.7
|
%
|
42.0
|
%
|
39.4
|
%
|
||||
The
income tax provision (benefit) component of accumulated other comprehensive
income was $278,000, ($309,000), and ($57,000) for the years ended December
31,
2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, the Company
recognized a $627,000, $4.0 million and $3.3 million income tax benefit related
to the exercise of employee stock options. The benefit was recorded in
contributed capital within the consolidated balance sheets.
NOTE
13 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
We
are a
party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of our customers. These financial
instruments primarily 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 we have in particular
classes of financial instruments.
We
have
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 and the Company
uses
the same lending policies for these instruments as it does for the loan
portfolio. We had outstanding unfunded loan commitments, consisting primarily
of
the unfunded portion of construction and entertainment finance loans, of
approximately $256.7 million and $252.5 million at December 31, 2006 and 2005,
respectively.
Unfunded
commitments under commercial lines of credit, revolving credit lines and
overdraft protection agreements are commitments for possible extensions of
future extensions of credit to existing customers. These lines of credit are
typically uncollateralized and usually do not contain a specific maturity date
and often are not drawn upon to the total extent to which the Company is
committed. We had outstanding commercial lines of credit totaling $1.1 million
and $0.9 million at December 31, 2006 and 2005, respectively.
NOTE
14 — COMMITMENTS AND CONTINGENCIES
Commitments
We
lease
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, 2006 are as follows:
|
(in
thousands)
|
||||
|
2007
|
$
|
3,640
|
||
|
2008
|
3,228
|
|||
|
2009
|
2,154
|
|||
|
2010
|
1,513
|
|||
|
2011
|
1,354
|
|||
|
Thereafter
|
1,153
|
|||
|
Sub-Lease
income
|
(98
|
)
|
||
|
$
|
12,944
|
|||
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. We incurred rent expense of $4.5 million, $4.2 million, and $3.6
million in 2006, 2005 and 2004, respectively.
Contingencies
We
are
subject to various pending legal actions which arise in the normal course of
business. We maintain 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 are not expected to have
a
material adverse effect on our financial condition or results of
operations.
NOTE
15 — REGULATORY REQUIREMENTS
The
Company, the Bank’s holding company, is subject to supervision by the Federal
Reserve Board (“FRB”). 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 Banking Law. These provisions
authorize the Bank’s issuance of deposits, place limits on the size of loans the
Bank can make, and specify the maintenance of minimum liquidity
levels.
The
Company and the Bank are also subject to various capital requirements
administered by the FRB and FDIC, respectively. The FRB and the FDIC have
substantially similar risk-based capital ratio and leverage ratio guidelines
for
banking organizations. 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 Company’s
consolidated financial statements and the Bank’s operations. Under the
applicable capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company’s and the Bank’s
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s and 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
Company and 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, 2006 and 2005, that the Company and the Bank meet all
applicable capital adequacy requirements.
On
March
1, 2005, the FRB adopted a final rule that allows the continued inclusion of
trust preferred securities in the tier 1 capital of bank holding companies.
The
final rule limits restricted core capital elements (which include trust
preferred securities) to 25 percent of all core capital elements, net of
goodwill less any associated deferred tax liability. Amounts of restricted
core
capital elements in excess of these limits generally may be included in tier
2
capital. The final rule provides a five year transition period, ending March
31,
2009, for application of the quantitative limits.
As
of
December 31, 2006, the most recent notification from the FDIC categorized the
Bank as “well capitalized” under the applicable regulatory framework. Similarly,
the Company’s capital levels exceeded the levels necessary to be considered
“well capitalized”. To be categorized as “well capitalized”, the Company and the
Bank must maintain minimum Total Risk-Based and Tier 1 Risk-Based Ratios, and
the Bank must also maintain a minimum Tier 1 Leverage Ratio as set forth in
the
following table. There are no conditions or events since that notification
that
management believes have changed the Company’s and the Bank’s category.
ITLA
Capital and the Bank’s actual regulatory capital amounts and ratios are
presented in the following table:
|
|
Actual
|
Minimum
Requirement
for
Capital Adequacy
Purposes
|
Capital
Required
to
Maintain
“Well
Capitalized”
Designation
|
||||||||||||||||||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||
|
As
of December 31,
2006
|
|||||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
337,868
|
11.9
|
%
|
$
|
227,517
|
8.0
|
%
|
$
|
284,396
|
10.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
325,500
|
11.5
|
%
|
$
|
226,322
|
8.0
|
%
|
$
|
282,903
|
10.0
|
%
|
|||||||||
|
Tier
I capital (to risk-weighted assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
290,912
|
10.2
|
%
|
$
|
113,759
|
4.0
|
%
|
$
|
170,639
|
6.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
290,013
|
10.3
|
%
|
$
|
113,162
|
4.0
|
%
|
$
|
169,743
|
6.0
|
%
|
|||||||||
|
Tier
I capital (to average total assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
290,912
|
9.0
|
%
|
$
|
128,696
|
4.0
|
%
|
$
|
160,870
|
5.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
290,013
|
9.1
|
%
|
$
|
127,974
|
4.0
|
%
|
$
|
159,968
|
5.0
|
%
|
|||||||||
|
As
of December 31,
2005
|
|||||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
316,421
|
13.0
|
%
|
$
|
195,364
|
8.0
|
%
|
$
|
244,205
|
10.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
296,252
|
12.2
|
%
|
$
|
193,964
|
8.0
|
%
|
$
|
242,455
|
10.0
|
%
|
|||||||||
|
Tier
I capital (to risk-weighted assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
268,969
|
11.0
|
%
|
$
|
97,683
|
4.0
|
%
|
$
|
146,525
|
6.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
265,787
|
11.0
|
%
|
$
|
96,983
|
4.0
|
%
|
$
|
145,475
|
6.0
|
%
|
|||||||||
|
Tier
I capital (to average total assets)
|
|||||||||||||||||||||
|
ITLA
Capital
|
$
|
268,969
|
9.1
|
%
|
$
|
118,458
|
4.0
|
%
|
$
|
148,073
|
5.0
|
%
|
|||||||||
|
Imperial
Capital Bank
|
$
|
265,787
|
9.1
|
%
|
$
|
116,769
|
4.0
|
%
|
$
|
145,961
|
5.0
|
%
|
|||||||||
Additionally,
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount
of
dividends which may be paid at any date is generally limited to the retained
earnings of the Bank, and loans or advances are limited to 10 percent of the
Bank's capital stock and surplus on a secured basis.
At
December 31, 2006, the Bank's retained earnings available for the payment of
dividends was $140.1 million. Accordingly, $152.9 million of the Company's
equity in the net assets of the Bank was restricted at December 31, 2006.
Funds available for loans or advances by the Bank to the Company amounted
to $15.3 million. In addition, dividends paid by the Bank to the Company would
be prohibited if the effect thereof would cause the Bank's capital to be reduced
below applicable minimum capital requirements.
NOTE
16—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.
|
|
Net
Income
|
Weighted-
Average
Shares
Outstanding
|
Per
Share
Amount
|
|||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Year
ended December 31, 2006
Basic
earnings per share
|
$
|
26,889
|
5,562
|
$
|
4.83
|
|||||
|
Dilutive
effect of stock options
|
—
|
150
|
(0.12
|
)
|
||||||
|
Diluted
earnings per share
|
$
|
26,889
|
5,712
|
$
|
4.71
|
|||||
|
Year
ended December 31, 2005
Basic
earnings per share
|
$
|
24,063
|
5,749
|
$
|
4.19
|
|||||
|
Dilutive
effect of stock options
|
—
|
214
|
(0.15
|
)
|
||||||
|
Diluted
earnings per share
|
$
|
24,063
|
5,963
|
$
|
4.04
|
|||||
|
Year
ended December 31, 2004
Basic
earnings per share
|
$
|
30,625
|
6,077
|
$
|
5.04
|
|||||
|
Dilutive
effect of stock options
|
—
|
377
|
(0.29
|
)
|
||||||
|
Diluted
earnings per share
|
$
|
30,625
|
6,454
|
$
|
4.75
|
|||||
NOTE
17—DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair
value estimates are based on judgments regarding credit risk, 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.
We
use
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
Securities —Fair
values are based on bid prices and quotations published and/or received from
established securities dealers, except for the value of the residual interest
which is valued using present value of estimated future cash flows.
Stock
in Federal Home Loan Bank —The
carrying value approximates fair value based on the redemption provisions of
the
FHLB.
Loans
—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.
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 demand deposit, money market and passbook accounts is estimated to
be
the amount payable on demand due to the short-term nature of these deposits.
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 and Other Borrowings — The
fair
value is estimated by discounting the expected cash flows at current market
rates over contractual maturities.
Junior
Subordinated Debentures —
The fair
value is estimated using the present value of future cash flows, discounted
using the current rate at which a similar debenture would be issued.
The
carrying amounts and estimated fair values of our financial instruments are
as
follows:
|
|
December
31,
|
||||||||||||
|
|
2006
|
2005
|
|||||||||||
|
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
Cost
or
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||||
|
(in
thousands)
|
|||||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
30,448
|
$
|
30,448
|
$
|
93,747
|
$
|
93,747
|
|||||
|
Investment
securities available-for-sale
|
99,527
|
99,527
|
92,563
|
92,563
|
|||||||||
|
Investment
securities held-to-maturity
|
193,512
|
190,475
|
233,880
|
229,025
|
|||||||||
|
Stock
in Federal Home Loan Bank
|
48,984
|
48,984
|
43,802
|
43,802
|
|||||||||
|
Loans,
net
|
2,973,368
|
3,008,621
|
2,523,480
|
2,530,654
|
|||||||||
|
Accrued
interest receivable
|
20,753
|
20,753
|
16,287
|
16,287
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposit
accounts
|
$
|
2,059,405
|
$
|
2,061,922
|
$
|
1,735,428
|
$
|
1,733,205
|
|||||
|
Federal
Home Loan Bank advances and other borrowings
|
1,010,000
|
998,219
|
992,557
|
985,682
|
|||||||||
|
Junior
subordinated debentures
|
86,600
|
90,425
|
86,600
|
92,788
|
|||||||||
NOTE
18—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 used to identify operating segments were the specific product and
business lines of the various operating segments of the Company. Operating
segments are organized separately by product and service offered. We have
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 the Company’s lending operations, which by its legal form, is
identified as operations of the Bank and Imperial Capital REIT. This segment
derives the majority of its revenue from interest received on loans originated
and purchased. 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 our operating
segments occur primarily 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 consolidated balance sheets
and statements of income. Accounting allocations are made in the same manner
for
all operating segments.
Required
reported segment information for 2006, 2005 and 2004 is detailed
below:
|
Lending Operations
|
All
Other
|
Eliminations
|
Consolidated
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of and for the Year Ended December
31, 2006
Revenues
from external customers
|
$
|
228,057
|
$
|
1,216
|
$
|
—
|
$
|
229,273
|
|||||
|
Total
interest income
|
225,376
|
1,125
|
—
|
226,501
|
|||||||||
|
Total
interest expense
|
123,878
|
8,197
|
—
|
132,075
|
|||||||||
|
Depreciation
and amortization expense
|
2,305
|
393
|
—
|
2,698
|
|||||||||
|
Provision
for income taxes
|
22,513
|
(4,020
|
)
|
—
|
18,493
|
||||||||
|
Capital
expenditures
|
2,286
|
325
|
—
|
2,611
|
|||||||||
|
Total
assets
|
3,396,079
|
319,554
|
(300,123
|
)
|
3,415,510
|
||||||||
|
Income
(loss) before provision for income taxes
|
55,410
|
(10,028
|
)
|
—
|
45,382
|
||||||||
|
As
of and for the Year Ended December
31, 2005
Revenues
from external customers
|
$
|
182,580
|
$
|
2,152
|
$
|
—
|
$
|
184,732
|
|||||
|
Total
interest income
|
175,855
|
2,303
|
—
|
178,158
|
|||||||||
|
Total
interest expense
|
79,315
|
7,171
|
—
|
86,486
|
|||||||||
|
Depreciation
and amortization expense
|
2,290
|
392
|
—
|
2,682
|
|||||||||
|
Provision
for income taxes
|
20,113
|
(2,631
|
)
|
—
|
17,482
|
||||||||
|
Capital
expenditures
|
2,232
|
523
|
—
|
2,755
|
|||||||||
|
Total
assets
|
3,029,118
|
302,351
|
(280,273
|
)
|
3,051,196
|
||||||||
|
Income
(loss) before provision for income taxes
|
49,362
|
(7,817
|
)
|
—
|
41,545
|
||||||||
|
As
of and for the Year Ended December
31, 2004
Revenues
from external customers
|
$
|
139,154
|
$
|
308
|
$
|
—
|
$
|
139,462
|
|||||
|
Total
interest income
|
124,788
|
1,608
|
(1,442
|
)
|
124,954
|
||||||||
|
Total
interest expense
|
36,528
|
6,332
|
(1,442
|
)
|
41,418
|
||||||||
|
Depreciation
and amortization expense
|
1,723
|
362
|
—
|
2,085
|
|||||||||
|
Provision
for income taxes
|
22,836
|
(2,888
|
)
|
—
|
19,948
|
||||||||
|
Capital
expenditures
|
2,752
|
242
|
—
|
2,994
|
|||||||||
|
Total
assets
|
2,253,190
|
327,763
|
(262,882
|
)
|
2,318,071
|
||||||||
|
Income
(loss) before provision for income taxes
|
59,537
|
(8,964
|
)
|
—
|
50,573
|
||||||||
NOTE
19—PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The
parent company only financial statements of ITLA Capital are as follows:
Condensed
Balance Sheets
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Assets
Cash
and cash equivalents
|
$
|
1,401
|
$
|
7,874
|
|||
|
Investment
securities available-for-sale, at fair value
|
2,216
|
3,734
|
|||||
|
Investments
in wholly-owned subsidiaries:
|
|||||||
|
Imperial
Capital Bank
|
292,990
|
268,264
|
|||||
|
Imperial
Capital Real Estate Investment Trust
|
1,504
|
3,479
|
|||||
|
Other
subsidiaries
|
177
|
177
|
|||||
|
Investments
in unconsolidated subsidiaries
|
2,600
|
2,600
|
|||||
|
Other
assets
|
18,393
|
15,952
|
|||||
|
Total
assets
|
$
|
319,281
|
$
|
302,080
|
|||
|
Liabilities
and Shareholders’ Equity
Junior
subordinated debentures
|
$
|
86,600
|
$
|
86,600
|
|||
|
Other
liabilities
|
11,344
|
10,999
|
|||||
|
Shareholders’
equity
|
221,337
|
204,481
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
319,281
|
$
|
302,080
|
|||
Condensed
Statements of Income
|
|
Years
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Interest
income
|
$
|
1,125
|
$
|
2,303
|
$
|
1,608
|
||||
|
Interest
expense
|
8,197
|
7,171
|
6,332
|
|||||||
|
Net
interest expense
|
(7,072
|
)
|
(4,868
|
)
|
(4,724
|
)
|
||||
|
Provision
for loan losses
|
(4
|
)
|
(64
|
)
|
—
|
|||||
|
Non-interest
expense:
|
||||||||||
|
General
and administrative expense
|
3,052
|
2,809
|
2,883
|
|||||||
|
Other
|
(91
|
)
|
140
|
1,300
|
||||||
|
Total
non-interest expense
|
2,961
|
2,949
|
4,183
|
|||||||
|
Loss
before income tax benefit and equity in net income of
subsidiaries
|
(10,029
|
)
|
(7,753
|
)
|
(8,907
|
)
|
||||
|
Income
tax benefit
|
(4,021
|
)
|
(2,609
|
)
|
(2,866
|
)
|
||||
|
Loss
before equity in net income of subsidiaries
|
(6,008
|
)
|
(5,144
|
)
|
(6,041
|
)
|
||||
|
Equity
in net income of subsidiaries
|
32,897
|
29,207
|
36,666
|
|||||||
|
Net
income
|
$
|
26,889
|
$
|
24,063
|
$
|
30,625
|
||||
Condensed
Statements of Cash Flows
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||
|
Net
income
|
$
|
26,889
|
$
|
24,063
|
$
|
30,625
|
||||
|
Adjustments
to net income:
|
||||||||||
|
Equity
in undistributed net income of subsidiaries
|
(32,897
|
)
|
(29,207
|
)
|
(36,666
|
)
|
||||
|
Provision
for loan losses
|
(4
|
)
|
(64
|
)
|
—
|
|||||
|
Other,
net
|
29
|
3,465
|
3,099
|
|||||||
|
(Increase)
decrease in other assets
|
(1,506
|
)
|
(335
|
)
|
2,127
|
|||||
|
(Decrease)
increase in liabilities
|
(445
|
)
|
524
|
3,440
|
||||||
|
Net
cash (used in) provided by operating activities
|
(7,934
|
)
|
(1,554
|
)
|
2,625
|
|||||
|
Cash
Flows From Investing Activities:
|
||||||||||
|
Capital
distribution received from Imperial Capital REIT
|
1,857
|
11,065
|
—
|
|||||||
|
Dividends
received from Imperial Capital Bank
|
8,500
|
3,000
|
28,000
|
|||||||
|
Dividends
received from Imperial Capital REIT
|
251
|
3,756
|
1,839
|
|||||||
|
Other,
net
|
906
|
1,376
|
316
|
|||||||
|
Net
cash provided by investing activities
|
11,514
|
19,197
|
30,155
|
|||||||
|
Cash
Flows From Financing Activities:
|
||||||||||
|
Proceeds
from exercise of employee stock options
|
3,692
|
4,650
|
4,159
|
|||||||
|
Cash
paid to acquire treasury stock
|
(11,374
|
)
|
(22,625
|
)
|
(30,346
|
)
|
||||
|
Cash
dividends paid
|
(2,371
|
)
|
—
|
—
|
||||||
|
Net
cash used in financing activities
|
(10,053
|
)
|
(17,975
|
)
|
(26,187
|
)
|
||||
|
Net
(decrease) increase in cash and cash equivalents
|
(6,473
|
)
|
(332
|
)
|
6,593
|
|||||
|
Cash
and cash equivalents at beginning of period
|
7,874
|
8,206
|
1,613
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
1,401
|
$
|
7,874
|
$
|
8,206
|
||||
Item
9. Changes In and Disagreements With Accountants on
Accounting and Financial
Disclosure
None.
Item
9A. Control and Procedures
Evaluation
of Disclosure Controls and Procedures
An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was
carried out as of December 31, 2006 under the supervision and with the
participation of the Company’s Chief Executive Officer, Chief Financial Officer
and several other members of the Company’s senior management. The Company’s
Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2006, the Company’s disclosure controls and procedures were
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated
and
communicated to the Company’s management (including the Chief Executive Officer
and Chief Financial Officer) to allow timely decisions regarding required
disclosure, and (ii) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms.
The
Company does not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent all error and all fraud. A control
procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any control procedure also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures
may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be
detected.
The
annual report of management on the effectiveness of our internal control over
financial reporting and the attestation report thereon issued by our independent
registered public accounting firm are set forth under “Management’s Report on
Internal Control Over Financial Reporting” and “Report of Independent Registered
Public Accounting Firm” under “Item 8. Financial Statements and Supplementary
Data.”
Changes
in Internal Control Over Financial Reporting
During
the quarter ended December 31, 2006, no changes occurred in the Company’s
internal control over financial reporting that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Executive
Officers and Directors of the Registrant
The
executive officers of the Registrant are identified below.
|
Name
|
Age
|
Position
|
|
George
W. Haligowski
|
52
|
Chairman
of the Board, President and Chief Executive Officer of ITLA Capital
and
the Bank
|
|
Norval
L. Bruce
|
65
|
Vice
Chairman of the Board and Chief Credit Officer of ITLA Capital and
the
Bank
|
|
Timothy
M. Doyle
|
50
|
Executive
Managing Director and Chief Financial Officer of ITLA Capital and
the
Bank
|
|
Lyle
C. Lodwick
|
52
|
Executive
Managing Director and Chief Operating Officer of ITLA Capital and
the
Bank
|
|
Phillip
E. Lombardi
|
50
|
Senior
Managing Director and Chief of Lending Operations of ITLA Capital
and the
Bank
|
George
W. Haligowski has
served as ITLA Capital’s Chairman of the Board, President and Chief Executive
Officer since inception. He has also served as the Bank’s Chairman of the Board
and Chief Executive Officer since 1992, and was the Bank’s President from 1992
to October 1997. In 2000 he was again appointed as President of the Bank. From
1990 to 1992, he 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). Mr. Haligowski’s post secondary education
consists of the following programs: He graduated from the Securities Industry
Institute held at the University of Pennsylvania Wharton School. He also became
an alumnus of the Harvard Business School by completing the Owners Presidents
Management Program. He completed the Advanced Management Program at the
University of Southern California. He received his Masters of Banking diploma
from L.S.U. Graduate School of Banking. Mr. Haligowski also serves on several
boards, including Operation Hope, Chairman Emeritus of the Young Presidents
Organization of San Diego, and is Chairman of the University of California
San
Diego Scripps Institute of Oceanography's Advisory Board the Director's
Cabinet.
Norval
L. Bruce has
served as the Vice Chairman and Chief Credit Officer for ITLA Capital and the
Bank since June of 1999. He was previously President and Chief Operating Officer
of the Bank from October 1997 to June 1999, and previously was the Executive
Vice President and Chief Credit Officer of the Bank from 1990 to October 1997.
Mr. Bruce was appointed a director of the Bank and ITLA Capital in January
1997
and September 1997, respectively. 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. Mr. Bruce has an Associates of Arts degree
from Clark College of Vancouver Washington, and attended the University of
Washington where he studied economics and engineering. He is a graduate of
the
Southwestern Graduate School of Banking at Southern Methodist University and
he
has completed the Executive Program in Management from the John E. Anderson
Graduate School of Management at UCLA.
Timothy
M. Doyle has
served as Executive Managing Director and Chief Financial Officer of ITLA
Capital and the Bank since August 2005. He was previously Senior Managing
Director and Chief Financial Officer of ITLA Capital and the Bank from May
2000
to August 2005, and prior to that he was Managing Director and Chief
Administrative Officer of ITLA Capital and the Bank from May 1996 to May 2000.
Before joining the 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 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. Mr. Doyle graduated with a
Bachelor of Science degree in Accounting from Western New England College,
and
has completed the International Business Management Senior Executive Program
of
the London Business School.
Lyle
C. Lodwick has
served as Executive Managing Director and Chief Operating Officer of ITLA
Capital and the Bank since August 2005. Prior to joining ITLA Capital, Mr.
Lodwick served as Executive Vice President and Chief Operating Officer of
Sunwest Bank and, prior to that, he served as Executive Vice President and
Chief
Credit Officer at Pacific Crest Capital, Inc. During his tenure at Pacific
Crest
Capital, Inc. from 1992 to 2004, he held several senior level positions with
the
company. From 1982 to 1985, he was Assistant Regional Credit Manager, Western
Region, with Commercial Credit Corporation. Mr. Lodwick has a BA from Whittier
College and an MBA from the University of LaVerne.
Phillip
E. Lombardi
has
served as Senior Managing Director - Chief of Lending Operations of ITLA Capital
and the Bank since August 2005. Prior to joining ITLA Capital, he was Vice
President and Manager of the Los Angeles Real Estate Industries lending division
of Bank of the West (formerly Sanwa Bank of California) from 2001 to 2004.
He
was previously Vice President and Relationship Manager for Citicorp Real Estate,
Inc. and the Commercial Asset Management unit of Citibank, F.S.B. from 1985
through 2000; and Construction Superintendent and later Marketing Director
for
666 Venture, Inc. from 1981 to 1985. Mr. Lombardi has an MBA from the University
of Chicago with a Specialization in Finance, and a BA from the University of
Puget Sound.
The
directors of ITLA Capital, excluding Mr. Haligowski and Mr. Bruce, are
identified below.
Preston
Martin, age
83,
is the former Vice Chairman of the Federal Reserve Board of Governors. Mr.
Martin previously served as a Senior Advisory Director to the Board. Mr. Martin
is currently Chairman of the Board of Martin Associates, a San Francisco based
financial services company. Mr. Martin was Chairman and Chief Executive Officer
of Seraco Corporation, a Sears Roebuck enterprise, PMI Mortgage Insurance
Corporation and PMI Mortgage Corporation. Mr. Martin was also Professor of
Finance and Director of Executive Programs at the University of Southern
California. Mr. Martin holds a Ph.D. in Monetary Economics from Indiana
University, as well as an MBA and a BS in Finance from the University of
Southern California.
Jeffrey
L. Lipscomb,
age 53,
is a Chartered Financial Consultant (ChFC), and 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. Additionally, he
is an
Executive Vice-President of Excelsior Financial Network, LLC, a wealth planning
management group. Mr. Lipscomb was also with Kidder Peabody from 1983 to 1986.
Mr. Lipscomb received a Bachelor of Arts Degree in General Psychology from
the
University of California, Santa Barbara in 1976.
Sandor
X. Mayuga,
age 59,
is a member of the California State Bar and has been Of Counsel to the law
firm
of Keesal, Young & Logan since April 2004. Prior to that, he was a member of
the law firm of Tisdale & Nicholson, LLP 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. Mr. Mayuga is a graduate of the University
of Pennsylvania School of Law (Juris Doctoris, 1974), and the University of
California, Santa Barbara (A.B., Political Science, with High Honors, 1970).
While at the University of Pennsylvania, he also studied at The Wharton School
of Finance and Commerce. He also earned a Certificate in Private International
Law at Academie du Droit Internationale de la Haye (1975).
Hirotaka
Oribe,
age 72,
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, 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. Mr.
Oribe holds a Bachelor and Masters of Engineering from Waseda University in
Tokyo, and holds a Master of Architecture in Urban Design from Harvard
University's Graduate School of Design. He is also a licensed architect with
the
State of California and the Commonwealth of Massachusetts.
Robert
R. Reed,
age 70,
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. From 1995 to 2000, Mr. Reed
served as a director of the Santa Ana City Cable Television Review Board.
Audit
Committee Membership
The
Audit
Committee of ITLA Capital’s Board of Directors consists of Directors Martin
(Chairman), Lipscomb and Reed. The Board of Directors has determined that Mr.
Martin is an “audit committee financial expert,” as defined in the SEC’s rules,
and that Mr. Martin is “independent,” as independence is defined for audit
committee members in the listing standards of the NYSE and NASDAQ Stock
Market.
Code
of Ethics
We
have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, and persons
performing similar functions, and to all of our other employees and our
directors. A copy of our code of ethics is available on our website, located
at
www.itlacapital.com.
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 our 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
our
knowledge, based solely on a review of the copies of such reports furnished
to
us and written representations that no other reports were required, during
the
fiscal year ended December 31, 2006, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except for the inadvertent failure of Mr. Haligowski to
timely report two transactions (which occurred on the same day) and of each
of
Messrs. Bruce, Doyle, Lodwick, Lombardi and Officer Scott A. Wallace to report
one transaction.
Item
11. Executive Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
In
this
section, we will give an overview and analysis of our compensation program
and
policies, the material compensation decisions we have made under those programs
and policies, and the material factors that we considered in making those
decisions. Following this section, under the heading “Additional Information
Regarding Executive Compensation,” you will find a series of tables containing
specific information about compensation paid or payable to the following
individuals, whom we refer to as our named executive officers:
|
|
|
|
|
|
•
|
George
W. Haligowski, Chairman, President and Chief Executive
Officer
|
|
|
|
|
|
|
•
|
Norval
L. Bruce, Vice Chairman and Chief Credit Officer
|
|
|
|
|
|
|
•
|
Timothy
M. Doyle, Executive Managing Director and Chief Financial
Officer
|
|
|
|
|
|
|
•
|
Lyle
C. Lodwick, Executive Managing Director and Chief Operating
Officer
|
|
|
|
|
|
|
•
|
Phillip
E. Lombardi, Senior Managing Director and Chief of Lending
Operations
|
The
discussion below is intended to help you understand the detailed information
provided in those tables and put that information into context within our
overall compensation program.
Compensation
Philosophy and Objectives
The
policies of the Compensation Committee of our Board of Directors, or the
Committee, with respect to the compensation of executive officers, including
the
Chief Executive Officer, or CEO, are designed to provide compensation sufficient
to attract, motivate and retain executives of outstanding ability and potential.
Overall, we seek to provide total compensation packages that are competitive
in
terms of total potential value to our executives, in order to create a
compensation program that will adequately reward our executives for their roles
in creating value for our shareholders. We intend to be competitive with other
similarly situated companies in the banking and financial services
industries.
Our
compensation decisions with respect to executive officer salaries, annual
incentives, and long-term incentive compensation opportunities are influenced
by
(a) the executive’s level of responsibility and function within ITLA
Capital, (b) the performance and profitability of ITLA Capital and the
individual’s performance, and (c) our assessment of the competitive
marketplace, including peer companies. Our philosophy is to focus on total
direct compensation opportunities through a mix of base salary, annual cash
bonus, and long-term incentives, including equity-based awards in the form
of
stock options, other benefits and perquisites, post-termination severance and
acceleration of stock option vesting for certain named executive officers upon
termination and/or a change in control. Our other benefits and perquisites
for
our named executive officers primarily consist of life and health insurance
benefits, a qualified 401(k) savings plan, nonqualified deferred compensation
plans, reimbursement for certain club memberships, use of a Company-owned
automobile or automobile allowance and payment of preferential interest on
savings accounts (available to all employees). Mr. Haligowski also receives
an
allowance for housing related expenses and chartered air travel. Our philosophy
is to position the aggregate of these elements at a level that is commensurate
with our size and sustained performance, and we believe it is important to
maintain a strong link between executive incentives and the creation of
shareholder value. The use of these programs enables us to reinforce our pay
for
performance philosophy, as well as strengthen our ability to attract and retain
highly qualified executives. We believe that this combination of programs
provides an appropriate mix of fixed and variable pay, balances short-term
operational performance with long-term shareholder value, and encourages
executive recruitment, motivation and retention.
During
February 2006, the Committee conducted an overall review of our compensation
plans and agreements. This review was prompted by the requirement to conform
our
compensation plans to Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”), and by the fact that all shares of restricted stock under
our Recognition and Retention Plan (the “RRP”), originally adopted in 1995, were
allocated as of December 31, 2005. All shares allocated were also fully vested
as of December 31, 2005. Our supplemental executive retirement plan (the “SERP”)
provided for allocations of restricted stock issued under the RRP on a tax
deferred basis through the SERP. Under his employment agreement with us dated
January 28, 2000 (the “Original Employment Agreement”) and the SERP, Mr.
Haligowski was entitled to receive annually an allocation under our SERP of
a
RRP restricted stock award equal to one-third of his base salary and an
additional contribution to his SERP account following a change in control equal
to 3.95 times his base salary. The SERP entitled all other SERP participants
to
receive an annual award equal to one-fifth of base salary. In order to provide
our executive officers, including Mr. Haligowski, with a benefit comparable
to
what we had been providing under the SERP prior to the utilization of all
remaining RRP shares in 2005, and to maximize the tax deductibility of
compensation payments, we entered into (1) an amendment and restatement of
Mr.
Haligowki’s employment agreement, and executed a non-competition and
non-solicitation agreement, with Mr. Haligowski; (2) executed change in control
severance agreements with nine executive officers, including: Messrs. Bruce,
Doyle, Lodwick and Lombardi (in the case of Messsrs. Bruce and Doyle these
agreements replaced their existing change in control severance agreements with
us); (3) amended and restated our employer securities and non-employer
securities non-qualified deferred compensation plans (the “Deferred Compensation
Plans”) and our SERP primarily to conform those plans with Section 409A of the
Code; (4) amended and restated our salary continuation plan (the “Salary
Continuation Plan”) to conform that plan with Section 409A of the Code and to
make certain other changes described below; and (5) made a clarifying amendment
to our 2005 Re-Designated, Amended and Restated Employee Stock Incentive Plan
(the “ESIP”) intended to ensure the deductibility under Section 162(m) of the
Code of compensation attributable to stock options or stock appreciation rights
that may be granted under that plan to executive officers.
Mr.
Haligowki’s employment agreement was amended and the non-competition and
non-solicitation agreement entered into so that the change in control benefits
he would have received under the Original Employment Agreement inclusive of
the
SERP change in control benefit described above under the Original Employment
Agreement, together with the payments to be made to Mr. Haligowski under the
non-competition and non-solicitation agreement, would not be substantially
greater or less. The Salary Continuation Plan, which was originally adopted
by
us in March 2000 and in which Mr. Haligowski is currently the only participant,
was amended to eliminate an enhanced change in control benefit, which was to
provide for an increased monthly payout over ten years instead of over 15 years
as with other types of termination, and to eliminate the reduction in benefit
that was to occur if the participant voluntarily terminated his employment
before retirement age. In addition, a number of other amendments were made
to
the Salary Continuation Plan to conform the plan to Section 409A of the Code,
including changes to definitions, the elimination of our ability to accelerate
benefits and changes to plan termination provisions. All of these plans and
agreements are summarized below under “Additional Information Regarding
Executive Compensation.”
Determination
of Appropriate Pay Levels
In
General.
Generally, the compensation of our executive officers is currently composed
of a
base salary, an annual cash incentive award and equity awards in the form of
stock options. For each of our named executive officers, the Committee reviews
and approves all elements of compensation, taking into consideration
recommendations from Mr. Haligowski (for compensation other than his own),
and
the individual contributions of the particular executive. With respect to Mr.
Haligowski, the Committee utilizes the assistance of an independent compensation
consultant, Nash and Company, Inc., which provides competitive market data
every
year with respect to CEO salary compensation. The comparison group includes
other banks and thrifts in California with assets ranging from $1.0 to $10.0
billion. In addition to information provided by Nash and Company, Inc., the
Committee has historically taken into account information from other sources
in
setting the compensation for Mr. Haligowski and other executive officers,
including information from other independent members of the board of directors
and publicly available data relating to the compensation practices and policies
of other companies within our industry.
The
annual executive bonus plan is a discretionary incentive compensation award
determined by the Committee based on the achievement of the goals set forth
in
our annual strategic plan, including but not limited to goals relating to annual
loan production, asset quality, performance and earnings goals (which may
fluctuate from year-to-year) and individual performance. In addition, stock
options are granted to provide the opportunity for long-term compensation based
upon the performance of our common stock over time.
Base
Salary. We provide the opportunity for our named executive officers and other
executives to earn a competitive annual base salary. We provide this opportunity
to attract and retain an appropriate caliber of talent for the position, and
to
provide a base wage that is not subject to our performance risk.
Our
base
salary levels reflect a combination of factors, including competitive pay
levels, the executive’s experience and tenure, our overall annual strategic plan
for salary increases, the executive’s individual performance, and changes in
responsibility. We review salary levels annually to recognize these factors.
We
do not target base salary at any particular percent of total
compensation.
Base
salary increases in 2006 for our named executive officers other than our CEO
were generally consistent with the aggregate 4.75% pay increase approved by
the
Committee for our departments for 2006. For 2006, the average increase in the
salaries of the executive officers, excluding the CEO, from 2005 salaries was
5.65%. Base salary increases granted to Messrs. Bruce, Lodwick and Lombardi
for 2006 ranged from 3.0 to 5.0% and were established after considering job
performance, internal pay alignment and equity, and marketplace competitiveness.
Mr. Doyle’s base salary for 2006 was increased by 10.0% after taking into
account the above factors plus the fact that his base salary in 2005 was below
base salaries paid to peers at similar size companies and his contributions
to
our growth over the last three years. The salary of our CEO is set by the
Committee, but in accordance with his employment agreement, was established
at
$590,000 for 2006, the same as for 2005. Although it is generally customary
for
the Committee to adjust Mr. Haligowski’s base salary on a bi-annual basis, and
despite Nash and Company, Inc. stating that a 10% salary increase would be
in
line with the practices of a peer group of companies, the Committee determined
not to adjust Mr. Haligowski’s base salary for 2007. As noted below, in order to
make a greater proportion of Mr. Haligowski’s compensation based on our
performance, the Committee instead determined to increase Mr. Haligowski’s
targeted cash incentive opportunity for 2007.
Annual
Executive Bonus Plan. We
provide the opportunity for our named executive officers and other executives
to
earn an annual cash incentive award. We provide this opportunity to attract
and
retain an appropriate caliber of talent for the position and to motivate
executives to achieve our annual business goals. We establish annual target
cash
incentive opportunities annually in December or January expressed as a
percentage of base salary to be paid during the ensuing fiscal year. For 2006,
annual target cash incentive opportunities for the named executive officers
other than Mr. Haligowski were set at up to 50% of base salary and at up to
150%
of base salary for Mr. Haligowski. The 2007 target established by the Committee
is the same except that Mr. Haligowki’s annual cash incentive opportunity was
set at up to 200% of base salary. The Committee increased Mr. Haligowski’s
targeted cash incentive opportunity since his base salary was not increased
in
2006, as discussed above.
Our
awards are subject to the Committee’s discretion and may take into account the
achievement of goals set forth in our annual strategic plan, individual
performance and the recommendation of the CEO (for awards other than his own).
As a result, actual bonuses may be above or below target bonus levels, at the
discretion of the Committee. Bonus payments under our annual bonus plan are
contingent on continued employment with us at the end of the year. In 2005,
the
corporate goals identified by the Committee and the
board
for 2006 included meeting various objectives relating generally to loan
production, asset quality, pre-tax earnings and net income. In December 2006,
the Committee and the board determined that applicable corporate performance
goals that were achieved in 2006 merited a bonus award of 100% of the target
bonus award for the named executive officers other than Mr. Haligowski and
110%
of the target bonus award for Mr. Haligowski. The Committee and the board
determined that Mr. Haligowski should receive an award of 164% of his base
salary due to his continued outstanding leadership and contributions to the
Company’s accomplishments in 2006.
In
exercising its discretion, the Committee may take into account factors affecting
our overall corporate performance goals and our actual performance results
that
may cause differences between the numbers used for our performance goals and
the
numbers reported in our financial statements. These factors may exclude all
or a
portion of both the positive or negative effect of external events that are
outside the control of our executives, such as natural disasters, litigation,
or
regulatory changes in accounting, taxation or capital standards. These
adjustments may also exclude all or a portion of both the positive or negative
effect of unusual or significant strategic events that are within the control
of
our executives but that are undertaken with an expectation of improving our
long-term financial performance, such as restructurings, acquisitions, or
divestitures.
Equity
Awards.
We
provide the opportunity for our named executive officers and other executives
to
earn a long-term equity incentive award. Long-term equity incentive awards
provide employees with the incentive to stay with us for longer periods of
time,
which in turn, provides us with greater stability. Stock options and other
equity awards also align the incentives of our executives with the interests
of
our shareholders and with our long-term success. The Committee and board develop
their equity award determinations based on their judgments as to whether the
complete compensation packages provided to our executives, including prior
equity awards, are sufficient to retain, motivate and adequately award the
executives. We have traditionally used stock options as our form of equity
compensation because stock options provide a relatively straightforward
incentive for our executives, result in less immediate dilution of existing
shareholders’ interests and, prior to our adoption of SFAS No. 123(R), resulted
in less compensation expense for us relative to other types of equity
awards.
We
generally review long-term equity incentives for our named executive officers
and other executives annually in December or January. We grant equity awards
to
employees through our ESIP, which was adopted by our board and shareholders
to
permit the grant of stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares and performance units. The material
terms of the ESIP are further described below under “Additional Information
Regarding Executive Compensation—Outstanding Equity Awards at December 31,
2006-Stock Incentive Plans.”
For
the
last completed fiscal year, the Committee determined that our named executive
officers had a sufficient equity stake in us, consisting of shares of common
stock and/or existing options, to align their interests with ours and our
stockholders and consequently there were no new equity award grants in 2006
to
our named executive officers.
We
do not
coordinate the timing of equity award grants with the release of material
non-public information. The exercise price for stock options is established
at
the fair market value of the closing price of our stock on the date the
Committee approves the grant. Our stock options generally have a 10-year
contractual exercise term. All of our outstanding stock options and other equity
awards to our named executive officers are fully vested.
In
general, option grants are also subject to the following post-termination and
change in control provisions:
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Event
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Award
Vesting
|
Exercise
Term
|
|
Termination
by Us Other than Cause; Disability, Retirement or Death
|
Forfeit
Unvested
|
Earlier
of: (1) three (3) months or (2) Remaining Option Period
|
|
Disability,
Retirement or Death
|
Forfeit
Unvested
|
Earlier
of: (1) six (6) months or (2) Remaining Option Period Option
Period
|
|
Termination
for Cause
|
Forfeit
Vested and
Unvested
|
Expire
|
|
Other
Termination
|
Forfeit
Unvested
|
Earlier
of: (1) Remaining Option Period or (2) 30 Days from Date of
Termination
|
|
Change
in Control
|
Accelerated*
|
*
|
|
______________
*
In
the event of a change in control as defined in the ESIP, any outstanding
awards that are unexercisable or otherwise unvested will become fully
vested and immediately exercisable. If there is a termination of
employment, the applicable termination provisions regarding exercise
term
will apply.
|
||
Executive
Benefits and Perquisites
Our
named
executive officers and other executives participate in our broad based employee
benefit plans, including medical, dental, vision, insurance and our 401(k)
plan
(including matching contributions) and, like all other employees, may receive
a
preferential interest rate on interest-bearing deposit accounts. These plans
and
benefits are available to all salaried employees and do not discriminate in
favor of executive officers. We also make the SERP available to our named
executive officers and the Deferred Compensation Plans available to our named
executive officers and other highly compensated employees. Mr. Haligowki is
currently the only participant in our Salary Continuation Plan. The material
terms of these plans are further described below under “Additional Information
Regarding Executive Compensation—Agreements with Mr. Haligowski—Salary
Continuation Plan,”“—Nonqualified Deferred Compensation” and “—Supplemental
Executive Retirement Plan.”
We
also
provide additional personal benefits and perquisites as an additional incentive
for our executives, to remain competitive in the general marketplace for
executive talent and to minimize distractions from the executive’s attention to
important ITLA Capital initiatives. The Committee periodically reviews the
levels of perquisites and other personal benefits provided to executive
officers. We have no current plans to make material changes to levels of
benefits and perquisites provided to our executives.
For
the
last completed fiscal year, we provided the following personal benefits and
perquisites to our named executive officers:
|
|
||
|
Executive
Benefit
|
Description
|
|
|
Automobile
Plan
|
Certain
executives are provided with a Company-owned automobile or an automobile
allowance pursuant to our automobile policy.
|
|
|
Reimbursed
Life Insurance Premiums
|
We
reimburse certain executives for certain life insurance premium
payments.
|
|
|
Computer
Equipment and Internet Connection Service
|
We
provide certain executives with computer equipment and an internet
connection for use in their homes.
|
|
|
Club
Memberships
|
Certain
executives have their club membership dues
reimbursed.
|
|
In
addition, ITLA Capital makes available a corporate limousine and driver to
certain executive officers for business use only. Mr. Haligowski also receives
a
housing allowance, reimbursement for financial counseling and tax preparation,
the use of a chartered aircraft for up to 35 hours per year, reimbursement
for a
non-equity membership in one private club in an initial amount not to exceed
$7,500 with monthly dues of $400 (as may be increased or decreased by the club),
reimbursement for his reasonable expenses and costs associated with his
memberships in the Young Presidents' Organization and the Harvard Business
School Alumni Association, and tax reimbursement payments. The cost for
chartered aircraft use is based on the duration of the flight, not on the number
of passengers. We do not incur any additional costs for adding passengers when
there are seats available on the aircraft. Accordingly, we do not assign any
cost for family members accompanying Mr. Haligowski on any of those flights.
We
gross-up his compensation or otherwise reimburse his taxes on any income imputed
as a result of personal aircraft usage. However, as a result of Internal Revenue
Service rules, executives are imputed income for any family members or other
personal guests who may accompany the executive officer on any flights. In
instances where family member or other personal guest attendance has been
related to the business purpose of the trip, we have grossed-up Mr. Haligowski’s
compensation to cover taxes on any income imputed as a result of their
attendance. The Committee believes that such benefits are appropriate and often
assist with Mr. Haligowski fulfilling his employment obligations.
Attributed
costs of the personal benefits described above for the named executive officers
for the fiscal year ended December 31, 2006, are included in the “All Other
Compensation” column of the Summary Compensation Table.
Change
in Control and Severance Benefits
We
provide the opportunity for Mr. Haligowski and our executive officers to be
protected in the event of a change of control and/or an “involuntary
termination” of employment following a change of control of ITLA Capital. Mr.
Haligowski may also receive certain payments and benefits pursuant to his
employment agreement if his employment is involuntarily terminated not in
connection with a change in control. The purpose of providing these change
in
control payments and benefits is to attract and retain executives of the highest
caliber and mitigate the risk to these executives that their employment will
be
involuntarily terminated in the event we are acquired.
Mr.
Haligowski’s employment agreement and his non-competition and non-solicitation
agreement, and Mr. Bruce’s and Mr. Doyle’s change of control agreements provide
for certain payments and benefits upon a change of control. Each of these
agreements were entered into in 2006 and were individually negotiated by the
Committee and management. In Mr. Haligowski’s case these agreements were
negotiated to be generally consistent with the amount of benefits and terms
of
his prior severance benefits under his original employment agreement. In the
case of Messrs. Bruce and Doyle, these agreements replaced the requirement
contained in their prior change of control agreements that an involuntary
termination occur with any termination of employment (other than for cause)
as a
trigger for payment. The Committee eliminated this requirement in recognition
of
their years of service to us relative to the other executive officers, and
that
these individuals are not receiving any substituted benefit to make up for
the
lack of SERP allocations in 2006 and thereafter. A cap was placed on the amount
of their cash payment.
The
change of control agreements for Messrs. Lodwick and Lombardi provide for
certain payments and benefits if their employment is involuntarily terminated
in
connection with or within 24 months after a change in control of ITLA Capital.
Each of these change in control severance agreements thus requires a “double
trigger” in order for any payments or benefits to be provided to the named
executive officer in connection with or following a change in control - in
other
words, both a change in control and an involuntary termination of employment
(which includes a voluntary termination by the executive following a material
reduction in his or her duties, responsibilities or benefits) must occur. At
the
same time, the mere sale of ITLA Capital will not automatically trigger a
payout, as our intention is to induce the executive to remain employed following
a change in control so long as the acquiring Company so desires without a
material reduction in the executive’s duties, responsibilities or benefits. Our
severance and change in control provisions for the named executive officers
are
summarized in “Additional Information Regarding Executive
Compensation—Agreements with Mr. Haligowski” and “—Change of Control
Agreements.”
We
believe these severance and change in control benefits are an essential element
of our executive compensation package and assist us in recruiting and retaining
talented individuals. We also believe that our severance and change in control
provisions are consistent with the provisions and benefit levels of other
companies disclosing such provisions as reported in public SEC filings.
Information regarding applicable severance and change in control benefits for
the named executive officers is provided under the heading “Potential Payments
Upon Termination of Employment.”
Impact
of Accounting and Tax Treatments of Compensation
Section
162(m) of the Internal Revenue Code generally eliminates the deductibility
of
compensation over $1 million paid to certain highly compensated executive
officers of publicly held corporations, excluding certain qualified
performance-based compensation. The Committee has reviewed and will
continue to review on an ongoing basis our executive compensation programs,
and
propose appropriate modifications to these programs, if the Committee deems
them
necessary, with a view toward implementing our compensation programs in a manner
that avoids or minimizes any disallowance of tax deductions under Section
162(m). The Committee will balance these considerations against the need to
be
able to compensate executives in a manner commensurate with performance and
the
competitive environment for executive talent. While stock options and stock
appreciation rights as a general matter automatically constitute qualified
performance-based compensation (provided that the certain plan content and
grant
procedure requirements are met), cash and other equity-based awards (including
but not limited to restricted stock) must be subject to stockholder-approved
performance criteria in order to so qualify. In this regard, the ESIP approved
by stockholders authorizes the awarding of equity-based performance awards
that
constitute qualified performance-based compensation exempt from the $1 million
deductibility limit of Section 162(m).
With
our
adoption, effective January 1, 2006, of SFAS No. 123(R), “Share-Based Payment”
(“SFAS No. 123R”), which requires the recognition of compensation expense for
stock options, we do not expect the accounting treatment of differing forms
of
equity awards to vary significantly. Accordingly, accounting treatment is not
expected to have a material effect on the selection of forms of equity
compensation in the foreseeable future.
Role
of Executive Officers in Determining Compensation
Our
Chief
Executive Officer, Mr. Haligowski,
recommends
to the Committee base salary, target annual incentive compensation bonus levels,
actual bonus payments and long-term incentive grants for our executive officers
(other than himself). Mr. Haligowski makes these recommendations to the
Committee based on publicly available industry data and qualitative judgments
regarding individual performance. Mr. Haligowski is not involved with any aspect
of determining his own compensation.
ADDITIONAL
INFORMATION REGARDING EXECUTIVE COMPENSATION
2006
Summary Compensation Table
The
following table sets forth the compensation earned for the year ended December
31, 2006 by the named executive officers:
|
Year
|
Salary
|
Bonus
(1)
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation (2)
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
All
Other Compensation (3)
|
Total
Compensation
|
||||||||||||||||||||
|
George
W. Haligowski
|
2006
|
$
|
590,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
969,750
|
$
|
33,451
|
$
|
394,523
(4
|
)
|
$
|
1,987,724
|
||||||||||
|
Chairman
of the Board, President
|
||||||||||||||||||||||||||||
|
and
Chief Executive Officer
|
||||||||||||||||||||||||||||
|
Norval
L. Bruce
|
2006
|
$
|
248,200
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
124,100
|
$
|
23,718
|
$
|
82,832
(5
|
)
|
$
|
478,850
|
||||||||||
|
Vice
Chairman of the Board and
|
||||||||||||||||||||||||||||
|
Chief
Credit Officer
|
||||||||||||||||||||||||||||
|
Timothy
M. Doyle
|
2006
|
$
|
247,500
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
123,750
|
$
|
—
|
$
|
33,371
(6
|
)
|
$
|
404,621
|
||||||||||
|
Executive
Managing Director and Chief
|
||||||||||||||||||||||||||||
|
Financial
Officer
|
||||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
2006
|
$
|
235,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
117,498
|
$
|
—
|
$
|
23,700
(7
|
)
|
$
|
376,198
|
||||||||||
|
Executive
Managing Director and Chief
|
||||||||||||||||||||||||||||
|
Operating
Officer
|
||||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
2006
|
$
|
170,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
85,000
|
$
|
—
|
$
|
13,482
(8
|
)
|
$
|
268,482
|
||||||||||
|
Managing
Director and Chief of
|
||||||||||||||||||||||||||||
|
Lending
Operations
|
||||||||||||||||||||||||||||
____________
|
(1)
|
Bonus
amounts for 2006 are reported under the “Non-Equity Incentive Plan
Compensation” column.
|
|
(2)
|
Represents
cash incentive bonus award earned for 2006.
|
|
(3)
|
Included
within this column is the incremental cost to the Company associated
with
the named executive’s personal use of a Company-owned automobile, based on
the depreciation expense incurred by the Company for the
year.
|
|
(4)
|
For
2006, represents the aggregate incremental cost to us of perquisites
and
other personal benefits, and other compensation provided, totaling
$394,523, including: (a) $42,000 in supplemental housing payments,
(b)
$141,124 in preferential interest on employee savings accounts in
2006
(available to all employees), (c) $60,960 for Mr. Haligowski’s personal
use of chartered air transportation service paid for by the Company,
and
(d) $108,710 for club memberships and meeting attendance related
expenses.
Additional amounts included within “All Other Compensation” include life
insurance premiums, employer contributions to ITLA Capital’s 401(k) plan,
financial counseling and tax preparation fees, home computer
equipment and
internet service, and reimbursements for tax obligations incurred
by Mr.
Haligowski.
|
|
U
|
|
|
(5)
|
For
2006, represents the aggregate incremental cost to us of perquisites
and
other personal benefits, and other compensation provided, totaling
$82,832, including: (a) $45,802 in preferential interest on employee
savings accounts in 2006. Additional amounts included within “All Other
Compensation” include life insurance premiums, employer contributions to
ITLA Capital’s 401(k) plan, home computer equipment and internet service,
and club memberships.
|
|
(6)
|
For
2006, represents the aggregate incremental cost to us of perquisites
and
other personal benefits, and other compensation provided, totaling
$33,371, including: (a) $13,417 in preferential interest on employee
savings accounts in 2006. Additional amounts included within “All Other
Compensation” include life insurance premiums, employer contributions to
ITLA Capital’s 401(k) plan, and home computer equipment.
|
|
(7)
|
For
2006, represents the aggregate incremental cost to us of perquisites
and
other personal benefits, and other compensation provided, totaling
$23,700, including: (a) $13,327 in preferential interest on employee
savings accounts in 2006. Additional amounts included within “All Other
Compensation” include life insurance premiums, and employer contributions
to ITLA Capital’s 401(k) plan.
|
|
(8)
|
For
2006, represents the aggregate incremental cost to us of perquisites
and
other personal benefits, and other compensation provided, totaling
$13,482. Amounts included within “All Other Compensation” include life
insurance premiums, employer contributions to ITLA Capital’s 401(k) plan,
and preferential interest on employee savings accounts in 2006.
|
Agreements
with Mr. Haligowski
Employment
Agreement. On
February 24, 2006, we entered into an amended and restated employment agreement
with Mr. Haligowski, which constituted an amendment and restatement of his
Original Employment Agreement with ITLA Capital dated January 28, 2000 (the
"Employment Agreement"). The Employment Agreement has a five-year term which
commenced effective as of January 1, 2006 and is renewable on each subsequent
January 1st, as long as neither ITLA Capital, nor the Bank, has notified Mr.
Haligowski at least 90 days in advance that the term will not be so extended.
If
a "change in control" (as defined in the Employment Agreement) occurs during
the
term of the Employment Agreement, then notwithstanding the delivery of any
notice of non-renewal to Mr. Haligowski, the employment term will automatically
be extended until five years after the date of the change in
control.
The
Employment Agreement entitles Mr. Haligowski to: (1) an annual base salary
of
not less than $590,000; (2) participate in any performance-based awards and
discretionary bonuses paid to executive officers; (3) receive a minimum monthly
housing allowance of $3,500 and, at his election, a minimum monthly automobile
allowance of $2,600 or the use of a vehicle pursuant to our automobile policy;
(4) receive a personal life insurance policy, with premiums paid by us,
providing a death benefit of at least four times his annual base salary; (5)
receive memberships paid by us in certain organizations and clubs; (6) up to
$6,500 per year, plus imputed taxes, for the maintenance of his personal estate
and tax planning; and (7) participate in benefit plans and receive other fringe
benefits provided by us.
The
Employment Agreement provides that if Mr. Haligowski is "involuntarily
terminated" prior to a change in control, then he will: (1) receive a prorated
lump sum payment based on the amount of cash bonus and other cash incentive
compensation paid to him for our last completed fiscal year; (2) either (a)
continue to receive monthly through the remaining term of the agreement
one-twelfth of his base salary at the highest annual rate in effect during
the
three years before the termination date and one-twelfth of the average amount
of
cash bonus and cash incentive compensation earned by him during the two fiscal
years preceding the termination date or (b) at his election, receive the amount
of all payments described in (a) in a lump sum; (3) either (a) continue to
receive for himself and his dependents substantially the same medical, dental
and disability benefits at the same cost to him for five years after the date
of
termination, reduced to the extent he receives substantially the same coverage
at substantially the same cost to him from another employer, or (b) at his
election (or at our election, if coverage under our group plan is not available
to Mr. Haligowski and his dependents), receive an amount in cash equal to the
premium cost being paid by us before the termination date; (4) be provided
with
office space and secretarial support of the same type provided during his
employment for 18 months after the termination date; (5) receive title to owned
or leased vehicle being used by him; (6) receive all interests maintained by
us
in life insurance policies maintained on his life, including the cash surrender
values; and (7) become vested in all of his outstanding unvested stock options
and restricted stock awards held in the SERP.
The
Employment Agreement provides that if Mr. Haligowski is involuntarily terminated
in connection with or within five years after a change in control of ITLA
Capital, then he will receive a lump sum payment equal to 299% of his "base
amount," as defined in Section 280G of the Code, less the present value of
the
benefits to be received by him under ITLA Capital's Salary Continuation Plan
and
the accelerated vesting present value of stock options and restricted stock,
to
the extent such amounts are required to be considered in the calculation of
parachute payments under Section 280G of the Code (the "Lump Sum Change in
Control Payment"). Instead of receiving the full amount of the Lump Sum Change
in Control Payment, however, Mr. Haligowski may elect to receive the continued
health, medical and disability insurance benefits, 18 months of office space
and
secretarial support, title to his Company-owned or leased vehicle and ITLA
Capital's interests in the life insurance policies on his life, each as
described in the immediately preceding paragraph, in which case the amount
of
the Lump Sum Change in Control Payment will be reduced by the present value
of
these elected benefits (the "Elective Benefits"). In no event may the Lump
Sum
Change in Control Payment, prior to reduction for Elective Benefits, exceed
the
aggregate of 100% of the total value of the payments and benefits Mr. Haligowski
would receive under the Employment Agreement if the involuntarily termination
occurred prior to a change in control, plus 150% of his annual base salary
in
effect before the change in control. This resulting aggregate amount is equal
to
the value of Mr. Haligowski's change in control benefits under the Original
Employment Agreement, excluding the SERP change in control benefit referred
to
in the Original Employment Agreement of 3.95 times his annual base salary but
inclusive of the life insurance benefit described in the preceding paragraph
(the "Original Agreement Adjusted Change in Control Benefit"). The Employment
Agreement provides that if a change in control occurs on or after January 1,
2008, the Lump Sum Change in Control Payment prior to reduction for Elective
Benefits may not be less than the Original Agreement Adjusted Change in Control
Benefit less $1.0 million, notwithstanding the fact that this amount exceeds
299% of Mr. Haligowski's base amount.
The
Employment Agreement provides that if any of the change in control payments
or
benefits to be provided under the agreement in combination with any payments
or
benefits under other plans or arrangements constitute "excess parachute
payments" under Section 280G of the Code, Mr. Haligowski will be paid an
additional amount (referred to as a "gross up payment") that will offset, on
an
after tax basis, the effect of any excise tax consequently imposed upon him
under Section 4999 of the Code.
The
term
"Change in Control" means the occurrence of any of the following events with
respect to ITLA Capital, or with respect to the Bank: (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 ITLA
Capital, or the Bank representing 33.33% or more of ITLA Capital's or the Bank's
outstanding securities; (2) individuals who are members of the Board of
Directors of ITLA Capital or the Bank 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 ITLA Capital's or the
Bank'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 ITLA Capital or the Bank, or a similar transaction in which ITLA
Capital or the Bank 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 ITLA Capital or the Bank with any other
corporation other than a merger or consolidation in which the voting securities
of ITLA Capital or the Bank outstanding immediately prior thereto represent
at
least 66.67% of the total voting power represented by the voting securities
of
ITLA Capital or the Bank 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 ITLA Capital
or
the Bank; (2) any of the above mentioned events or occurrences involving any
other subsidiary of ITLA Capital or the Bank, although this may be amended
at a
later date; or (3) 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 term "involuntary termination"
is
defined to include termination of Mr. Haligowski's employment by ITLA Capital
or
the Bank (other than for cause or due to retirement after attaining age 65)
without his consent, by Mr. Haligowski following a material reduction of or
interference with his duties, responsibilities or benefits without his consent
or by ITLA Capital or the Bank (or their successors) or by Mr. Haligowski at
the
time of or within five years after a Change in Control.
Under
the
Employment Agreement, if Mr. Haligowski is terminated due to disability or
death, then he or his estate will be entitled to the same payments and benefits
to which he would have been entitled if he were involuntarily terminated prior
to a change in control, other than the continued use of office space and
secretarial support, plus a prorated amount of any bonus or other incentive
compensation for the year in which the termination occurs. If Mr. Haligowski
voluntarily terminates his employment other than for a reason that constitutes
involuntary termination or other than in connection with or within five years
after a change in control, he will receive his base salary and benefits earned
through the date of termination plus any benefit continuation required by law.
If Mr. Haligowski's employment is terminated for cause, ITLA Capital will have
no obligations to him under the Employment Agreement, other than any benefit
continuation required by law.
Non-competition
and Non-solicitation Agreement.
We
entered into a non-competition and non-solicitation agreement (the
"Non-Competition Agreement") with Mr. Haligowski on February 24, 2006. Like
the
Employment Agreement, the Non-Competition Agreement has a five-year term which
commenced effective as of January 1, 2006. Mr. Haligowski's forbearance
obligations under the Non-Competition Agreement begin on his employment
termination in connection with or following an acquisition of ITLA Capital
or
the Bank and continue for three years thereafter (the "Restricted Period").
Mr.
Haligowski will receive aggregate payments of $3.5 million during the Restricted
Period in consideration of his compliance with his obligations under the
Non-Competition Agreement during the Restricted Period. ITLA Capital has the
unilateral right to extend the term of the Non-Competition Agreement for an
additional five year term by adjusting the compensation to be paid to Mr.
Haligowski under that agreement.
Salary
Continuation Plan.
The
Salary Continuation Plan, which was originally adopted by ITLA Capital in March
2000 and in which Mr. Haligowski is currently the only participant, provides
that if the participant's employment is terminated for any reason other than
cause, or if the participant retires after attaining age 65, the participant
will begin receiving an annual salary continuation benefit six months thereafter
(or starting on the first day of the next calendar month, if termination is
due
to death or disability), payable monthly over 15 years. The amount of Mr.
Haligowski's annual salary continuation benefit is 75% of his average annual
base salary for the three full calendar years preceding the year in which
termination occurs or in which he attains age 65.
Information
regarding applicable severance and change in control benefits for Mr. Haligowski
is provided under the heading “Potential Payments Upon Termination of
Employment.”
2006
Grants of Plan-Based Awards
The
following table sets forth information regarding plan-based awards to our named
executive officers in 2006:
|
Name
|
Grant
Date
|
Estimated
Possible Payouts Under Non-Equity Incentive Plan Awards
Target
(1)
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
Target
(1)
|
All
Other Stock Awards: Number of Shares of Stock or Units
Maximum
(#)
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/Sh)
|
Grant
Date Fair Value of Stock and Option Awards
|
|||||||||||||||||||||
|
George
W. Haligowski
|
n/a
|
$
|
885,000
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
|
Norval
L. Bruce
|
n/a
|
|
$
|
124,100
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Timothy
M. Doyle
|
n/a
|
$
|
123,750
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
|
Lyle
C. Lodwick
|
n/a
|
$
|
117,500
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
|
Phillip
E. Lombardi
|
n/a
|
$
|
85,000
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
_______________
|
(1)
|
For
each executive officer represents target amount potentially payable
under
our Annual Executive Bonus Plan for 2006 (up to 150% of base salary
for
Mr. Haligowski and up to 50% of base salary for each of the other
named
executive officers) at the time the targets for these awards were
set by
the Committee and approved by the board in January 2006. The actual
amounts earned for 2006 under these awards are reflected in the Summary
Compensation Table under the “Non-Equity Incentive Plan Compensation”
column.
|
Outstanding
Equity Awards At December 31, 2006
The
following table provides information regarding each unexercised stock option
held by each of our named executive officers as of December 31,
2006:
|
|
Option
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
|
|||||||||||||||||||
|
George
W. Haligowski
|
45,000
|
—
|
—
|
$
|
18.00
|
2/2/2008
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
10,000
|
—
|
—
|
$
|
14.00
|
2/2/2009
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
37,500
|
—
|
—
|
$
|
23.00
|
2/19/2012
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
50,000
|
—
|
—
|
$
|
48.46
|
12/19/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Total
|
142,500
|
|||||||||||||||||||||||||||
|
Norval
L. Bruce
|
10,500
|
—
|
—
|
$
|
23.00
|
2/19/2012
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
12,500
|
—
|
—
|
$
|
48.46
|
12/19/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Total
|
23,000
|
|||||||||||||||||||||||||||
|
Timothy
M. Doyle
|
15,000
|
—
|
—
|
$
|
18.00
|
2/02/08
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
15,000
|
—
|
—
|
$
|
14.00
|
2/02/09
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
5,000
|
—
|
—
|
$
|
11.00
|
1/31/2010
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
15,000
|
—
|
—
|
$
|
23.00
|
2/19/2012
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
25,000
|
—
|
—
|
$
|
48.46
|
12/19/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Total
|
75,000
|
|||||||||||||||||||||||||||
|
Lyle
C. Lodwick
|
35,000
|
—
|
—
|
$
|
54.25
|
8/8/2015
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
12,500
|
—
|
—
|
$
|
48.46
|
12/19/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Total
|
47,500
|
|||||||||||||||||||||||||||
|
Phillip
E. Lombardi
|
22,500
|
—
|
—
|
$
|
53.33
|
6/24/2015
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
7,500
|
—
|
—
|
$
|
48.46
|
12/19/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Total
|
30,000
|
|||||||||||||||||||||||||||
Stock
Incentive Plans.
On July
27, 2005, ITLA Capital’s shareholders approved the ESIP and the 2005
Re-Designated, Amended and Restated Stock Option Plan For Nonemployee Directors
(the “Director Option Plan” and together with the ESIP the “Stock Option
Plans”). The Stock Option Plans were originally approved by shareholders on
October 18, 1995 and amendments and restatements of these plans were approved
by
shareholders on July 27, 2005.
In
accordance with the Stock Option Plans, officers, directors and our employees
are eligible to receive options to purchase common stock. Under the ESIP,
officers and employees are also eligible for awards of stock appreciation
rights, restricted stock, restricted stock units, performance shares and
performance units. The purpose of the Stock Option Plans is to enable us 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 interests with our interests.
Every one of our employees is eligible to be considered for the grant of awards
under the ESIP. The maximum number of shares of common stock that may be issued
pursuant to awards granted under the ESIP is 1,561,000 shares, provided that
each share issued pursuant to awards of stock appreciation rights, restricted
stock, restricted stock units, performance shares and performance units counts
against this limit as two shares. The maximum number of shares of common stock
that may be issued pursuant to awards granted under the Director Option Plan
is
70,000 shares. The maximum number of shares of common stock and shares with
respect to outstanding awards under the Stock Option Plan are subject to
adjustment in the event of a stock dividend, stock split, recapitalization
or
similar event.
The
Stock
Option Plans are administered by the Committee and, other than with respect
to
formula awards under the Director Option Plan described below, the Committee
has
full authority to select the employees and directors to receive awards and
to
grant such awards. Subject to provisions of the Stock Option Plans, 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 Plans are borne by us.
The
ESIP
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 and may include but are not limited to stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
shares and performance units. Under the Director Option Plan, each
person who was a non-employee director on the original effective date of the
plan (October 18, 1995) automatically received as of that date, and each person
who became or becomes a non-employee director after the original effective
date
of the plan automatically received or will receive, as of the date such person
became or becomes a non-employee director, non-qualified stock options to
acquire 5,000 shares of common stock, subject to adjustment as described above,
vesting in full on the one-year anniversary of the date of grant (referred
to as
the “initial award”). On the first, second, third, fourth and fifth
anniversaries of the initial award, each non-employee director automatically
received or will receive non-qualified stock options to acquire 1,000 shares
of
common stock, subject to adjustment as described above, vesting in full on
the
one-year anniversary of the date of grant (referred to as the “anniversary
awards”). In addition to the anniversary awards, each non-employee director is
eligible to receive grants of non-qualified stock options from time to time
in
the sole discretion of the Committee.
In
the
event of a change in control of ITLA Capital all awards under the Stock Option
Plans shall vest 100%. For purposes of the Stock Option Plans, a "change in
control" shall mean any of the following events:
(a)
we
receive a report on Schedule 13D filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Exchange Act disclosing that any
person, group, corporation or other entity is the beneficial owner directly
or
indirectly of 30% or more of our outstanding common stock;
(b)
any
person (as such term is defined in Section 13(d) of the Exchange Act), group,
corporation or other entity other than us or any corporation owned directly
or
indirectly by our stockholders in substantially the same proportions as their
ownership of stock in us, purchases shares pursuant to a tender offer or
exchange offer to acquire any of our common stock, (or securities convertible
into our common stock) for cash, securities or any other consideration, provided
that after consummation of the offer, the person, group, corporation or other
entity in question is the beneficial owner (as such term is defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 30% or more of our
outstanding common stock ;
(c)
our
stockholders approve (a) any consolidation or merger in which we or any
corporation owned directly or indirectly by our stockholders in substantially
the same proportions as their ownership of our common stock is not the
continuing or surviving corporation or pursuant to which shares of our common
stock would be converted into cash, securities or other property, or (b) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all of our assets; or
(d)
there
shall have been a change in a majority of the members of our Board of Directors
within a 12 month period unless the election or nomination for election by
our
stockholders of each new director was approved by the vote of two-thirds of
the
directors then still in office who were in office at the beginning of the 12
month period.
Awards
may not be granted under the Stock Option Plans after July 27, 2015, the tenth
anniversary of the shareholder approvals of the amendments and restatements
of
the Stock Option Plans.
2006
Option Exercises and Stock Vested
The
following table sets forth information about stock options exercised and shares
of restricted stock vested during the year ended December 31, 2006 for each
named executive officer:
|
Option
Awards
|
Stock
Awards
|
||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized on Exercise
|
Number
of Shares Acquired on Vesting (#)
|
Value
Realized on Vesting
|
|||||||||
|
George
W. Haligowski
|
20,000
|
$
|
805,000
|
—
|
—
|
||||||||
|
Norval
L. Bruce
|
—
|
—
|
—
|
—
|
|||||||||
|
Timothy
M. Doyle
|
—
|
—
|
—
|
—
|
|||||||||
|
Lyle
C. Lodwick
|
—
|
—
|
—
|
—
|
|||||||||
|
Phillip
E. Lombardi
|
—
|
—
|
—
|
—
|
|||||||||
Nonqualified
Deferred Compensation
The
following table sets forth information about compensation payable to each named
executive officer under the Deferral Plan (as defined below):
|
Name
|
Executive
Contributions in Last FY
|
Registrant
Contributions in Last FY
|
Aggregate
Earnings in Last FY (2)
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance at Last FYE
|
|||||||||||
|
George
W. Haligowski
|
$
|
—
|
$
|
—
|
$
|
436,273
|
$
|
—
|
$
|
4,386,090
|
||||||
|
Norval
L. Bruce
|
$
|
185,404(1
|
)
|
$
|
—
|
$
|
89,203
|
$
|
—
|
$
|
1,473,822
|
|||||
|
Timothy
M. Doyle
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Lyle
C. Lodwick
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Phillip
E. Lombardi
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
_______________
(1)
The
entire amount is reported as compensation for 2006 in the Summary Compensation
Table under the “Salary” column.
(2)
Based
on the performance during 2006 of the investment options (including, among
others, our Common Stock) selected by the named executive officers. Of the
amounts shown, $33,451 and $23,718, representing the portion of the preferential
interest credited to the accounts of Mr. Haligowski and Mr. Bruce, respectively,
were reported as compensation for 2006 for Messrs. Haligowski and Bruce in
the
Summary Compensation Table under the “Change in Pension Value and Non-qualified
Deferred Compensation Earnings” column.
The
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. None of the named executive officers currently
participates in the Supplemental Plan. 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
participant. Both of these plans are unfunded plans, meaning that all benefits
payable thereunder are payable from our general assets, and funds available
to
pay benefits are subject to the claims of our general creditors. We have
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.
Supplemental
Executive Retirement Plan
Pursuant
to the SERP, the Committee allocated to participants on a tax-deferred basis
shares of restricted stock issued to the SERP under our RRP. The last remaining
RRP shares held in the SERP were allocated to SERP participants in 2005. Under
the terms of the SERP, Mr. Haligowski received an annual restricted stock
allocation equal to one-third of his base salary and all other participants
received an annual restricted stock allocation equal to one-fifth of base
salary, subject to the approval of the Committee, which could also allocate
a
greater or lesser award or no award in its discretion. For this purpose, each
share of common stock issued to the SERP has been valued at $9.00 per share,
the
fair market value of the common stock on the date of issuance from the RRP
to
the SERP. All awards made under the SERP are now fully vested. The following
table sets forth information about the SERP benefits payable to each named
executive officer:
|
Name
|
Executive
Contributions in Last FY
|
Registrant
Contributions in Last FY
|
Aggregate
Earnings in Last FY (1)
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance at Last FYE
|
|||||||||||
|
George
W. Haligowski
|
$
|
—
|
$
|
—
|
$
|
1,546,185
|
$
|
—
|
$
|
9,460,178
|
||||||
|
Norval
L. Bruce
|
$
|
—
|
$
|
—
|
$
|
358,597
|
$
|
—
|
$
|
2,194,673
|
||||||
|
Timothy
M. Doyle
|
$
|
—
|
$
|
—
|
$
|
299,178
|
$
|
—
|
$
|
1,831,114
|
||||||
|
Lyle
C. Lodwick
|
$
|
—
|
$
|
—
|
$
|
30,893
|
$
|
—
|
$
|
189,655
|
||||||
|
Phillip
E. Lombardi
|
$
|
—
|
$
|
—
|
$
|
26,336
|
$
|
—
|
$
|
162,090
|
||||||
____________
|
(1)
|
Includes
value of additional shares allocated pursuant to dividend reinvestment,
as
well as the change in fair value during the year related to SERP
shares
maintained within each participants’ respective trust account. None of
these amounts were reported as compensation for 2006 in the Summary
Compensation Table.
|
Change
of Control Agreements
We
recently entered into change in control severance agreements with Messrs. Bruce,
Doyle and Lodwick and Lombardi. In the case of Messrs. Bruce and Doyle, these
agreements replaced their existing change in control severance agreements with
ITLA Capital. The terms of the agreements are three years for the agreements
with Messrs. Bruce and Doyle and one year for the agreements with Messrs.
Lodwick and Lombardi, beginning effective as of February 1, 2006 and renewable
on each subsequent February 1st, as long as neither ITLA Capital nor the officer
gives notice to the other at least 90 days in advance that the term will not
be
so extended. If a "change in control" occurs during the term of the agreement,
then notwithstanding the delivery of any non-renewal notice, the agreement
term
will automatically be extended until three years, in the case of the agreements
with Messrs. Bruce and Doyle, or two years, in the case of the agreements with
Messrs. Lodwick and Lombardi, after the date of the change in control.
The
agreements with Messrs. Bruce and Doyle provides that if their employment is
“terminated without cause” which means a termination for any reason other than
cause within six months before or within three years after a change in control,
or if the officer terminates his employment for any reason within one year
after
a change in control, he will: (1) receive a lump sum payment equal to 299%
of
his "base amount" (not to exceed $1.0 million in the case of Mr. Bruce and
$1.25
million in the case of Mr. Doyle); (2) either (a) continue to receive
substantially the same health, dental and life insurance benefits for two years
after the termination date, in the case of Mr. Bruce, and three years after
the
termination date, in the case of Mr. Doyle, or (b) at his election, (or at
ITLA
Capital's election, if coverage under ITLA Capital's group plan is not available
to the officer) receive an amount in cash equal to the premium cost being paid
by ITLA Capital before the termination date; (3) receive title to ITLA
Capital-owned or leased vehicle being used by him or, if the officer receives
a
monthly car allowance in lieu of a Company vehicle, an amount in cash equal
to
24 times, in the case of Mr. Bruce, and 36 times, in the case of Mr. Doyle,
the
greater of the monthly allowance on the date of the change in control or on
the
termination date; and (4) become vested in all of his outstanding unvested stock
options and restricted stock awards.
The
agreements with Messrs. Lodwick and Lombardi provide that if the officer's
employment is "involuntarily terminated" in connection with or within two years
after a change in control, he or she will: (1) receive a lump sum payment equal
to the sum of (a) 1.5 times his base salary on the date of the change in control
or the date of termination, whichever is greater and (b) a prorated bonus amount
for the year in which the termination occurs based on the officer's prior year
annual bonus, (2) either (a) continue to receive substantially the same health,
dental and life insurance benefits for 18 months after the termination date
or
(b) at his election (or at ITLA Capital's election, if coverage under ITLA
Capital's group plan is not available to the officer), receive an amount in
cash
equal to the premium cost being paid by ITLA Capital before the termination
date; (3) receive title to ITLA Capital-owned or leased vehicle being used
by
him or, if the officer receives a monthly car allowance in lieu of a Company
vehicle, an amount in cash equal to 18 times the greater of the monthly
allowance on the date of the change in control or on the termination date;
and
(4) become vested in all of his outstanding unvested stock options and
restricted stock awards. The term "Involuntary Termination" means the
termination of the employment of the executive without his express written
consent or a material diminution of or interference with the executive's duties,
responsibilities and benefits as these same duties, responsibilities and
benefits exist the day prior to the Change of Control, including (without
limitation) any of the following actions unless consented to in writing by
the
executive: (1) a requirement that the executive be based at a place other than
the executive's work location immediately prior to the Change of Control or
within 35 miles thereof, except for reasonable business travel; (2) a material
demotion of the executive; (3) a material reduction in the number or seniority
of other personnel reporting to the executive 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 executive, other than as part of a company-wide
reduction in staff; (4) a material adverse change in the executive'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
executive; (6) a material change in the reporting relationship to which the
executive reports prior to the Change of Control; or (7) a material increase
or
decrease in business responsibilities and duties, such that the executive'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 executive attains age 65, death,
or
termination of employment by us due to disability.
Each
agreement provides that to the extent the value and amounts of benefits under
the agreement, together with any other amounts and the value of other benefits
received by the officer in connection with a change in control would cause
any
amount to be non-deductible by ITLA Capital pursuant to Section 280G of the
Code, then the amounts and benefits under the agreement will be reduced to
the
extent necessary to avoid the non-deductibility of any such amounts and benefits
under Section 280G, assuming a change in control.
The
following additional definitions apply to the termination and change in control
provisions in the change in control agreements:
A
termination for “Cause” occurs if we terminate employment because of (i) willful
and continued failure by the executive substantially to perform his duties
(other than a failure resulting from physical or mental illness) after a demand
for substantial performance is delivered to the executive by the Chairman of
the
Board of Directors or the Chief Executive Officer of the Company which
specifically identifies the manner in which the executive has not substantially
performed his duties, (ii) the executive'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 executive's
employment with the Company or otherwise interfering with the executive'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 Executive; provided that no act or failure to act shall be considered
"willful" unless done or omitted to be done by the Executive 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
Executive's attention to matters not directly 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
Executive's engaging in such activities. The Executive shall not be deemed
to
have been Terminated for Cause unless and until the Company has delivered to
the
Executive 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 Executive 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 that the
Executive has engaged in conduct described in this Section 1(f) and specifying
the particulars in detail.
A
“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 Exchange Act is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of ITLA Capital
representing 33.33% or more of ITLA Capital's outstanding securities; (2)
individuals who are members of the Board of Directors of ITLA Capital 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 ITLA Capital '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 ITLA Capital or a similar
transaction in which ITLA Capital 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 ITLA Capital with any
other corporation other than a merger or consolidation in which the voting
securities of ITLA Capital outstanding immediately prior thereto represent
at
least 66.67% of the total voting power represented by the voting securities
of
ITLA Capital 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 ITLA Capital; 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.
Potential
Payments Upon Termination of Employment
The
following tables summarize the approximate value of the termination payments
and
benefits that the named executive officers would have received if their
employment had been terminated on December 29, 2006 under the circumstances
shown. The tables exclude (i) amounts accrued through December 29, 2006 that
would be paid in the normal course of continued employment, such as accrued
but
unpaid salary and bonus amounts, (ii) vested account balances under our 401(k)
plan, and (iii) vested account balances under our Deferral Plan and the SERP,
as
described under “Nonqualifed Deferred Compensation” and “Supplemental Executive
Retirement Plan.”
George
W. Haligowski
|
Termination
Scenario
|
Lump
Sum Prorated Bonus (1)
|
Salary/Bonus
Continuation and Non-Compete (2)
|
Health
Coverage Continuation (3)
|
Accelerated
Vesting of Stock and Option Awards (4)
|
Death
Benefit Under Supplemental Life Insurance Policy (5)
|
Other
Benefits (6)
|
Payment
of 299% of “Base Amount”(7)
|
Tax
Gross Up Payment (8)
|
|||||||||||||||||
|
If
termination for cause occurs
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||
|
If
voluntary termination (not constituting “Involuntary Termination” under
Employment Agreement) occurs
|
$
|
—
|
$
|
5,590,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||
|
If
“Involuntary Termination” under Employment Agreement (not in connection
with or within five years after change in control) occurs
|
$
|
975,000
|
$
|
12,270,000
|
$
|
62,000
|
$
|
—
|
$
|
—
|
$
|
1,098,000
|
$
|
—
|
$
|
—
|
|||||||||
|
If
“Involuntary Termination” under Employment Agreement in connection with or
after change in control occurs
|
$
|
—
|
$
|
9,090,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
9,905,701
|
$
|
—
|
|||||||||
|
If
termination occurs as a result of disability
|
$
|
975,000
|
$
|
12,270,000
|
$
|
62,000
|
$
|
—
|
$
|
—
|
$
|
858,000
|
$
|
—
|
$
|
—
|
|||||||||
|
If
termination occurs as a result of death
|
$
|
975,000
|
$
|
12,270,000
|
$
|
62,000
|
$
|
—
|
$
|
1,700,000
|
$
|
858,000
|
$
|
—
|
$
|
—
|
|||||||||
____________
|
(1)
|
Payable
to Mr. Haligowski (or to his estate or designated beneficiary, in
the
event of death) under his employment agreement if his employment
is
“Involuntarily Terminated” not in connection with or after a change in
control or due to disability or death.
|
| (2) |
Payable
to Mr. Haligowski under his employment agreement and non-competition
and
non-solicitation agreement and the Salary Continuation Plan for the
applicable period described under “Agreements with Mr.
Haligowski-Employment Agreement,”“-Non-Competition and Non-Solicitation
Agreement” and “-Salary Continuation Plan.” These payments are comprised
of the following: (i) in the case of voluntary termination not
constituting “Involuntary Termination” under Mr. Haligowski’s employment
agreement, the present value of the total payments that would be
made to
him under the Salary Continuation Plan, using a discount rate of
5%
($5,590,000); (ii) in the case of Involuntary Termination not in
connection with or after a change in control, or termination due
to
disability or death (A) the present value of the total payments that
would
be made to him (or his beneficiary, in the event of his death) under
the
Salary Continuation Plan, using a discount rate of 5% ($5,590,000)
and (B)
the aggregate amount of the total monthly salary and bonus continuation
payments (through December 29, 2010) under his employment agreement
($6,680,000, or $139,165 per month); and (iii) in the case of Involuntary
Termination in connection with or after a change in control, (A)
the
present value of the total payments that would be made to him under
the
Salary Continuation Plan, using a discount rate of 8% ($5,590,000)
and (B)
the total payments that would be made under his non-competition and
non-solicitation agreement ($3,500,000).
|
|
(3)
|
Represents
the cost of providing the medical, dental and disability benefits
described under “Agreements with Mr. Haligowski-Employment
Agreement.”
|
|
(4)
|
All
stock options and SERP allocations are
vested.
|
|
(5)
|
Represents
death benefit under supplemental life insurance policy maintained
for Mr.
Haligowski.
|
|
(6)
|
Represents
the cost or value of $240,000 for continued use of office space and
secretarial support, $103,000 for the transfer to Mr. Haligowski
of title
to his leased vehicle, and $755,000 representing the transfer to
Mr.
Haligowski of our interest in life insurance policies on his life.
The
cost of office space and secretarial support are excluded if termination
occurs as a result of disability or death as these benefits would
not be
provided under such circumstances.
|
|
(7)
|
Represents
lump sum amount payable to Mr. Haligowski under his employment agreement
in the event his employment is Involuntarily Terminated in connection
with
or following a change in control of the Company, as described under
“Agreements with Mr. Haligowski-Employment
Agreement.”
|
|
(8)
|
Based
on the amounts shown in the table, no tax gross up payment would
be
payable to Mr. Haligowski under his employment agreement. See “Agreements
with Mr. Haligowski - Employment
Agreement.”
|
Norval
L. Bruce
|
Termination
Scenario
|
Payment
of 299% of “Base Amount”(1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
|||||||||
|
If
“Termination Without Cause” under his Change of Control Agreement in
connection with or within 36 months after change in control
occurs
|
$
|
1,000,000
|
$
|
25,504
|
$
|
—
|
$
|
84,445
|
|||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Bruce under his change of control
agreement
in the event his employment is terminated in connection with or following
a change in control of the Company, as described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
All
stock options and SERP allocations are
vested.
|
|
(4)
|
Represents
the cost or value of $62,925 for the transfer to Mr. Bruce of title
to his
leased vehicle, $3,520 for the transfer to Mr. Bruce of home-based
computer equipment and $18,000 for the transfer to Mr. Bruce of our
interest in a golf club
membership.
|
Timothy
M. Doyle
|
Termination
Scenario
|
Payment
of 299% of “Base Amount”(1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Death
Benefit under Supplemental Life Insurance Policy (4)
|
Other
Benefits (5)
|
|||||||||||
|
If
“Termination Without Cause” under his Change of Control Agreement in
connection with or within 36 months after change in control
occurs
|
$
|
1,250,000
|
$
|
45,813
|
$
|
—
|
$
|
—
|
$
|
69,593
|
||||||
|
If
termination occurs as a result of death
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
250,000
|
$
|
—
|
||||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Doyle under his change of control
agreement
in the event his employment is terminated in connection with or following
a change in control of the Company, as described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
All
stock options and SERP allocations are
vested.
|
|
(4)
|
Represents
death benefit payable under supplemental life insurance policy maintained
by the Company for Mr. Doyle’s
benefit.
|
|
(5)
|
Represents
the cost or value of $66,203 for the transfer to Mr. Doyle of title
to his
leased vehicle and $3,390 for the transfer to Mr. Doyle of home-based
computer equipment.
|
Lyle
C. Lodwick
|
Termination
Scenario
|
Lump
Sum Payment (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
|||||||||
|
If
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$
|
412,488
|
$
|
16,785
|
$
|
—
|
$
|
49,375
|
|||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Lodwick under his change of control
agreement in the event his employment is “Involuntarily Terminated” in
connection with or following a change in control of the Company,
as
described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
All
stock options and SERP allocations are
vested.
|
|
(4)
|
Represents
the cost or value of $49,375 for the transfer to Mr. Lodwick of title
to
his leased vehicle.
|
Phillip
E. Lombardi
|
Termination
Scenario
|
Lump
Sum Payment (1)
|
Health
Coverage and Life Insurance Continuation (2)
|
Accelerated
Vesting of Stock and Option Awards (3)
|
Other
Benefits (4)
|
|||||||||
|
If
“Involuntary Termination” under Change in Control Severance Agreement in
connection with or within 24 months after change in control
occurs
|
$
|
335,805
|
$
|
9,658
|
$
|
—
|
$
|
33,940
|
|||||
____________
|
(1)
|
Represents
lump sum amount payable to Mr. Lombardi under his change of control
agreement in the event his employment is “Involuntarily Terminated” in
connection with or following a change in control of the Company,
as
described under “Change of Control
Agreements.”
|
|
(2)
|
Represents
the cost of providing the health, dental and life insurance benefits
described under “Change of Control
Agreements.”
|
|
(3)
|
All
stock options and SERP allocations are
vested.
|
|
(4)
|
Represents
the cost or value of $33,940 for the transfer to Mr. Lombardi of
title to
his leased vehicle.
|
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis contained above with management and, based on such review and
discussion, the Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this Report on
Form
10-K.
Submitted
by the Compensation Committee of ITLA Capital’s Board of Directors:
Jeffrey
L. Lipscomb
Sandor
X.
Mayuga
Hirotaka
Oribe
Compensation
Committee Interlocks and Insider Participation
No
member
of the Compensation Committee is a current or former officer or employee of
ITLA
Capital or any of its subsidiaries. None of our executive officers has served
on
the board of directors or the Committee of any other entity that had an
executive officer serving on our Board of Directors or on the Compensation
Committee of our Board of Directors.
Director
Compensation
The
following table sets forth certain information regarding the compensation earned
by or awarded to each director, who is not also a named executive officer,
who
served on our Board of Directors in 2006. Directors who are employees of ITLA
Capital are not compensated for their service as directors.
|
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards (1)
|
Non-Equity
Incentive Plan Compensation
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
|
All
Other Compensation (2)
|
Total
|
|||||||||||||||
|
Jeffrey
L. Lipscomb
|
$
|
45,000
|
—
|
—
|
—
|
—
|
$
|
5,000
|
$
|
50,000
|
||||||||||||
|
Preston
Martin
|
$
|
42,000
|
—
|
$
|
2,492
|
—
|
—
|
$
|
15,000
|
$
|
59,492
|
|||||||||||
|
Sandor
X. Mayuga
|
$
|
40,000
|
—
|
—
|
—
|
—
|
$
|
—
|
$
|
40,000
|
||||||||||||
|
Hirotaka
Oribe
|
$
|
46,000
|
—
|
—
|
—
|
—
|
$
|
15,000
|
$
|
61,000
|
||||||||||||
|
Robert
R. Reed
|
$
|
45,000
|
—
|
—
|
—
|
—
|
$
|
5,000
|
$
|
50,000
|
||||||||||||
_______________
|
(1)
|
|
Amount
in the table represent the compensation cost of stock options recognized
for 2006 for financial statement reporting purposes pursuant to SFAS
No.
123(R), and includes the cost attributable to grants made in 2006
and in
prior years. The assumptions we used in calculating this amount are
set
forth in Item 8. Financial Statements and Supplementary Data--Condensed
Consolidated Financial Statements—Notes to Financial Statements—Note
1—Summary of Significant Accounting Policies—Stock-Based
Compensation. As of December 31, 2006, total shares underlying stock
options held by the directors were as follows: Mr. Lipscomb - 6,500
shares; Mr. Martin - 10,000 shares; Mr. Mayuga - 6,500 shares; Mr.
Oribe -
6,500 shares; and Mr. Reed - 6,500 shares. On
October 30, 2006, Mr. Martin was granted an option for 1,000 shares
at an
exercise price of $57.48 as an automatic anniversary award pursuant
to the
Director Stock Option Plan (see “—Stock Incentive Plans”). This grant date
fair value of this award to Mr. Martin, computed in accordance with
SFAS
No. 123(R), was approximately $15,000.
|
|
(2)
|
Amounts
in this column represent honorariums paid during 2006 to Mr. Lipscomb,
Mr.
Oribe, and Mr. Reed, as well as an annual retainer fee for Mr. Martin,
as
explained below.
|
Director
Compensation Arrangements. During 2006, each non-employee director was paid
a
monthly fee of $2,250 for serving on our Board of Directors and $1,000 for
each
Board or Committee meeting attended for service on such committee. In addition,
Director Reed received an honorarium of $5,000 for his active assistance in
legislative matters during 2006, Director Lipscomb received an honorarium of
$5,000 for his active assistance with compensation matters and chairmanship
of
the Compensation Committee, and Director Oribe received an honorarium of $15,000
for his extensive work with the Executive Committee and large loan approval
process. In 2006, Director Martin received an annual retainer fee of $15,000
for
his service as Chairman of the Audit Committee. Directors are also eligible
to
receive stock options under the Director Stock Option Plan (see “—Stock
Incentive Plans”). Mr. Martin, who received an automatic anniversary award under
the Director Stock Option Plan described in footnote 1 to the table above,
was
the only non-employee director who received an option grant in 2006.
We
pay
for or reimburse our directors’ travel, lodging and other reasonable
out-of-pocket expenses in connection with attendance at board, committee and
stockholder meetings, and for other reasonable expenses related to board service
such as director education.
Voluntary
Retainer Stock and Deferred Compensation Plan.
In 1996,
we 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 non-employee 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 our common stock, each non-employee director
has
credited to his Stock Unit Account an additional number of Stock Units in an
amount determined under the Outside Director Plan. Each non-employee director’s
Stock Unit Account will be settled by delivering to the non-employee director
(or his beneficiary) the number of shares of our common stock equal to the
number of whole Stock Units then credited to the non-employee 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.
To
date,
no amounts have been deferred under the Outside Director Plan.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
At
March
5, 2007, we had 5,527,651 shares of common stock outstanding.
The
following table sets forth, as of March 5, 2007, certain information as to
those
persons who were known by management to be beneficial owners of more than five
percent of our common stock outstanding.
|
Beneficial
Owner
|
Shares
Beneficially Owned
|
Percent
of Class
|
|||||
|
Dimensional
Fund Advisors, LP
|
478,886
(1
|
)
|
8.66
|
%
|
|||
|
1299
Ocean Avenue, 11th Floor
Santa
Monica, CA 90401
Franklin
Mutual Advisers, LLC
|
445,796
(2
|
)
|
8.06
|
%
|
|||
|
51
John F. Kennedy Parkway
Short
Hills, NJ 07078
Thomson
Horstmann & Bryant, Inc.
|
407,009
(3
|
)
|
7.36
|
%
|
|||
|
Park
80 West, Plaza One
Saddle
Brook, NJ 07663
Barclays
Global Advisors, NA, et. al
|
400,532
(4
|
)
|
7.25
|
%
|
|||
|
45
Fremont Street
San
Francisco, CA 94105
Wellington
Management Company, LLP
|
374,430
(5
|
)
|
6.77
|
%
|
|||
|
75
State Street
Boston,
MA 02109
George
W. Haligowski
|
335,454
(6
|
)
|
5.92
|
%
|
|||
|
888
Prospect Street, Suite 110
La
Jolla, CA 92037
|
|||||||
____________
(1) As
reported by Dimensional Fund Advisors, LP ("Dimensional") on a Schedule 13G
amendment filed on February 9, 2007 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. Dimensional reported
sole
voting and dispositive powers as to all of the 478,886 shares, and shared voting
and dispositive powers as to none of the 478,886 shares covered by the
report.
(2) As
reported by Franklin Mutual Advisers, LLC ("Franklin") on a Schedule 13G
amendment filed on February 11, 2005 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. Franklin reported sole
voting and dispositive powers as to all of the 445,796 shares, and shared voting
and dispositive powers as to none of the 445,796 shares covered by the
report.
(3)
As reported by Thomson Horstmann & Bryant, Inc., ("Thomson") on a Schedule
13G amendment filed on January 29, 2007 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Thomson
reported sole voting power as to 221,206 shares, sole dispositive power as
to
all of the 407,009 shares, and shared voting and dispositive power as to none
of
the 407,009 shares covered by the report.
(4) As
reported by Barclays Global Investors, NA., Barclays Global Fund Advisors,
Barclays Global Investors, Ltd., Barclays Global Investors Japan Trust and
Banking Company Limited and Barclays Global Investors Japan Limited on a
Schedule 13G filed on January 23, 2007 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. With respect
to the 400,532 shares listed, Barclays Global Investors, NA., reported sole
voting power as to 271,864 shares, sole dispositive power as to 308,626 shares
and shared voting and dispositive powers as to none of such shares, and Barclays
Global Fund Advisors reported sole voting and dispositive powers as to 91,906
shares, and shared voting and dispositive powers as to none of such
shares.
(5) As
reported by Wellington Management Company, LLP ("WMC") on a Schedule 13G
amendment filed on February 14, 2007 with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. WMC reported sole voting
and dispositive powers as to none of the 374,430 shares, shared voting power
as
to 210,700 shares, and shared dispositive power as to all of the 374,430 shares
covered by the report.
(6) Includes
142,500 shares underlying stock options which were exercisable as of March
5,
2007, 163,782 shares held in Mr. Haligowski’s SERP account in the rabbi trust
established by the Company and 29,172 held in Mr. Haligowski’s deferred
compensation plan account in the rabbi trust.
The
following table sets forth, as of March 5, 2007, 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.
|
Beneficial
Owner
|
Shares
Beneficially
Owned
(1)(2)(3)
|
Percent
of
Class
|
|||||
|
George
W. Haligowski
|
335,454
|
5.92
|
%
|
||||
|
Timothy
M. Doyle
|
106,701
|
1.90
|
|||||
|
Norval
L. Bruce
|
61,195
|
1.10
|
|||||
|
Lyle
C. Lodwick
|
50,782
|
0.91
|
|||||
|
Phillip
E. Lombardi
|
32,805
|
0.59
|
|||||
|
Sandor
X. Mayuga
|
12,300
|
0.22
|
|||||
|
Preston
Martin
|
11,166
|
0.20
|
|||||
|
Robert
R. Reed
|
7,800
|
0.14
|
|||||
|
Jeffrey
L. Lipscomb
|
7,100
|
0.13
|
|||||
|
Hirotaka
Oribe
|
6,700
|
0.12
|
|||||
|
All
Directors and Executive Officers as a Group (10 Persons)
|
632,003
|
10.75
|
|||||
____________
| (1) |
Includes
shares held directly, as well as 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.
|
| (2) |
Includes
shares underlying exercisable options and options exercisable within
60
days of March 5, 2007 as follows: Chairman Haligowski - 142,500 shares;
Director Lipscomb - 6,500 shares; Director Mayuga - 6,500 shares;
Director
Oribe - 6,500 shares; Director Reed - 6,500 shares; Director Martin
-
9,000 shares; Vice Chairman Bruce - 23,000 shares; Timothy M. Doyle
-
75,000 shares; Lyle C. Lodwick - 47,500 shares; Phillip E. Lombardi
-
30,000 shares; and all directors and executive officers as a group
-
353,000 shares.
|
| (3) |
Includes
vested SERP account shares held in the rabbi trust established by
the
Company, as follows: Chairman Haligowski -163,782 shares; Vice Chairman
Bruce - 37,995 shares; Timothy M. Doyle - 31,701 shares; Lyle C.
Lodwick -
3,282 shares; Phillip E. Lombardi - 2,805 shares and all directors
and
executive officers as a group - 239,565. Also includes 29,172 shares
held
for Mr. Haligowski in his deferred compensation plan account in the
rabbi
trust.
|
The
following table sets forth information as of December 31, 2006 with respect
to
compensation plans under which shares of our common stock may be
issued:
Equity
Compensation Plan Information
|
Plan
Category
|
Number
of Shares to
be
issued upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
And
Rights
|
Number
of Shares
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans
(Excluding
Shares
Reflected
in the
First
Column) (1)
|
|||||||
|
Equity
compensation plans approved by stockholders
|
545,984
|
$
|
35.73
|
264,344
|
||||||
|
Equity
compensation plans not approved by stockholders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Total
|
545,984
|
$
|
35.73
|
264,344
|
||||||
____________
| (1) |
This
amount includes 125,000 shares issuable under our 1996 Voluntary
Retainer
Stock and Deferred Compensation Plan for Outside Directors, described
under “Item 11. Executive Compensation — Directors Compensation.” Under
the Company’s 2005 Re-Designated, Amended and Restated Employee Stock
Incentive Plan, up to 65,422 of the 130,844 shares remaining available
for
issuance under that plan as of December 31, 2006 could be issued
to plan
participants pursuant to awards of restricted stock, restricted stock
units, performance shares and/or performance
units.
|
Item
13. Certain Relationships and Related Transactions, and
Director Independence
Certain
Relationships and Related Transactions.
Our Code
of Business Conduct and Ethics provides that all related party transactions
(defined as transactions requiring disclosure under Item 404 of Securities
and
Exchange Commission Regulation S-K) must be approved reviewed and approved
by a
majority of our disinterested independent directors.
During
the year, we also the services of Keesal, Young & Logan. Director Mayuga is
a partner in that law firm. During 2006, this law firm received $16,000 in
legal
fees from ITLA Capital and the Bank.
Director
Independence. Pursuant
to the NYSE’s listing standards, we are required to have a majority of
independent directors, and no director qualifies as independent unless our
Board
of Directors has affirmatively determined that the director has no material
relationship with the Company. As permitted by the NYSE’s listing standards, our
Board of Directors has
adopted categorical standards to assist it in making determinations of
independence. These standards are contained in Section 1 of our Corporate
Governance Guidelines, which are posted on our website at www.itlacapital.com,
under
“Investor Relations” and then under “Governance.” Our Board has determined that
Directors Lipscomb, Martin, Mayuga, Oribe and Reed
have no
material relationships with us, and therefore are independent directors of
the
Company. This determination was based upon the fact that other than Director
Mayuga, none of these directors has any relationship with the Company other
than
as a director and member of committees of the Board. In making its determination
that Director Mayuga is independent, the Board considered the relationship
disclosed above under “-Certain Relationships and Related
Transactions.”
Item
14. Principal Accountant Fees and
Services
During
the fiscal years ended December 31, 2006 and 2005, Ernst & Young LLP
provided various audit, audit related and non-audit services to the Company.
Set
forth below are the aggregate fees billed for these services:
|
(a)
|
Audit
Fees: Aggregate fees billed for professional services rendered for
the
audits of the Company’s annual financial statements and internal controls
over financial reporting, and reviews of financial statements included
in
the Company’s Quarterly Reports on Form 10-Q for those fiscal years:
$332,000 - 2006; $306,000 - 2005.
|
|
(b)
|
Audit
Related Fees: Aggregate fees billed for professional services rendered
related to audits of employee benefit plans, consultation related
to the
implementation of the Sarbanes-Oxley Act, and consultation on accounting
matters: $20,000 - 2006; $34,000 -
2005.
|
| (c) |
Tax
Fees: Aggregate fees billed for professional services rendered related
to
tax compliance, tax advice and tax return preparation: $95,000- 2006;
$165,000 - 2005.
|
|
(d)
|
All
other fees: Aggregate fees billed for professional services rendered
in
connection with the review and consultation on various issues relating
to
employment and other benefit related contracts: $22,000 - 2006; None
-
2005.
|
The
audit
committee preapproves all audit and permissible non-audit services to be
provided by Ernst & Young LLP and the estimated fees for these services.
None of the services provided by Ernst & Young LLP described in items (a) -
(d) above was approved by the audit committee pursuant to a waiver of the
pre-approved requirements of the SEC’s rules and regulations.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)(1)
Financial Statements:
Our
consolidated financial statements, and Report of Independent Registered Public
Accountants thereon, are included in this Form 10-K at the pages listed
below:
|
|
Page
|
|
43
|
|
|
44
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
49
|
|
|
50
|
(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.
(a)(3)
Exhibits:
See
Exhibit Index.
Pursuant
to the requirements of Section 13 or 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 16, 2007
|
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 on behalf of
the Registrant
and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
George W. Haligowski
|
Chairman
of the Board, President and
|
March
16, 2007
|
|
George
W. Haligowski
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
||
|
/s/
Timothy M. Doyle
|
Executive
Managing Director and
|
March
16, 2007
|
|
Timothy
M. Doyle
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
||
|
/s/
Norval L. Bruce
|
Director
|
March
16, 2007
|
|
Norval
L. Bruce
|
||
|
/s/
Jeffrey L. Lipscomb
|
Director
|
March
16, 2007
|
|
Jeffrey
L. Lipscomb
|
||
|
/s/
Sandor X. Mayuga
|
Director
|
March
16, 2007
|
|
Sandor
X. Mayuga
|
||
|
/s/
Robert R. Reed
|
Director
|
March
16, 2007
|
|
Robert
R. Reed
|
||
|
/s/
Hirotaka Oribe
|
Director
|
March
16, 2007
|
|
Hirotaka
Oribe
|
||
|
/s/
Preston Martin
|
Director
|
March
16, 2007
|
|
Preston
Martin
|
|
Regulation
S-K Exhibit Number
|
Document
|
Reference
to Prior Filling or Exhibit Number Attached
Hereto
|
||
|
3.1
|
Certificate
of Incorporation
|
**
|
||
|
3.2
|
Bylaws,
as amended
|
***
|
||
|
4
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
**********
|
||
|
10.1
|
2005
Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
Directors (“NEDP”)
|
*****
|
||
|
10.2
|
2005
Re-Designated, Amended and Restated Employee Stock Incentive Plan
(“ESIP”)
|
********
|
||
|
10.3a
|
Nonqualified
(Non-Employer Securities) Deferred Compensation Plan
|
********
|
||
|
10.3b
|
Nonqualified
(Employer Securities Only) Deferred Compensation Plan
|
********
|
||
|
10.4
|
Supplemental
Salary Savings Plan
|
*
|
||
|
10.5a
|
Amended
and Restated Employment Agreement with George W.
Haligowski
|
********
|
||
|
10.5b
|
Non-Competition
and Non-Solicitation Agreement with George W. Haligowski
|
********
|
||
|
10.6
10.7
10.8
10.9
|
Change
in Control Severance Agreement with Norval L. Bruce
Change
in Control Severance Agreement with Timothy M. Doyle
Change
in Control Severance Agreement with Lyle C. Lodwick
Change
in Control Severance Agreement with Phillip E. Lombardi
|
********
********
********
10.9
|
||
|
10.10
|
Recognition
and Retention Plan
|
**
|
||
|
10.11
|
Voluntary
Retainer Stock and Deferred Compensation Plan for Outside
Directors
|
****
|
||
|
10.12
|
Amended
and Restated Supplemental Executive Retirement Plan
|
********
|
||
|
10.13
|
Amended
and Restated ITLA Capital Corporation Rabbi Trust
Agreement
|
*********
|
||
|
10.14
|
Amended
and Restated Salary Continuation Plan
|
********
|
||
|
10.15
|
Form
of Incentive Stock Option Agreement under ESIP
|
******
|
||
|
10.16
10.17
|
Form
of Non-Qualified Stock Option Agreement under the ESIP
Form
of Non-Qualified Stock Option Agreement under the NEDP
|
******
*******
|
||
|
10.18
|
Description
of Named Executive Officer Salary, Bonus and Perquisite Arrangements
for 2007
|
10.18
|
||
|
10.19
|
Description
of Director Fee Arrangements
|
10.19
|
||
|
11
|
Statement
Regarding Computation of Per Share Earnings
|
Not
Required
|
||
|
13
|
Annual
Report to Security Holders
|
None
|
||
|
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
|
||
|
23.1
|
Consent
of Ernst & Young LLP
|
23.1
|
||
|
24
|
Power
of Attorney
|
None
|
||
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.1
|
||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
31.2
|
||
|
32
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial
Officer
|
32
|
|
*
|
Filed
as an exhibit 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 an exhibit 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.
|
|
*
*
*
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2000 (File No. 0-26960).
|
|
*
*
* *
|
Filed
as an exhibit to Amendment No. Two to the Company’s Registration Statement
on Form S-4 (File No. 333-03551) filed with the Commission on June
19,
1996.
|
|
*
*
* * *
|
Filed
as an appendix to the Company’s definitive proxy materials filed on June
27, 2005.
|
|
*
*
* * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on August
9, 2005.
|
|
*
*
* * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
November 4, 2005.
|
|
*
*
* * * * * *
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on
February 24, 2006.
|
|
*
*
* * * * * * *
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
2006.
|
|
*
*
* * * * * * * *
|
The
Company hereby agrees to furnish the SEC, upon request, copies
of the
instruments defining the rights of the holders of each issue of
the
Company's long-term debt.
|
-
98
-