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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-26960
ITLA CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4596322
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7979 IVANHOE AVE., SUITE 100, LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (818) 551-0600
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such requirements for the past 90 days.
Yes X NO .
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 7, 1997, there were issued and outstanding 7,827,750
shares of the registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the registrant, computed by reference to
the closing price of such stock as of March 7, 1997, was $134,550,863. (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.)
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ITEM 1. BUSINESS
GENERAL
On October 1, 1996, ITLA Capital Corporation ("ITLA Capital" and with
its subsidiaries the "Company") became the holding company of Imperial Thrift
and Loan Association ("Imperial" or the "Association"), a 23 year old California
thrift and loan company. The Company's principal operating subsidiaries are
Imperial and, to a much lesser extent, ITLA Funding Corporation ("Funding").
Unless the context otherwise requires, all references herein to the Company
include ITLA Capital, Imperial and Funding on a consolidated basis. All
references to the Company prior to October 1, 1996 refer only to Imperial.
Imperial is engaged in originating real estate loans secured primarily
by income producing properties for retention in its portfolio, funded primarily
by deposits insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits. Imperial's business is conducted through ten offices in
California and one loan production office in Nevada and through loan
correspondents located in the western United States. Real estate loans are
originated throughout the state of California; loans outside of California are
originated through Imperial's Las Vegas office or through other wholesale loan
origination arrangements. Deposit gathering activities are concentrated in Los
Angeles and Orange Counties, the San Francisco Bay Area, and the Sacramento and
San Diego areas. Imperial also accepts out of state deposits.
Subsequent to the holding company reorganization, ITLA Capital
established Funding, a Delaware corporation, formed to originate commercial real
estate loans for sale in the secondary market. See "- Other Business
Activities." Funding has entered into a real estate loan sale agreement with an
established brokerage firm to sell loan originations as a part of securitization
offerings. Funding has established offices in California, Illinois, New York,
Texas and Florida and commenced sales in the first quarter of 1997.
FORWARD-LOOKING STATEMENTS
When used in this Form 10K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
LOAN PORTFOLIO
Imperial concentrates its lending activities on originating loans
secured by income producing real estate, both commercial and residential
(including apartments). The interest rates charged on loans generally vary
based on a number of factors, including the degree of credit risk, size and
maturity of the loan or contract, whether the loan has a fixed or a variable
rate, and prevailing market rates for similar types of loans or contracts. In
prior years, Imperial was also involved in purchasing automobile finance
contracts. During 1996, Imperial sold
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substantially all of this portfolio. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- -Loans Receivable" for additional information regarding the composition of the
loan portfolio at December 31, 1996.
REAL ESTATE LENDING
GENERAL. While Imperial has been a real estate lender since its
inception, the nature of its real estate lending activities has changed
significantly since 1992. Under former managements, Imperial emphasized
collateral value ratios in its lending process but approved many real estate
loans with limited credit underwriting, including limited analysis of the
borrower's ability to repay the loan. The repayment of many of these loans
depended primarily on a stable or increasing value for the loan's collateral.
Weaknesses in this strategy became apparent in the early 1990s as California's
pronounced recession severely reduced the repayment abilities of certain
borrowers and in many cases property prices in California declined to levels
which were inadequate to repay, either through refinancing or foreclosure and
subsequent sale, loans secured by such properties. These developments
contributed to high levels of nonperforming real estate assets and loss
provisions. Since late 1992, Imperial has revised its real estate underwriting
standards to make a borrower's financial resources and ability to repay a loan
comparable in importance to the loan's collateral as a repayment source.
Management believes that the California economy has recently exhibited positive
trends in selected areas, which has contributed to Imperial's improved asset
quality. A worsening of economic conditions in the state could have an adverse
effect on Imperial's real estate lending business, including reducing the demand
for new loans, limiting the ability of borrowers to pay financed amounts, and
impairing the value of Imperial's real estate collateral.
Imperial originates loans secured primarily by first trust deeds on
income producing properties, such as retail centers, small office and light
industrial buildings, apartments, mobile home parks, mini-storage facilities,
and other mixed use or special commercial purpose properties. At December 31,
1996, 111 real estate loans in the aggregate amount of $14.6 million were
secured by second trust deeds and three real estate loans in the aggregate
amount of $1.0 million were secured by third trust deeds. Of these loans
collateralized by junior liens, 86% were secured by income producing properties
and 14% were secured by one-to-four family residential properties. Of the real
estate loans outstanding at December 31, 1996, $15.9 million represented loans
to facilitate the sale of other real estate owned ("OREO"). Most of Imperial's
real estate borrowers are business owners, individual investors, or investment
partnerships whose credit histories generally do not reflect adverse credit
characteristics. The income producing property lending that Imperial engages in
typically involves larger loans to a single obligor and is generally viewed as
exposing the lender to a greater risk of loss than residential one-to-four
family lending. Income producing property values are also generally subject to
greater volatility than residential property values. The liquidation values of
income producing properties may be adversely affected by risks generally
incident to interests in real property, including changes or continued weakness
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental, room or occupancy rates;
increases in interest rates, real estate and personal property tax rates and
other operating expenses (including energy costs); the availability of
refinancing; changes in governmental rules, regulations and fiscal policies,
including rent control ordinances, environmental legislation and taxation; and
other factors beyond the control of the borrower or the lender.
CONSTRUCTION LOANS. Imperial also originates construction loans for
income producing properties, as well as for single family home construction
other than large scale tract developments. At December 31, 1996, Imperial had
$22.5 million in construction loans outstanding. In addition to the lending
risks previously discussed, construction loans also present risks associated
with the accuracy of the initial estimate of the property's value upon
completion and its actual value, as well as timely completion of construction
activities for their allotted costs.
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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.
LOAN PURCHASES. Imperial generally applies underwriting criteria to
loans purchased similar to those applied to loans originated except that current
appraisals and borrower credit reports are not obtained. In its loan purchases,
Imperial generally reserves the right to reject particular loans from a loan
package being purchased and does so for loans in a package that do not meet its
underwriting criteria. In determining whether to purchase a loan Imperial
assesses both the borrower's ability to repay the loan and the adequacy of the
proposed collateral. On purchases, Imperial reviews the appraisal and credit
report obtained by the loan seller or originator and arranges for an outside
consultant to perform an analysis of the loan and the value of the underlying
collateral, including on-site inspection before purchasing the loan. Similar to
its loan originations, on loan purchases, Imperial reviews information
concerning the income, financial condition, employment and credit history of the
applicant. On purchases, Imperial generally obtains an updated title search
separate from that provided by the loan seller.
During 1996, Imperial purchased approximately $62.1 million of income
producing property loans from three financial institutions located in
California. The loans purchased consisted of 70 loans with principal balances
ranging from $140,000 to $3.7 million.
LENDING ORIGINATION AND UNDERWRITING. Although Imperial's lending and
collection policy permits loan to value ratios of up to 75% in some cases, real
estate loans are generally made in amounts up to 65% of the appraised value of
commercial properties, and generally up to 70% of the appraised value of
apartment properties. Loans are generally made for terms up to 10 years, with
amortization periods of up to 30 years, but most frequently in the 15-25 year
range. Most loans are subject to a quarterly adjustment of their interest rate
based on one of several interest rate indexes. Of Imperial's gross real estate
loan portfolio of $667.9 million at December 31, 1996, 28.6% was indexed to the
Reference Rate charged by the Bank of America (essentially equivalent to the
prime rate); 19.6% was indexed to the Federal Home Loan Bank 11th District Cost
of Funds Index ("COFI"); 42.5% was indexed to either the six-month London
Interbank Offered Rate ("LIBOR"), U.S. Treasury security indexes or the Federal
Home Loan Bank of San Francisco ("FHLB") advance rate; and the balance of 9.3%
was fixed rate. Most variable rate loans may not adjust downward below their
initial rate (the "floor interest rate"), with increases generally limited to
maximum adjustments of 2% per year and 5% for the life of the loan. The floor
interest rate feature of Imperial's loans can contribute to increased income in
periods of declining interest rates, and also assists Imperial in its efforts to
limit the risks to earnings and equity value resulting from changes in interest
rates. At December 31, 1996, the weighted average floor interest rate for
Imperial's variable rate loans portfolio was 9.61% and the weighted average
lifetime interest rate cap on such portfolio was 14.87%.
The maximum size of a single real estate loan made by Imperial is
limited by California law to 20% of Imperial's equity capital; at December 31,
1996 that limit was approximately $17.2 million although Imperial's current self
imposed limit, restricted by resolution of its board of directors, is 80% of
this amount or $13.8 million as the maximum amount of any one loan. Imperial's
largest combined credit extension to related borrowers was $6.8 million at
December 31, 1996. At December 31, 1996, Imperial had a total of 59 combined
extensions of credit to related borrowers of over $2.0 million, and all such
loans were performing in accordance with their repayment terms. At December 31,
1996, Imperial had 1,160 secured real estate loans outstanding, with an average
balance per loan of approximately $575,000.
COMPETITION. The Company's competition in originating real estate
loans is principally from community banks, certain other thrift and loan
companies, real estate financing conduits, small insurance companies, and
occasionally larger banks and savings and loan associations. Many of these
entities enjoy competitive advantages over the Company 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 origination and
operating cost structure. The Company seeks to offset the potential effect of
these factors by providing borrowers with greater individual attention and a
more flexible and accelerated underwriting, approval and funding process than
they might obtain elsewhere.
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MARKETING AND ORIGINATIONS. Imperial originates real estate loans
through branch offices located in Costa Mesa, Glendale, La Jolla, Sacramento and
San Jose, and loan production offices in San Francisco and Las Vegas. These
offices are staffed by a total of approximately 22 loan officers. Offices are
headed by team leaders who report directly to Imperial's Senior Vice President -
Director of Bank Lending. Loan officers solicit mortgage loan brokers for loan
applications that meet Imperial's underwriting criteria, and also accept
applications directly from borrowers. In 1996, 1995 and 1994, approximately 65%,
43% and 64%, respectively, of the loans funded by Imperial were originated
through mortgage brokers, with the balance resulting from direct applications
from borrowers. Mortgage loan brokers act as intermediaries between property
owners and Imperial in arranging real estate loans and earn a fee based upon the
principal amount of each loan funded. Since a large portion of Imperial's
marketing effort in its branches and loan production offices is through the
contact of loan officers with mortgage brokers, Imperial does not incur
significant expenses in the form of advertising its lending services to the
general public. Also, since the Company provides only limited deposit products,
and not a full range of banking services, it generally does not market its
lending services to, or receive loan applications from, its depositors, and
hence may be characterized more as a transaction lender than a relationship
lender.
In an effort to expand its origination capabilities, the Company has
established relationships with real estate lending correspondents, typically
larger mortgage brokerage firms pursuant to which such firms would agree to
originate, subject to Imperial's or Funding's underwriting criteria, various
types of income property secured loans and residential property secured loans to
be funded, or brokered by the Company. The Company believes that such
relationships have diversified its geographic base by permitting it to originate
loans throughout the United States. In 1996, these relationships resulted in
approximately 18% of loan originations held in portfolio by Imperial.
LOAN APPROVAL PROCESS. Imperial's loan officers prepare a written
presentation on every loan application submitted to Loan Committee (comprised of
Imperial's Chief Executive, Chief Lending and Chief Credit Officers, the Senior
Vice President-Director of Bank Lending and the Vice President-Quality Control)
for approval. This presentation includes a description of the prospective
borrower and any guarantors, the collateral, and the proposed use(s) of loan
proceeds, as well as borrower and property financial statements and analysis.
Each application is evaluated from a number of underwriting perspectives,
including borrower liquidity, net worth, cash investment, income, debt ratio,
credit history, and operating experience, as well as property appraised value,
remaining economic life, use, condition, and level of debt service coverage.
Imperial's real estate loans are both nonrecourse and full recourse and
Imperial generally seeks to obtain personal guarantees from the principals of
borrowers which are single or limited asset entities, such as partnerships,
corporations, or trusts on full recourse loans. Loans up to $500,000 in amount
may be approved by any loan committee member. Loans of $500,000 or more require
approval by Imperial's loan committee, which generally meets at least weekly.
Variable rate loans over $500,000 must generally satisfy an interest rate
sensitivity test to be approved; that is, the current actual income of real
property security must be adequate to achieve a minimum debt service coverage
ratio of 90% if the interest rate on the loan was at the maximum amount allowed
under the terms of the note (generally the fully indexed start rate plus 500
basis points).
At least one loan committee member must personally conduct on-site
inspections of any property involved in loan recommendations of $1.0 million or
more, and the Chief Executive Officer must agree to any loan committee decision
to approve any loan of this size. Imperial's loan officers are responsible for
initial reviews of borrowers, properties, and loan terms, and submission of
loans to the loan committee. Following loan approval and prior to funding, a
prefunding audit is performed by Imperial's underwriting department to assure
that all loan approval terms have been satisfied, that they conform with lending
policies (including authorized exceptions), and all required documentation is
present and in proper form.
SERVICING AND COLLECTIONS. Imperial's loan servicing operations are
intended to provide prompt customer service and accurate and timely information
for account follow-up, financial reporting and management review. Imperial's
real estate secured loans are serviced through the loan administration
department located in Imperial's
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headquarters in Glendale, California. Following the funding of an approved
loan, all pertinent loan data is entered into Imperial's data processing system,
which provides monthly billing statements, tracks payment performance, and
effects agreed upon interest rate adjustments on variable rate loans. Regular
loan service efforts include payment processing and collection follow up, as
well as tracking the performance of additional borrower obligations with respect
to the maintenance of casualty insurance coverage, payment of property taxes and
senior liens, if any, and periodically requesting required information,
including current borrower and property financial and operating statements.
When payments are not received by their contractual due date, collection efforts
begin on the 5th day of delinquency with a telephone contact, and proceed to
written notices that progress from reminders of the borrower's payment
obligation to an advice that a notice of default may be forthcoming. Accounts
delinquent for more than 30 days are generally transferred to Imperial's asset
management department which, following a review of the account and management
approval, implements a collection or restructure plan or a foreclosure or note
sale strategy, and evaluates any potential loss exposure on the asset. Given
the levels of delinquent and nonperforming real estate secured loans Imperial
has serviced and disposed of in the past three years, management believes that
Imperial has developed significant expertise in effecting the resolution of
problem loans.
NONPERFORMING ASSETS AND OTHER LOANS OF CONCERN
At December 31, 1996, nonperforming assets, consisting of nonaccrual
loans and OREO totaled $12.6 million, or 1.56% of total assets, and Troubled
Debt Restructurings ("TDR's") totaled $2.1 million. For additional information
regarding nonperforming assets and TDR's, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk
Elements." In addition to nonperforming loans and TDR's, as of December 31,
1996, Imperial had 35 loans with an aggregate outstanding loan balance of $13.1
million with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the properties securing the loans
have caused management concern about the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such loans in the nonperforming loan category. At December 31, 1996, nine of
these loans had a book value in excess of $500,000, of which three loans had a
book value in excess of $1.0 million. The following is a brief discussion of the
Company's "other loans of concern" where the remaining principal balance of the
loan at December 31, 1996 exceeded $1.0 million.
MULTI-TENANT OFFICE BUILDING, VAN NUYS, CALIFORNIA. This loan was
originated in May 1993 to a general partnership in the amount of $1.8 million,
has a current balance of $1.75 million, and is secured by a 37,614 square
foot multi-tenant office building. The loan matures in 2003. The loan was
classified due to periodic delinquencies. Although the borrower claimed that the
property's underlying cash flows were insufficient to support the debt service
on the loan, property operating statements provided to Imperial by the borrower
indicate that cash flow is adequate. Imperial's loan is currently being kept
current by the holder of a second trust deed on the property. It is anticipated
that Imperial will be paid in full when the second trust deed holder forecloses
on the property.
COMMERCIAL CONSTRUCTION, PALMDALE, CALIFORNIA. This loan was
originated in January 1994 to a limited partnership in the amount of $1.4
million and is secured by a retail/automotive center. The loan matured in
January 1995 and was extended by forbearance agreements until October 1996,
when the borrower filed bankruptcy. A January 1997 appraisal indicated a value
of $1.45 million. At December 1996, Imperial's book balance was $1.35 million.
The borrower has brought previously delinquent taxes on the property current,
and all buildings are now under contract for sale.
SCHOOL FACILITY, LOS ANGELES, CALIFORNIA. This loan originated in
1989 and was renewed in 1992. The original loan amount was $1.46 million, and
the balance is currently $1.45 million. The loan is secured by a preparatory
school facility. Imperial is monitoring the loan because of delinquent taxes in
the amount of $133,000 as well as periodic delinquent monthly payments, however,
as of December 31, 1996, the loan was performing in accordance with its
repayment terms. An appraisal of the property dated July 1996 indicated the
value of the collateral to be $1.8 million.
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CLASSIFIED ASSETS
Management also uses a loan classification system to help it evaluate
the risks inherent in its real estate loan portfolio. Loans are identified as
satisfactory, special mention, substandard, doubtful or loss based upon
consideration of all sources of repayment, underlying collateral values, current
and anticipated economic conditions, trends and uncertainties, and historical
experience. Underlying collateral values for real estate dependent loans are
supported by property appraisals or evaluations. Imperial reviews its loan
classifications on at least a monthly basis. At December 31, 1996, Imperial
classified $16.3 million in loans as substandard and $3.3 million as special
mention. Of the 50 loans comprising the $16.3 million in substandard loans, 24
loans totaling $6.4 million were included in the non-performing table in "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Elements" and the balance was included in the $13.8 million of
"other loans of concern," discussed above.
FUNDING SOURCES
The primary source of funding for Imperial's lending operations and
investments are investment certificates, which are functionally equivalent to
deposits at banks and savings and loan associations and are hereinafter referred
to as "deposits." Imperial's deposits are federally insured by the FDIC to the
extent permitted by law. Imperial's deposits are substantially all in the form
of term investment certificates that pay fixed rates of interest for periods
ranging from 90 days to five years. Imperial also offers variable rate passbook
accounts, and during late 1995 introduced a variable rate money market account
with limited checking features. As with many other thrift and loans in
California, Imperial's strategy with all deposit accounts is to offer rates
significantly above those customarily offered by other financial institutions in
its market. Imperial has generally accumulated deposits by relying on renewals
of term accounts by existing depositors, participating in deposit rate surveys
which list Imperial among the higher rate paying insured institutions, and
periodically advertising in various local market newspapers and other media.
Imperial is able to pursue this strategy by operating a savings branch system
offering fewer products and services than many institutions. Because Imperial
does not provide demand checking accounts, safe deposit boxes, money orders,
trust services, and various other retail banking services, management believes
its staffing and overhead costs are significantly lower than banks and savings
institutions. Management further believes that its deposits are a reliable
funding source, and that the cost of funds resulting from Imperial's deposit
gathering strategy is comparable to those of other thrift and loan companies
pursuing a similar strategy. However, because Imperial competes for deposits
primarily on the basis of rates, Imperial could experience difficulties in
attracting deposits if it could not continue to offer deposit rates at levels
above those of banks and savings institutions. Management also believes that any
efforts to significantly increase the size of its deposit base may require
greater marketing efforts and/or increases in deposit rates to the higher levels
of the deposit rate surveys in which Imperial participates. Although there were
no brokered deposits at December 31, 1996, Imperial may seek such deposits in
the future. During 1996, Imperial acquired a branch office located in San
Francisco, California with deposits of $28.9 million and acquired $31.9 million
of deposits from another financial institution which were consolidated into an
existing branch office. 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."
To a limited extent, Imperial has also used advances from the FHLB and
bank lines of credit as funding sources. Imperial became a member of the FHLB in
1994 and was subsequently approved for a credit line of up to 25% of its total
assets. FHLB advances are collateralized by pledges of qualifying investment
securities, mortgage-backed securities, and loan collateral. At December 31,
1996, FHLB advances outstanding totaled $43.5 million, and the remaining
available borrowing capacity, based on the loans and securities pledged as
collateral, totaled $84,749,000. See "Item 8. Financial Statements and
Supplementary Data -- Notes 2,3 and 8 to the Company's Consolidated Financial
Statements."
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OTHER BUSINESS ACTIVITIES
Prior to 1996, Imperial was in the business of purchasing automobile
finance contracts. During late 1995, Imperial decided to discontinue this
activity and in 1996 Imperial sold substantially all its automobile finance
contract portfolio. Management has no current plans to reenter this business.
Management intends to evaluate the feasibility of the Company entering other
financial related businesses. There can be no assurance, however, that the
Company will elect to enter such additional businesses or, if it does, that it
will achieve favorable results in any such activities.
ITLA FUNDING CORPORATION
In October 1996, the Company established Funding, a Delaware
corporation, formed to originate commercial real estate loans for sale in the
secondary market. Funding has entered into a real estate loan sale agreement
with an established brokerage firm to sell loan originations as part of
securitization offerings. Funding has established offices in California,
Illinois, New York, Texas and Florida and commenced in the sales the first
quarter of 1997.
REGULATION
Imperial is subject to supervision and regulation by the California
Department of Corporations ("CDOC") and, as an insured institution, by the FDIC.
The Company is not a bank holding company and is not directly regulated or
supervised by the CDOC, the FDIC, the Federal Reserve Board or any other bank
regulatory authority, except with respect to the general regulatory and
enforcement authority of the CDOC and the FDIC over transactions and dealings
between the Company and Imperial, and except with respect to both the specific
limitations regarding ownership of the capital stock of the parent corporation
of any thrift and loan, and the specific limitations regarding the payment of
dividends from Imperial. Commencing on July 1, 1997 all California financial
institutions, including Imperial, will be regulated by a new California agency,
the Department of Financial Institutions.
CALIFORNIA LAW The thrift and loan business conducted by Imperial is
governed by the California Industrial Loan Law and the rules and regulations of
the CDOC which, among other things, regulate the issuance of certain thrift
deposits as well as the collateral requirements and maximum maturities of the
various type of loans that are permitted to be made by California-chartered
industrial loan companies (thrift and loan companies).
Subject to restrictions imposed by applicable California law, Imperial
is permitted to make secured and unsecured consumer and nonconsumer loans. The
maximum term for repayment for loans made by thrift and loan companies ranges up
to 40 years and 30 days depending upon the type of collateral and priority of
secured position, if any. Although nonconsumer secured loans of fewer than 10
years may generally be repaid in unequal periodic payments, consumer loans must
generally be repaid in substantially equal periodic payments. California law
limits lending activities outside of California by thrift and loan companies to
no more than 40% of total assets. At December 31, 1996, 9% of Imperial's loan
portfolio consisted of loans or obligations made outside the state of
California.
California law contains extensive requirements for the diversification
of the loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things, place more than
25% of its loans or other obligations in loans or obligations which are secured
only partially, but not primarily, by real property; may not make any one loan
secured primarily by improved real property which exceeds 20% of its paid-up and
unimpaired capital stock and surplus not available for dividends (10% for
unimproved property); may not lend an amount in excess of 5% of its paid-up and
unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation (and that stock may not exceed 10%
of outstanding stock of the corporation); may not make loans to, or hold the
obligations of, any one person as primary obligor in an aggregate principal
amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not
available for dividends (5% if the loans are unsecured); may not have
outstanding leases which exceed 20% of the thrift's aggregate net loans and
obligations including direct lease obligations; and may have no more than 70% of
its
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total assets in loans which have remaining terms to maturity in excess of seven
years and are secured solely or primarily by real property. At December 31,
1996, Imperial satisfied all of these requirements. Based on the existing loans
in Imperial's portfolio at December 31, 1996, Imperial's ratio of loans secured
solely or primarily by real property with terms in excess of seven years to
assets was approximately 41.5%. Management believes that Imperial can maintain
compliance with such regulatory requirements by managing the mix of its assets
and loans without any material adverse impact on earnings or liquidity.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the CDOC. A thrift and loan also may not make any loan to, or
hold any obligation of, any of its shareholders or any shareholder of its
holding company or affiliates, except that this prohibition does not apply to
persons who own less than 10% of the stock of a holding company or affiliates
which are listed on a national securities exchange. Any person who wishes to
acquire 10% or more of the capital stock or capital of a California thrift and
loan company or 10% or more of the voting capital stock or other securities
giving control over management of its parent company must obtain the prior
written approval of the CDOC.
A thrift and loan is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
In particular, thrift and loans may not have outstanding at any time investment
certificates that exceed 20 times paid-up and unimpaired capital and surplus.
Under California law, thrift and loans that desire to increase their leverage
must meet specified minimum standards for liquidity reserves in cash, loan loss
reserves, minimum capital stock levels and minimum unimpaired paid-in surplus
levels. For example, in order for a thrift and loan to increase its deposits to
more than 15 times the aggregate amount of its paid-up and unimpaired capital
and unimpaired surplus not available for dividends, the thrift must among other
things maintain a liquidity reserve in cash or cash equivalents equal to 1.5% of
its total investment certificates outstanding, maintain its capital stock not
less than $1.25 million, and maintain its unimpaired paid-in surplus not less
than $750,000. At December 31, 1996, Imperial's total deposits were 7.8 times
its paid-up and unimpaired capital and unimpaired surplus not available for
dividends. In addition, at December 31, 1996, Imperial maintained a liquidity
reserve in cash or cash equivalents equal to 6.9% of its total deposits
outstanding and its allowance for credit losses was $10.9 million. At December
31, 1996, Imperial had no brokered deposits.
Thrift and loan companies are not permitted to borrow, except by the
sale of investment or thrift certificates, in an amount exceeding 300% of its
outstanding capital stock, surplus and undivided profits, without the CDOC's
prior consent. All sums borrowed in excess of 150% of its oustanding capital
stock, surplus and undivided profits must be unsecured borrowings or, if
secured, approved in advance by the CDOC, and be included as investment or
thrift certificates for purposes of computing the maximum amount of certificates
a thrift and loan may issue. However, collateralized FHLB advances are excluded
for this test of secured borrowings and are not specifically limited by
California law. Imperial had $43.5 million of outstanding borrowings at December
31, 1996, consisting solely of collateralized FHLB advances.
Thrift and loan companies are generally limited to investments, other
than loans, that are legal investments for commercial banks. California
commercial banks are prohibited from investing an amount exceeding 15% of
shareholders' equity in the securities of any one issuer, except for specified
obligations of the United States, California, and local governments and agencies
thereof. A thrift and loan company may acquire real property only in
satisfaction of debts previously contracted, pursuant to certain foreclosure
transactions or as may be necessary for the transaction of its business, in
which case such investment is limited to one-third of a thrift and loan's paid-
up capital stock and surplus not available for dividends. Imperial complied with
these requirements at December 31, 1996.
The California Industrial Loan Law allows a thrift and loan to
increase its secondary capital by issuing interest-bearing capital notes in the
form of subordinated notes and debentures. Such notes are not deposits and
9
<PAGE>
are not insured by the FDIC or any other governmental agency, generally are
required to have a maturity of at least seven years, and are subordinated to
deposit holders, general creditors and secured creditors of the issuing thrift.
Although investment authority and other activities that may be engaged
in by Imperial generally are prescribed under the California Industrial Loan
Law, certain provisions of the FDIA may limit Imperial's ability to engage in
certain activities that otherwise are authorized under the California Industrial
Loan Law. See "Federal Law - Restrictions on Imperial's Activities and
Investments."
A thrift and loan is not permitted to declare dividends on its capital
stock unless it has at least $750,000 of unimpaired capital plus additional
capital of $50,000 for each branch office maintained. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a thrift and loan's retained earnings, or (ii) in the alternative, after
giving effect to the distributions the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would not be less than 125% of its liabilities (net of deferred taxes, income
and other credits).
A thrift and loan is likewise prohibited from paying dividends from
that portion of capital that has been restricted for dividend payment purposes
by its bylaws or by resolution of its board of directors. The amount of
restricted capital maintained by a thrift and loan provides the basis for
establishing the maximum amount that a thrift and loan may lend to one single
borrower. Accordingly, a thrift and loan typically restricts as much capital as
necessary to achieve its desired loan to one borrower limit, which in turn
restricts the funds available for the payment of dividends. Imperial's Board
has passed a resolution requiring Imperial to maintain a Tier 1 capital ratio of
not less than 10%.
FEDERAL LAW Imperial's deposits are insured by the Bank Insurance
Fund ("BIF") to the full extent permissible by law. As an insurer of deposits,
the FDIC issues regulations, conducts examinations, requires the filing of
reports, and generally supervises the operations of institutions to which it
provides deposit insurance. The FDIC is also the federal agency charged with
regulating state-chartered banks that are not members of the Federal Reserve
System. For this purpose, Imperial is considered to be a state-chartered
nonmember bank. Imperial is subject to the rules and regulations of the FDIC to
the same extent as FDIC-insured state-chartered commercial banks. In addition to
the approval of the CDOC, the approval of the FDIC is required prior to any
merger, consolidation, or acquisition of control of Imperial, and prior to the
establishment or relocation of a branch office facility of Imperial. Any person
who wishes to acquire control of Imperial must obtain the consent of both the
FDIC and the CDOC.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured, state-chartered
banks, including thrift and loans, such as Imperial, are required to maintain
minimum levels of regulatory capital. The FDIC also is authorized to impose
capital requirements in excess of these standards on individual banks on a case-
by-case basis.
Imperial is required to comply with three separate minimum capital
requirements: a "Tier 1 capital ratio" or Leverage 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.
At December 31, 1996, Imperial did not have any net deferred tax assets in
excess of the specified limits.
TIER 1 CAPITAL RATIO (LEVERAGE 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, with an additional cushion
of at least 100 to 200 basis points for all other state-chartered, FDIC-
supervised banks, which
10
<PAGE>
effectively imposes a minimum Tier 1 capital ratio for such other banks of
between 4.0% to 5.0%. Under FDIC regulations, highly-rated banks are those that
the FDIC determines are not anticipating or experiencing significant growth and
have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity and good earnings. At December 31,
1996, Imperial's required Leverage Ratio was 4.0% and its actual Leverage Ratio
was 10.64%.
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require Imperial to maintain a ratio of
Tier 1 capital to risk-weighted assets ("Tier 1 Risk-Based Ratio") of at least
4.0% and a ratio of total risk-based capital to risk-weighted assets ("Total
Capital Ratio") 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, U.S.
Treasury Bills and GNMA securities are placed in the 0% risk category. FNMA and
FHLMC 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. Supplementary or Tier 2 capital
includes, among other things, so-called permanent capital instruments
(cumulative or other perpetual preferred stock, mandatory convertible
subordinated debt and perpetual subordinated debt), so-called maturing capital
instruments (mandatory redeemable preferred stock, intermediate-term preferred
stock, mandatory convertible subordinated debt and subordinated debt), and the
allowance for credit losses up to a maximum of 1.25% of risk-weighted assets.
The federal banking agencies also adopted final regulations specifying
that the agencies will include, in their evaluations of a bank's capital
adequacy, an assessment of the exposure to declines in the economic value of the
bank's capital due to changes in interest rates.
The FDIC and the other federal banking agencies have also promulgated
final amendments to their respective risk-based capital requirements which would
explicitly identify concentration of credit risk and certain risks arising from
nontraditional activities, and the management of such risk as important factors
to consider in assessing an institution's overall capital adequacy. The FDIC
may now require higher minimum capital ratios based on certain circumstances,
including where the institution has significant risks from concentration of
credit or certain risks arising from nontraditional activities.
The federal banking agencies have adopted for regulatory purposes
Statement of Financial Accounting Standards ("SFAS") No. 115, which, among other
things, generally adds a new element to Shareholders' equity under Generally
Accepted Accounting Principles ("GAAP") by including net unrealized gains and
losses on certain securities. In December 1994, the FDIC issued final
amendments to its regulatory capital requirements which require that the net
amount of unrealized losses from available for sale equity securities with
readily determinable fair values be deducted for purposes of calculating the
Tier 1 capital ratio. All other net unrealized
11
<PAGE>
holding gains (losses) on available for sale securities are excluded from the
definition of Tier 1 capital. At December 31, 1996, Imperial had no available
for sale equity securities in its investment portfolio.
PROMPT CORRECTIVE ACTION REQUIREMENTS. The FDIC has implemented a
system requiring regulatory sanctions against state-chartered banks (which for
this purpose includes Imperial) 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 Capital
Ratio is 10.0% or more, its Tier 1 Risk-Based Ratio is 6.0% or more, its
Leverage 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. An institution will be
undercapitalized if its Total Capital Ratio is less than 8.0%, Tier 1 Risk-Based
Ratio is less than 4.0%, or if its Leverage Ratio is less than 4.0% (3.0% if the
institution receives the highest rating on the composite financial institutions
rating system). An institution whose capital falls between the well capitalized
and undercapitalized levels will be treated as adequately capitalized. An
institution will be treated as significantly undercapitalized if the above
capital ratios are less than 6.0%, 3.0%, or 3.0% respectively. An institution
will be treated as critically undercapitalized if its ratio of tangible equity
(Tier 1 capital plus cumulative preferred stock minus intangible assets other
than purchased mortgage servicing rights) to adjusted total assets is equal to
or less than 2.0%. At December 31, 1996, such ratio for Imperial was 10.64% and,
therefore, Imperial's capital qualified it for the well capitalized category.
The FDIC is authorized and, under certain circumstances required to
take certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized institution." Any such institution must
submit a capital restoration plan and until such plan is approved by the FDIC
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The FDIC is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any institution that fails to comply with its capital plan or is
"significantly undercapitalized" must be made subject to one or more additional
specified actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the institution. A
"critically undercapitalized' institution is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the FDIC must appoint a receiver or
conservator for an institution, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized. Any undercapitalized institution
is also subject to the general enforcement authority of the FDIC, including the
appointment of a conservator or a receiver.
The FDIC is also generally authorized to reclassify an institution
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the FDIC of any of these measures on Imperial may
have a substantial adverse effect on Imperial's operations and profitability.
The Company does not have preemptive rights, and therefore, if Imperial is
directed by the FDIC to issue additional shares of common stock, such issuance
may result in the dilution in the percentage of ownership of Imperial.
12
<PAGE>
NEW SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies
adopted final guidelines establishing standards for safety and soundness. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
FDIC INSURANCE ASSESSMENTS. The FDIC assesses deposit insurance
premiums under a risk-based assessment system, which is based on the probability
that the deposit insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue needs of the
deposit insurance fund. Under the risk-based assessment system, a BIF member
institution such as Imperial is categorized into one of three capital categories
(well capitalized, adequately capitalized, and undercapitalized) and one of
three categories based on supervisory evaluations by its primary federal
regulator (in Imperial's case, the FDIC). The FDIC's assessment rates for BIF-
insured institutions range from 0 to 27 basis points per $100 of domestic
deposits. At December 31, 1996, Imperial paid no BIF assessment to the FDIC.
RESTRICTIONS ON IMPERIAL'S ACTIVITIES AND INVESTMENTS. Under the
FDIA, a state-chartered bank (which includes Imperial) and its subsidiaries may
not engage as principal in any activities that are not permissible for national
banks and their subsidiaries unless (1) the bank meets the applicable FDIC
capital standards described above, and (2) the FDIC has determined that the
activity would pose no significant risk to the BIF. With limited exceptions, the
FDIC may not use this authority to permit a state-chartered bank to engage in
equity investments (other than investments in subsidiaries) or in insurance
underwriting. Imperial's activities are permissible activities for national
banks.
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<PAGE>
The FDIC regulations which implement the FDIA limitation on state bank
activities require a state bank to abide by any conditions or restrictions
applicable to national banks if the state bank wishes to conduct the activity
without first obtaining the FDIC's consent. These regulations could limit
Imperial's ability to expand into new activities that might otherwise be
available under California law, or to invest in equity securities of
corporations, which is permissible under certain circumstances for California-
chartered commercial banks but not for national banks.
Imperial is prohibited from engaging in certain tying arrangements in
connection with an extension of credit, sale or lease of property or provision
of services. For example, with certain exceptions, Imperial may not require a
customer to obtain other services provided by Imperial, and may not require the
customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit or reduced consideration for credit to the
customer.
In addition, federal law imposes restrictions on transactions between
Imperial and its affiliates. All such transactions, including leases and service
contracts, must be on terms and under circumstances that are substantially the
same, or at least as favorable to Imperial, as those prevailing at the time for
comparable transactions involving nonaffiliated companies. In the absence of
comparable transactions, the affiliate transaction must be on terms and under
circumstances that in good faith would be offered by Imperial to nonaffiliated
companies. Extensions of credit by Imperial to an affiliate must be fully
collateralized or over collateralized, depending on the type of collateral.
Imperial may not extend credit to any one affiliate in an amount that exceeds
10% of its capital (20% for all affiliates in the aggregate). Any purchase of
assets by Imperial from an affiliate is also subject to these limits, as are
certain other transactions, including any guarantee of an affiliate's
obligations or any investment in securities issued by an affiliate. The
California Industrial Loan Law also applies certain restrictions to transactions
with affiliates. Federal and state law also places limitations on loans by
Imperial to its directors, officers and controlling persons. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated persons.
The FDIC has enforcement authority over Imperial with respect to the
restrictions on tying arrangements and affiliate transactions.
LIMITATIONS ON DIVIDENDS. In policy statements, the FDIC has advised
insured institutions that the payment of cash dividends in excess of current
earnings from operations is inappropriate and may be cause for supervisory
action. As a result of this policy, Imperial may find it difficult to pay
dividends out of retained earnings from historical periods prior to the most
recent fiscal year or to take advantage of earnings generated by extraordinary
items. The FDIC has authority to prohibit financial institutions from engaging
in business practices which are considered to be unsafe or unsound. It is
possible, depending upon the financial condition of Imperial and other factors,
that such regulators could in some circumstances assert that the payment of
dividends constitutes an unsafe or unsound practice and could prohibit payment
of dividends even though such payment is otherwise permissible. In addition,
federal law prohibits any insured institution from paying dividends if after
such payment the institution would be undercapitalized. See "Federal Law Prompt
Corrective Action Requirements."
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. Imperial is
subject to certain fair lending requirements and reporting obligations involving
lending operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record of
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with
such laws and CRA into account when regulating and supervising other activities.
In its most recent CRA examination, the FDIC rated Imperial "satisfactory" in
complying with its CRA obligations.
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<PAGE>
In May 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
MEMORANDUM OF UNDERSTANDING From March 1, 1993 until March 11, 1996,
Imperial had operated under a Memorandum of Understanding ("MOU") between
Imperial, the FDIC and CDOC. A MOU is an informal administrative action designed
to address and correct weaknesses identified by supervisory agencies. MOUs are
utilized with institutions considered to be of supervisory concern but which
have not deteriorated to the point where formal administrative action is
warranted. The FDIC utilizes MOUs where it believes that the problems have been
adequately identified and that the institution will, in good faith, move to
correct the problems. Although a MOU is not a legally enforceable agreement, an
institution's failure to comply with the provisions of a MOU, or a continued
deterioration of the areas addressed in the MOU, may lead to more formal
administrative action.
The FDIC and CDOC concluded a joint examination of Imperial as of
August 17, 1992. The examination resulted in the FDIC and CDOC requiring
Imperial to enter into a MOU, which required, among other things, that Imperial:
(a) increase its Shareholders' equity by $2.0 million; (b) maintain a Leverage
Ratio of at least 7.5%; (c) reduce assets classified in the examination to
specified levels; and (d) effect enhancements to various lending, collection and
funds management policies and procedures. Imperial's former parent made the
required capital contribution and Imperial otherwise sought to comply with the
terms of the MOU. Following another joint examination in August 1993, the FDIC
and the CDOC requested Imperial to enter into a subsequent MOU. The MOU
required, among other things, that Imperial: (a) continue to maintain a Leverage
Ratio of at least 7.5%; (b) increase its allowance for credit losses; (c)
maintain management acceptable to the FDIC and CDOC; (d) not pay cash dividends
without prior approval of the FDIC and CDOC; (e) establish a plan for the
further reduction of assets classified in the examination; (f) reduce its
dependence on volatile liabilities; and (g) effect further revisions and
enhancements to a variety of policies and procedures, including internal loan
review, funds management, and interest rate risk policies and procedures.
Because Imperial was subjected to the MOU, additions of new directors or senior
officers were subject to notice of nondisapproval by the FDIC. In November 1995,
the FDIC and CDOC conducted another examination of Imperial as of October 31,
1995. The FDIC's and CDOC's report of this examination did not cite any material
deviations from the MOU. Management requested termination of the MOU at the
earliest practicable date, which request was granted on March 11, 1996.
POTENTIAL ENFORCEMENT ACTIONS Insured depository institutions, such
as Imperial, and their institution-affiliated parties, may be subject to
potential enforcement actions by the FDIC and the CDOC 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. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties, and the imposition of
restrictions and sanctions under the FDIC's prompt corrective action provisions.
Management knows of no pending or threatened enforcement actions against
Imperial.
DATA PROCESSING AGREEMENT
The Company has entered into an agreement with a third party to
provide data processing services to the Company, including general ledger
accounting, the production of management reports, and loan and deposit customer
statement and billing services. The fees under the agreement consist of a base
monthly fee which may
15
<PAGE>
vary based on the number of accounts processed, as well as other charges based
on usage. The initial term of this agreement, entered into in 1994, is for five
years, with annual renewals thereafter unless either party gives 180 days prior
written notice of intent to terminate. In the event that the Company elects to
terminate the contract prior to the expiration of the initial term, a
termination fee of approximately 50% of the estimated remaining payments due
under the contract would be payable, unless the third party had committed
significant events of default under the agreement. Charges under the agreement
totaled approximately $275,000 for 1996; at that date, the estimated remaining
payments due under the contract, at current portfolio and service levels, were
approximately $695,000.
ITEM 2. PROPERTIES
The Company leases all of its operating facilities. The Company's
only material lease obligation is for Imperial's headquarters office in
Glendale, California, which lease extends until 2006 with base annual rental
expense of $479,000 for the entire term, plus common area expenses that are
subject to annual increases. The following table sets forth certain information
regarding the Company's facilities.
<TABLE>
<CAPTION>
Year Current
Locations Office Uses Square Footage Lease Term Expires
- --------- ----------- -------------- ------------------
<S> <C> <C> <C>
La Jolla, CA Headquarters, real estate lending, savings 4,551 1999
Glendale, CA Imperial's headquarters, real estate lending, savings 23,498 2006
Beverly Hills, CA Savings 2,218 1998
Costa Mesa, CA Real estate lending, savings 3,493 2000
Encino, CA ITLA Funding Corporation's headquarters, savings 5,298 2004
Las Vegas, NV Loan production office 800 1996(1)
Sacramento, CA Real estate lending, savings 2,996 1996(1)
San Francisco, CA Loan production office 1,900 1999
San Francisco, CA Real estate lending, savings 5,005 2002
San Jose, CA Real estate lending, savings 2,612 1997(1)
San Mateo, CA Savings 2,282 1996(1)
</TABLE>
(1) These leases will not be renewed.
The Company's other out of state operations are conducted from
executive suite facilities. For additional information regarding the Company's
premises and equipment, see "Item 8. Financial Statement and Supplementary
Data--Note 12 to Notes to Consolidated Financial Statements."
Management believes that the Company's present facilities are adequate
for its current needs, and that alternative or additional space, if necessary,
will be available on reasonable terms.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings incidental to its
business. Management believes that the outcome of such proceedings, in the
aggregate, will not have a material effect on the Company's business or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National market
system under the symbol "ITLA". At December 31, 1996, there were approximately
eight holders of record of Company common stock and 7,824,000 shares
outstanding.
17
<PAGE>
The following table sets forth, for the periods indicated, the range
of high and low trade prices for Company common stock quoted on Nasdaq. Stock
price data on Nasdaq reflects interdealer prices, without retail mark-up, mark-
down or commission.
<TABLE>
<CAPTION>
MARKET PRICE
------------------------- AVERAGE DAILY
1996 HIGH LOW CLOSE CLOSING PRICE
---- --- ----- -------------
<S> <C> <C> <C> <C>
4th Quarter $15.00 $13.38 $15.00 $14.42
3rd Quarter 14.50 12.63 13.63 13.40
2nd Quarter 15.25 13.25 14.75 14.25
1st Quarter 14.00 11.75 14.00 13.04
1995
4th Quarter (1) 12.63 11.38 12.25 11.91
__________
</TABLE>
(1) Trading commenced October 24, 1995
The following table includes supplementary quarterly operating results
and per share information for the past two years. The data presented should be
read in conjunction 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.
<TABLE>
<CAPTION>
QUARTERLY OPERATIONS (UNAUDITED) FOR THE QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Net interest income $8,462 $ 8,415 $8,703 $9,517
Total noninterest income 310 328 254 161
Provision for valuation allowance - - - 700
Provision for estimated credit 1,721 1,100 950 1,100
losses
Real estate operations, net 687 350 62 (50)
General and administrative expense 2,739 3,497 3,621 3,229
Provision for income taxes 1,385 1,427 1,729 1,879
Net income 2,240 2,369 2,595 2,820
Earnings per share $0.37 $0.32 $0.33 $0.35
1995
Net interest income $7,572 $ 7,705 $8,228 $9,024
Total noninterest income 379 371 430 522
Provision for valuation allowance - 4,774 - -
Provision for estimated credit 2,628 5,116 3,280 2,074
losses
Real estate operations, net 1,732 1,460 1,630 640
General and administrative expense 4,023 3,839 3,622 3,772
Provision (benefit) for income taxes (171) (2,953) 52 1,116
Net income (loss) (261) (4,160) 74 1,944
Earnings (loss) per share $(0.06) $(0.96) $0.01 $0.35
</TABLE>
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following condensed statements of operations and financial
condition and selected performance ratios as of December 31, 1996, 1995, 1994,
1993 and 1992 and for the years then ended have been derived from the audited
consolidated financial statements of the Company. The information below is
qualified in its entirety by the detailed information included elsewhere herein
and should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Condensed Statements of Operations:
Total interest income $ 69,496 $ 61,872 $ 54,306 $ 50,673 $ 51,739
Total interest expense 34,399 29,343 21,732 20,009 22,156
-------- -------- -------- -------- --------
Net interest income before
provisions for valuation
allowance and estimated
credit losses 35,097 32,529 32,574 30,664 29,583
Provision for estimated credit losses 4,871 13,098 6,731 5,905 9,544
Provision for valuation allowance on
loans held for sale 700 4,774 - - -
-------- -------- -------- -------- --------
Net interest income after
provisions for valuation
allowance and estimated
credit losses 29,526 14,657 25,843 24,759 20,039
-------- -------- -------- -------- --------
Noninterest income 1,053 1,310 1,491 2,751 2,610
-------- -------- -------- -------- --------
Noninterest expense:
Compensation and benefits 5,723 7,313 7,044 6,860 7,216
Occupancy and equipment 1,929 2,230 2,601 1,874 2,077
Other general and 5,434 5,717 6,575 5,628 4,958
administrative expenses
Real estate operations, net 1,049 5,070 4,381 5,076 4,337
-------- -------- -------- -------- --------
Total noninterest expense 14,135 20,330 20,601 19,438 18,588
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes 16,444 (4,363) 6,733 8,072 4,061
Provision (benefit) for income taxes 6,420 (1,960) 2,729 3,223 1,678
-------- -------- -------- -------- --------
Net income (loss) $ 10,024 $ (2,403) $ 4,004 $ 4,849 $ 2,383
======== ======== ======== ======== ========
Earnings (loss) per share (1) $1.36 $( 0.52) $0.93 $1.12 $0.55
Dividends paid - - - - $ 828
Dividends per share (1) - - - - $0.19
Condensed Statements of Financial
Condition:
Cash and cash equivalents $ 48,881 $ 22,106 $ 13,361 $ 17,001 $ 4,613
Investment securities available for sale 50,292 - - - -
Investment and mortgage-backed
securities held to maturity 31,870 60,324 13,146 1,992 6,796
Stock in Federal Home Loan Bank 8,349 12,362 3,000 - -
Loans receivable, net (2) 661,851 503,797 478,419 438,199 399,049
Allowance for credit losses (10,885) (8,105) (11,076) (8,800) (8,000)
Interest receivable 4,411 3,865 3,250 2,814 2,497
Other real estate owned, net 5,416 6,103 10,544 13,058 15,293
Premises and equipment, net 2,610 3,008 3,586 1,271 1,508
Deferred income taxes 3,613 3,309 4,408 5,617 4,575
Other assets 4,035 3,904 2,768 1,651 681
-------- -------- -------- -------- --------
Total assets $810,443 $610,673 $521,406 $472,803 $427,012
======== ======== ======== ======== ========
Deposit accounts $670,336 $494,793 $448,557 $426,111 $386,750
Federal Home Loan Bank advances 43,500 54,000 22,700 - -
Accounts payable and other liabilities 7,289 5,188 6,446 6,994 7,412
Shareholders' equity 89,318 56,692 43,703 39,698 32,850
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $810,443 $610,673 $521,406 $472,803 $427,012
======== ======== ======== ======== ========
Book value per share (1) $11.42 $9.48 $10.12 $9.19 $7.60
- ----------
</TABLE>
(1) After an 86.4 for 1 stock split effective October 17, 1995.
(2) Loans, including loans held for sale, before allowance for credit losses
and net of unearned finance charges and loan fees.
19
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS:
Return on average assets 1.44% (.44)% .79% 1.05% .56%
Return on average shareholders' equity 12.86 (5.26) 9.53 12.93 7.29
Net interest margin (1) 5.13 6.09 6.64 6.87 7.23
Average interest-earning assets to
average interest-bearing liabilities 112.14 108.19 107.20 107.47 107.21
Noninterest expense to average total
assets 2.04 3.70 4.06 4.21 4.40
Efficiency ratio (2) 39.10 60.08 60.48 58.17 57.74
Efficiency ratio excluding REO expense 36.20 45.10 47.61 42.98 44.27
General and administrative expense to
average total assets 1.88 2.78 3.20 3.11 3.37
Average shareholders' equity to average
assets 11.23 8.32 8.28 8.12 7.73
Nonperforming assets to total assets 1.56 2.14 5.62 4.48 5.72
Nonperforming assets held for
investment to total assets 1.46 2.08 5.62 4.48 5.72
Allowance for credit losses to loans
held for investment, net (3) 1.65 1.81 2.32 2.01 2.00
Allowance for credit losses to
nonaccrual loans (4) 169.50 122.45 58.98 108.19 87.64
Net loan charge-offs to average loans .37 3.27 .97 1.22 1.80
</TABLE>
- ----------
(1) Net interest margin represents net interest income divided by total average
earning assets.
(2) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
(3) Loans held for investment before allowance for credit losses and net of
unearned finance charges and loan fees.
(4) Excludes nonaccrual loans held for sale totaling $783,000 and $366,000 in
1996 and 1995, respectively.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On October 1, 1996, ITLA Capital Corporation ("ITLA Capital" and with
its subsidiaries the "Company") became the holding company for Imperial Thrift
and Loan Association ("Imperial" or the "Association"). Substantially all
results of operations for the year ended December 31, 1996 of the Company are
those of its wholly-owned subsidiary, Imperial. As a result, the following
discussion and analysis primarily reviews the financial condition and results of
operations of Imperial. All references to the Company prior to October 1, 1996
refer only to Imperial.
The following discussion and analysis is intended to identify the
major factors that influenced the financial condition as of December 31, 1996
and 1995 and results of operations of the Company for the years ended December
31, 1996, 1995 and 1994. The Company's principal business involves the
origination of loans secured primarily by income producing real estate, located
predominately in California. While commercial real estate lending has
historically provided Imperial with interest-earning assets with generally
higher yields than those of most banks and savings institutions, Imperial also
has incurred higher loan origination costs and provisions for estimated credit
losses and estimated losses on other real estate owned ("OREO") than similar
institutions. Prior to February 1996, Imperial also purchased automobile
finance contracts. During 1996, Imperial sold substantially all of this
portfolio. No gain or loss was recognized from this sale.
Imperial operates mainly in the state of California, which over the
past several years has experienced both a recession and a significant decline in
property values. These external factors contributed to higher levels of
nonperforming assets and associated costs (including provisions for estimated
credits losses and OREO expenses) over the past three years.
Consolidated net income was $10.0 million, or $1.36 per share, in 1996
compared to a net loss of $2.4 million, or $0.52 per share, in 1995 and net
income of $4.0 million, or $0.93 per share, in 1994. The increase in net
earnings in 1996 was due primarily to increased net interest income, $35.1
million in 1996 compared to $32.5 million in 1995, a reduction in provisions for
estimated credit losses and valuation allowance on loans held for sale to an
aggregate of $5.6 million in 1996 from $17.9 million in 1995, and a reduction in
real estate operations, net, to $1.0 million in 1996 compared to $5.1 million in
1995. General and administrative expense was reduced to $13.1 million in 1996
compared to $15.3 million in 1995. As a result of the Company's profitability,
income tax expense increased to $6.4 million in 1996 compared to a $2.0 million
benefit in 1995. The decline in net income between 1995 and 1994 was primarily
due to the provisions for estimated credit losses and valuation allowance on
loans held for sale totaling $17.9 million in 1995 compared to $6.7 million in
1994.
The return on average assets was 1.44% in 1996 compared to a negative
.44% in 1995 and .79% in 1994. The return on average equity was 12.86% for 1996
compared to a negative 5.26% in 1995 and 9.53% in 1994.
Average assets totaled $694.3 million in 1996 compared to $549.1
million in 1995, an increase of $145.2 million or 26.4%, largely due to the
increase in average loans of $68.4 million or 13.9% and cash, investments and
mortgage-backed securities of $81.2 million or 186.7%. The average balance of
mortgage-backed securities was $37.8 million in 1996 compared to $1.7 million in
1995, as these securities were purchased late in the fourth quarter of 1995 and
therefore had a minimal impact on the Company's average balances in 1995.
During 1996, the Company originated $303.1 million of loans for investment and
purchased an additional $62.1 million of loans from third parties. Average
customer deposit accounts totaled $556.3 million in 1996 compared to $489.5
million in 1995, an increase of $66.8 million or 13.7%. This increase was
utilized to fund the increase in the loan portfolio. Average Federal Home Loan
Bank ("FHLB") advances totaled $53.6 million in 1996 compared to $4.4 million in
1995 as these funds were obtained in December 1995 to fund the purchase of the
mortgage-backed securities.
21
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents, for the periods indicated, condensed
average balance sheet information for the Company, 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 for 1996 and monthly average balances,
which management believes do not differ materially from daily average balances,
for 1995 and 1994. Nonaccrual loans are included in loans receivable.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1996 1995
------------------------------------ -------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ---------- ------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and investments $ 86,862 $ 4,571 5.26% $ 41,790 $ 2,286 5.47%
Mortgage-backed securities 37,813 2,177 5.76 1,698 103 6.07
Loans receivable (1):
Secured by real estate 548,471 61,021 11.13 429,494 49,616 11.55
Other 10,804 1,727 15.98 61,332 9,867 16.09
-------- ------- ----- -------- ------- -----
Total loans receivable 559,275 62,748 11.22 490,826 59,483 12.12
-------- ------- ----- -------- ------- -----
Interest-earning assets 683,950 $69,496 10.16% 534,314 $61,872 11.58%
======= ===== ======= =====
Noninterest-earning assets 20,179 25,328
Allowance for credit losses (9,816) (10,519)
-------- --------
TOTAL $694,313 $549,123
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Savings and passbook accounts $ 48,713 $ 2,386 4.90% $ 32,611 $ 1,477 4.53%
Time certificates 507,598 29,055 5.72% 456,847 27,572 6.04
-------- ------- ----- -------- ------- -----
Total deposit accounts 556,311 31,441 5.65 489,458 29,049 5.93
FHLB advances 53,604 2,958 5.52 4,426 294 6.64
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 609,915 34,399 5.64 493,884 29,343 5.94
Noninterest-bearing
liabilities 6,421 9,550
Shareholders' equity 77,977 45,689
-------- --------
TOTAL $694,313 $549,123
======== ========
Net interest spread (2) 4.52% 5.64%
Net interest income before
provisions for estimated
credit losses and
valuation allowance $35,097 $32,529
======= =======
Net interest margin (3) 5.13% 6.09%
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1994
-------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and investments $ 31,581 $ 1,245 3.94%
Mortgage-backed securities - - -
Loans receivable (1):
Secured by real estate 400,476 43,929 10.97
Other 58,856 9,132 15.52
-------- -------- -----
Total loans receivable 459,332 53,061 11.55
-------- -------- -----
Interest-earning assets 490,913 $ 54,306 11.06%
======== =====
Noninterest-earning assets 25,731
Allowance for credit losses (9,298)
--------
TOTAL $507,346
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Savings and passbook accounts $ 55,271 $ 2,039 3.69%
accounts
Time certificates 401,122 19,604 4.89
-------- -------- -----
Total deposit accounts 456,393 21,643 4.74
FHLB advances 1,527 89 5.83
-------- -------- -----
Total interest-bearing
liabilities 457,920 21,732 4.75
Noninterest-bearing
liabilities 7,422
Shareholders' equity 42,004
TOTAL $507,346
========
Net interest spread (2) 6.31%
Net interest income before
provisions for estimated
credit losses and
valuation allowance $32,574
=======
Net interest margin (3) 6.64%
</TABLE>
____________
(1) Before allowance for credit losses and net of deferred loan fees and other
unearned income. Net loan fee amortization of $2.1 million, $2.3 million
and $2.3 million was included in net interest income for 1996, 1995 and
1994, respectively.
(2) Average yield on interest-earning assets minus average rate paid on
interest-bearing liabilities.
(3) Net interest income divided by total average earning assets.
22
<PAGE>
The Company's primary source of revenue is net interest income. The
Company's net interest income is affected by (i) the difference between the
yields recognized on interest-earning assets, such as loans and investments, and
the interest rates paid on interest-bearing liabilities (referred to as "net
interest spread"), which consist primarily of deposits and FHLB advances, and
(ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. When interest-earning assets equal or exceed interest-bearing
liabilities, any positive net interest spread will generate net interest income;
if interest-bearing liabilities exceed interest-earning assets, the Company may
incur a decline in net interest income even when the net interest spread is
positive. For 1996, 1995 and 1994, the Company's ratio of average interest-
earning assets to average interest-bearing liabilities was 112.1%, 108.2% and
107.2%, respectively.
The table below 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 (volume) and changes in average interest
rates (rate). The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship of
absolute dollar amounts of each. Nonaccrual loans are included in total average
loans outstanding.
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
-----------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
------------------------- -----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans receivable, net $ 8,591 $(5,326) $3,265 $3,673 $ 2,749 $6,422
Investment securities 2,456 (171) 2,285 473 568 1,041
Mortgage-backed securities 2,295 (221) 2,074 103 - 103
------- ------- ------ ------ ------- ------
Total increase (decrease) 13,342 (5,718) 7,624 4,249 3,317 7,566
------- ------- ------ ------ ------- ------
Interest paid on:
Deposit accounts 3,897 (1,505) 2,392 2,003 5,403 7,406
FHLB advances 3,263 (599) 2,664 191 14 205
------- ------- ------ ------ ------- ------
Total increase (decrease) 7,160 (2,104) 5,056 2,194 5,417 7,611
------- ------- ------ ------ ------- ------
Increase (decrease) in net interest
income $ 6,182 $(3,614) $2,568 $2,055 $(2,100) $ (45)
======= ======= ====== ====== ======= ======
</TABLE>
1996 Compared to 1995
Net interest income totaled $35.1 million in 1996 compared to $32.5
million in 1995, an increase of $2.6 million or 7.9%. The increase in net
interest income was due to growth in average earning assets, which increased
from $534.3 million in 1995 to $683.9 million in 1996, offset by a decline in
the net interest margin from 6.09% in 1995 to 5.13% in 1996. This decline in
the net interest margin was primarily due to the sale of the higher yielding
automobile finance contracts in 1996 and the amortization of higher yielding
loans originated in prior years.
Interest income totaled $69.5 million in 1996 compared to $61.9
million in 1995, an increase of $7.6 million or 12.3%. Interest and fee income
from loans receivable totaled $62.7 million in 1996 compared to $59.5 million in
1995, an increase of $3.2 million or 5.5%. Interest and fee income from loans
increased due to higher
23
<PAGE>
loan volume in 1996 partially offset by a decline in loan yield. The average
balance of loans receivable was $559.3 million in 1996 compared to $490.8
million in 1995, an increase of $68.4 million or 13.9%. The average yield on
loans receivable was 11.22% in 1996 compared to 12.12% in 1995. The decline in
loan yield was due to the sale of approximately $54.0 million of higher yielding
automobile loans during the first quarter of 1996, as well as a decline in
yields on real estate loans originated in 1996 compared to prior years. This
sale and the origination of lower yielding real estate loans is expected to
result in the Company achieving lower average yields in future operating
periods. Interest income from mortgage-backed securities totaled $2.2 million
in 1996 compared to $0.1 million in 1995, an increase of $2.1 million, due to an
increase in the average outstanding balance partially offset by a reduction in
yield. The average balance of mortgage-backed securities was $37.8 million in
1996 compared to $1.7 million in 1995, as these securities were purchased late
in the fourth quarter of 1995 and therefore had a minimal impact in 1995. The
yield on the mortgage-backed securities was 5.76% in 1996 compared to 6.07% in
1995, as higher than anticipated principal prepayments on the underlying pools
of mortgages resulted in the Company accelerating premium amortization in 1996.
Interest income from cash and investments totaled $4.6 million in 1996 compared
to $2.3 million in 1995, an increase of $2.3 million or 100%, due to an
increased average outstanding balance partially offset by a reduction in yield.
The average balance of cash and investment securities was $86.9 million in 1996
compared to $41.8 million in 1995, an increase of $45.1 million or 107.9%. The
average yield on cash and investment securities was 5.26% in 1996 compared to
5.47% in 1995.
Interest expense totaled $34.4 million in 1996 compared to $29.3
million in 1995, an increase of $5.1 million or 17.2%. Interest expense from
deposit accounts totaled $31.4 million in 1996 compared to $29.0 million in
1995, an increase of $2.4 million or 8.2%, due to an increase in volume of
deposit accounts offset by a decrease in the average rate paid on deposits. The
average balance of deposits was $556.3 million in 1996 compared to $489.5
million in 1995, an increase of $66.8 million or 13.7%, as the Company increased
deposits to fund growth in the loan portfolio. The average rate paid on
deposits was 5.65% in 1996 compared to 5.93% in 1995. Interest expense from
FHLB advances totaled $3.0 million in 1996 compared to $0.3 million in 1995, as
the average balance of these advances increased to $53.6 million in 1996
compared to $4.4 million in 1995, while the interest rate paid on FHLB advances
declined to 5.52% in 1996 compared to 6.64% in 1995. These advances were
acquired to fund the acquisition of the mortgage-backed securities.
1995 Compared to 1994
Net interest income totaled $32.5 million in 1995, a nominal decrease
compared to 1994. This decrease was due to a decline in net interest margin
from 6.64% in 1994 to 6.09% in 1995, partially offset by growth in average
earning assets, which increased from $490.9 million in 1994 to $534.3 million in
1995.
Interest income totaled $61.9 million in 1995 compared to $54.3
million in 1994, an increase of $7.6 million or 13.9%. Interest and fee income
from loans receivable totaled $59.5 million in 1995 compared to $53.1 million in
1994, an increase of $6.4 million or 12.1%, due to both increased volume of
loans and increased loan yield. The average balance of loans receivable was
$490.8 million in 1995 compared to $459.3 million in 1994, an increase of $31.5
million or 6.9%. The average yield on loans receivable was 12.12% in 1995
compared to 11.55% in 1994. Interest income from cash and investment securities
totaled $2.3 million in 1995 compared to $1.2 million in 1994, an increase of
$1.1 million or 83.6%, due to both increased volume of cash and investment
securities and increased yield. The average balance of cash and investment
securities was $41.8 million in 1995 compared to $31.6 million in 1994, an
increase of $10.2 million or 32.3%. The average yield on cash and investment
securities was 5.47% in 1995 compared to 3.94% in 1994.
Interest expense totaled $29.3 million in 1995 compared to $21.7
million in 1994, an increase of $7.6 million or 35.0%. Interest expense from
deposit accounts totaled $29.0 million in 1995 compared to $21.6 million in
1994, an increase of $7.4 million or 34.2%, due to both increased volume of
deposit accounts and an increase in the average interest rate paid for deposits.
The average balance of deposits was $489.5 million in 1995 compared to $456.4
million in 1994, an increase of $33.1 million or 7.2% as the Company increased
deposits to fund growth
24
<PAGE>
in the loan portfolio. The average rate paid on deposits was 5.93% in 1995
compared to 4.74% in 1994. Interest expense from FHLB advances totaled $0.3
million in 1995 compared to $0.1 million in 1994, due to both increased volume
and to a lesser extent an increase in the interest rate paid for borrowed funds.
The average balance of FHLB advances was $4.4 million in 1995 compared to $1.5
million in 1994. The average cost of FHLB advances was 6.64% in 1995 compared
to 5.83% in 1994.
PROVISION FOR ESTIMATED CREDIT LOSSES
1996 Compared to 1995
Provision for estimated credit losses totaled $4.9 million in 1996
compared to $13.1 million in 1995, a reduction of $8.2 million or 62.8%. The
reduction in the provision in 1996 was due primarily to improved asset quality
in the Company's loan portfolio, as the Company disposed of approximately $23.4
million of nonperforming and other potential problem real estate loans in the
third quarter of 1995 and approximately $54.0 million of automobile finance
contracts held for sale in the first quarter of 1996. As a result of these
transactions and improved economic conditions in the Company's marketplace, the
asset quality of the remaining loan portfolio, as evidenced by the Company's
current level of nonperforming loans and delinquency data, improved during 1996
compared to 1995. See also Risk Elements - Allowance for Credit Losses and
Nonperforming Assets.
1995 Compared to 1994
The provision for estimated credit losses totaled $13.1 million in
1995 compared to $6.7 million in 1994, an increase of $6.4 million or 94.6%.
The increase in the provision in 1995 was due primarily to the execution of more
aggressive strategies, as compared to 1994, to resolve and dispose of
nonperforming and other potential problem real estate loans, as well as an
increase in the level of general loss allowances considered appropriate in
connection with such strategies.
PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD FOR SALE
1996 Compared to 1995
Provision for valuation allowance on loans held for sale totaled $0.7
million in 1996 compared to $4.8 million in 1995, a decrease of $4.1 million or
85.3%. In the fourth quarter of 1995, management decided to market its
automobile finance contracts via a bulk sale. In connection with this decision,
the Company established a valuation allowance of $3.9 million, comprising
entirely of previously recognized specific loss allowances, to reduce the
carrying value of these loans to their estimated market value. After selling
approximately $54.0 million of these contracts in the first quarter of 1996, the
Company recorded a provision for valuation allowance on loans held for sale of
$0.7 million to adjust the carrying value of the remaining unsold automobile
finance contracts to their estimated market value. At December 31, 1996, the
carrying amount of the remaining unsold automobile finance contracts, net of
market valuation writedowns and unearned discount, was $1.1 million at the lower
of cost or fair market value. The Company will continue to classify the
residual amount of automobile finance contracts as held for sale at the lower of
cost or fair market value.
1995 Compared to 1994
Provision for valuation allowance on loans held for sale totaled $4.8
million in 1995. No such provision was recorded in 1994. To accelerate the
disposition of nonperforming assets, in the second quarter of 1995, management
determined to market certain nonaccrual and other potential problem real estate
loans held for bulk sale, and reclassified 73 real estate loans, with an
aggregate balance of $23.4 million, as held for sale. In connection with this
reclassification, the Company established valuation allowances of $8.3 million,
comprised of $3.5 million in previously recognized specific loss allowances and
$4.8 million of newly provided valuation
25
<PAGE>
allowances, to reduce the carrying value of these loans to their estimated
market value. The Company sold these loans in the third quarter of 1995. These
sales resulted in the Company receiving proceeds equal to the carrying value of
the loans sold.
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense totaled $13.1 million, $15.3
million and $16.2 million in 1996, 1995 and 1994, respectively.
1996 Compared to 1995
General and administrative expense totaled $13.1 million in 1996
compared to $15.3 million in 1995, a decrease of $2.2 million or 14.2%.
Compensation and benefits expense totaled $5.7 million in 1996 compared to $7.3
million in 1995, a decrease of $1.6 million or 21.7%. This decrease was due
primarily to a reduction in the number of full-time equivalent employees
("FTE's"). The Company began 1995 with 158 FTE's. This number decreased
throughout 1995 to a low of 108 in July 1996 before increasing to 141 FTE's at
December 31, 1996. This reduction was due to several strategic initiatives
executed by management in late 1995 and 1996, including the centralization of
all loan operations, the sale of substantially all of the automobile finance
contracts portfolio and the realignment of various departments throughout the
organization. Occupancy and equipment expense totaled $1.9 million in 1996
compared to $2.2 million in 1995, a decline of $0.3 million or 13.5%, due
primarily to the expiration of leases for the Burbank and Fresno facilities
which were not renewed. The Company consolidated the Fresno retail branch with
its San Jose branch, while the Burbank location had been unused and was being
subleased since 1994. FDIC assessment expense totaled $0.2 million in 1996
compared to $0.9 million in 1995, a decrease of $0.7 million or 71.9%. The
increased regulatory assessments resulting from the increased average balance of
deposit accounts was fully offset by reduced deposit assessment rates as
Imperial improved its designation to "well capitalized" in 1996 from "adequately
capitalized" in 1995. Institutions designated "well capitalized" have
significantly lower FDIC assessments than institutions with other designations.
Other general and administrative expenses totaled $5.2 million in 1996 compared
to $4.8 million in 1995, an increase of $0.4 million or 7.1%.
1995 Compared to 1994
General and administrative expense totaled $15.3 million in 1995
compared to $16.2 million in 1994, a decrease of $0.9 million or 5.9%.
Compensation and benefits expense totaled $7.3 million in 1995 compared to $7.0
million in 1994, a slight increase due primarily to normal annual salary
adjustments. Occupancy and equipment expense totaled $2.2 million in 1995
compared to $2.6 million in 1994, a decrease of $0.4 million or 14.3%, due
primarily to the cost savings from the relocation of Imperial's corporate
headquarters office to lower cost office space in Glendale, California. FDIC
assessment expense totaled $0.9 million in 1995 compared to $1.1 million in
1994, a decrease of $0.2 million or 21.4%. Other general and administrative
expenses totaled $4.8 million in 1995 compared to $5.5 million in 1994, a
decrease of $0.7 million or 11.4%.
REAL ESTATE OPERATIONS, NET
Real estate operations, net, totaled $1.0 million, $5.1 million and
$4.4 million in 1996, 1995 and 1994, respectively.
26
<PAGE>
1996 Compared to 1995
Real estate operations, net, totaled $1.0 million in 1996 compared to
$5.1 million in 1995, a decrease of $4.1 million or 79.3%. This decrease was
due primarily to a decrease in provision for estimated losses on OREO, which
totaled $1.0 million in 1996 compared to $4.2 million in 1995. The reduced
provision for estimated losses on OREO in 1996 compared to 1995 was due
primarily to management's decision to more aggressively market these assets by
recording larger provisions for estimated losses on OREO in 1995 to allow for
the disposition of OREO properties within three to six months of foreclosure,
and thus the potential realization of lower sales prices than were expected to
be obtained as a result of longer marketing periods. This decision in 1995 to
decrease the holding periods and incur potentially higher costs associated with
that strategy was due to a change in asset management philosophy from prior
periods, which was based in part on a belief that the short term costs of the
strategy may be offset by a reduction in the various carrying costs associated
with nonearning assets. As management successfully disposed of the inventory of
OREO properties that were marketed in this more aggressive manner in 1995, and
as the Company sold $23.4 million of nonperforming and potential problem real
estate loans in 1995 before the loans became OREO (see "Results of Operations -
Provision for Estimated Credit Losses"), the Company was able to substantially
reduce the amount of provision for estimated losses on OREO in 1996. Management
believed this strategy was more cost effective in the long term than holding
these assets for extended periods of time.
1995 Compared to 1994
Real estate operations, net, totaled $5.1 million in 1995 compared to
$4.4 million in 1994, an increase of $0.7 million or 15.7%. This increase was
due primarily to an increase in provision for estimated losses on OREO, which
totaled $4.2 million in 1995 compared to $3.1 million in 1994. As previously
discussed, this $1.1 million increase was attributable to the Company's shift in
marketing strategy for OREO properties, whereby the Company determined to
decrease marketing periods by lowering asking prices and recording larger
provisions for estimated losses on OREO.
INCOME TAXES
1996 Compared to 1995
Provision for income taxes totaled $6.4 million in 1996 compared to a
benefit of $2.0 million in 1995. The effective tax rate in 1996 was 39.0%
compared to a benefit of 44.9% in 1995. The effective rates differed from the
applicable statutory federal tax rate due to state income taxes and state income
tax credits from nontaxable income on loans located in designated redevelopment
and enterprise zones.
At December 31, 1996, the Company had a net deferred tax asset of $3.6
million. This deferred tax asset related primarily to loss provisions
recognized on the Company's financial statements which have not yet been
recognized on the Company's income tax returns. The Company does not have any
deferred tax assets relating to net operating loss carryforward deductions. The
deferred tax asset is considered fully realizable, as when the temporary
differences associated with the deferred tax asset are recognized for income tax
purposes, those deductions are expected to be fully offset by future taxable
income. Accordingly, the Company has not established a valuation allowance on
the deferred tax asset.
The Company is in the process of evaluating certain tax aspects of the
deconsolidation between Imperial and its former parent company. No assertions
have been made and management has not reached any conclusions at this time
regarding these matters. As a result, the potential liability related to these
matters, if any, which may be material, has not been reflected in the
consolidated financial statements.
27
<PAGE>
1995 Compared to 1994
The Company recognized a benefit for income taxes totaling $2.0
million in 1995 compared to income tax expense of $2.7 million in 1994 due to
the operating losses realized during 1995. The 1995 benefit rate was 44.9%
compared to an effective tax rate of 40.5% in 1994. The effective rates
differed from the applicable statutory federal tax rate due to state taxes,
state income tax credits from nontaxable income on loans located in designated
redevelopment and enterprise zones and higher income tax rates in carry back
years.
FINANCIAL CONDITION
GENERAL
Total assets increased $289.0 million to $810.4 million at December
31, 1996 from $521.4 million at December 31, 1994, an increase of 55.4%. The
increase in assets during this two year period was funded primarily by a growth
of $221.8 million in deposits, $30.8 million in FHLB advances and $45.6 million
in additional shareholders' equity, primarily as a result of two public
offerings. During this period, the Company increased its efforts to originate
real estate loans and discontinued the purchase of automobile finance contracts.
Total net loans receivable increased by $183.4 million to $661.9
million at December 31, 1996 from $478.4 million at December 31, 1994, an
increase of 38.3%. Cash and investment securities increased by $72.7 million to
$99.2 million at December 31, 1996 from $26.5 million at December 31, 1994.
Additionally, the Company held $8.3 million and $3.0 million in FHLB stock at
December 31, 1996 and 1994, respectively, and $31.9 million in mortgage-backed
securities at December 31, 1996. There were no mortgage-backed securities at
December 31, 1994.
28
<PAGE>
At December 31, 1996 Compared with December 31, 1995
Total assets increased $199.8 million, or 32.7%, to $810.4 million at
December 31, 1996 from $610.7 million at December 31, 1995. This increase
included increases of $155.3 million in net loans receivable, or 31.3%, to
$651.0 million at December 31, 1996 from $495.7 million at December 31, 1995.
Asset growth also included increases in cash and investment securities of $59.0
million. These increases were marginally offset by reductions in OREO to $5.4
million from $6.1 million, FHLB stock to $8.3 million from $12.4 million, and
mortgage-backed securities to $31.9 million from $42.3 million at December 31,
1996 and 1995, respectively. The growth in assets was funded by increases in
deposits and shareholders' equity of $175.5 million and $32.6 million,
respectively, from December 31, 1995 to December 31, 1996. Deposit growth was
concentrated in term certificates, which increased from $459.8 million at
December 31, 1995 to $608.5 million at December 31, 1996, as well as money
market savings and passbook accounts, which increased from $35.0 million at
December 31, 1995 to $61.8 million at December 31, 1996. Shareholders' equity
increased by $32.6 million, primarily as a result of $22.6 million in net
proceeds generated by the Company's public offering of 1.8 million shares of
common stock and the retention of $10.0 million of net income for the year.
At December 31, 1995 Compared with December 31, 1994
Total assets increased $89.3 million, or 17.1%, to $610.7 million at
December 31, 1995 from $521.4 million at December 31, 1994. This increase
reflected a $28.3 million increase in net loans receivable, a $13.6 million
increase in cash and investment securities, a $42.3 million increase in
mortgage-backed securities and a $9.4 million increase in FHLB stock offset by a
$4.4 million decrease in OREO. Deposit growth of $46.2 million over this period
and an increase of $31.3 million in FHLB advances and other borrowings were
sufficient to fund the growth in assets. Deposit growth was concentrated in
term certificates, which increased from $412.5 million at December 31, 1994 to
$459.8 million at December 31, 1995, with passbook accounts declining from $36.1
million at December 31, 1994 to $35.0 million at December 31, 1995. Management
believes that this shift in deposits reflects primarily the preference of
customers to obtain the higher yields associated with term certificates.
Shareholders' equity increased by $13.0 million, primarily as a result of $15.4
million in net proceeds raised by the Company's initial public offering and
offset by the operating loss in 1995.
29
<PAGE>
LOANS RECEIVABLE
The following table shows the comparison of the Company's loan and
automobile finance contract portfolio by major categories as of the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans receivable:
Real estate $644,079 $439,778 $413,856 $375,521 $304,563
Construction 22,498 14,396 12,398 10,400 26,270
Automobile finance contracts,
gross 1,291 68,034 74,183 72,249 67,132
Equipment lease contracts 44 63 319 1,426 22,966
-------- -------- -------- -------- --------
Gross loans receivable 667,912 522,271 500,756 459,596 420,931
Less:
Unearned income on
automobile finance
contracts 205 12,285 15,641 14,763 16,473
Deferred loan fees 5,856 6,189 6,696 6,634 5,409
-------- -------- -------- -------- --------
Total net loans receivable 661,851 503,797 478,419 438,199 399,049
Less:
Allowance for credit losses 10,885 8,105 11,076 8,800 8,000
-------- -------- -------- -------- --------
Net loans receivable $650,966 $495,692 $467,343 $429,399 $391,049
======== ======== ======== ======== ========
</TABLE>
30
<PAGE>
The following table sets forth certain information regarding the real
property collateral securing the Company's real estate and construction loans.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
AVERAGE PERCENT NON-
GROSS LOAN OF ACCRUAL
NUMBER AMOUNT BALANCE TOTAL LOANS
------ ------- ------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential:
One to four units 140 $ 13,265 $ 94.7 2.0% $1,078
Five or more units 171 124,054 725.5 18.6 61
----- -------- ----- ------
Total residential 311 137,319 441.5 20.6 1,139
Commercial:
Office 124 94,461 761.8 14.2 2,808
Retail 233 184,487 791.8 27.7 256
Industrial / warehouse 124 70,705 570.2 10.6 369
Special purpose - hotel 45 41,519 922.6 6.2 183
Mixed-use 120 57,065 475.5 8.5 236
Mobile home parks 25 11,194 447.8 1.7 -
Mini-storage 16 9,407 587.9 1.4 -
Other 124 34,423 277.6 5.2 -
----- -------- ----- ------
Total commercial 811 503,261 620.5 75.5 3,852
Land 20 3,499 175.0 0.5 -
Construction 18 22,498 1,249.9 3.4 1,431
----- -------- ----- ------
Total loans secured by real estate 1,160 $666,577 $ 574.6 100.0% $6,422
===== ======== ===== ======
</TABLE>
31
<PAGE>
The following table sets forth the geographic location of the
underlying collateral for the Company's loans secured by real estate at December
31, 1996.
<TABLE>
<CAPTION>
GROSS
OUTSTANDING PERCENT TO
NUMBER BALANCE AT TOTAL REAL
OF DECEMBER 31, ESTATE LOANS
LOANS 1996 OUTSTANDING
------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Southern California:
Los Angeles County 377 $206,891 31.0%
Orange County 71 45,765 6.9
San Diego County 63 39,600 5.9
San Bernardino County 41 13,487 2.0
All other Southern California Counties 77 44,001 6.6
----- -------- -----
Total Southern California 629 349,744 52.4
----- -------- -----
Northern California:
Contra Costa County 42 34,502 5.2
Sacramento County 69 40,790 6.1
Alameda County 47 18,723 2.8
San Francisco County 34 27,991 4.2
Fresno County 84 27,860 4.2
Santa Clara 51 31,384 4.7
All other Northern California Counties 162 75,572 11.2
----- -------- -----
Total Northern California 489 256,822 38.4
----- -------- -----
Arizona 15 11,691 1.8
Colorado 3 6,481 1.0
Idaho 1 1,299 0.2
Nevada 19 31,002 4.7
New Mexico 1 494 0.1
Oregon 2 7,100 1.1
Washington 1 1,944 0.3
----- -------- -----
Total Loans Secured by Real Estate 1,160 $666,577 100.0%
===== ======== =====
</TABLE>
Although the Company generally seeks to limit risks associated with
its portfolio of real estate and construction loans through a geographic
dispersion within California and by varying the types of underlying collateral,
significant risk concentrations still remain. Concentrations of loans in
certain geographic regions, for example, cause the Company's risk associated
with these loans to be closely associated with the general economic and social
environment of the region. Thus, localized economic and competitive conditions,
natural disasters or social conditions all may impact the values of collateral
located within a particular geographic area. In addition, certain types of
collateral properties may be more or less susceptible to changes in prevailing
economic, competitive or social conditions.
32
<PAGE>
The following table sets forth certain information with respect to the
Company's originations and loans receivable.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31
-----------------------------------------
1996 1995 1994
----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross real estate loans originated $303,091 $156,525 $148,647
Gross real estate loans purchased $ 62,093 $ 18,282 $ -
Gross real estate loans, end of period $666,577 $454,174 $426,254
Weighted-average portfolio yield 11.13% 11.55% 10.97%
Average size of loans originated $ 1,493 $ 776 $ 533
</TABLE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table shows the carrying amounts and approximate market
value of investment securities and mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
-------- ------ --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency
securities $49,233 $49,233 $ - $ - $ - $ -
Certificates of deposit 1,059 1,059 - - - -
------- ------- ------- ------- ------- -------
Total available-for-sale 50,292 50,292 - - - -
------- ------- ------- ------- ------- -------
Held-to-maturity:
U.S. Treasury securities - - 2,980 2,984 9,878 9,868
U.S. government agency
securities - - 3,989 3,988 - -
Certificates of deposit - - 11,080 11,080 3,268 3,265
------- ------- ------- ------- ------- -------
- - 18,049 18,052 13,146 13,133
Mortgage-backed securities 31,870 31,319 42,275 42,039 - -
------- ------- ------- ------- ------- -------
Total held-to-maturity 31,870 31,319 60,324 60,091 13,146 13,133
------- ------- ------- ------- ------- -------
Total investment and
mortgage-backed securities $82,162 $81,611 $60,324 $60,091 $13,146 $13,133
======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1996, investment securities available-for-sale
consisted of $21.7 million of securities that mature in one year or less with an
average yield of 5.37% and $28.5 million that mature from one to two years with
an average yield of 6.08%, and investment securities held to maturity,
consisting solely of mortgage-backed securities, with an estimated weighted-
average life of 4.7 years and an average yield of 5.76%.
33
<PAGE>
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to the Company's ability to maintain cash flow
adequate to fund operations and meet obligations and other commitments on a
timely basis, including the payment of maturing deposits and the origination or
purchase of new loan receivables. The Company maintains a cash and investment
securities portfolio designed to satisfy operating and regulatory liquidity
requirements while preserving capital and maximizing yield. As of December 31,
1996, the Company held approximately $50.3 million of investment securities
classified as available for sale. All investment securities available for sale
held by the Company were fixed income instruments which were rated "AAA" or
better by applicable rating agencies. As of December 31, 1996 and 1995, the
Association's liquidity ratios were 13.3 percent and 8.1 percent, respectively,
exceeding the regulatory requirement of 1.5 percent. In addition, the Company's
liquidity position is supported by a credit facility with the FHLB of San
Francisco. As of December 31, 1996, the Company had available borrowing
capacity under this credit facility of $84.7 million, plus $30.0 million of
unused federal funds credit facilities under established lines of credit with
two banks.
Total deposit accounts increased to $670.3 million at December 31,
1996 from $494.8 million at December 31, 1995, an increase of $175.5 million or
35.5%. The funds provided from the increase in deposits were used to fund the
growth in the Company's loan portfolio. The Company purchased $31.9 million
of deposits in the second quarter and $28.0 million of deposits in the third
quarter of 1996 at a total premium of $0.5 million. The Company retained 75%
and 76% of the funds from maturing investment certificates through rollover of
the certificates in 1996 and 1995, respectively. Although the Company competes
for deposits primarily on the basis of rates, based on its historical experience
regarding retention of deposits, management believes that a significant portion
of deposits will remain with the Company upon maturity on an ongoing basis.
The Company's deposits have increased from $448.6 million at December
31, 1994 to $670.3 million at December 31, 1996. The following table sets forth
information concerning deposits outstanding at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 61,797 $ 34,968 $ 36,075
Time deposits under $100,000 511,908 424,277 394,077
Time deposits over $100,000 96,631 35,548 18,405
-------- -------- --------
Total interest-bearing deposits $670,336 $494,793 $448,557
======== ======== ========
</TABLE>
CAPITAL RESOURCES
In April 1996, the Company completed a public offering of 1,840,000
shares of its common stock. The proceeds of this offering, which included the
exercise of the entire underwriters' overallotment option, totaled $22.6 million
after the underwriting discount and estimated expenses
As of December 31, 1996, the Association's Leverage (Core), Tier I and
Total Risk-Based capital ratios were 10.64%, 12.00% and 13.25%, respectively.
These ratios were 10.14%, 10.71% and 11.97% as of December 31, 1995,
respectively. The minimum regulatory requirement for Leverage (Core), Tier I
and Risk-Based capital are 4.0 percent, 4.0 percent and 8.0 percent,
respectively. As of December 31, 1996, the Association's capital position was
designated as "well capitalized" for regulatory purposes.
The Company's shareholders' equity increased $32.6 million during
1996. The increase in shareholders' equity at December 31, 1996 from December
31, 1995 was primarily due to the April 1996 common stock offering
34
<PAGE>
of $22.6 million and the accumulation of $10.0 million of net income as retained
earnings for the year. There were no dividends declared or paid to shareholders
during 1996.
ASSET / LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The principal objective of asset/liability management is to manage the
Company's asset and liability portfolios to minimize any adverse impact on net
interest income caused by fluctuating interest rates. To achieve this
objective, the Company's strategy is to manage the rate sensitivity and maturity
balance of its interest-earning assets and interest-bearing liabilities within a
limited range. The Company emphasizes the origination of variable rate loans
with contractual floors typically equal to the initial interest rate, matched
with short and intermediate term investment certificates.
In evaluating the Company's exposure to changes in interest rates,
certain risks inherent in the method of analysis presented in the table on the
following page 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 deposit accounts
could cause interest sensitivities to vary from those that appear in the
following table. Further, certain assets, such as variable rate real estate
loans, have features that restrict changes in interest rates on a short term
basis and over the life of the asset. The majority of the Company's variable
rate real estate loans may not adjust downward below their initial rate (the
"floor interest rate"), with increases generally limited to maximum adjustments
of 2% per year and 5% over the life of the loan. At December 31, 1996, the
weighted-average floor interest rate for the Company's variable rate loan
portfolio was 9.61%. The Company considers the anticipated effects of these
various factors in implementing its interest rate risk management activities.
35
<PAGE>
The following table presents an estimate of the Company's sensitivity
to interest rate changes.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
MATURING OR REPRICING IN
--------------------------------------------------------------------------------------------
AFTER 3
MONTHS BUT AFTER 1 YEAR
3 MONTHS WITHIN BUT WITHIN 5 NONINTEREST
OR LESS 1 YEAR YEARS AFTER 5 YEARS SENSITIVE TOTAL
--------- ----------- -------------- ------------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans receivable (1) $387,046 $ 198,574 $ 69,456 $12,836 - $667,912
Mortgage-backed
securities 3,531 8,981 11,924 7,434 - 31,870
Cash and other
investments 63,286 7,333 28,554 - - 99,173
Noninterest-earning assets
less allowance for
credit losses and
unearned loan fees - - - 11,488 11,488
-------- --------- -------- ------- ------- --------
TOTAL $453,863 $ 214,888 $109,934 $20,270 $11,488 $810,443
======== ========= ======== ======= ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Term certificates
under $100,000 $185,566 $ 228,390 $ 97,952 - - $511,908
Term certificates over
$100,000 25,240 62,725 8,666 - - 96,631
Passbook accounts 61,797 61,797
Federal Home Loan Bank
advances 4,000 33,500 6,000 - - 43,500
Other liabilities - - - - 7,289 7,289
Shareholders' Equity - - - - 89,318 89,318
-------- --------- -------- ------- ------- --------
TOTAL $276,603 $ 324,615 $112,618 $ - $96,607 $810,443
======== ========= ======== ======= ======= ========
Net repricing assets
over (under)
repricing
liabilities equals
interest rate
sensitivity GAP $177,260 $(109,727) $ (2,684) $20,270 $(85,119)
======== ========= ======== ======= ========
Cumulative interest
rate sensitivity
GAP $177,260 $ 67,533 $ 64,849 $85,119 $ -
======== ========= ======== ======= ========
Cumulative GAP as a
percentage of total
assets 22.0% 8.4% 8.0% 10.5% -%
</TABLE>
- ----------
(1) Variable rate loans consist principally of real estate secured loans with a
maximum term of 30 years. Approximately 91% of such loans are generally
adjustable quarterly based on changes in various indexes, principally the
London Interbank Offered Rate ("Libor"), the Bank of America Reference Rate
or the FHLB 11th District Cost of Funds Index ("COFI"), subject generally
to a maximum increase of 2% annually and 5% over the life of the loan.
Nonaccrual loans of approximately $7.2 million are assumed to reprice after
5 years. All loans that were held for sale at December 31, 1996 are
assumed to reprice within 3 months.
36
<PAGE>
RISK ELEMENTS
ALLOWANCE FOR CREDIT LOSSES AND NONPERFORMING ASSETS
The following table provides certain information with respect to the
Company's allowance for credit losses including charge-offs, recoveries, and
certain ratios for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 8,105 $ 11,076 $ 8,800 $ 8,000 $ 5,606
Provision for estimated credit losses 4,871 13,098 6,731 5,905 9,544
Charge-offs:
Loans secured by real estate (2,237) (9,448) (2,676) (2,879) (5,268)
Construction loans - (43) (27) (295) (458)
Automobile finance contracts - (7,212) (1,870) (1,089) (806)
Equipment lease contracts - (82) (432) (1,340) (940)
-------- -------- -------- -------- --------
Total charge-offs (2,237) (16,785) (5,005) (5,603) (7,472)
-------- -------- -------- -------- --------
Recoveries:
Loans secured by real estate 146 45 132 66 14
Construction loans - - - - -
Automobile finance contracts - 632 297 230 207
Equipment lease contracts - 39 121 202 101
-------- -------- -------- -------- --------
Total recoveries 146 716 550 498 322
-------- -------- -------- -------- --------
Net charge-offs (2,091) (16,069) (4,455) (5,105) (7,150)
-------- -------- -------- -------- --------
Balance at end of period $ 10,885 $ 8,105 $ 11,076 $ 8,800 $ 8,000
======== ======== ======== ======== ========
Loans:
Average loans outstanding during period $559,275 $490,826 $459,332 $418,981 $396,978
Loans receivable, net (1) at end of period $660,721 $447,985 $478,419 $438,199 $399,049
Ratios:
Net charge-offs to average loans 0.37% 3.27% .97% 1.22% 1.80%
Net charge-offs to loans held for investment, net
at end of period (1) 0.32% 3.59% .93% 1.16% 1.79%
Net charge-offs to allowance for credit
losses at end of period 19.21% 198.26% 40.22% 58.01% 89.38%
Net charge-offs to provision for estimated credit
losses 42.93% 122.68% 66.19% 86.45% 74.92%
Allowance for credit losses to loans held for
investment, net at end of period (1) 1.65% 1.81% 2.32% 2.01% 2.00%
Allowance for credit losses to
nonaccrual loans (2) 169.50% 122.45% 58.98% 108.19% 87.64%
</TABLE>
- ----------
(1) Loans held for investment, before allowance for credit losses and net of
unearned finance charges and loan fees.
(2) Excludes nonaccrual loans held for sale.
The allowance for credit losses increased to $10.9 million at December 31,
1996 from $8.1 million at December 31, 1995. The increase resulted from the
growth in the Company's loan portfolio as the level of nonaccrual loans remained
relatively constant. Net charge-offs decreased significantly to $2.1 million in
1996 from $16.1 million in 1995, permitting the Company to record a provision
for estimated credit losses of $4.9 million as compared to $13.1 million in
1995.
The allowance for credit losses declined to $8.1 million at December 31,
1995 from $11.1 million at December 31, 1994 despite a $6.4 million increase in
the provision for estimated credit losses. The increase in the provision for
estimated credit losses in 1995 to $13.1 million from $6.7 million in 1994 was
attributable
37
<PAGE>
principally to increased charge-offs resulting from the application during 1995
of more aggressive strategies, as compared to 1994, to resolve and dispose of
nonaccrual and other potential problem real estate loans, an increase in the
level of general loss allowances deemed appropriate in connection with such
strategies and increases in delinquencies and charge-offs related to the
automobile finance contracts. During 1995 the Company adopted a strategy based
in part on a belief that the potential high costs of earlier resolution of
problem real estate assets may be offset by a reduction of the direct and
opportunity costs associated with carrying nonearning assets, including general
and administrative expenses and funding and capital costs. This approach
represented a change from the prior period in asset management philosophy, in
terms of the time frames the Company was willing to entertain for the resolution
and disposition of problem loans. The accelerated resolution strategy involved
the Company pursuing foreclosure on a greater proportion of problem real estate
loans rather than seeking workouts or restructurings. In addition, the Company
decided to shorten the time frames for marketing new OREO to 3-6 months. This
new strategy resulted in an increase in the number of foreclosures, lower fair
values being assigned to real estate properties upon foreclosure and a
corresponding increase in loan charge-offs for which increased provisions for
estimated credit losses were deemed appropriate. In addition, the bulk sale of
$23.4 million of nonaccrual and other potential problem loans resulted in the
charge-off of $3.5 million in previously provided specific credit loss
allowances. These real estate loan charge-offs aggregating $9.4 million in
combination with the $7.2 million of automobile finance contract charge-offs,
discussed below, resulted in charge-offs exceeding the beginning balance in the
allowance for credit losses. Although the bulk sale and increase in foreclosures
resulted in nonacccrual loans declining to $7.0 million at December 31, 1995 as
compared to $ 18.8 million at December 31, 1994, provisions for estimated credit
losses were also increased due to declines identified in 1995 in the values of
certain properties securing the Company's real estate loans. Lastly, credit loss
provisions related to the Company's automobile finance contract portfolio were
increased as a result of the Company's decision in late 1995 to discontinue its
automobile finance activities as both the average delinquency in the portfolio
and charge-offs increased in 1995 as compared to 1994.
The allowance for credit losses increased steadily to $11.1 million at
December 31, 1994 from $5.6 million at December 31, 1991 reflecting a
deteriorating economic environment in California resulting in, management
believes, declines in real estate values into at least mid-1994. Provisions for
estimated credit losses were $6.7 million, $5.9 million and $9.5 million for the
years ended December 31, 1994, 1993 and 1992. respectively. The allowance for
credit losses substantially increased during 1994 due to the increase in the
provision for estimated credit losses in 1994 from 1993 due principally to a
$10.7 million increase in nonaccrual loans as compared with 1993, as well as
management's determination that the level of total loss allowances should be
increased. The allowance for credit losses increased to $8.8 million at December
31, 1993 as the level of loan charge-offs stabilized permitting a reduction in
the provision for estimated credit losses. The decrease in the provision for
estimated credit losses in 1993 from 1992 was also the result of a relatively
stable level of nonaccrual loans. Both the allowance and the provision for
estimated credit losses increased in 1992 as the Company experienced a higher
level of charge-offs in 1992 and, with the addition of new management in 1992.
management's determination that significant additional general loss allowances
would be required as a result of its initial assessment of the loan portfolio.
Management estimates that approximately $1.5 million of the provisions for
estimated credit losses in each of years 1993 and 1992 were made as a result of
regulatory examinations.
38
<PAGE>
The following table sets forth management's historical allocation of
the allowance for credit losses by loan category and the percentage of loan in
each category to total at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------ ------------------------
ALLOWANCE ALLOWANCE ALLOWANCE
FOR CREDIT % OF FOR CREDIT % OF FOR CREDIT % OF
LOSSES LOANS(1) LOSSES LOANS(1) LOSSES LOANS(1)
----------- -------- ------------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan or Contract
Categories:
Secured by real
estate $10,885 99.8% $8,096 86.8% $ 9,306 85.1%
Automobile
finance (2) - 0.2 - 13.1 1,750 14.8
Equipment lease - - 9 .1 20 .1
------- ----- ------ ----- ------- -----
Total $10,885 100.0% $8,105 100.0% $11,076 100.0%
======= ===== ====== ===== ======= =====
<CAPTION>
DECEMBER 31
------------------------------------------------------
1993 1992
ALLOWANCE ALLOWANCE
FOR CREDIT % OF FOR CREDIT % OF
LOSSES LOANS(1) LOSSES LOANS(1)
---------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan or Contract
Categories:
Secured by real
estate $7,806 84.0% $6,719 78.6%
Automobile
finance (2) 864 15.7 612 15.9
Equipment lease 130 .3 669 5.5
------ ----- ------ -----
Total $8,800 100.0% $8,000 100.0%
====== ===== ====== =====
</TABLE>
- ------------
(1) Percentage represents the percent of gross loans in category to total gross
loans.
(2) No allocation to automobile loans was provided at December 31, 1996 and
1995 as these loans were held for sale, at estimated fair market value.
Management periodically assesses the adequacy of the allowance for
credit losses by reference to many factors which may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements, general portfolio trends relative to asset and portfolio size,
asset categories, potential credit concentrations, nonaccrual loan levels,
historical loss experience and risks associated with changes in economic, social
and business conditions. Accordingly, the calculation of the adequacy of the
allowance for credit losses is not based solely on the level of nonperforming
assets. Management believes that the Company's allowance for credit losses as
of December 31, 1996 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 the Company's
financial condition and results of operations. In addition, the determination
of the amount of the allowance for credit losses is subject to review by the
Association's regulators, as part of the routine examination process, which may
result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
The table below sets forth the delinquency status of the Company's
real estate loan portfolio at each of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------- ---------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PERIOD OF DELINQUENCY:
30-59 days $ 3,614 .54% $ 5,923 1.30% $14,018 3.29%
60-89 days 5,016 .75 3,904 .86 6,058 1.42
90 days or more 4,601 .69 5,642 1.24 18,168 4.26
------- ---- ------- ---- ------- ----
Total loans delinquent $13,231 1.98% $15,469 3.40% $38,244 8.97%
======= ==== ======= ==== ======= ====
</TABLE>
39
<PAGE>
The Company's loan administration, underwriting and asset management
departments all participate in various aspects of the Company's program to
monitor real estate loan performance. The loan administration department
monitors payment performance and borrower adherence to other contractual
obligations. The Company, in addition to reviewing the quality of newly
originated loans, also performs annual reviews of all real estate loans of
$1,000,000 or greater. In addition, the Company periodically engages
independent outside consultants to review the Company's real estate loan
portfolio and report findings to management and the Audit Committee of the Board
of Directors. Loans considered by any initial review source to warrant special
attention are referred to the asset management department for its analysis and
action recommendations. The asset management department may further recommend
classification of loans to Imperial's Review and Reserve Committee, which is
comprised of the Chief Financial Officer, the Senior Vice President - Retail
Lending, and the Chief Credit Officer. This committee meets at least monthly to
review the status of classified loans, consider new classifications or
declassifications, determine the need for and amount of any specific loan loss
allowances, and recommend to Imperial's Executive Committee of the Board of
Directors the level of allowance for credit losses to be maintained. If
collection of the full amount of principal is believed by management to be
unlikely and the value of the collateral securing the obligation is
insufficient, the Company generally takes steps to protect and liquidate the
collateral. Losses resulting from the difference between the loan balance and
the fair market value of the collateral are recognized by a partial charge-off
of the loan balance to the collateral's fair market value. While real property
collateral is held for sale, it is subject to periodic evaluation and/or
appraisal. If an evaluation or appraisal indicates that the property will
ultimately sell for less than its recorded value, the Company recognizes the
loss by a charge to provision for estimated losses on other real estate owned.
The Company's policy requires that the accrual of income shall cease
if either principal or interest payments are past due in excess of 90 days or if
full collection of interest or principal becomes uncertain, regardless of the
time period involved, unless the loan is both well secured and in the process of
collection.
The following table sets forth the Company's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1):
Loans secured by real
estate, net $ 6,422 (3) $ 6,619 $18,168 $ 7,767 $ 8,962
Other 783 366 611 367 166
------- ------- ------- ------- -------
Total nonaccrual loans 7,205 6,985 18,779 8,134 9,128
Other real estate owned, net 5,416 6,103 10,544 13,058 15,293
------- ------- ------- ------- -------
Total nonperforming assets $12,621 $13,088 $29,323 $21,192 $24,421
======= ======= ======= ======= =======
Troubled debt restructurings (2) $ 2,106 $ 6,182 $15,206 $16,846 $ 5,937
Nonaccrual loans held for
investment to total gross
loans held for investment 0.96% 1.46% 3.87% 1.83% 2.26%
Allowance for credit losses as
a % of nonaccrual loans (4) 169.50% 122.45% 58.98% 108.18% 87.64%
Nonperforming assets to
total assets 1.56% 2.14% 5.62% 4.48% 5.72%
Nonperforming assets held
for investment to
total assets 1.46% 2.08% 5.62% 4.48% 5.72%
</TABLE>
- ---------
(1) Gross interest income that would have been recorded on nonaccrual loans
had they been current in accordance with original terms was $641,000 for
the year ended December 31, 1996. The amount of interest income on such
nonaccrual loans included in net income for year ended December 31, 1996
was $275,000.
(2) $1,059,000 of the restructured loans were accruing at December 31, 1996.
Gross interest income that would have been recorded on restructured loans
under their original terms was $394,000 for 1996. The amount of interest
income on such restructured loans for the year ended December 31, 1996 was
$328,000.
(3) In addition to the above, management has concerns as to the borrowers'
ability to comply with present repayment terms on $13,801,000 of accruing
loans as of December 31, 1996.
(4) Excludes nonaccrual loans held for sale.
Nonaccrual loans held for investment totaled $6.4 million at December 31,
1996, consisting of 24 nonaccrual real estate loans. Three of these loans had an
outstanding balance greater than $500,000, and one loan had an outstanding
balance greater than $1.0 million. The following is a brief discussion of the
Company's nonaccrual loan where the remaining principal balance at December 31,
1996 was greater than $1.0 million.
LOAN COLLATERALIZED BY THREE OFFICE BUILDINGS, NORTHERN CALIFORNIA. This
loan was originated in September 1991 in the amount of $1,201,000, and matured
in September 1996. The current balance is $1,172,000. Due to incapacity of the
borrower, take-out financing was not arranged prior to the loan's maturity, and
the loan has since become an obligation of the borrower's estate. An appraisal
of the office buildings collateralizing the loan, dated December 1996, estimated
the value of the collateral at $1,580,000.
In 1996, $7.3 million of new OREO was acquired, $7.0 million of OREO was
sold, and $1.0 million of write downs were taken, resulting in net OREO at
December 31, 1996 of $5.4 million. OREO at December 31, 1996 consisted of 29
properties with an average balance of approximately $187,000. Only three
properties had a net balance of greater than $500,000, with book values of
$818,000, $662,000 and $594,000.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants on consolidated financial
statements as of and for the period ended December 31, 1996 42
Report of Independent Certified Public Accountants on financial statements as
of December 31, 1995 and for the two years then ended 43
Consolidated Balance Sheets as of December 31, 1996 and 1995 44
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 45
Consolidated Statements of Changes in Shareholders' Equity for the period January 1, 1994 to
December 31, 1996 46
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 47
Notes to Consolidated Financial Statements 48
</TABLE>
41
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and the Board of Directors
of ITLA Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of ITLA Capital
Corporation and subsidiaries (the Company) as of December 31, 1996, and the
related statements of operations, changes in shareholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ITLA Capital Corporation and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
February 19, 1997
42
<PAGE>
[LETTERHEAD OF GRANT THRONTON]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Imperial Thrift and Loan Association
We have audited the accompanying balance sheet of Imperial Thrift and
Loan Association as of December 31, 1995 and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1995. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Thrift and
Loan Association as of December 31, 1995 and the results of its
operations and its cash flows for the each of the years in the two-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
43
/s/ Grant Thornton LLP
Los Angeles, California
February 23, 1996 (except for the sixth paragraph
of Note 13, as to which the date is
March 11, 1996)
<PAGE>
ITLA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 48,881 $ 22,106
Investment securities available for sale, at approximate market value 50,292 -
Investment securities held to maturity, at amortized cost (market
value $18,052 for 1995) - 18,049
Stock in Federal Home Loan Bank 8,349 12,362
Mortgage-backed securities held to maturity, at amortized cost
(market value $31,319 and $42,039 for 1996 and 1995, respectively) 31,870 42,275
Loans receivable:
Loans held for investment at cost, net 660,721 447,985
Loans held for sale, at market value 1,130 55,812
-------- --------
661,851 503,797
Less allowance for credit losses 10,885 8,105
-------- --------
Net loans receivable 650,966 495,692
Interest receivable 4,411 3,865
Other real estate owned, net 5,416 6,103
Income taxes receivable 2,007 2,223
Premises and equipment, net 2,610 3,008
Deferred income taxes 3,613 3,309
Other assets 2,028 1,681
-------- --------
$810,443 $610,673
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $670,336 $494,793
Federal Home Loan Bank advances 43,500 54,000
Accounts payable and other liabilities 7,289 5,188
-------- --------
Total liabilities 721,125 553,981
-------- --------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued - -
Contributed capital - common stock, $.01 par value; 20,000,000 shares
authorized, 7,824,000 and 5,980,000 issued and outstanding in 1996
and 1995, respectively 53,345 30,743
Retained earnings 35,973 25,949
-------- --------
Total shareholders' equity 89,318 56,692
-------- --------
$810,443 $610,673
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
44
<PAGE>
ITLA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $62,748 $59,483 $53,061
Investment securities 4,571 2,286 1,245
Mortgage-backed securities 2,177 103 -
------- ------- -------
Total interest income 69,496 61,872 54,306
------- ------- -------
Interest expense:
Deposit accounts 31,441 29,049 21,643
Federal Home Loan Bank advances 2,958 294 89
------- ------- -------
Total interest expense 34,399 29,343 21,732
------- ------- -------
Net interest income before provisions for valuation
allowance and estimated credit losses 35,097 32,529 32,574
Provision for estimated credit losses 4,871 13,098 6,731
Provision for valuation allowance on loans held for sale 700 4,774 -
------- ------- -------
Net interest income after provisions for valuation
allowance and estimated credit losses 29,526 14,657 25,843
------- ------- -------
Noninterest income 1,053 1,310 1,491
Noninterest expense:
Compensation and benefits 5,723 7,313 7,044
Occupancy and equipment 1,929 2,230 2,601
FDIC assessment 244 869 1,106
Other 5,190 4,848 5,469
------- ------- -------
Total general and administrative 13,086 15,260 16,220
------- ------- -------
Real estate operations, net 435 1,293 1,151
Provision for estimated losses on other real estate owned 1,038 4,169 3,074
(Gain) loss on sale of other real estate owned, net (424) (392) 156
------- ------- -------
Total real estate operations, net 1,049 5,070 4,381
------- ------- -------
Total noninterest expense 14,135 20,330 20,601
------- ------- -------
Income (loss) before provision (benefit) for income taxes 16,444 (4,363) 6,733
Provision (benefit) for income taxes 6,420 (1,960) 2,729
------- ------- -------
NET INCOME (LOSS) $10,024 $(2,403) $ 4,004
======= ======= =======
EARNINGS (LOSS) PER SHARE $ 1.36 $ (0.52) $ 0.93
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
45
<PAGE>
ITLA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1994 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF CONTRIBUTED RETAINED
SHARES CAPITAL EARNINGS TOTAL
--------- ----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1994 4,320 $15,351 $24,348 $39,699
Net income - - 4,004 4,004
----- ------- ------- -------
Balance at December 31, 1994 4,320 15,351 28,352 43,703
Issuance of common stock 1,660 15,392 - 15,392
Net loss - - (2,403) (2,403)
----- ------- ------- -------
Balance at December 31, 1995 5,980 30,743 25,949 56,692
Issuance of common stock 1,844 22,602 - 22,602
Net income - - 10,024 10,024
----- ------- ------- -------
Balance at December 31, 1996 7,824 $53,345 $35,973 $89,318
===== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
46
<PAGE>
ITLA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,024 $ (2,403) $ 4,004
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 601 795 642
Provision for estimated credit losses 4,871 13,098 6,731
Provision for valuation allowance on loans held for sale 700 4,774 -
Provision for estimated losses on other real estate owned 1,038 4,169 3,074
(Gain) loss on sale of premises and equipment (4) (11) 118
(Gain) loss on sales of other real estate owned (424) (392) 156
Loss on sale of real estate loans - 105 -
Loss on sale of investments - - 190
Increase in interest receivable (546) (615) (436)
Decrease (increase) in income taxes receivable 216 (1,285) (132)
(Increase) decrease in deferred income taxes (304) 1,099 1,209
Decrease (increase) in other assets (417) 149 (1,158)
Increase (decrease) in accounts payable and other liabilities 2,101 (1,258) 4
--------- --------- ---------
Net cash provided by operating activities 17,856 18,225 14,402
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in net loans receivable (219,532) (77,232) (54,054)
Purchases of investment securities available for sale (222,365) - -
Proceeds from the maturity of investment securities available for sale 172,463 - -
Purchases of investment securities held to maturity (364,029) (451,985) (89,226)
Proceeds from the maturity of investment securities held to maturity 382,078 447,082 77,883
Decrease (increase) in stock in Federal Home Loan Bank 4,013 (9,362) (3,000)
Purchases of mortgage-backed securities - (42,280) -
Repayment of principal on mortgage-backed securities 10,199 - -
Proceeds from sale of other real estate owned 7,385 12,565 8,284
Proceeds from sale of real estate loans 1,324 19,005 -
Proceeds from sale of automobile finance contracts 50,050 - -
Cash paid for capital expenditures (329) (317) (3,107)
Other 17 116 32
--------- --------- ---------
Net cash used in investing activities (178,726) (102,408) (63,188)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 22,602 15,392 -
Net increase in deposit accounts 175,543 46,236 22,446
Federal funds purchased - (10,000) 10,000
(Decrease) increase in Federal Home Loan Bank advances (10,500) 41,300 12,700
--------- --------- ---------
Net cash provided by financing activities 187,645 92,928 45,146
--------- --------- ---------
Net increase in cash and cash equivalents 26,775 8,745 (3,640)
Cash and cash equivalents at beginning of period 22,106 13,361 17,001
--------- --------- ---------
Cash and cash equivalents at end of period $ 48,881 $ 22,106 $ 13,361
========= ========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 34,082 $ 29,089 $ 21,711
Cash paid during the period for income taxes $ 6,509 $ 42 $ 1,750
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 7,313 $ 11,901 $ 9,698
Loans to facilitate the sale of other real estate owned $ 3,570 $ 10,101 $ 3,880
</TABLE>
See accompanying notes to the consolidated financial statements
47
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - ITLA Capital Corporation ("the Company") is primarily
engaged in the origination of loans secured by income producing real estate,
located historically in California. Through its wholly-owned subsidiary,
Imperial Thrift and Loan Association ("Imperial" or "the Association"), the
Company accepts Federal Deposit Insurance Corporation ("FDIC") insured deposits
which are used primarily to fund the investment in variable rate commercial real
estate loans. Through its other wholly-owned subsidiary, ITLA Funding
Corporation ("Funding"), the Company originates income producing real estate
loans for placement with third party investors.
The Company was organized in 1996 and became the sole shareholder of
Imperial as a result of a transaction that occurred on October 1, 1996. On that
date, a nonoperating subsidiary of the Company was merged with and into
Imperial, and all outstanding shares of Imperial common stock were converted
into an equal number of shares of Company common stock. This transaction has
been accounted for as a reorganization of entities under common control.
Imperial has operated as a California thrift and loan association since
1974, and became a publicly traded company in October 1995, when its shares were
sold in an initial public offering. Imperial operates six loan production
offices in California and one loan production office in Nevada, and has nine
savings branches in California. Substantially all results of operations of the
Company for the year ended December 31, 1996 are those of Imperial.
Funding was formed in October 1996 and was limited to start-up activities
in 1996, including establishing a network of regional loan production offices in
New York, Chicago, Tampa, Houston and Encino (Los Angeles).
FINANCIAL STATEMENT PRESENTATION - The accounting and reporting policies
of the Company conform to generally accepted accounting principles ("GAAP") and
to prevailing practices within the financial services industry. The
consolidated financial statements include the accounts of the Company and its
two wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated. Certain amounts in prior periods have been
reclassified to conform with the presentation in the current period. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Investment securities and
mortgage-backed securities held to maturity are carried at cost, adjusted for
premium amortization or discount accretion computed on the effective interest
method. The Company has the intent and ability to hold these securities to
their maturities. Investment securities available for sale are carried at fair
value with unrealized gains or losses reported net of taxes, as a separate
component of shareholders' equity, until realized.
48
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE - Loans receivable are generally carried at principal
amounts outstanding less deferred loan fees and other unearned income. Deferred
loan fees and other unearned income include deferred unamortized fees net of
direct incremental loan origination costs as required by Statement of Financial
Accounting Standards ("SFAS") No. 91. Interest income is accrued as earned.
Net deferred fees are recognized as interest income using the interest method.
Loans held for sale are recorded at the lower of cost or fair market value.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be unlikely. When a loan is placed on nonaccrual status, all
previously accrued but uncollected interest is reversed against current period
operating results. Subsequent cash collections on nonaccrual loans are either
recognized as interest income on a cash basis, if the loan is well secured and
in management's judgment the net book value is fully collectible, or recorded
entirely as a reduction of principal.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement on a timely basis. Once 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 observable market price or the fair value of the
collateral if the loan is collateral dependent.
When the measurement of the impaired loan is less than the recorded amount
of the loan, an impairment is recognized by creating a valuation allowance with
a corresponding charge to the provision for estimated credit losses or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to the provision for estimated credit losses.
The Company's policy for recognizing interest income on impaired loans is
the same as that for nonaccrual loans.
ALLOWANCE FOR CREDIT LOSSES - The Company maintains an allowance for
credit losses at a level considered adequate to cover probable losses on loans
and leases. In evaluating the adequacy of the allowance for credit losses,
management estimates the amount of the potential risk of loss for each loan that
has been identified as having more than standard credit risk. Those estimates
give consideration to economic and social conditions, estimated real estate
collateral value and cash flow, and the financial strength and commitment of the
borrower or guarantors, where appropriate. Additionally, an estimate for
potential credit loss is calculated for the remaining portion of the portfolio
giving consideration to the Company's historical loss experience in the
portfolio, adjusted, as appropriate, for the estimated effects of current
economic conditions and changes in the composition of the loan portfolio over
time. Accounts which are considered uncollectible by management are charged
off, unless secured by real estate.
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO"), which
represents real estate acquired through foreclosure, is carried at the lower of
cost or estimated fair value less costs of disposition. The net operating
results from OREO are recognized in the current period as noninterest expense.
49
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT - Premises and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are calculated on a straight-line method over the estimated useful lives of the
assets.
INCOME TAXES - Provision (benefit) for income taxes is the amount of
estimated tax due (or refundable) reported on the Company's tax returns and the
change in the amount of deferred tax assets and liabilities. Deferred income
taxes represent the estimated net income tax expense payable (or benefits
receivable) for temporary differences between the accounting basis and tax basis
of the Company's assets and liabilities.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is computed on the
basis of the average number of common shares outstanding during each period plus
the additional dilutive effect of common stock equivalents. The dilutive effect
of outstanding stock options is calculated using the treasury stock method. The
weighted-average number of common shares outstanding, including common stock
equivalents, during 1996, 1995 and 1994 was 7,393,549, 4,646,192 and 4,320,000,
respectively.
NOTE 2---INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of investment securities and
mortgage-backed securities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Available for sale:
Investment securities:
U.S. government agency $49,233 $ - $ - $49,233
Certificates of deposit 1,059 - - 1,059
------- --- ---- -------
Total available for sale $50,292 $ - $ - $50,292
======= === ==== =======
Held to maturity:
Mortgage-backed securities $31,870 $11 $562 $31,319
------- --- ---- -------
Total held to maturity $31,870 $11 $562 $31,319
======= === ==== =======
</TABLE>
50
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 2---INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1995:
Held to maturity:
Investment securities:
U.S. Treasury securities $ 2,980 $ 4 $ - $ 2,984
U.S. government agency 3,989 1 3,988
Certificates of deposit 11,080 - - 11,080
------- --- ---- -------
18,049 4 1 18,052
Mortgage-backed securities 42,275 28 264 42,039
------- --- ---- -------
Total held to maturity $60,324 $32 $265 $60,091
======= === ==== =======
</TABLE>
The amortized cost and fair value of investment securities available
for sale, by contractual maturity, at December 31, 1996 are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------- -------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $21,755 $21,755
Due from one to five years 28,537 28,537
------- -------
$50,292 $50,292
======= =======
</TABLE>
The remaining contractual maturity and estimated weighted-average life of
the mortgage-backed securities was approximately 20.1 and 4.7 years,
respectively, at December 31, 1996. The weighted-average life of mortgage-
backed securities differs from the contractual maturity due to anticipated
principal prepayments.
At December 31, 1996, approximately $81,094,000 of securities are pledged
to secure a line of credit at the Federal Home Loan Bank of San Francisco
("FHLB"). See Note 8 to the consolidated financial statements.
During 1996 and 1995, there were no transfers from the held to maturity
portfolio and no securities were sold prior to their maturity or call date.
51
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3--LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans receivable held for investment:
Loans secured by real estate $644,079 $439,778
Construction loans 22,498 14,396
Loans receivable held for sale:
Automobile finance contracts - at approximate market value 1,291 68,034
Direct financing leases - at approximate market value 44 63
-------- --------
Loans receivable before deferred fees and unearned income 667,912 522,271
Unearned finance income on automobile finance contracts
held for sale (205) (12,285)
Deferred loan fees and other unearned income (5,856) (6,189)
-------- --------
$661,851 $503,797
======== ========
</TABLE>
At December 31, 1996, approximately 94.6%, 3.4% and 2.0% of the Company's
loans collateralized by real estate are secured by income producing properties,
properties under development, and residential 1-4 properties, respectively.
Approximately 91.0% of the Company's loans secured by real estate were
collateralized by properties located in California.
At December 31, 1996, approximately $114,145,000 of loans receivable were
pledged to secure a line of credit at the FHLB. See Note 8 to the consolidated
financial statements.
52
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3--LOANS RECEIVABLE (CONTINUED)
The approximate contractual maturities of loans receivable at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
LOANS MATURING IN
---------------------------------------------------
BETWEEN GREATER
LESS THAN ONE AND THAN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
----------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Secured by real estate $32,026 $89,130 $522,923 $644,079
Construction 14,139 5,159 3,200 22,498
Other 312 1,021 2 1,335
------- ------- -------- --------
Total $46,477 $95,310 $526,125 $667,912
======= ======= ======== ========
Loans with fixed interest rates $22,512 $29,906 $ 9,442 $ 61,860
Loans with variable interest rates 23,965 65,404 516,683 606,052
------- ------- -------- --------
Total $46,477 $95,310 $526,125 $667,912
======= ======= ======== ========
Percentage with variable rates 51.6% 68.6% 98.2% 90.7%
</TABLE>
The foregoing tabulation should not be regarded as a forecast of future
cash collections because a substantial portion of loan receivables may be
renewed or repaid prior to contractual maturity.
53
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3--LOANS RECEIVABLE (CONTINUED)
The following is the activity in the allowance for credit losses for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 8,105 $ 11,076 $ 8,800
Provision for estimated credit losses 4,871 13,098 6,731
Gross charge-offs:
Loans secured by real estate (2,237) (9,491) (2,703)
Automobile finance contracts, direct
financing leases and other - (7,294) (2,302)
------- -------- -------
Total gross charge-offs (2,237) (16,785) (5,005)
------- -------- -------
Recoveries:
Loans secured by real estate 146 45 132
Automobile finance contracts, direct
financing leases and other - 671 418
------- -------- -------
Total gross recoveries 146 716 550
------- -------- -------
Net charge-offs (2,091) (16,069) (4,455)
------- -------- -------
Balance at end of year $10,885 $ 8,105 $11,076
======= ======== =======
</TABLE>
As of December 31, 1996, the accrual of income was suspended on
approximately $7,205,000 of loans and leases, which included approximately
$6,422,000 of loans secured by real estate and $783,000 of other loans. At
December 31, 1995, the accrual of income was suspended on approximately
$6,619,000 of loans secured by real estate and $366,000 of other loans. The
interest income that was contractually due on loans that were on nonaccrual
status that was not recognized during the years ended December 31, 1996, 1995
and 1994 was approximately $366,000, $501,000 and $910,000, respectively.
As of December 31, 1996 and 1995, restructured loans totaled $2,106,000 and
$6,182,000, respectively. There were no related commitments to lend additional
funds on restructured loans. For the years ended December 31, 1996, 1995 and
1994, $394,000, $800,000 and $1,460,000, respectively, of gross interest income
would have been recorded had the loans been current in accordance with their
original terms compared to $328,000, $667,000 and $1,200,000, respectively, of
interest income which was included in net income for the same periods. The
average yield on restructured loans was 11.46% at December 31, 1996.
54
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3--LOANS RECEIVABLE (CONTINUED)
The Company's recorded investment in impaired loans, all of which were
nonaccrual loans, and the related valuation allowance, were as follows as of
December 31:
<TABLE>
<CAPTION>
RECORDED VALUATION
INVESTMENT ALLOWANCE
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996:
Valuation allowance required $3,627 $ 778
No valuation allowance
required 699 -
------ ------
Total impaired loans $4,326 $ 778
====== ======
1995:
Valuation allowance required $6,985 $1,015
No valuation allowance
required - -
------ ------
Total impaired loans $6,985 $1,015
====== ======
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1996 and 1995 was $3,808,000 and $12,926,000, respectively.
Interest income recognized on impaired loans for the years ended December 31,
1996 and 1995 was $413,000 and $551,000, respectively.
Loans having carrying values of $7,313,000 and $11,901,000 were transferred
to OREO in 1996 and 1995, respectively.
NOTE 4--OTHER REAL ESTATE OWNED
Other real estate owned was stated as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for sale $ 6,532 $ 8,716
Less valuation allowance (1,116) (2,613)
------- -------
$ 5,416 $ 6,103
======= =======
</TABLE>
55
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 4--OTHER REAL ESTATE OWNED (CONTINUED)
The activity in the valuation allowance for other real estate owned was as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 2,613 $ 3,603 $ 4,173
Provision for estimated losses 1,038 4,169 3,074
Charges upon sale of other real estate owned (2,535) (5,159) (3,644)
------- ------- -------
$ 1,116 $ 2,613 $ 3,603
======= ======= =======
</TABLE>
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment $ 3,772 $ 3,642
Leasehold improvements 2,427 2,302
Automobiles 98 131
------- -------
6,297 6,075
Less accumulated depreciation and (3,687) (3,067)
amortization ------- -------
$ 2,610 $ 3,008
======= =======
</TABLE>
56
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 6--DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market savings and passbook accounts $ 61,797 $ 34,968
Time certificates under $100,000 511,908 424,277
Time certificates over $100,000 96,631 35,548
-------- --------
$670,336 $494,793
======== ========
</TABLE>
Money market savings and passbook accounts have no contractual maturity and
pay interest at rates ranging from 1.00% to 5.165% per annum. Additionally,
money market savings accounts allow three check withdrawals per month. Time
certificates have maturities ranging from 90 days to five years and bear
interest at varying rates based on market conditions, ranging from 3.50% to
8.87% per annum.
There were no broker deposits outstanding at December 31, 1996 or 1995.
Interest expense on time certificates over $100,000 for the years ended December
31, 1996, 1995 and 1994 amounted to approximately $1,881,000, $1,193,000 and
$847,000, respectively.
The Association is subject to the provisions of the California Industrial
Loan Law, which limits the amount of deposits which the Association may have
outstanding to 20 times its shareholder's equity. At December 31, 1996, the
Association's deposits are 7.8 times its shareholder's equity.
The Association is a member of the Federal Deposit Insurance Corporation
("FDIC") and its deposits are insured up to $100,000 each per insured depositor.
As of December 31, 1996, the contractual maturities of time certificate
accounts were as follows:
<TABLE>
<CAPTION>
YEAR OF
MATURITY AMOUNT
-------- --------
(IN THOUSANDS)
<S> <C>
1997 $501,921
1998 84,993
1999 16,398
2000 3,967
2001 1,260
--------
$608,539
========
</TABLE>
57
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 7--LINES OF CREDIT
The Association has uncommitted, unsecured lines of credit with two banks
renewable daily in the amount of $30,000,000. There were no borrowings against
these lines at December 31, 1996.
NOTE 8--FHLB ADVANCES
FHLB advances represent collateralized obligations with the FHLB of
San Francisco. The outstanding balance of these advances were $43,500,000 and
$54,000,000 at December 31, 1996 and 1995, respectively.
The contractual maturities of FHLB advances are as follows:
<TABLE>
<CAPTION>
YEAR OF DECEMBER 31,
MATURITY 1996
-------- --------------
(IN THOUSANDS)
<S> <C>
1997 $37,500
1998 6,000
-------
$43,500
=======
</TABLE>
The Company has pledged loans receivable secured by real estate with a
carrying value of $114,145,000, investment securities available for sale with a
carrying value of $49,224,000 and mortgage-backed securities with a carrying
value of $31,870,000, for a total of $195,239,000 of assets pledged as
collateral for this borrowing facility. The total borrowing capacity available
from the collateral that has been pledged is approximately $128,249,000, of
which $43,500,000 has been utilized as of December 31, 1996.
The following table represents the maximum month-end balance
outstanding, weighted-average daily balance outstanding, average rates paid
during the year, and the average rates on the balance at year-end for FHLB
advances:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum month-end balance $54,000 $54,000
Weighted-average daily balance $53,604 $ 4,426
Average rates paid 5.52% 6.64%
Average rates on balance at year-end 5.52% 5.49%
Balance at year-end $43,500 $54,000
</TABLE>
58
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 9--BENEFIT PLANS
The Company has a salary savings plan (the "Savings Plan") that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating employees may defer a portion of
their pretax earnings, up to 14% of their compensation. The Company matches 50%
of each employee's contribution, up to a maximum 6% of the employee's salary.
Employees vest in employer contributions and their earnings thereon over a five
year period. The Company's matching contributions to the Savings Plan were
$101,456, $127,998 and $135,669 in 1996, 1995 and 1994, respectively.
The Company also has two deferred compensation plans designated to provide
additional retirement benefits for certain officers and key employees who cannot
take full advantage of the Savings Plan. Costs associated with these deferred
compensation plans amounted to $7,416 and $24,766 in 1996 and 1995,
respectively.
The Company adopted an employee stock incentive plan and stock option plan
for nonemployee directors (collectively, "the Stock Plan") which provides for
the award of up to 1 million shares of common stock to officers, directors and
key employees as compensation for future services, not to exceed a combined
550,000 shares during 1995, the first year of the Stock Plan, with annual awards
thereafter limited to 100,000 additional shares. As of December 31, 1996, the
Company granted an aggregate of 496,500 options under the Stock Plan at exercise
prices ranging from $10.00 to $14.63 per share, which generally vest over three
years from the date of grant.
The number of options for each of the following groups of options in 1996
and 1995, respectively, are as follows: options outstanding at the beginning of
the year, 509,500 and 0; options outstanding at the end of the year, 496,500 and
509,500; options exercisable at end of year, 154,917 and 0; options granted
during the year, 91,000 and 513,500; options exercised during the year, 4,000
and 0; and options forfeited during the year, 100,000 and 4,000.
The weighted average exercise prices of options for each of the following
groups of options in 1996 and 1995, respectively, are as follows: options
outstanding at the beginning of the year $10.04 and $0; options outstanding at
the end of the year, $10.08 and $10.04; options exercisable at the end of the
year, $10.13 and $0; and options forfeited during the year, $10.13 and $10.04.
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 grants; dividend yield of 0%, expected volatility of 27.5% and 27.6% in 1996
and 1995, respectively, risk-free interest rates of 6.32% to 6.83% and 5.65% to
6.01% in 1996 and 1995, respectively, and expected lives of seven years. The
weighted-average fair value of options granted during 1996 and 1995 was $6.61
and $4.45, respectively. The Company accounts for the Stock Plan under
Accounting Principles Board Opinion No. 25 and accordingly, no compensation
costs have been recognized in the accompanying consolidated statements of
operations for 1996 or 1995. If compensation costs for the Stock Plan had been
determined under SFAS No. 123, pro forma net income and earnings per share would
have been $9,543,000 and $1.29, respectively, for 1996 and pro forma net loss
and loss per share would have been $(2,485,000) and $(.53), respectively, for
1995.
59
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10--INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Association's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Allowance for credit losses $3,383 $2,742
Accrued vacation 585 224
California franchise taxes 342 1
Nondeductible other real estate owned expenses 249 301
Provision for estimated losses on other
real estate owned 165 844
------ ------
Total deferred tax assets 4,724 4,112
------ ------
Components of the deferred tax liability:
Deferred loan origination costs 568 568
FHLB stock dividends 308 27
Deferred California franchise taxes - 208
Other 235 -
------ ------
Total deferred tax liabilities 1,111 803
------ ------
Net deferred tax asset $3,613 $3,309
====== ======
</TABLE>
The deferred tax asset is considered fully realizable, as when the
temporary differences associated with the deferred tax asset are recognized for
income tax purposes, those deductions are expected to be fully offset by future
taxable income. Accordingly, the Company has not established a valuation
allowance on the deferred tax asset.
60
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 10--INCOME TAXES (CONTINUED)
A summary of the provision (benefit) for income taxes for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 6,043 $(2,813) $1,023
State 681 (246) 497
------- ------- ------
6,724 (3,059) 1,520
------- ------- ------
Deferred:
Federal (1,036) 1,589 956
State 732 (490) 253
------- ------- ------
(304) 1,099 1,209
------- ------- ------
$ 6,420 $(1,960) $2,729
======= ======= ======
</TABLE>
A reconciliation of the federal statutory income tax (benefit) rate to the
effective income tax (benefit) rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory, federal tax rate 35.0% (34.0)% 34.0%
State franchise tax, net of federal income tax benefit 7.5 (7.5) 7.2
State franchise tax LARZ credits and other benefits (3.5) (3.4) (0.7)
----- ----- -----
39.0% (44.9)% 40.5%
===== ===== =====
</TABLE>
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit. These
instruments may involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company has exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit. This
exposure is represented by the contractual amount of those instruments as the
Company uses the same lending policies for these instruments as it does for the
loan portfolio. The Company has outstanding unfunded loan commitments of
approximately $34,572,000 and $16,964,000 at December 31, 1996 and 1995,
respectively.
61
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases office facilities under noncancelable operating leases.
Future minimum lease payments required under leases with initial or remaining
noncancelable terms in excess of one year at December 31, 1996 are approximately
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997 $1,007
1998 862
1999 816
2000 752
2001 812
Thereafter 4,062
------
$8,311
======
</TABLE>
Certain leases contain rental escalation clauses based on increases in the
Consumer Price Index, and renewal options of up to ten years which may be
exercised by the Company. The Company incurred rent expense of $1,134,000,
$1,373,000 and $1,884,000 in 1996, 1995 and 1994, respectively. The Company
received sublease income of $78,000, $116,000 and $48,000 in 1996, 1995 and
1994, respectively. There are no subleases remaining at December 31, 1996.
The Company has committed to invest $500,000 in a limited partnership,
organized to invest in various limited partnerships that will engage in low-
income housing improvement projects in California. The commitment is being paid
in installments on demand but no installments during any calendar year shall
exceed $125,000. At December 31, 1996, the Company had made cumulative payments
of $90,000 towards this commitment. The unpaid portion is due and payable no
later than April 30, 2002 or the date on which the partnership or the interest
therein is liquidated, whichever occurs first.
CONTINGENCIES
The Company is in the process of evaluating certain tax aspects of the
deconsolidation between Imperial and its former parent company. No assertions
have been made and management has not reached any conclusions at this time
regarding these matters. As a result, the potential liability related to these
matters, if any, which may be material, has not been reflected in the
consolidated financial statements.
The Company is subject to various pending legal actions which arise in the
normal course of business. The Company maintains reserves for losses from legal
actions which are both probable and estimable. Although the amount of the
ultimate exposure, if any, cannot be determined at this time, in management's
opinion, based upon advice of counsel, the disposition of claims currently
pending will not have a material adverse effect on the Company's financial
position and results of operations.
62
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 13--REGULATORY REQUIREMENTS
The Association is subject to supervision and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Department of Corporations
("DOC") of the State of California under the provisions of the California
Industrial Loan Law. These provisions authorize the Association's issuance of
thrift certificates, place limits on the size and type of loans the Association
can make, and specify that the Association's allowance for credit losses be
maintained at certain minimum levels.
The Association is also subject to various capital requirements administered
by the federal banking agencies. 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
Association's financial statements and ultimately the consolidated financial
statements of the Company. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet specific
capital guidelines that involve quantitative measures of the Association's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Association'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 Association to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I capital to risk-weighted assets, and of Tier I
capital to average total assets (leverage ratio). Management believes, as of
December 31, 1996, that the Association meets all applicable capital adequacy
requirements.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Association as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized" the
Association must maintain minimum Total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
Association's category.
63
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 13--REGULATORY REQUIREMENTS (CONTINUED)
The Association's actual regulatory capital amounts and ratios are presented
in the following table:
<TABLE>
<CAPTION>
CAPITAL REQUIRED TO
MINIMUM REQUIREMENT MAINTAIN "WELL
FOR CAPITAL CAPITALIZED"
ACTUAL ADEQUACY PURPOSES DESIGNATION
----------------------- -------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
- -----------------------
Total capital
(to risk-weighted assets) $94,791 13.25% $57,236 8.0% $71,545 10.0%
Tier I capital
(to risk-weighted assets) $85,843 12.00% $28,618 4.0% $42,927 6.0%
Core capital
(to average total assets) $85,843 10.64% $32,260 4.0% $40,325 5.0%
AS OF DECEMBER 31, 1995
- -----------------------
Total capital
(to risk-weighted assets) $63,366 11.97% $42,367 8.0% $52,959 10.0%
Tier I capital
(to risk-weighted assets) $56,692 10.71% $21,183 4.0% $31,775 6.0%
Core capital
(to average total assets) $56,692 10.14% $22,364 4.0% $27,955 5.0%
</TABLE>
Imperial operated under a Memorandum of Understanding ("MOU") with the FDIC
and DOC, which required a reduction in classified assets, prior written approval
of dividends and a minimum leverage ratio of 7.5% from the first quarter of 1994
until the first quarter of 1996, when the MOU was terminated.
NOTE 14--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate. Such instruments include securities, loans receivable, time deposits,
accrued interest receivable and accrued interest payable. Because no market
exists for a significant portion of the Company's loan portfolio, fair value
estimates are based on judgments regarding credit risk, investor expectations of
future economic conditions, normal cost of administration of these instruments
and other risk characteristics, including interest rate risk and prepayment
risk. These estimates are subjective in nature and 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.
64
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 14--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate value:
Cash and Cash Equivalents - The carrying values reported in the balance
sheet approximate fair values due to the short-term nature of the assets.
Investment and Mortgage-Backed Securities - Fair values are based on bid
prices and quotations published and/or received from securities dealers.
FHLB Stock - Fair values are based on bid prices quoted from the FHLB.
Loans Receivable - The fair value of net loans receivable has been
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.
Deposit Accounts - The fair value of passbook accounts is estimated to be
the amount payable on demand. The fair values for certificates of deposit, both
over and under $100,000, are estimated by discounting the expected cash flows at
current market rates over expected maturities.
FHLB Advances - The fair value of FHLB advances is estimated by discounting
the expected cash flows at current market rates over contractual maturities.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996
----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 48,881 $ 48,881
Investment securities 50,292 50,292
Stock in FHLB 8,349 8,349
Mortgage-backed securities 31,870 31,319
Loans held for sale, net 1,130 1,130
Loans receivable held for investment 666,577 671,366
Deferred loan fees and other unearned income (5,856) -
Allowance for credit losses (10,885) -
-------- --------
Net loans receivable 650,966 672,496
-------- --------
$790,358 $811,337
======== ========
Financial liabilities:
Deposits $670,336 $671,040
FHLB advances 43,500 43,500
-------- --------
$713,836 $714,540
======== ========
</TABLE>
65
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 15--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
- -----------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(IN THOUSANDS)
<S> <C>
ASSETS
Cash and cash equivalents $ 1,363
Investment in Imperial Thrift and Loan Association 86,286
Investment in ITLA Funding Corporation 1,506
Other assets 163
-------
Total assets $89,318
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ -
Shareholders' equity 89,318
-------
Total liabilities and shareholders' equity $89,318
=======
</TABLE>
CONDENSED STATEMENT OF INCOME
- -----------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-----------
(IN THOUSANDS)
<S> <C>
Interest income: $ 9
-------
Total income 9
-------
General and administrative expenses 29
-------
Total expenses 29
-------
Loss before income tax benefit and equity in undistributed
income of subsidiaries (20)
Income tax benefit (8)
-------
Loss before equity in undistributed income of subsidiaries (12)
Equity in undistributed income of subsidiaries 10,036
-------
Net income $10,024
=======
</TABLE>
66
<PAGE>
ITLA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
NOTE 15--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
- ---------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
(IN THOUSANDS)
<S> <C>
Cash Flows From Operating Activities:
Net income $ 10,024
Adjustments to net income:
Equity in undistributed income of subsidiaries (10,036)
Income tax benefit (8)
Increase in other assets (155)
--------
Net cash provided by operating activities (175)
--------
Cash Flows From Investing Activities:
Dividend received from Imperial Thrift and Loan Association 3,000
Capital contribution to ITLA Funding Corporation (1,500)
--------
Net cash provided from investing activities 1,500
--------
Cash Flows From Financing Activities:
Common stock issued through exercise of employee stock options 38
--------
Net cash provided from financing activities 38
--------
Net change in cash and cash equivalents 1,363
Cash and cash equivalents at beginning of period -
--------
Cash and cash equivalents at end of period $ 1,363
========
</TABLE>
67
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 31, 1996, the Company dismissed the firm of Grant Thornton
("Grant") as independent certified public accountants for the Company.
The authority to change independent certified public accountants was
provided to the Audit Committee by the Board of Directors.
Grant performed an audit of the financial statements for the past two
fiscal years. Their report did not contain an adverse opinion or a disclaimer of
opinion and did not contain an adverse opinion or a disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the past two fiscal years and from December 31, 1995 through the
effective date of the Grant termination, there have been no disagreements
between the Company and Grant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure, which
disagreements would have caused Grant to make reference to the subject matter of
such disagreements in connection with its report.
During the two most recent fiscal years and through July 31, 1996, there
have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v))
with Grant. Grant has furnished a letter addressed to the Securities and
Exchange Commission stating that it agrees with the above statements.
On July 31, 1996, the Company engaged the firm of Arthur Andersen as
independent certified public accountants for the Company.
During the fiscal year ended December 31, 1995 and from December 31, 1995
through the engagement on July 31, 1996 of Arthur Andersen as the Company's
independent certified public accountant, neither the Company nor anyone on its
behalf had consulted Arthur Andersen with respect to any accounting or auditing
issues involving the Company other than discussions with regard to the
engagement. In particular, there were no discussions with the Company regarding
the application of accounting principles to a specific transaction, the type of
audit opinion that might be rendered on the financial statements or any related
item.
The Company reported the information above on a Form 8-K filed on August 6,
1996.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers of the Company are identified below.
Name Age Position
---- --- --------
George W. Haligowski 42 Chairman of the Board, President and Chief
Executive Officer of ITLA Capital and
Imperial; Chairman of the Board of ITLA
Funding.
68
<PAGE>
Michael A. Sicuro 38 Managing Director and Chief Financial Officer
of ITLA Capital; Senior Vice President and
Chief Financial Officer of Imperial;
Director and Chief Financial Officer of
ITLA Funding.
Timothy M. Doyle 40 Managing Director and Chief Administrative
Officer of ITLA Capital; Senior Vice
President and Chief Administrative Officer
of Imperial.
Norval L. Bruce 55 Director, Executive Vice President and Chief
Credit Officer of Imperial; Director of
ITLA Funding.
George J. Guarini 43 Director, President and Chief Executive
Officer of ITLA Funding; Senior Vice
President and Chief Lending Officer of
Imperial.
Steven C. Romelt 47 Senior Vice President - Director of Bank
Lending of Imperial.
Michael L. Mayer 39 First Vice President, General Counsel and
Corporate Secretary of ITLA Capital and
Imperial; Corporate Secretary of ITLA
Funding.
GEORGE W. HALIGOWSKI has served as Chairman of the Board, President and
Chief Executive Officer of Imperial since July 1992 and of the Company since
inception. From 1990 to the present, he has also served as President, Chief
Executive Officer and Principal of Halivest International, Ltd., an
international finance and asset management company. He was previously employed
as a Vice President by Shearson Lehman Hutton, (1988-1990) and Prudential-Bache
Securities (1983-1988), and by Avco Financial Services as Regional Director of
its Japanese branch operations in 1976 to 1981, as Training Coordinator for Avco
Thrift and Loan in 1976 and as a Branch Manager from 1974 to 1976.
MICHAEL A. SICURO has served as Managing Director and Chief Financial
Offcer of the Company since inception and Senior Vice President and Chief
Financial Off1cer of Imperial since June 1996. From 1994 to June 1996, Mr.
Sicuro was employed by Blue Cross of California most recently as Vice President
and Chief Financial Officer. Mr. Sicuro was previously employed by U.S. Bancorp
Mortgage Company as Senior Vice President and Chief Financial Officer from 1993
to 1994; Western Federal Savings and Loan Association as Senior Vice President
and Controller from 1992 to 1993; and First Interstate Bancorp as Vice President
and Deputy Controller from 1990 to 1992. Mr. Sicuro was an Audit Manager with
Deloitte and Touche from 1984 to 1990.
TIMOTHY M. DOYLE has served as Managing Director and Chief Administrative
Officer of the Company and Imperial since January 1997 and previously was First
Vice President and Director of Management Audit of the Company since October
1996 and of Imperial since May 1996. Before joining Imperial, Mr. Doyle 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 Offcer of Halivest International, Ltd. from 1989
to 1991. From 1982 to 1988, Mr. Doyle was the Corporate Controller of the
Shepaug Corporation.
69
<PAGE>
NORVAL L. BRUCE has served as Executive Vice President and Chief Credit
Officer of Imperial since 1990 and became a director of Imperial in January
1997. From 1988 to 1989, Mr. Bruce served as Executive Vice President and Chief
Credit Officer of Security Pacific Bank, Nevada. Mr. Bruce 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.
GEORGE J. GUARINI has served as President of Funding since inception. He
has also served as the Senior Vice President and Chief Lending Officer of
Imperial since May 1996, and previously held other senior level lending
positions with Imperial form June 1994 to May 1996. From 1991 to 1994, Mr.
Guarini served as Senior Vice President - Special Assets of California Republic
Bank. Mr. Guarini was employed from 1989 to 1991 by Security Pacific National
Bank as a Senior Lending Officer. Mr. Guarini was previously employed from 1981
to 1989 by City Savings Bank, FSB located in Somerset, New Jersey, in a variety
of management positions.
STEVEN C. ROMELT has served as Senior Vice President - Director of Bank
Lending for Imperial since November 1996. Previously, he was Vice President and
Regional Manager for Southern Pacific Thrift and Loan Association from March
1995 to November 1996. Mr. Romelt also held various senior level lending
positions for Imperial from December 1990 to March 1995 and held various lending
positions with a number of other financial institutions from 1979 to December
1990.
MICHAEL L. MAYER has served as First Vice President, General Counsel and
Corporate Secretary of the Company since inception and of Imperial since April
1996 and previously served as Vice President and Corporate Counsel of Imperial
from August 1994 to April 1996. Prior to joining Imperial, Mr. Mayer was a
Senior Attorney with California Federal Bank from 1987 to 1994 and before that
was an Attorney with Security Pacific National Bank from 1984 to 1987.
The directors of the registrant, excluding Mr. Haligowski, are identified
below.
JEFFREY L. LIPSCOMB, age 43, is an Investment Advisory Associate with EQ
Financial Consultants, Inc. and formerly was a Registered Principal and
Assistant Manager of the San Diego office of Equitable Financial Companies since
1986, handling corporate group benefits and personal financial planning.
SANDOR X. MAYUGA, age 48, is a member of the state bar of California, has
been a member of the law firm of Tisdale & Nicholson since 1994, and previously
conducted his own private law practice from 1985 to 1995. Mr. Mayuga previously
served as a Director of Imperial and Lake America from December 1983 to June
1993.
HIROTAKA ORIBE, age 62, 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 multifamily housing, office buildings and
retail space, and land development. Mr. Oribe previously held other positions
with affiliates of Kajima Corporation of Japan from 1973 to 1979 and was a
practicing architect from 1962 to 1973.
ROBERT R. REED, age 60, 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.
Mr. Reed previously served as a director of Imperial from September 1994 to
August 1995, when all directors appointed by the Company's former parent
resigned as part of the Company's initial public offering.
EMPLOYEES
As of December 31, 1996, the Company had approximately 141 full-time
equivalent employees. Management believes that its relations with employees are
satisfactory. The Company is not subject to any collective bargaining
agreements.
70
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of the Chief Executive
Officer and the named executive officers of the Company with salary and bonus
greater than $100,000 for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------ ------------ All Other
Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#)(2) ($)
--------------------------- ---- --- --- ------ ---
<S> <C> <C> <C> <C> <C>
George W. Haligowski 1996 293,316 81,545 (1) - 65,904 (3)
Chairman of the Board, President and 1995 174,058 136,888 285,000 70,572 (3)
Chief Executive Officer 1994 150,000 194,174 (1) - 39,766 (3)
Norval L. Bruce 1996 123,500 - - 8,277 (4)
Executive Vice President, 1995 108,125 13,500 40,000 15,168 (4)
Chief Credit Officer and Director 1994 102,917 20,000 - 10,395 (4)
of Imperial
George J. Guarini 1996 119,334 - - 11,495 (5)
President and Chief Executive Officer of 1995 89,796 8,500 40,000 12,445 (5)
ITLA Funding; Senior Vice President and 1994 40,667 - - 14,116 (5)
Chief Lending Officer of Imperial
</TABLE>
(1) $55,000 of the 1996 bonus and the entire 1994 bonus was deferred at the
election of the named officer under the Company's Nonqualified Deferred
Compensation Plan.
(2) Granted in October 1995 and vests one-third on each of the three subsequent
anniversary dates of issuance.
(3) Consists of (a) $21,000 in auto related benefits, (b) $22,850 in
supplemental housing payments, (c) $6,950 in life insurance premiums, (d)
$4,500 in employer contributions to the Company's 401(k) plan and (e)
$10,604 in preferential interest on employee savings accounts in 1996. The
respective amounts were $19,321, $22,850, $7,154, $6,682, and $14,565 in
1995 and $7,855, $15,797, $7,154, $4,125, and $4,835 in 1994.
(4) Consists of (a) $3,448 in auto related benefits, (b) $576 in life insurance
premiums, (c) $3,705 in employer contributions to the Company's 401(k) plan
and (d) $548 in preferential interest on employee savings accounts in
1996. The respective amounts were $8,750, $576, $5,492, and $350 in 1995 and
$5,452, $576, $3,925 and $442 in 1994.
(5) Consists of (a) $10,200 of auto related benefits and (b) $1,295 in employer
contributions to the Company's 401(k) plan in 1996, $9,600 of auto related
benefits and $2,845 of employer contributions to the Company's 401(k) plan
in 1995, and (a) $5,250 in auto related benefits and (b) $705 in employer
contributions to the Company's 401(k) plan and (c) $8,161 in supplemental
housing payments in 1994.
EMPLOYMENT AGREEMENT AND CHANGE OF CONTROL AGREEMENTS
The Company has entered into an employment agreement with Mr. Haligowski,
and change of control agreements with Messrs. Bruce and Guarini. The employment
agreement provides for an initial employment term of three years, with the
agreement automatically annually extending for an additional one-year period
unless either party provides the other with at least 90 days notice of the
nonextension or termination. The employment agreement provides that the Company
may terminate the officer "for cause," as defined in the employment agreement,
and that in the event the Company terminates the officer without cause including
as a result of a change of control, the officer will be entitled to receive his
base salary for the remaining term of the agreement and a pro rata portion of
his bonus, if any, for the year in which his employment is terminated as well as
a continuation of all employment related benefits through the remaining term of
the agreement and the immediate vesting of any stock options previously granted
and outstanding. The annual base salary for Mr. Haligowski under the employment
agreement is currently $299,250 (which may be increased from time to time by the
Board of Directors). The employment agreement also provides for, among other
things, annual incentive compensation, disability pay, participation in stock
benefit plans, and other fringe benefits, including a supplemental housing
payment of not less than $2,500 per month, an automobile allowance of not less
than $1,750 per month, and life
71
<PAGE>
insurance coverage in an amount not less than four times Mr. Haligowski's annual
salary. Under the employment agreement, Mr. Haligowski received an initial
option grant of 285,000 shares of common stock. See "Benefits - Stock Plans."
The change in control agreements have initial terms of one year and shall
automatically extend for additional one-year periods upon a change of control,
as defined in the agreement, or upon their anniversary date, unless either party
provides the other with at least 90 days notice of termination. These agreements
provide that in the event the officer is terminated within twelve months
following a change of control, as defined in the agreement, the officer shall be
entitled to receive upon such termination an amount equal to the greater of the
annualized salary as in effect on the date of the change of control or the date
of termination and a pro rata portion of his bonus, if any, for the year in
which his employment is terminated. The annual base salary for Messrs. Bruce and
Guarini is currently $131,670 and $175,000 respectively.
Change of control, in both the employment agreement and the change in
control agreements, is defined to include (i) the sale of substantially all of
the stock or assets of the Company, whether by merger, consolidation, sale of
assets or sale or exchange of Common Stock or the complete liquidation of the
Company, (ii) the sale by the Company or the acquisition by any person in any
single transaction (or series of related transactions) of more than 30% of the
then outstanding Common Stock of the Company (on a fully diluted basis) or (iii)
any date upon which the directors of the Company nominated by the Board cease to
constitute a majority of the Board. Both the employment agreement and the change
of control agreements will provide that no payments may be made thereunder in
connection with the termination of the officers covered by such agreements if,
at the time such payments would otherwise be made, the Company is prohibited
from making such payments by any applicable federal or state law or regulation
governing its operations, unless the Company has obtained prior approval for
such otherwise prohibited payments from the appropriate regulatory authorities.
BENEFITS
INSURANCE PLANS. All full-time employees, after approximately three months
employment with the Company, are covered under group plans providing major
medical, dental, and vision benefits, and long-term disability, travel accident,
accidental death and dismemberment insurance and group term life insurance.
SALARY SAVINGS PLAN. The Company Salary Savings Plan is a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code (the
"Code") designed to provide employees with the opportunity to accumulate
retirement funds (the "401(k) Plan"). Permanent employees aged 21 or more are
eligible to participate in the 401(k) Plan as of January 1 or July 1 first
following their hire date. Under the 401(k) Plan subject to limitations imposed
under Section 401(k) and Section 415 of the Code, a participant may elect to
defer on a monthly basis from 2% to 14% of his compensation by directing the
Company to contribute such amount to the 401(k) Plan on such employee's behalf.
The Company currently makes matching contributions to the 401(k) Plan equal to
50% of the first 6% of the participant's monthly contribution. The Board reviews
the match on an annual basis, and the Company may also make discretionary
contributions to the 401(k) Plan. "Compensation" for purposes of the 401(k) plan
is defined as a participant's compensation from the Company as reported annually
on Form W-2, including contributions to the 401(k) Plan by the employee, and
contributions by the Company in the employee's behalf to any other pension,
insurance, welfare or other employee benefit plan. Under the 401(k) Plan, a
separate account is established for each participant. Participants are always
100% vested in their contributions and the earnings thereon. Participants become
vested in employer contributions and the earnings thereon at the rate of 20% per
year commencing with the first full year of service (defined as completion of 12
consecutive months of work). Participants become fully vested in employer
contributions and the earnings thereon on their fifth anniversary of employment,
or in the event of death, permanent disability or attainment of age 65 while
employed by the Company. The 401(k) Plan provides for in-service hardship
distributions of elective deferrals, as well as loans of a portion of vested
account balances. Distributions from the 401(k) Plan are made upon termination
of service in a lump sum or in annual installments over a period of years at the
election of the participant with the right to take a lump sum payment at any
time during such period.
72
<PAGE>
NONQUALIFIED DEFERRED COMPENSATION PLANS. 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. The Deferral Plan allows a participant to defer
receipt of, and current taxation upon, designated portions of his direct cash
compensation until a future date specified by the participants. Both of these
plans are unfunded plans, meaning that all benefits payable thereunder are
payable from the Company's general assets, and funds available to pay benefits
are subject to the claims of the Company's general creditors. The Company may
establish an irrevocable grantor trust in connection with the Supplemental Plan.
This trust would be funded with contributions from the Company for the purpose
of providing the benefits promised under the terms of the Supplemental Plan, and
the earnings on any trust assets would be taxable to the Company. Supplemental
Plan participants would also only have the rights of unsecured creditors with
respect to the trust's assets.
STOCK PLANS. The Company has adopted the 1995 Employee Stock Incentive Plan
and the 1995 Stock Option Plan for Nonemployee Directors (collectively, the
"Stock Option Plan") pursuant to which officers, directors and employees of the
Company are eligible to receive options to purchase Common Stock. The purpose of
the Stock Option Plan is to enable the Company to attract, retain and motivate
employees by providing for or increasing their proprietary interests in the
Company, and in the case of nonemployee directors, to attract such directors and
further align their interest with those of the Company. Every employee of the
Company is eligible to be considered for the grant of awards under the Stock
Option Plan. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the Stock Option Plan is 1,000,000 shares of
which a maximum of 550,000 shares may be awarded during the first year of the
Stock Option Plan, with annual awards thereafter limited to 100,000 additional
shares during each of the next five years of the Stock Option Plan (with the
shares subject to the Stock Option Plan and all grants thereunder being subject
to adjustments to prevent dilution).
The Stock Option Plan is administered by the Compensation Committee of the
Board, except that grants to nonemployee directors are made by the Board of
Directors pursuant to a predetermined formula. The Committee will consist of two
or more nonemployee directors of Imperial, and has full and final authority to
select the employees to receive awards and to grant such awards. Subject to
provisions of the Stock Option Plan, the Committee has a wide degree of
flexibility in determining the terms and conditions of awards and the number of
shares to be issued pursuant thereto. The expenses of administering the Stock
Option Plan will be borne by the Company.
The Stock Option Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of Common Stock or any other security or benefit with a
value derived from the value of Common Stock. Awards to employees are not
restricted to any specified form or structure. Stock options to purchase 5,000
shares of Common Stock were automatically granted to the nonemployee directors
upon the completion of the Company's initial public offering and upon their
election to the Board of Directors, and options to purchase an additional 1,000
shares will be granted annually thereafter, provided such individuals continue
to serve as directors.
Awards may not be granted under the Stock Option Plan after the tenth
anniversary of the adoption of the Stock Option Plan. The Company has granted an
aggregate of 620,250 options under the Stock Option Plan, of which 305,000 have
been granted to Mr. Haligowski, 45,000 and 40,000 have been granted to
Messrs. Bruce and Guarini, respectively, 24,000 have been granted to non-
employee directors, and 206,250 have been granted to other employees of which
8,750 have been exercised. The exercise price per share of the options so
granted ranges from $10.00 to $14.63 per share and will generally vest 33 1/3%
per year, beginning with the first anniversary of the date of the grant.
RECOGNITION AND RETENTION PLAN. The Company has adopted the Recognition
and Retention Plan ("RRP"), the purpose of which is to promote the long term
interests of the Company and its shareholders by providing a means for
attracting and retaining officers and employees of the Company and its
affiliates. Under the RRP, awards of restricted shares of the Company's common
stock may be made to employees as additional long term incentive compensation.
Every employee of the Company is eligible to be considered for the grant of
awards under the RRP. The maximum number of shares of common stock which may be
issued pursuant to the RRP is 300,000 shares over the ten year life of the plan.
No RRP shares may be granted in any fiscal year in which the Company fails to
achieve a return on average assets of 50 basis points for the fiscal year and
Imperial is treated as adequately capitalized under the FDIC regulations. The
RRP is administered by the Compensation Committee of the Board which has a wide
degree of flexibility, within the provisions of the RRP, in determining the
terms and conditions of awards and the number of shares to be issued pursuant
thereto. No awards were made under the RRP in 1996.
DIRECTORS COMPENSATION
DIRECTORS FEES. Each non-employee director was paid a monthly fee during
1996 of $1,250 for serving on the Company's Board of Directors. Each
non-employee director is paid $500 for each board committee meeting attended for
service on such committee.
VOLUNTARY RETAINER STOCK AND DEFERRED COMPENSATION PLAN. In 1996, the
Company adopted the Voluntary Retainer Stock and Deferred Compensation plan for
Outside Directors (the "Outside Director Plan"). The Outside Director Plan
provides for the deferral of compensation earned by non-employee directors in
the form of Stock Units ("Stock Units") in a Stock Unit account ("Stock Unit
Account"). Directors may elect to have up to 100% of their fees converted into
stock units.
For dividends paid with respect to the Company's common stock, each
non-employee director has credited to his or her Stock Unit Account an
additional number of Stock Units in an amount determined under the Outside
Director Plan. Each non-employee director's Stock Unit Account shall be settled
by delivering to the non-employee director (or his beneficiary) the number of
shares of Company common stock equal to the number of whole Stock Units then
credited to the non-employee director's Stock Unit Account, in either (i) a lump
sum or (ii) substantially equal annual installments over a period not to exceed
ten years.
DIRECTORS STOCK OPTION PLANS. Directors are also eligible to receive stock
option grants as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Compensation Committee, which acts as the compensation
committee of the Company and Imperial, was comprised of Directors Lipscomb and
Oribe.
73
<PAGE>
OPTION GRANTS FOR 1996
No stock option were granted pursuant to the Stock Option Plan to the named
executive officers in 1996.
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1996 held by the named executive
officers.
OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Acquired Value Options at FY-End at FY-End(1)
on Exercise Realized (#) ($)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski - N/A 95,000 190,000 $475,000 $950,000
Norval L. Bruce - N/A 13,333 26,667 $ 66,665 $133,335
George Guarini - N/A 13,333 26,667 $ 66,665 $133,335
- --------------------
(1) The difference between the aggregate option exercise price and the closing
price of $15.00 of the underlying shares at December 31, 1996.
</TABLE>
74
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
At December 31, 1996, the Company had 7,824,000 shares of common stock
outstanding.
The following table sets forth, as of March 25, 1997, certain information
as to those persons who were known by management to be beneficial owners of
more than five percent of Company common stock outstanding.
<TABLE>
<CAPTION>
Shares Percent
Beneficial Owner Beneficially Owned of Class
---------------- ------------------ --------
<S> <C> <C>
Wellington Management Company
75 State Street
Boston, Massachusetts 02109........... 750,000/1/ 9.58%
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663........ 746,200/2/ 9.54%
Kramer Spellman L.P.
2050 Center Avenue, Suite 300
Fort Lee, New Jersey 07024............ 677,800/3/ 8.66%
</TABLE>
- --------------
/1/ As reported by Wellington Management Company ("Wellington") on a Schedule
13G dated on or about February 10, 1997, and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Wellington reported sole voting and investment power as to no shares,
shared voting power as to 354,400 shares and shared investment power as to
750,000 of the 750,000 shares covered by the report.
/2/ As reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a Schedule
13G dated on or about January 9, 1997, and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Thomson reported sole voting power as to 473,400, sole investment power as
to 746,200, shared voting power as to 10,400 and shared investment power as
to none of the 746,200 shares covered by Thomson's report.
/3/ As reported by Kramer Spellman L.P. ("Kramer-Spellman") on a Schedule 13D
dated on or about March 20, 1996 and on a Schedule 13D dated on or about
April 22, 1996. Messrs. Orin s. Kramer and Jay Spellman, the general
partners of Kramer-Spellman reported shared voting and dispositive power as
to all of the 677,800 shares covered by the report.
The following table sets forth, as of December 31, 1996, 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 the
Company as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Name Owned of Class
-------------------- ------------ --------
<S> <C> <C>
George W. Haligowski 120,000 (1) 1.52%
Norval L. Bruce 14,333 (1) .18%
George J. Guarini 13,833 (1) .18%
Jeffrey L. Lipscomb 5,000 (1) .06%
Sandor X. Mayuga 5,800 (1) .07%
Hirotaka Oribe 5,200 (1) .07%
Robert R. Reed 200 -
All Directors and Executive
Officers as a Group
(10 Persons) 165,366 (1) 2.08%
</TABLE>
- --------------
(1) Includes shares held directly, as well as an aggregate of 137,666 shares
which are subject to immediately exercisable options and options exercisable
within 60 days of December 31, 1996, under the Company's Stock Option Plans,
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 investment power. The above named individuals held
exercisable options and options exercisable within 60 days of December 31, 1996
as follows: Chairman Haligowski - 95,000 shares; Director Lipscomb - 5,000
shares; Director Mayuga - 5,000 shares; and Director Oribe - 5,000 shares;
Norval L. Bruce - 13,333 shares and George J. Guarini - 13,333 shares.
75
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, the Company utilized the services of various law firms,
including the law firm of Tisdale & Nicholson. Sandor X. Mayuga, a director of
the Company, is a partner in that law firm. During 1996, Mr. Mayuga's firm
received approximately $844 in legal fees from the Company, which amount was not
in excess of 5% of such firm's revenues during 1996.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The Company's consolidated financial statements, and auditors' reports
thereon, are included in this Form 10-K at the pages listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants 42,43
Consolidated Balance Sheets as of December 31, 1996 and 1995 44
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994 45
Consolidated Statement of Changes in Shareholders' Equity for the period
January 1, 1994 to December 31, 1996 46
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 47
Notes to Consolidated Financial Statements 48
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
76
<PAGE>
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Reference to
Regulation S-K prior filing or
Exhibit Exhibit Number Sequential Page
Number Document Attached Hereto Number
-------------- -------- --------------- ---------------
<C> <S> <C> <C>
2 Certificate of Incorporation, as amended ** Not applicable
3 Bylaws, as amended ** Not applicable
4 Instruments defining the rights of security holders,
including indentures None Not applicable
9 Voting trust agreement None Not applicable
10 Material contracts None Not applicable
10.1 1995 Stock Option Plan for Nonemployee Directors * Not applicable
10.2 1995 Employee Stock Incentive Plan * Not applicable
10.3 Nonqualified Deferred Compensation Plan * Not applicable
10.4 Supplemental Salary Savings Plan * Not applicable
10.5 Glendale Headquarters Lease Agreement * Not applicable
10.6 Data Processing Agreement * Not applicable
10.7 Employment Agreement with George W. Haligowski * Not applicable
10.8 Change of Control Agreements * Not applicable
10.9 Recognition and retention plan ** Not applicable
10.10 Voluntary Retainer Stock and Deferred Compensation
Plan for Outside Directors ** Not applicable
11 Statement re computation of per share earnings None Not applicable
12 Statement re computation of ratios None Not applicable
13 Annual report to Security Holders Not required Not applicable
18 Letter re change in accounting principles None Not applicable
21 Subsidiaries of the registrant 21 Page 79
22 Published report regarding matters submitted to vote
of security holders None Not applicable
23 Consent of Independent Certified Public Accountants None Not applicable
24 Power of attorney Not required Not applicable
27 Financial Data Schedule Not required Not applicable
28 Information from reports furnished to state insurance
regulatory authorities None Not applicable
</TABLE>
- -------------
* Filed as exhibits to Imperial's Registration Statement on Form S-1
(File No. 33-96518) filed with the Commission on September 1, 1995, pursuant
to Section 5 of the Securities Act of 1933.
** Filed as exhibits to the Company's Registration Statement on Form S-4 (File
No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
Section 5 of the Securities Act of 1933.
(b) REPORTS ON FORM 8-K
None.
77
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITLA CAPITAL CORPORATION
Date: March 27, 1997 By: /s/ George W. Haligowski
-----------------------------------
George W. Haligowski
Chairman of the Board, President
and Chief Executive Officer
(Duly Authorized Representative)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George W. Haligowski Chairman of the Board, President and March 27, 1997
- ---------------------------------- Chief Executive Officer
George W. Haligowski (Principal Executive Officer)
/s/ Michael A. Sicuro Managing Director, Chief Financial Officer March 27, 1997
- ---------------------------------- (Principal Financial and Accounting
Michael A. Sicuro Officer)
/s/ Sandor X. Mayuga Director March 27, 1997
- ----------------------------------
Sandor X. Mayuga
/s/ Robert R. Reed Director March 27, 1997
- ----------------------------------
Robert R. Reed
/s/ Hirotaka Oribe Director March 27, 1997
- ----------------------------------
Hirotaka Oribe
/s/ Jeffrey L. Lipscomb Director March 27, 1997
- ----------------------------------
Jeffrey L. Lipscomb
</TABLE>
78
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Incorporation
Percentage of or
Parent Subsidiary Ownership Organization
------ ---------- ------------- ---------------
<S> <C> <C> <C>
ITLA Capital Corporation Imperial Thrift and Loan 100% California
Association
ITLA Capital Corporation ITLA Funding Corporation 100% Delaware
</TABLE>
79
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 48,881
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,292
<INVESTMENTS-CARRYING> 31,870
<INVESTMENTS-MARKET> 31,319
<LOANS> 661,851
<ALLOWANCE> 10,885
<TOTAL-ASSETS> 810,443
<DEPOSITS> 670,336
<SHORT-TERM> 37,500
<LIABILITIES-OTHER> 7,289
<LONG-TERM> 6,000
0
0
<COMMON> 53,345
<OTHER-SE> 35,973
<TOTAL-LIABILITIES-AND-EQUITY> 810,443
<INTEREST-LOAN> 62,748
<INTEREST-INVEST> 6,748
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 69,496
<INTEREST-DEPOSIT> 31,441
<INTEREST-EXPENSE> 34,399
<INTEREST-INCOME-NET> 35,097
<LOAN-LOSSES> 4,871
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,835
<INCOME-PRETAX> 16,444
<INCOME-PRE-EXTRAORDINARY> 16,444
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,024
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 5.13
<LOANS-NON> 7,205
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,106
<LOANS-PROBLEM> 13,100
<ALLOWANCE-OPEN> 8,105
<CHARGE-OFFS> 2,237
<RECOVERIES> 146
<ALLOWANCE-CLOSE> 10,885
<ALLOWANCE-DOMESTIC> 10,885
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,000
<FN>
INCLUDED IN NONINTEREST EXPENSE IS $700,000 OF PROVISION FOR VALUATION
ALLOWANCE ON LOANS HELD FOR SALE.
</FN>
</TABLE>
