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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, 1997
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)
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DELAWARE 95-4596322
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
888 PROSPECT STREET, SUITE 110, LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (619) 551-0511
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 24, 1998, there were issued and outstanding 7,697,984 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 24, 1998, was $162.9 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)
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PART I
ITEM 1. BUSINESS
GENERAL
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 24 year old California thrift and loan
company, on October 1, 1996. 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 seven offices in
California, one office in Nevada, one office in Colorado, 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 and Denver offices 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 San Diego area. Imperial also accepts out-of-state deposits.
In 1996, 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 real estate
loan sale agreements with third parties to sell loan originations as a part of
their securitization offerings. Funding operates a national network of sales
representatives from its Encino, California headquarters.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K 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 domestic or foreign business markets, financial or legal
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 substantially all of this portfolio. At December 31, 1997,
the Company's gross loan portfolio held for investment and held for sale totaled
$817.9 million. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
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Operations - Financial Condition - Loans Receivable" for additional information
regarding the composition of the loan portfolio at December 31, 1997.
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 1990's as California's
pronounced recession severely reduced the repayment abilities of certain
borrowers and, in many cases, property values 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 the borrower's financial resources and ability to repay and
the amount and stability of cash flow, if any, from the underlying collateral
comparable in importance to the loan-to-value ratio as a repayment source.
Management believes that, in recent years, the California economy has 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,
1997, 88 real estate loans in the aggregate amount of $11.3 million were secured
by second trust deeds and three real estate loans in the aggregate amount of
$0.9 million were secured by third trust deeds, for a total of $12.2 million, or
1.5% of total loans, secured by junior liens. Of these loans collateralized by
junior liens, 88% were secured by income producing properties and 12% were
secured by one-to-four family residential properties. Of the real estate loans
outstanding at December 31, 1997, $16.5 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.
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, 1997, Imperial had
$39.7 million of 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. 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. During 1997, Imperial purchased two loans totaling $3.7
million. 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 the borrower's financial
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resources and ability to repay and the amount and stability of cash flow, if
any, from the underlying collateral. On purchases, Imperial reviews the
appraisal and credit report obtained by the loan seller or originator and
arranges for a staff member or an outside consultant to perform an analysis of
the loan and the value of the underlying collateral, including on-site
inspection, before purchasing the loan. Similar to its loan originations, on
loan purchases, Imperial reviews information concerning the income, financial
condition, employment and credit history of the applicant. In addition, Imperial
generally obtains an updated title search separate from that provided by the
loan seller.
Lending, Origination and Underwriting. Although Imperial's lending and
collection policy permits loan to value ratios of up to 80% in some cases, real
estate loans are generally made in amounts up to 70% of the appraised value of
commercial properties, and generally up to 75% of the appraised value of
apartment properties. Loans are generally made for terms up to ten years, with
amortization periods of up to 30 years. Depending on market conditions at the
time the loan was originated, certain loan agreements may include prepayment
penalties. Most loans are subject to a quarterly adjustment of their interest
rate based on one of several interest rate indexes. Imperial's gross real estate
loan portfolio (including real estate loans held for sale) of $817.9 million at
December 31, 1997 included 19.4% indexed to the Reference Rate charged by Bank
of America (essentially equivalent to the prime rate); 14.1% indexed to the
Federal Home Loan Bank 11th District Cost of Funds Index ("COFI"); 58.2% indexed
to the six-month London Interbank Offered Rate ("LIBOR"); 3.2% indexed to either
the U.S. Treasury security indexes or the Federal Home Loan Bank of San
Francisco ("FHLB") advance rate; and the balance of 5.1% 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 up to 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, 1997, the weighted-average floor interest rate for Imperial's variable rate
loans portfolio was 9.67% and the weighted-average lifetime interest rate cap on
such portfolio was 14.86%.
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,
1997, that limit was approximately $19.5 million. Imperial's largest combined
credit extension to related borrowers was $13.5 million at December 31, 1997. At
December 31, 1997, Imperial had a total of 104 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, 1997, Imperial had 1,202
secured real estate loans outstanding, with an average balance per loan of
approximately $680,500.
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.
Marketing and Originations. Imperial originates real estate loans
through branch offices located in San Francisco, Costa Mesa, Glendale and La
Jolla, and loan production offices in San Jose, Sacramento, Fresno, Las Vegas
and Denver. These offices are staffed by a total of approximately 25 loan
officers. Loan officers solicit mortgage loan brokers for loan applications that
meet Imperial's underwriting criteria, and also accept applications directly
from borrowers. In 1997, 1996 and 1995, approximately 43%, 65% and 43%,
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
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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 the Company'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. A total of $118.6 million of loans were originated
through the Company's network of loan origination correspondents in 1997,
including $86.4 million originated for outside investors and $32.2 million
retained for the Association's loan portfolio.
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, President and Chief Operating Officer, Chief Lending
and Chief Credit Officers, the Vice President of Real Estate Lending and the
Assistant Vice President of Credit Management) 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, 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
$750,000 in amount may be approved by any loan committee member. Loans of
$750,000 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 or designee must personally conduct
on-site inspections of any property involved in loan recommendations of $1.0
million or more. All loans over $1.0 million require the signature of the Chief
Credit Officer or the President, while loans over $2.0 million must have the
President's approval. Loans over $4.0 million require both the Chief Credit
Officer and the President's approval. All loans greater than $6.5 million, or an
aggregate exposure of $7.5 million to one borrower, must be approved by the
Executive Committee of the Board. Imperial's loan officers are responsible for
initial reviews of borrowers, properties, loan terms, and submission of loans to
the loan committee. Following loan approval and prior to funding, Imperial's
underwriting and processing departments assure that all loan approval terms have
been satisfied, that they conform with lending policies (including authorized
exceptions), and all required documentation is present and in proper form.
Servicing and Collections. Imperial's loan servicing operations are
designed to provide prompt customer service and accurate and timely information
for account followup, financial reporting and management review. Imperial's
loans are serviced through the loan administration department located in
Imperial's 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 processes contractual interest rate adjustments on variable
rate loans. Regular loan service efforts include payment processing and
collection followup, 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
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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 resolving problem loans.
NONPERFORMING ASSETS AND OTHER LOANS OF CONCERN
At December 31, 1997, nonperforming assets, consisting of nonaccrual
loans and OREO, totaled $12.3 million, or 1.21% of total assets. Nonaccrual
loans totaled $8.3 million, consisting of 22 loans. Four of these loans had an
outstanding balance greater than $0.5 million, and two loans had an outstanding
balance greater than $1.0 million. For additional information regarding
nonperforming assets, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Credit Risk Elements." In
addition to nonperforming loans, as of December 31, 1997, Imperial had 25 loans
with an aggregate outstanding loan balance of $10.2 million with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the properties securing the loans have caused management to be
concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in the
nonperforming loan category. At December 31, 1997, eight of these loans had a
book value in excess of $500,000, of which two loans had a book value in excess
of $1.0 million.
The following is a brief discussion of the Company's nonaccrual loans
where the remaining principal balance of the loan at December 31, 1997 exceeded
$1.0 million.
Loan Secured by an Apartment Complex (Rancho Cordova, California). This
loan originated in 1996 with an original loan amount of $2.9 million and
currently has a balance of $2.6 million. The loan was placed on nonaccrual
status in June 1997 because of delinquent monthly payments. In November of 1997,
the Association received payment of all delinquent principal and interest;
however, the loan remains on nonaccrual status pursuant to the Association's
policy requiring a period of sustained performance prior to returning a loan to
performing status.
Loan Secured by Three Office Buildings (Northern California,
California). This loan originated in 1991 and matured in 1996. The original and
current loan amount is $1.2 million. 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. The Company has extended a
forbearance agreement, whereby the borrower's estate made a lump-sum payment of
$50,000 and is required to make monthly payments of $15,000 until June 1998. The
borrower is performing in accordance with the forbearance agreement.
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, 1997
exceeded $1.0 million.
Loan Secured by an Office Building (Fresno, California). This loan
originated in 1995 with an original loan amount of $1.4 million and currently
has a balance of $1.3 million. Imperial is monitoring the loan because the
borrower filed for bankruptcy due to matters unrelated to the operation of the
loan's collateral, as well as delinquent property taxes in the amount of
$22,000. The loan is performing in accordance with its repayment terms.
Loan Secured by a School Facility (Los Angeles, California). This loan
originated in 1989 and was renewed in 1992. The original loan amount was $1.5
million and currently has a balance of $1.4 million. Imperial is monitoring the
loan because of delinquent taxes in the amount of $133,000, as well as periodic
delinquent monthly payments. The loan is performing in accordance with its
repayment terms.
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,
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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, 1997, Imperial classified $0.4 million of loans as
doubtful, $14.5 million as substandard, and $3.6 million as special mention. Of
the 41 loans comprising the $14.9 million in substandard and doubtful loans, 22
loans totaling $8.3 million were included in the nonperforming table in "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition - Credit Risk Elements", and the balance was included in the $10.2
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 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 or to acquire additional brokered
deposits. At December 31, 1997, brokered deposits totaled $67.0 million or 7.9%
of total deposits. For information concerning overall deposits outstanding
during the periods indicated and the rates paid thereon, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Net Interest Income."
Imperial has also used advances from the FHLB as a funding source.
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
whole loan collateral. At December 31, 1997, FHLB advances outstanding totaled
$61.5 million, and the remaining available borrowing capacity, based on the
loans and securities pledged as collateral, totaled $38.3 million. Additionally,
Imperial also has uncommitted, unsecured lines of credit with two banks
renewable daily in the amount of $30.0 million. These lines of credit were not
utilized during 1997. See "Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Notes 2, 3 and 8."
OTHER BUSINESS 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 real estate
loan sale agreements with third parties to sell loan originations as part of
their securitization offerings. Funding has established a national sales
platform of 17 locations operating from its Encino, California headquarters.
During 1997, Funding originated $86.4 million of loans which were placed with
brokerage firms to be pooled into commercial mortgage-backed securities, and
originated $32.2 million of loans on behalf of Imperial.
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Automobile Finance Contracts. 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.
REGULATION
Imperial is subject to supervision and regulation by the Department of
Financial Institutions of the State of California ("DFI") and, as an insured
institution, by the FDIC. ITLA Capital is not a bank holding company and is not
directly regulated or supervised by the DFI, the FDIC, the Federal Reserve Board
or any other bank regulatory authority, except with respect to the general
regulatory and enforcement authority of the DFI and the FDIC over transactions
and dealings between ITLA Capital 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. Prior to July 1, 1997, Imperial was
regulated by the California Department of Corporations ("CDOC").
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 DFI 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 ten
years may generally be repaid in unequal periodic payments, consumer loans must
generally be repaid in substantially equal periodic payments. California law
limits lending activities outside of California by thrift and loan companies to
no more than 20% of total assets. Such amount may be increased to 40% with the
approval of the DFI. At December 31, 1997, 13.7% of Imperial's total assets
consisted of loans or obligations made outside the state of California.
California law contains extensive requirements for the diversification
of the loan portfolios of 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 its aggregate net loans and obligations
including direct lease obligations; and may have no more than 70% of its 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, 1997,
Imperial satisfied all of these requirements. Based on the existing loans in
Imperial's portfolio at December 31, 1997, Imperial's ratio of loans secured
solely or primarily by real property with terms in excess of seven years to
assets was approximately 50.5%. 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.
8
<PAGE> 9
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 DFI. 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 DFI.
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, 1997, Imperial's total deposits were 8.7 times
its paid-up and unimpaired capital and unimpaired surplus not available for
dividends. In addition, at December 31, 1997, Imperial maintained a liquidity
reserve in cash or cash equivalents equal to 18.8% of its total deposits
outstanding and its allowance for credit losses was $12.2 million.
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 DFI's
prior consent. All amounts borrowed in excess of 150% of its outstanding capital
stock, surplus and undivided profits must be unsecured borrowings or, if
secured, approved in advance by the DFI, 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 $61.5 million of outstanding borrowings at December
31, 1997, 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, 1997.
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 Federal Deposit Insurance Act ("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). See "Federal Law - Prompt Corrective Action Requirements".
9
<PAGE> 10
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 2 capital ratio of not less
than 10%.
FEDERAL LAW
Imperial's deposits are insured by the Bank Insurance Fund ("BIF") of
the FDIC to the full extent permissible by law. As an insurer of deposits, the
FDIC issues regulations, conducts examinations, requires the filing of reports,
and generally supervises the operations of institutions to which it provides
deposit insurance. The FDIC is also the federal agency charged with regulating
state-chartered banks that are not members of the Federal Reserve System. 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 DFI, 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
DFI.
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, 1997, 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 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, 1997, Imperial's required Leverage Ratio was 4.0%
and its actual Leverage Ratio was 9.61%.
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
10
<PAGE> 11
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. At
December 31, 1997, Imperial's Total Capital Ratio was 12.67%.
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.
For regulatory purposes, the federal banking agencies have adopted
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 holding gains (losses) on available for
sale securities are excluded from the definition of Tier 1 capital. At December
31, 1997, 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%, its 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, 1997, Imperial's capital
qualified it for the "well capitalized" category, as its Total Capital, Tier 1
Risk-Based and Leverage Ratios were 12.67%, 11.41% and 9.61%, respectively.
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.
11
<PAGE> 12
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.
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, for example,
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, fees
and benefits. The guidelines establish the safety and soundness standards that
the agencies will use to identify and address problems at insured depository
institutions before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
FDIC Insurance Assessments. The FDIC assesses deposit insurance premiums
under a risk-based assessment system, which is based on the probability that the
deposit insurance fund will incur a loss with respect to the institution, the
likely amount of any 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 zero to 27 basis points per $100 of domestic deposits.
For the fiscal year ended December 31, 1997, 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.
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.
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
12
<PAGE> 13
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.
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.
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 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 DFI for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency. 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
13
<PAGE> 14
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 loan portfolio accounting and
transaction processing, deposit account processing and general ledger
accounting. The fees under the agreement consist of a base monthly fee which may
vary based on the number of accounts processed, as well as other charges based
on usage. The initial term of this agreement, 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 1997. As of December 31, 1997, the estimated
remaining payments due under the contract, at current portfolio and service
levels, were approximately $420,000.
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. This 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
SQUARE LEASE TERM
LOCATIONS OFFICE USES FOOTAGE EXPIRES
--------- ----------- ------- ------------
<S> <C> <C> <C>
La Jolla, CA Headquarters 5,807 2003
La Jolla, CA 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 Funding's headquarters, savings 5,298 2004
Las Vegas, NV Real estate lending 800 1998
Citrus Heights, CA Real estate lending 545 1998
San Francisco, CA Real estate lending, savings 5,005 2002
San Jose, CA Real estate lending 962 1999
</TABLE>
The Company's other out-of-state operations are conducted from executive
suite facilities. For additional information regarding the Company's premises,
see "Item 8. Financial Statement and Supplementary Data - Notes to Consolidated
Financial Statements - Note 12."
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.
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<PAGE> 15
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, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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, 1997, there were approximately 12
holders of record of Company common stock and 7,697,984 shares outstanding.
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
HIGH LOW CLOSE CLOSING PRICE
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
4th Quarter $ 21.25 $ 17.38 $ 19.25 $ 19.24
3rd Quarter $ 20.25 $ 15.75 $ 20.25 $ 17.87
2nd Quarter $ 16.25 $ 14.00 $ 16.25 $ 14.80
1st Quarter $ 17.25 $ 14.00 $ 14.88 $ 15.45
1996
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
</TABLE>
15
<PAGE> 16
QUARTERLY OPERATIONS (UNAUDITED)
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>
- ----------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
- ----------------------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Net interest income $ 9,687 $9,818 $ 10,780 $ 11,522
Provision for estimated credit losses 600 250 1,050 1,400
Provision for valuation allowance - 350 - -
Total noninterest income 348 344 228 720
General and administrative expense 4,511 4,398 4,504 4,819
Real estate operations, net 15 63 45 310
Provision for income taxes 2,003 2,087 2,221 2,344
Net income 2,906 3,014 3,188 3,369
Basic earnings per share $ 0.37 $ 0.39 $ 0.41 $ 0.44
Diluted earnings per share $ 0.36 $ 0.38 $ 0.40 $ 0.42
1996
Net interest income(1) $ 8,554 $8,456 $ 8,834 $ 9,655
Provision for estimated credit losses 1,721 1,100 950 1,100
Provision for valuation allowance - - - 700
Total noninterest income(1) 218 287 123 23
General and administrative expense 2,739 3,497 3,621 3,229
Real estate operations, net 687 350 62 (50)
Provision for income taxes 1,385 1,427 1,729 1,879
Net income 2,240 2,369 2,595 2,820
Basic earnings per share $ 0.37 $ 0.32 $ 0.33 $ 0.36
Diluted earnings per share $ 0.37 $ 0.32 $ 0.33 $ 0.35
</TABLE>
(1) Amounts differ from previously reported information because of
reclassifications made to conform to the presentation in the current period.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following condensed statements of operations and financial condition
and selected performance ratios as of December 31, 1997, 1996, 1995, 1994 and
1993 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
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Total interest income $ 85,117 $ 69,898 $ 62,107 $ 54,306 $ 50,673
Total interest expense 43,310 34,399 29,343 21,732 20,009
- -------------------------------------------------------------------------------------------------------------------------
Net interest income before provisions for valuation
allowance and estimated credit losses 41,807 35,499 32,764 32,574 30,664
Provision for estimated credit losses 3,300 4,871 13,098 6,731 5,905
Provision for valuation allowance on loans held for sale 350 700 4,774 - -
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for valuation
allowance and estimated credit losses 38,157 29,928 14,892 25,843 24,759
- -------------------------------------------------------------------------------------------------------------------------
Noninterest income 1,640 651 1,075 1,491 2,751
- -------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 8,511 5,723 7,313 7,044 6,860
Occupancy and equipment 2,444 1,929 2,230 2,601 1,874
Other general and administrative expenses 7,277 5,434 5,717 6,575 5,628
Real estate operations, net 433 1,049 5,070 4,381 5,076
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 18,665 14,135 20,330 20,601 19,438
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes 21,132 16,444 (4,363) 6,733 8,072
Provision (benefit) for income taxes 8,655 6,420 (1,960) 2,729 3,223
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 12,477 $ 10,024 $ (2,403) $ 4,004 $ 4,849
=========================================================================================================================
Basic earnings (loss) per share(1) $ 1.61 $ 1.38 $ (0.52) $ 0.93 $ 1.12
=========================================================================================================================
Diluted earnings (loss) per share(1) $ 1.57 $ 1.36 $ (0.52) $ 0.93 $ 1.12
=========================================================================================================================
Dividends paid $ - $ - $ - $ - $ -
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Cash and cash equivalents $ 123,885 $ 62,599 $ 26,095 $ 13,817 $ 17,001
Investment securities available for sale 35,281 36,574 - - -
Stock in Federal Home Loan Bank 11,919 8,349 12,362 3,000 -
Investment and mortgage-backed securities held to maturity 25,132 31,870 56,335 12,690 1,992
Loans held for investment, net(2) 750,853 649,836 439,880 467,343 429,399
Loans held for sale, at lower of cost or fair market value 50,544 1,130 55,812 - -
Interest receivable 4,916 4,411 3,865 3,250 2,814
Other real estate owned, net 3,946 5,416 6,103 10,544 13,058
Premises and equipment, net 3,169 2,610 3,008 3,586 1,271
Deferred income taxes 4,190 3,613 3,309 4,408 5,617
Other assets 2,074 4,035 3,904 2,768 1,651
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,015,909 $ 810,443 $ 610,673 $ 521,406 $ 472,803
=========================================================================================================================
Deposit accounts $ 843,813 $ 670,336 $ 494,793 $ 448,557 $ 426,111
Federal Home Loan Bank advances 61,500 43,500 54,000 22,700 -
Accounts payable and other liabilities(3) 11,248 7,789 5,188 6,446 6,994
Shareholders' equity(3) 99,348 88,818 56,692 43,703 39,698
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,015,909 $ 810,443 $ 610,673 $ 521,406 $ 472,803
=========================================================================================================================
Book value per share(1) $ 12.91 $ 11.42 $ 9.48 $ 10.12 $ 9.19
=========================================================================================================================
</TABLE>
(1) After an 86.4 for 1 stock split effective October 17, 1995.
(2) Loans, net of allowance for credit losses, unearned finance charges and
deferred loan origination costs and fees.
(3) The balances of accounts payable and other liabilities and shareholders'
equity in the 1995 and 1996 condensed statements of financial condition have
been restated. See "Item 8 - Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note 15."
17
<PAGE> 18
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS
Return on average assets 1.46% 1.44% (0.44)% 0.79% 1.05%
Return on average shareholders' equity 13.23 12.86 (5.26) 9.53 12.93
Net interest margin(1) 4.94 5.19 6.13 6.64 6.87
Average interest-earning assets to average interest-bearing
liabilities 112.15 112.14 108.19 107.20 107.47
Noninterest expense to average total assets 2.19 2.04 3.70 4.06 4.21
Efficiency ratio(2) 42.96 39.10 60.08 60.48 58.17
Efficiency ratio excluding real estate operations, net 41.96 36.20 45.10 47.61 42.98
General and administrative expense to average total assets 2.14 1.88 2.78 3.20 3.11
Average shareholders' equity to average assets 11.06 11.23 8.32 8.28 8.12
Nonperforming assets to total assets 1.21 1.56 2.14 5.62 4.48
Nonperforming assets held for investment to total assets 1.21 1.46 2.08 5.62 4.48
Allowance for credit losses to loans held for investment,
net(3) 1.60 1.65 1.81 2.32 2.01
Allowance for credit losses to nonaccrual loans(4) 146.16 169.50 122.45 58.98 108.19
Net loan charge-offs to average loans 0.28 0.37 3.27 0.97 1.22
</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.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis reviews the financial condition and
results of operations of ITLA Capital Corporation ("ITLA Capital" and with its
subsidiaries the "Company") and its two wholly-owned subsidiaries, Imperial
Thrift and Loan Association ("Imperial" or the "Association") and ITLA Funding
Corporation ("Funding"). On October 1, 1996, ITLA Capital was formed and became
the sole shareholder of Imperial. Funding was incorporated in September 1996 and
commenced operations on January 1, 1997. 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, 1997 and 1996
and results of operations of the Company for the years ended December 31, 1997,
1996 and 1995. The Company's principal business involves the origination of
loans secured primarily by income producing real estate, located predominately
in California. 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 experienced both
a recession and a significant decline in property values during the period from
1992 to 1995. These external factors contributed to higher levels of
nonperforming assets and associated costs (including provisions for estimated
credits losses and other real estate owned ("OREO") expenses) during the period
from 1994 to 1996.
Consolidated net income was $12.5 million, or $1.57 per diluted share, in
1997 compared to $10.0 million, or $1.36 per diluted share, in 1996 and a net
loss of $(2.4) million, or $(0.52) per diluted share, in 1995. The increase in
net earnings in 1997 was due primarily to increased net interest income, $41.8
million in 1997 compared to $35.5 million in 1996, a reduction in provisions for
estimated credit losses and valuation allowance on loans held for sale to an
aggregate of $3.7 million in 1997 from $5.6 million in 1996, an increase in fee
income from mortgage banking activities, $1.0 million in 1997 compared to zero
in 1996, and a reduction in real estate operations, net, to $0.4 million in 1997
compared to $1.0 million in 1996, partially offset by an increase in general and
administrative expenses, $18.2 million in 1997 compared to $13.1 million in
1996, and an increase in provision for income taxes, $8.7 million in 1997
compared to $6.4 million in 1996. The increase in net earnings in 1996 was due
primarily to increased net interest income, $35.5 million in 1996 compared to
$32.8 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 return on average assets was 1.46% in 1997 compared to 1.44% in 1996
and a negative .44% in 1995. The return on average equity was 13.23% in 1997
compared to 12.86% in 1996 and a negative 5.26% in 1995.
Average assets totaled $852.6 million in 1997 compared to $694.3 million in
1996, an increase of $158.3 million or 22.8%, largely due to an increase in
average loans of $149.2 million or 26.7% and an increase in cash, investments
and mortgage-backed securities of $21.9 million or 25.3%. 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 an increase in average loans of $68.4 million
or 13.9% and an increase in 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. Total loan production (including the
unfunded portion of construction loans) was $442.0 million for the year ended
December 31, 1997, consisting of $355.6 million originated or purchased for the
portfolio and $86.4 million originated by Funding and sold to third-party
investors, compared to $365.2 million and $174.8 million for the years ended
December 31, 1996 and 1995, respectively. Average customer deposit accounts
totaled $696.5 million in 1997 compared to $556.3 million in 1996, an increase
of $140.2 million or 25.2%. This increase was primarily utilized to fund the
increase in the loan portfolio. Federal Home Loan Bank ("FHLB") advances
averaged $53.7 million in 1997, a slight increase over the average balance of
$53.6 million in 1996.
19
<PAGE> 20
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 1997 and 1996 and monthly average balances,
which management believes do not differ materially from daily average balances,
for 1995. Nonaccrual loans are included in loans receivable.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(4) (4) (4) (4)
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and investments $ 108,796 $ 5,971 5.49% $ 86,862 $ 4,571 5.26% $ 41,790 $ 2,286 5.47%
Mortgage-backed securities 28,565 1,836 6.43% 37,813 2,177 5.76% 1,698 103 6.07%
Loans receivable(1):
Secured by real estate 708,134 77,257 10.91% 548,471 61,423 11.20% 429,494 49,851 11.61%
Other 313 53 16.93% 10,804 1,727 15.98% 61,332 9,867 16.09%
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 708,447 77,310 10.91% 559,275 63,150 11.29% 490,826 59,718 12.17%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 845,808 $ 85,117 10.06% 683,950 $ 69,898 10.22% 534,314 $ 62,107 11.62%
================= ================= =================
Noninterest-earning assets 17,678 20,179 25,328
Allowance for credit losses (10,847) (9,816) (10,519)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 852,639 $ 694,313 $ 549,123
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Savings and passbook accounts $ 67,708 $ 3,508 5.18% $ 48,713 $ 2,386 4.90% $ 32,611 $ 1,477 4.53%
Time certificates 628,759 36,698 5.84% 507,598 29,055 5.72% 456,847 27,572 6.04%
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 696,467 40,206 5.77% 556,311 31,441 5.65% 489,458 29,049 5.93%
FHLB advances 53,714 3,104 5.78% 53,604 2,958 5.52% 4,426 294 6.64%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 750,181 $ 43,310 5.77% 609,915 $ 34,399 5.64% 493,884 $ 29,343 5.94%
================= ================= =================
Noninterest-bearing liabilities 8,144 6,421 9,550
Shareholders' equity 94,314 77,977 45,689
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 852,639 $ 694,313 $ 549,123
=================================================================================================================================
Net interest spread(2) 4.29% 4.58% 5.68%
=================================================================================================================================
Net interest income before
provisions for estimated
credit losses and valuation
allowance $ 41,807 $ 35,499 $ 32,764
=================================================================================================================================
Net interest margin(3) 4.94% 5.19% 6.13%
=================================================================================================================================
</TABLE>
(1) Before allowance for credit losses and net of deferred loan fees and other
unearned income. Net loan fee amortization of $2.2 million, $2.1 million and
$2.3 million was included in net interest income for 1997, 1996 and 1995,
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.
(4) The yield on loans receivable for 1996 and 1995 differs from amounts
previously disclosed due to reclassifications made to conform to the 1997
presentation.
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 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 1997, 1996 and 1995, the Company's ratio of average
interest-earning assets to average interest-bearing liabilities was 112.7%,
112.1% and 108.2%, respectively.
20
<PAGE> 21
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>
- ---------------------------------------------------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
- ---------------------------------------------------------------------------------------------------------------------------
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 $ 15,888 $ (1,728) $ 14,160 $ 8,758 $ (5,326) $ 3,432
Investment securities 1,224 176 1,400 2,456 (171) 2,285
Mortgage-backed securities (495) 154 (341) 2,295 (221) 2,074
- ---------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 16,617 (1,398) 15,219 13,509 (5,718) 7,791
- ---------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Deposit accounts 8,159 606 8,765 3,897 (1,505) 2,392
FHLB advances 4 142 146 3,263 (599) 2,664
- ---------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 8,163 748 8,911 7,160 (2,104) 5,056
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 8,454 $ (2,146) $ 6,308 $ 6,349 $ (3,614) $ 2,735
===========================================================================================================================
</TABLE>
1997 Compared to 1996
Net interest income totaled $41.8 million in 1997 compared to $35.5 million
in 1996, an increase of $6.3 million or 17.8%. The increase in net interest
income was due primarily to growth in average earning assets, which increased
from $683.9 million in 1996 to $845.8 million in 1997, partially offset by a
decline in the average yield earned on loans.
Interest income totaled $85.1 million in 1997 compared to $69.9 million in
1996, an increase of $15.2 million or 21.8%. Interest and fee income from loans
receivable totaled $77.3 million in 1997 compared to $63.2 million in 1996, an
increase of $14.2 million or 22.4%. Interest and fee income from loans increased
due to higher loan volume in 1997 partially offset by a decline in loan yield.
The average balance of loans receivable was $708.4 million in 1997 compared to
$559.3 million in 1996, an increase of $149.2 million or 26.7%. The average
yield on loans receivable was 10.91% in 1997 compared to 11.29% in 1996. The
decline in loan yield is due to the pricing of real estate loans in response to
competitive factors and the Company's emphasis on attempting to manage credit
risk. The continued origination of lower yielding real estate loans could result
in the Company achieving lower average yields in future operating periods.
Interest income from mortgage-backed securities totaled $1.8 million in 1997
compared to $2.2 million in 1996, a decrease of $0.4 million, due to a decline
in the average outstanding balance partially offset by an increase in yield. The
average balance of mortgage-backed securities declined to $28.6 million in 1997
from $37.8 million in 1996, due to principal repayments received. The yield on
the mortgage-backed securities was 6.43% in 1997 compared to 5.76% in 1996, due
to increased yields from the underlying adjustable rate mortgages and reduced
amortization of purchase premiums due to lower prepayments in 1997 compared to
1996. Interest income from cash and investments totaled $6.0 million in 1997
compared to $4.6 million in 1996, an increase of $1.4 million or 30.6%, due
primarily to an increased average outstanding balance and an increase in yield.
The average balance of cash and investment securities was $108.8 million in 1997
compared to $86.9 million in 1996, an increase of $21.9 million or 25.3%. The
average yield on cash and investment securities was 5.49% in 1997 compared to
5.26% in 1996.
Interest expense totaled $43.3 million in 1997 compared to $34.4 million in
1996, an increase of $8.9 million or 25.9%. Interest expense from deposit
accounts totaled $40.2 million in 1997 compared to $31.4 million in 1996, an
increase of $8.8 million or 27.9%, due to increases in both the volume of
deposit accounts and in the average rate paid on deposits. The average balance
of deposits was $696.5 million in 1997 compared to $556.3 million in 1996, an
increase of $140.2 million or 25.2%, as the Company increased deposits to fund
growth in the loan portfolio. The average rate paid on deposits was 5.77% in
1997 compared to 5.65% in 1996. Interest expense from FHLB advances totaled $3.1
million in 1997 compared to $3.0 million in 1996, due primarily to an increase
in the average rate from 5.52% in 1996 to 5.78% in 1997.
1996 Compared to 1995
Net interest income totaled $35.5 million in 1996 compared to $32.8 million
in 1995, an increase of $2.7 million or 8.3%. 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 6.13% in 1995 to 5.19% 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 $69.9 million in 1996 compared to $62.1 million in
1995, an increase of $7.8 million or 12.5%. Interest and fee income from loans
receivable totaled $63.2 million in 1996 compared to $59.7 million in 1995, an
increase of $3.4 million or 5.7%. Interest and fee income from loans increased
due to higher 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 11.29% in 1996 compared to 12.17% 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.
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
21
<PAGE> 22
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 in December 1995
to fund the acquisition of the mortgage-backed securities.
PROVISION FOR ESTIMATED CREDIT LOSSES
1997 Compared to 1996
Provision for estimated credit losses totaled $3.3 million in 1997 compared
to $4.9 million in 1996, a reduction of $1.6 million or 32.3%. The reduction in
the provision in 1997 reflects the amount of the Company's nonperforming assets
and improved economic conditions in the Company's marketplace. Nonperforming
assets to total assets declined to 1.2% as of December 31, 1997 from 1.6% as of
December 31, 1996. The aggregate amount of nonperforming assets decreased to
$12.3 million as of December 31, 1997 from $12.6 million at December 31, 1996.
At December 31, 1997, the total allowance for credit losses was $12.2 million or
1.6% of total loans receivable held for investment. See also "Credit Risk
Elements -- Allowance for Credit Losses and Nonperforming Assets."
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 level of
nonperforming loans and delinquency data, improved during 1996 compared to 1995.
PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD FOR SALE
1997 Compared to 1996
Provision for valuation allowance on loans held for sale totaled $0.4
million in 1997 compared to $0.7 million in 1996, a decrease of $0.3 million or
50.0%. These adjustments represent additional write-downs taken to adjust the
carrying value of the remaining unsold automobile finance contracts to their
estimated fair market value.
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 marketed the 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 fair market value. After the sale of
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 fair market value. At December 31, 1996,
the carrying amount of the remaining unsold automobile finance contracts, net of
market valuation write-downs and unearned discount, was $1.1 million at the
lower of cost or estimated fair market value.
NONINTEREST INCOME
Noninterest income totaled $1.6 million in 1997 compared to $0.7 million in
1996, an increase of $0.9 million or 151.9%. The increase in noninterest income
in 1997 was due to the fee income earned by Funding from its initial year of
operations. In 1997, Funding originated $86.4 million in loans and recognized
$1.0 million of fee income from loans originated on behalf of third-party
investors. Funding also originated $32.2 million of loans on behalf of Imperial.
No revenues were recognized from these intercompany originations. Noninterest
income totaled $0.7 million in 1996 compared to $1.1 million in 1995, a decline
of $0.4 million or 27.9%. The decline in noninterest income in 1996 compared to
1995 is due to the decline in late charges and other fees arising from
Imperial's portfolio of automobile finance contracts, as this portfolio was
substantially disposed of in the first quarter of 1996.
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense totaled $18.2 million, $13.1 million and
$15.3 million in 1997, 1996 and 1995, respectively.
22
<PAGE> 23
1997 Compared to 1996
General and administrative expense totaled $18.2 million in 1997 compared
to $13.1 million in 1996, an increase of $5.1 million or 39.3%. Compensation and
benefits expense totaled $8.5 million in 1997 compared to $5.7 million in 1996,
an increase of $2.8 million or 48.7%. The increase in compensation and benefits
expense was due primarily to an increase in staffing, as the number of average
full-time equivalent employees ("FTE's") totaled 151 during 1997 compared to 123
during 1996. This increase in FTE's was due primarily to the increase in staff
at Funding, which commenced operations in 1997. Compensation and benefits
expense also increased in 1997 compared to 1996 due to a nonrecurring benefit in
the prior year which reduced the amount of expense recognized by $0.4 million.
Occupancy and equipment expense totaled $2.4 million in 1997 compared to $1.9
million in 1996, an increase of $0.5 million or 26.7%. The increase in occupancy
and equipment expense was due primarily to the cost of the added facilities
occupied by Funding, which totaled $0.3 million in 1997. Other general and
administrative expenses totaled $7.1 million in 1997 compared to $5.2 million in
1996, an increase of $1.9 million or 36.2%, due primarily to the general and
administrative costs incurred by Funding during its initial year of operations,
which totaled $0.9 million, and to an increase in advertising expense incurred
as a result of the Company's business expansion activities in 1997, which
totaled $0.5 million.
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 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. 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%.
YEAR 2000
The Company is currently in the process of conducting a comprehensive
review of its computer systems to identify the systems that could be affected by
the "Year 2000" potential issue. The Year 2000 potential issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations. Management anticipates that
the enhancements necessary to prepare its systems for the year 2000 will be
completed in a timely manner.
The Company is also aware of the risks to third parties, including vendors
(and to the extent appropriate, depositors and borrowers) and the potential
adverse impact on the company resulting from failures by these parties to
adequately address these risks. The Company has been communicating with its
outside data processing service bureau, as well as other third-party service
providers (and to the extent appropriate, depositors and borrowers), to assess
their progress in evaluating their systems and implementing any corrective
measures required by them to be prepared for the year 2000. To date, the Company
has not been advised by any of its primary vendors that there are any
unmitigated risks regarding potential issues related to the Year 2000. However,
no assurance can be given as to the adequacy of any plans or to the timeliness
of their implementation.
The Company anticipates that it may incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to prepare
the systems for the Year 2000. Based on the Company's current knowledge and
investigations, any expense relating to the Year 2000 potential issues is not
expected to have a material impact on the Company's financial position or
results of operations.
REAL ESTATE OPERATIONS, NET
Real estate operations, net, totaled $0.4 million, $1.0 million, and $5.1
million in 1997, 1996 and 1995, respectively.
1997 Compared to 1996
Real estate operations, net, totaled $0.4 million in 1997 compared to $1.0
million in 1996, a decrease of $0.6 million or 60.0%. The decline in OREO
expenses in 1997 compared to 1996 is consistent with the decline in the amount
of OREO held during the two periods. The average balance of OREO was $4.2
million in 1997 compared to $6.5 million in 1996. Provision for estimated losses
on OREO totaled $0.2 million in 1997 compared to $1.0 million in 1996 and OREO
expenses totaled $0.2 million in 1997 compared to $0.4 million in 1996. There
was substantially no gain or loss from sales of OREO in 1997 compared to a net
gain of $0.4 million in 1996.
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
23
<PAGE> 24
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.
INCOME TAXES
1997 Compared to 1996
Provision for income taxes totaled $8.7 million in 1997 compared to $6.4
million in 1996. The effective tax rate was 41.0% in 1997 compared to 39.0% in
1996. 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. The
effective tax rate increased in 1997 compared to 1996 due to the reduced state
tax benefit realized from nontaxable income from redevelopment and enterprise
zone loans.
At December 31, 1997, the Company had net deferred tax assets of $4.2
million. These deferred tax assets 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 has no deferred tax
assets relating to net operating loss carryforward deductions. The deferred tax
assets are considered fully realizable, as when the temporary differences
associated with the deferred tax assets 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 assets.
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.
FINANCIAL CONDITION
GENERAL
Total assets increased $405.2 million to $1.0 billion at December 31, 1997
from $610.7 million at December 31, 1995, an increase of 66.4%. The increase in
assets during this two year period was funded primarily by growth of $349.0
million in deposits, an increase of $43.2 million in shareholders' equity,
resulting from the retention of earnings from 1996 and 1997 and the April 1996
public offering resulting in net proceeds of $22.6 million, a $7.5 million
increase in FHLB advances and a $5.6 million increase in accounts payable and
other liabilities. 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 secured by real estate, including loans held for
sale, increased by $361.5 million to $801.4 million at December 31, 1997 from
$439.9 million at December 31, 1995, an increase of 82.2%, while automobile
finance contracts held for sale declined to zero at December 31, 1997 from $50.5
million at December 31, 1995. Cash and investment securities increased by $119.0
million to $159.2 million at December 31, 1997 from $40.2 million at December
31, 1995. Additionally, the Company held $25.1 million and $42.3 million in
mortgage-backed securities at December 31, 1997 and 1995, respectively.
At December 31, 1997 Compared with December 31, 1996
Total assets increased $205.5 million, or 25.4%, to $1.0 billion at
December 31, 1997 from $810.4 million at December 31, 1996. This increase was
primarily due to a $151.6 million, or 23.3%, increase in net real estate loans
receivable, including real estate loans held for sale, to $801.4 million at
December 31, 1997 from $649.8 million at December 31, 1996. Asset growth also
included increases in cash and investment securities of $59.9 million and in
FHLB stock of $3.6 million. These increases were marginally offset by reductions
in mortgage-backed securities to $25.1 million from $31.9 million, in OREO to
$3.9 million from $5.4 million, and in automobile finance contracts held for
sale to zero from $1.1 million, at December 31, 1997 and 1996, respectively. The
growth in assets was funded primarily by increases in deposits and FHLB advances
of $173.4 million and $18.0 million, respectively, from December 31, 1996 to
December 31, 1997. Deposit growth was concentrated in term certificates, which
increased from $608.5 million at December 31, 1996 to $767.0 million at December
31, 1997, as well as money market savings and passbook accounts, which increased
from $61.8 million at December 31, 1996 to $76.8 million at December 31, 1997.
Shareholders' equity increased by $10.5 million, due primarily to the retention
of $12.5 million of net income for the year and the issuance of $0.3 million of
common stock through exercise of employee stock options and payment of stock
bonuses, partially offset by the purchase of $2.3 million of treasury stock.
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.
24
<PAGE> 25
LOANS RECEIVABLE
The following table shows the comparison of the Company's loan portfolio
held for investment and held for sale by major categories as of the dates
indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 727,479 $ 644,079 $ 439,778 $ 413,856 $ 375,521
Construction 39,668 22,498 14,396 12,398 10,400
Automobile finance contracts - - - 74,183 72,249
Direct financing leases - - - 319 1,426
- --------------------------------------------------------------------------------------------------------------------------
767,147 666,577 454,174 500,756 459,596
Less:
Unearned income on automobile finance contracts - - - (15,641) (14,763)
Deferred loan origination fees and other unearned
income (4,116) (5,856) (6,189) (6,696) (6,634)
- --------------------------------------------------------------------------------------------------------------------------
763,031 660,721 447,985 478,419 438,199
Allowance for credit losses (12,178) (10,885) (8,105) (11,076) (8,800)
- --------------------------------------------------------------------------------------------------------------------------
$ 750,853 $ 649,836 $ 439,880 $ 467,343 $ 429,399
==========================================================================================================================
LOANS HELD FOR SALE -- AT LOWER OF COST OR FAIR MARKET
VALUE:
Real estate $ 50,786 $ - $ - $ - $ -
Automobile finance contracts - 1,291 68,034 - -
Direct financing leases - 44 63 - -
- --------------------------------------------------------------------------------------------------------------------------
50,786 1,335 68,097 - -
Less:
Unearned income on automobile finance contracts - (205) (12,285) - -
Deferred loan origination fees and other unearned
income (242) - - - -
- --------------------------------------------------------------------------------------------------------------------------
$ 50,544 $ 1,130 $ 55,812 $ - $ -
==========================================================================================================================
</TABLE>
The approximate contractual maturities of loans receivable at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
LOANS MATURING IN
- --------------------------------------------------------------------------------------------------------------------------
BETWEEN GREATER
LESS THAN ONE AND THAN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate $ 20,300 $ 98,881 $ 659,084 $ 778,265
Construction 33,139 6,529 - 39,668
- --------------------------------------------------------------------------------------------------------------------------
$ 53,439 $ 105,410 $ 659,084 $ 817,933
==========================================================================================================================
Loans with fixed interest rates $ 15,714 $ 18,081 $ 9,448 $ 43,243
Loans with variable interest rates 37,725 87,329 649,636 774,690
- --------------------------------------------------------------------------------------------------------------------------
$ 53,439 $ 105,410 $ 659,084 $ 817,933
==========================================================================================================================
Percentage with variable rates 71% 83% 99% 95%
==========================================================================================================================
</TABLE>
The foregoing tabulation should not be regarded as a forecast of future
cash collections because a substantial portion of loans receivable may be
renewed or repaid prior to contractual maturity.
25
<PAGE> 26
The following table sets forth certain information regarding the real
property collateral securing the Company's real estate and construction loans
held for investment and held for sale.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
NUMBER AVERAGE PERCENT NON-
OF GROSS LOAN OF ACCRUAL
LOANS AMOUNT BALANCE TOTAL LOANS
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential:
One to four units 109 $ 7,156 $ 65.7 0.9% $ 470
Five or more units 185 134,949 729.5 16.5 2,709
- ------------------------------------------------------------------------- ---------------------
Total residential 294 142,105 483.4 17.4 3,179
- ------------------------------------------------------------------------- ---------------------
Commercial:
Office 147 134,313 913.7 16.4 -
Retail 286 256,205 895.8 31.3 615
Industrial / warehouse 114 62,103 544.8 7.6 1,913
Special purpose - hotel 58 66,375 1,144.4 8.1 -
Mixed-use 91 32,834 360.8 4.0 475
Mobile home parks 27 12,882 477.1 1.6 -
Other 148 68,777 464.7 8.4 2,050
- ------------------------------------------------------------------------- ---------------------
Total commercial 871 633,489 727.3 77.4 5,053
- ------------------------------------------------------------------------- ---------------------
Land 16 2,671 166.9 0.3 100
Construction 21 39,668 1,889.0 4.9 -
- ------------------------------------------------------------------------- ---------------------
Total land and construction 37 42,339 1,144.3 5.2 100
- ------------------------------------------------------------------------- ---------------------
Total loans secured by real estate 1,202 $ 817,933 $ 680.5 100.0% $ 8,332
========================================================================= =====================
</TABLE>
26
<PAGE> 27
The following table sets forth the geographic location of the underlying
collateral for the Company's loans secured by real estate held for investment
and held for sale.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
NUMBER PERCENT
OF GROSS OF
LOANS AMOUNT TOTAL
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Southern California:
Los Angeles County 369 $ 224,828 27.5%
Orange County 69 54,913 6.7
San Diego County 57 41,053 5.0
Riverside County 38 24,954 3.1
All other Southern California Counties 101 52,254 6.4
- --------------------------------------------------------------------------------------------------------------
Total Southern California 634 398,002 48.7
- --------------------------------------------------------------------------------------------------------------
Northern California:
Sacramento County 59 40,804 5.0
Santa Clara County 47 36,675 4.5
San Francisco County 38 34,187 4.2
Fresno County 80 28,408 3.5
Alameda County 50 27,632 3.4
Contra Costa County 29 26,951 3.3
All other Northern California Counties 168 86,177 10.4
- --------------------------------------------------------------------------------------------------------------
Total Northern California 471 280,834 34.3
- --------------------------------------------------------------------------------------------------------------
Outside California:
Arizona 39 47,097 5.8
Nevada 34 49,657 5.9
Colorado 6 11,177 1.4
Oregon 5 9,755 1.2
Washington 5 12,845 1.6
Texas 3 3,065 0.4
All other Outside California 5 5,501 0.7
- --------------------------------------------------------------------------------------------------------------
Total Outside California 97 139,097 17.0
- --------------------------------------------------------------------------------------------------------------
Total loans secured by real estate 1,202 $ 817,933 100.0%
==============================================================================================================
</TABLE>
Although the Company generally seeks to limit risks associated with its
portfolio of real estate and construction loans through a geographic dispersion
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 affect 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.
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
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross real estate loans originated by Funding on behalf of
third-party investors $ 86,389 $ - $ -
Gross real estate loans originated and retained in the
Company's portfolio $ 351,832 $ 303,091 $ 156,525
Gross real estate loans purchased $ 3,736 $ 62,093 $ 18,282
Gross real estate loans, end of period $ 817,933 $ 666,577 $ 454,174
Weighted-average portfolio yield 10.91% 11.20%(1) 11.61%(1)
Average size of loans originated and retained in the
Company's portfolio $ 1,530 $ 1,493 $ 776
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The yield on loans receivable for 1996 and 1995 differs from amounts
previously disclosed due to reclassifications made to conform to the 1997
presentation.
27
<PAGE> 28
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table shows the carrying amounts and approximate fair value
of investment securities and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency securities $ 35,056 $ 35,087 $ 35,515 $ 35,515 $ - $ -
Certificates of deposit 194 194 1,059 1,059 - -
- -------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 35,250 35,281 36,574 36,574 - -
- -------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities - - - - 2,980 2,984
Certificates of deposit - - - - 11,080 11,080
Mortgage-backed securities 25,132 25,063 31,870 31,319 42,275 42,039
- -------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 25,132 25,063 31,870 31,319 56,335 56,103
- -------------------------------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities $ 60,382 $ 60,344 $ 68,444 $ 67,893 $ 56,335 $ 56,103
=========================================================================================================================
</TABLE>
At December 31, 1997, investment securities available-for-sale consisted of
$10.2 million of securities that mature in one year or less with an average
yield of 5.99% and $25.0 million that mature from one to two years with an
average yield of 6.28%, and investment securities held to maturity, consisting
solely of mortgage-backed securities, with an estimated weighted-average life of
3.6 years and an average yield of 6.59%.
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, 1997, the
Company held approximately $35.3 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 equivalent by
applicable rating agencies. As of December 31, 1997 and 1996, the Association's
liquidity ratios were 14.1% and 13.3%, respectively, exceeding the regulatory
requirement of 1.5%. In addition, the Company's liquidity position is supported
by a credit facility with the FHLB of San Francisco. As of December 31, 1997,
the Company had borrowing capacity under this credit facility of $111.7 million,
plus $30.0 million of unused federal funds credit facilities under established
lines of credit with two banks.
Total deposit accounts increased to $843.8 million at December 31, 1997
from $670.3 million at December 31, 1996, an increase of $173.5 million or
25.9%. The funds provided from the increase in deposits were used primarily to
fund the growth in the Company's loan portfolio. 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 76% and 75% of the funds from maturing
investment certificates through rollover of the certificates in 1997 and 1996,
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 $494.8 million at December 31,
1995 to $843.8 million at December 31, 1997. The following table sets forth
information regarding deposits outstanding at the dates indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DECEMBER 31
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts $ 76,786 $ 61,797 $ 34,968
Time deposits under $100,000 522,014 511,908 424,277
Time deposits over $100,000 245,013 96,631 35,548
- -----------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 843,813 $ 670,336 $ 494,793
=====================================================================================================
</TABLE>
CAPITAL RESOURCES
As of December 31, 1997, the Association's Leverage (Core), Tier I and
Total Risk-Based capital ratios were 9.61%, 11.41% and 12.67%, respectively.
These ratios were 10.64%, 12.00% and 13.25% as of December 31, 1996,
respectively. The minimum regulatory requirement for Leverage (Core), Tier I and
Risk-Based capital are 4.0%, 4.0% and 8.0%, respectively. As of December 31,
1997, the Association's capital position was designated as "well capitalized'
for regulatory purposes.
28
<PAGE> 29
The Company's shareholders' equity increased $10.5 million from December
31, 1996 to December 31, 1997 due primarily to the accumulation of $12.5 million
in net income as retained earnings and a $0.3 million increase from the exercise
of employee stock options and issuance of Company stock as compensation to
certain officers, offset by a $2.3 million reduction due to the repurchase of
152,500 shares of the Company's stock currently held as treasury stock. There
were no dividends declared or paid during 1997.
CREDIT 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
selected ratios for the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 10,885 $ 8,105 $ 11,076 $ 8,800 $ 8,000
Provision for estimated credit losses 3,300 4,871 13,098 6,731 5,905
Charge-offs:
Loans secured by real estate (2,124) (2,237) (9,448) (2,676) (2,879)
Construction loans - - (43) (27) (295)
Automobile finance contracts - - (7,212) (1,870) (1,089)
Direct financing leases - - (82) (432) (1,340)
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs (2,124) (2,237) (16,785) (5,005) (5,603)
- -----------------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 117 146 45 132 66
Automobile finance contracts - - 632 297 230
Direct financing leases - - 39 121 202
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 117 146 716 550 498
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs (2,007) (2,091) (16,069) (4,455) (5,105)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 12,178 $ 10,885 $ 8,105 $ 11,076 $ 8,800
=======================================================================================================================
Loans:
Average loans outstanding during year $708,447 $559,275 $ 490,826 $459,332 $418,981
Loans receivable, net, at end of year(1) $767,147 $660,721 $ 447,985 $478,419 $438,199
Ratios:
Net charge-offs to average loans 0.28% 0.37% 3.27% 0.97% 1.22%
Net charge-offs to loans held for investment, net, at end
of year(1) 0.26% 0.32% 3.59% 0.93% 1.16%
Allowance for credit losses to loans held for investment,
net, at end of year(1) 1.60% 1.65% 1.81% 2.32% 2.01%
Allowance for credit losses to nonaccrual loans(2) 146.16% 169.50% 122.45% 58.98% 108.19%
- -----------------------------------------------------------------------------------------------------------------------
</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 $12.2 million at December 31,
1997 from $10.9 million at December 31, 1996. The Company recorded a provision
for estimated credit losses of $3.3 million in 1997 compared to $4.9 million in
1996, due primarily to the improved economic conditions in the Company's
marketplace. Net charge-offs totaled $2.0 million in 1997 compared to $2.1
million in 1996.
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 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 bulk sales and/or foreclosure on a greater proportion of
problem real estate loans rather than seeking workouts or restructurings. In
addition, the Company decided to shorten the marketing period to more quickly
dispose of its OREO. 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 nonaccrual 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
29
<PAGE> 30
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 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
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS
LOSSES (1) LOSSES (1) LOSSES (1)
- -----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
LOAN OR CONTRACT
CATEGORIES:
Secured by real estate $ 12,178 100.0% $ 10,885 99.8% $ 8,096 85.1%
Automobile finance(2) - 0.0% - 0.2% - 14.8%
Direct financing
leases - 0.0% - 0.0% 9 0.1%
- -----------------------------------------------------------------------------------------
Total $ 12,178 100.0% $ 10,885 100.0% $ 8,105 100.0%
=========================================================================================
<CAPTION>
- -------------------------------------------------------------------
DECEMBER 31
- -------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF
FOR CREDIT LOANS FOR CREDIT LOANS
LOSSES (1) LOSSES (1)
- -------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN OR CONTRACT
CATEGORIES:
Secured by real estate $ 9,306 85.1% $ 7,806 84.0%
Automobile finance(2) 1,750 14.8% 864 15.7%
Direct financing
leases 20 0.1% 130 0.3%
- --------------------------------------------------------------------
Total $ 11,076 100.0% $ 8,800 100.0%
====================================================================
</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, 1997, 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, 1997 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>
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
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 $ 3,654 0.45% $ 3,614 0.54% $ 5,923 1.30%
60 - 89 days 2,833 0.35% 5,016 0.75% 3,904 0.86%
90 days or more 4,491 0.54% 4,601 0.69% 5,642 1.24%
- -------------------------------------------------------------------------------------------------------------------------
Total loans delinquent $ 10,978 1.34% $ 13,231 1.98% $ 15,469 3.40%
=========================================================================================================================
</TABLE>
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 $1.5
million 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
consists of Imperial's President and Chief Operating Officer, Chief Credit
Officer, Chief Lending Officer and Chief Financial Officer, and ITLA Capital's
Managing Director and Chief Financial 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
management believes that the collection of the full amount of principal is
unlikely and the value of the collateral securing the obligation is
insufficient, the 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.
30
<PAGE> 31
The Company's policy requires that 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. Subsequent
cash collections on nonaccrual loans are either recognized as interest income on
a cash basis, if the loan is well secured and in management's judgment the net
book value is fully collectible, or recorded entirely as a reduction of
principal.
The following table sets forth the Company's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans(1):
Loans secured by real estate, net $ 8,332(3) $ 6,422 $ 6,619 $ 18,168 $ 7,767
Other - 783 366 611 367
- ----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 8,332 7,205 6,985 18,779 8,134
Other real estate owned, net 3,946 5,416 6,103 10,544 13,058
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 12,278 $ 12,621 $ 13,088 $ 29,323 $ 21,192
======================================================================================================================
Troubled debt restructurings (2) $ 1,574 $ 2,106 $ 6,182 $ 15,206 $ 16,846
Nonaccrual loans held for investment to total gross loans
held for investment 1.09% 0.96% 1.46% 3.87% 1.83%
Allowance for credit losses as a % of nonaccrual loans(4) 146.16% 169.50% 122.45% 58.98% 108.18%
Nonperforming assets to total assets 1.21% 1.56% 2.14% 5.62% 4.48%
Nonperforming assets held for investment to total assets 1.21% 1.46% 2.08% 5.62% 4.48%
</TABLE>
(1) Gross interest income that would have been recorded on nonaccrual loans had
they been current in accordance with original terms was $0.4 million for the
year ended December 31, 1997. The amount of interest income on such
nonaccrual loans included in net income for the year ended December 31, 1997
was $0.
(2) All of the restructured loans were accruing at December 31, 1997.
(3) In addition to the above, management has concerns as to the borrowers'
ability to comply with present repayment terms on $10.2 million of accruing
loans as of December 31, 1997.
(4) Excludes nonaccrual loans held for sale.
Nonaccrual loans held for investment totaled $8.3 million at December 31,
1997, consisting of 22 nonaccrual real estate loans. Four of these loans had an
outstanding balance greater than $500,000, and two loans, with a combined total
of $3.8 million, had outstanding balances greater than $1.0 million.
In 1997, $2.4 million of new OREO was acquired, $4.3 million of OREO was
sold, and $0.2 million of write-downs were taken, resulting in net OREO at
December 31, 1997 of $3.9 million. OREO at December 31, 1997 consisted of 13
properties with an average balance of approximately $300,000. Only four
properties had a net balance of greater than $500,000, with book values of
$750,000, $682,000, 602,000 and $594,000.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the differential or spread
between the interest earned on loans, investments and other interest-earning
assets and the interest paid on deposits and borrowings. Loan volumes and
yields, as well as the volume of and rates on investments, deposits and
borrowings, are affected by market interest rates. Additionally, because of the
terms and conditions of many of the Company's loan agreements and deposit
accounts, a change in interest rates could also affect the duration of the loan
portfolio and/or the deposit base, which could alter the Company's sensitivity
to future changes in interest rates.
The Company uses an internal earnings simulation model as a tool to
identify and manage its interest rate risk profile. The model is based on actual
cash flows and repricing characteristics for all financial instruments and
incorporates market-based assumptions regarding the impact of changing interest
rates on current volumes of applicable financial instruments, considering
applicable interest rate floors and caps associated with each financial
instrument. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest rate risk management focuses on maintaining consistent growth in
net interest income within Board-approved policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost and capital profile. The Company's Asset/Liability
Management Committee, which includes senior management representatives and
reports to the Board of Directors, monitors and manages interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
The following table shows the Company's estimated earnings sensitivity
profile as of December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------
CHANGES IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) (12 MONTHS)
- ----------------------------------------
<S> <C>
+200 Over One Year +14.90%
+100 Over One Year + 7.45%
- -100 Over One Year + 5.15%
- -200 Over One Year +12.97%
</TABLE>
Another tool used to identify and manage the Company's interest rate risk
profile is the static gap analysis. Interest sensitivity gap ("GAP") analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods. An asset-sensitive position indicates that there
are more rate-
31
<PAGE> 32
sensitive assets than rate-sensitive liabilities repricing or maturing within
specific time horizons, which would generally imply a favorable impact on net
interest income in periods of rising interest rates and a negative impact in
periods of falling rates. A liability-sensitive position would generally imply a
negative impact on net interest income in periods of rising rates and a positive
impact in periods of falling rates.
In evaluating 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 table on the following page.
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 up to 5%
over the life of the loan. These loans may also be subject to prepayment
penalties. At December 31, 1997, the weighted-average floor interest rate for
the Company's variable rate loan portfolio was 9.7%. The Company considers the
anticipated effects of these various factors in implementing its interest rate
risk management activities.
The following table presents an estimate of the Company's sensitivity to
interest rate changes.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
MATURING OR REPRICING IN
- ---------------------------------------------------------------------------------------------------------------------------------
AFTER 3 AFTER
MONTHS 1 YEAR NON-
3 MONTHS BUT WITHIN BUT WITHIN AFTER INTEREST
OR LESS 1 YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans receivable (1) $ 515,283 $ 242,664 $ 52,616 $ 7,129 $ - $ 817,692
Mortgage-backed securities 2,375 6,111 10,254 6,392 - 25,132
Cash and other investments 123,895 10,244 25,027 - - 159,166
Noninterest-earning assets less allowance for credit
losses and unearned loan fees - - - - 13,919 13,919
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 641,553 $ 259,019 $ 87,897 $ 13,521 $ 13,919 $ 1,015,909
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Term certificates under $100,000 $ 171,558 $ 303,597 $ 46,859 $ - $ - $ 522,014
Term certificates over $100,000 143,668 94,734 6,611 - - 245,013
Passbook accounts 76,786 - - - - 76,786
Federal Home Loan Bank advances 25,500 32,000 4,000 - - 61,500
Other liabilities - - - - 11,248 11,248
Shareholders' equity - - - - 99,348 99,348
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 417,512 $ 430,331 $ 57,470 $ - $ 110,596 $ 1,015,909
=================================================================================================================================
Net repricing assets over (under) repricing liabilities
equals interest rate sensitivity GAP $ 224,041 $(171,312) $ 30,427 $ 13,521 $ (96,677)
=================================================================================================================================
Cumulative interest rate sensitivity GAP $ 224,041 $ 52,729 $ 83,156 $ 96,677 $ -
=================================================================================================================================
Cumulative GAP as a percentage of total assets 22.1% 5.2% 8.2% 9.5% 0.0%
=================================================================================================================================
</TABLE>
(1) Variable rate loans consist principally of real estate secured loans with a
maximum term of 30 years. Approximately 95% of such loans are generally
adjustable quarterly based on changes in various indexes, principally LIBOR,
the Bank of America Reference Rate or COFI, subject generally to a maximum
increase of 2% annually and up to 5% over the life of the loan. Nonaccrual
loans of approximately $8.3 million are assumed to reprice after five years.
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
<S> <C>
PAGE
<CAPTION>
- ------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants on Consolidated
Financial Statements as of December 31, 1997 and 1996 and
for Each of the Three Years in the Period Ended December
31, 1997 34
Consolidated Balance Sheets as of December 31, 1997 and 1996 35
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 36
Consolidated Statements of Changes in Shareholders' Equity
for the Period January 1, 1995 to December 31, 1997 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 38
Notes to Consolidated Financial Statements 39
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors
of ITLA Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ITLA
Capital Corporation and subsidiaries (a Delaware corporation) (the Company) as
of December 31, 1997 and 1996 (as restated -- see Note 15), and the related
statements of operations, changes in shareholders' equity (as restated -- see
Note 15) and cash flows (as restated -- see Note 15) for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 ITLA Capital Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
January 29, 1998
34
<PAGE> 35
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DECEMBER 31
- ----------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 123,885 $ 62,599
Investment securities available for sale, at approximate
fair value 35,281 36,574
Stock in Federal Home Loan Bank 11,919 8,349
Mortgage-backed securities held to maturity, at amortized
cost (fair value $25,063 and $31,319 for 1997 and 1996,
respectively) 25,132 31,870
Loans held for investment, net (net of allowance for credit
losses of $12,178 and $10,885 in 1997 and 1996,
respectively) 750,853 649,836
Loans held for sale, at lower of cost or fair market value 50,544 1,130
Interest receivable 4,916 4,411
Other real estate owned, net 3,946 5,416
Premises and equipment, net 3,169 2,610
Deferred income taxes 4,190 3,613
Other assets 2,074 4,035
- ----------------------------------------------------------------------------------------------
Total assets $ 1,015,909 $ 810,443
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 843,813 $ 670,336
Federal Home Loan Bank advances 61,500 43,500
Accounts payable and other liabilities 11,248 7,789
- ----------------------------------------------------------------------------------------------
Total liabilities 916,561 721,625
- ----------------------------------------------------------------------------------------------
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, 7,849,484 and 7,824,000
issued and outstanding in 1997 and 1996, respectively 53,163 52,845
Retained earnings 48,450 35,973
Unrealized gain on investment securities available for
sale, net 19 -
- ----------------------------------------------------------------------------------------------
101,632 88,818
Less 152,500 shares of treasury stock, at cost (2,284) -
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 99,348 88,818
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,015,909 $ 810,443
==============================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
35
<PAGE> 36
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 77,310 $ 63,150 $ 59,718
Investment securities 5,971 4,571 2,286
Mortgage-backed securities 1,836 2,177 103
- ------------------------------------------------------------------------------------------------------
Total interest income 85,117 69,898 62,107
- ------------------------------------------------------------------------------------------------------
Interest expense:
Deposit accounts 40,206 31,441 29,049
Federal Home Loan Bank advances 3,104 2,958 294
- ------------------------------------------------------------------------------------------------------
Total interest expense 43,310 34,399 29,343
- ------------------------------------------------------------------------------------------------------
Net interest income before provisions for valuation
allowance and estimated credit losses 41,807 35,499 32,764
Provision for estimated credit losses 3,300 4,871 13,098
Provision for valuation allowance on loans held for sale 350 700 4,774
- ------------------------------------------------------------------------------------------------------
Net interest income after provisions for valuation
allowance and estimated credit losses 38,157 29,928 14,892
- ------------------------------------------------------------------------------------------------------
Noninterest income:
Fee income from mortgage banking activities 1,007 - -
Other 633 651 1,075
- ------------------------------------------------------------------------------------------------------
Total noninterest income 1,640 651 1,075
- ------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 8,511 5,723 7,313
Occupancy and equipment 2,444 1,929 2,230
FDIC assessment 208 244 869
Other 7,069 5,190 4,848
- ------------------------------------------------------------------------------------------------------
Total general and administrative 18,232 13,086 15,260
- ------------------------------------------------------------------------------------------------------
Real estate operations, net 226 435 1,293
Provision for estimated losses on other real estate owned 216 1,038 4,169
Gain on sale of other real estate owned, net (9) (424) (392)
- ------------------------------------------------------------------------------------------------------
Total real estate operations, net 433 1,049 5,070
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 18,665 14,135 20,330
- ------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes 21,132 16,444 (4,363)
Provision (benefit) for income taxes 8,655 6,420 (1,960)
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 12,477 $ 10,024 $ (2,403)
======================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ 1.61 $ 1.38 $ (0.52)
======================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ 1.57 $ 1.36 $ (0.52)
======================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 37
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1995 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAIN ON
INVESTMENT
NUMBER SECURITIES
OF CONTRIBUTED RETAINED AVAILABLE TREASURY
SHARES CAPITAL EARNINGS FOR SALE, NET STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 4,320 $ 15,351 $ 28,352 $ - $ - $ 43,703
Issuance of common stock -- as restated (see Note
15) 1,660 14,892 - - - 14,892
Net loss - - (2,403) - - (2,403)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- as restated (see
Note 15) 5,980 30,243 25,949 - - 56,192
Issuance of common stock 1,844 22,602 - - - 22,602
Net income - - 10,024 - - 10,024
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- as restated (see
Note 15) 7,824 52,845 35,973 - - 88,818
Issuance of common stock 25 318 - - - 318
Net income - - 12,477 - - 12,477
Unrealized gain on investment securities available
for sale, net - - - 19 - 19
Common stock repurchased (152) - - - (2,284) (2,284)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,697 $ 53,163 $ 48,450 $ 19 $ (2,284) $ 99,348
===========================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
37
<PAGE> 38
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,477 $ 10,024 $ (2,403)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,163 601 86
Provisions for estimated credit losses and valuation
allowance 3,650 5,571 17,872
Provision for estimated losses on other real estate
owned 216 1,038 4,169
Gain on sales of other real estate owned and real estate
loans (9) (424) (287)
Increase in interest receivable (505) (546) (615)
Provision (benefit) for deferred income taxes (590) (304) 1,099
Decrease (increase) in other assets 1,690 (201) (1,136)
Increase (decrease) in accounts payable and other
liabilities 3,459 2,101 (758)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,551 17,860 18,027
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans receivable, net (158,555) (219,532) (77,232)
Purchases of investment securities available for sale (32,995) (44,500) -
Proceeds from the maturity of investment securities
available for sale 34,299 8,313 -
Purchases of investment securities held to maturity - - (23,593)
Proceeds from the maturity of investment securities held
to maturity - 14,062 22,933
(Increase) decrease in stock in Federal Home Loan Bank (3,570) 4,013 (9,362)
Purchase of mortgage-backed securities - - (42,280)
Repayment of principal on mortgage-backed securities 6,637 10,199 -
Proceeds from sale of other real estate owned 3,690 7,385 12,565
Proceeds from sale of real estate loans 2,047 1,324 19,005
Proceeds from sale of automobile finance contracts - 50,050 -
Cash paid for capital expenditures (1,338) (329) (317)
Other, net 9 13 105
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (149,776) (169,002) (98,176)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance 318 22,602 14,892
Cash paid to acquire treasury stock (2,284) - -
Net increase in deposit accounts 173,477 175,543 46,236
Federal funds purchased - - (10,000)
Increase (decrease) in Federal Home Loan Bank advances 18,000 (10,500) 41,300
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 189,511 187,645 92,428
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 61,286 36,503 12,279
Cash and cash equivalents at beginning of period 62,599 26,096 13,817
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 123,885 $ 62,599 $ 26,096
====================================================================================================
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 42,768 $ 34,082 $ 29,089
Cash paid during the period for income taxes $ 7,500 $ 6,509 $ 42
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 2,427 $ 7,313 $ 11,901
Loans to facilitate the sale of other real estate owned $ 1,379 $ 3,570 $ 10,101
</TABLE>
See accompanying notes to the consolidated financial statements.
38
<PAGE> 39
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- ITLA Capital Corporation and Subsidiaries ("the Company")
is primarily engaged in the origination of loans secured by income producing
real estate. Through its wholly-owned subsidiary, Imperial Thrift and Loan
Association ("Imperial" or "the Association"), the Company accepts deposits
insured by the Federal Deposit Insurance Corporation ("FDIC") which are used
primarily to fund the investment in variable rate commercial real estate loans.
Through its other 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 savings branches and
seven loan production offices in California, and one loan production office in
both Nevada and Colorado.
Funding was formed in October 1996 and commenced operations in 1997.
Funding operates a national network of sales representatives from its Encino,
California headquarters.
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 to the presentation in the current period. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
INVESTMENT AND MORTGAGE-BACKED SECURITIES -- 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. 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 maturity.
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 non-accrual status, all
previously accrued but uncollected interest is reversed against current period
operating results. Subsequent cash collections on non-accrual 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 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 most recent 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, a valuation allowance is recognized 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, among other factors, economic and social conditions,
estimated real estate collateral value and cash flow, and the financial strength
and commitment of the borrower or guarantors, where appropriate. Additionally,
an estimate for credit loss is calculated for the remaining portion of the
portfolio giving consideration to the Company's historical loss experience in
the portfolio, adjusted, as appropriate, for the estimated effects of current
economic conditions and changes in the composition of the loan portfolio over
time. 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 non-interest expense.
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.
39
<PAGE> 40
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 -- The Financial Accounting Standards Board
("FASB") has issued SFAS No. 128 -- "Earnings Per Share". This statement is
effective for both interim and annual reporting periods ending after December
15, 1997. SFAS No. 128 replaces Primary Earnings Per Share ("Primary EPS") with
Basic Earnings Per Share ("Basic EPS"), and Fully Diluted Earnings Per Share
("Fully Diluted EPS") with Diluted Earnings Per Share ("Diluted EPS"). Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed in a similar manner as Fully Diluted EPS, and
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that shared in the earnings of the
Company. All periods presented in the accompanying consolidated financial
statements have been restated to conform to SFAS No. 128.
STOCK-BASED COMPENSATION -- The Company accounts for its stock-based
compensation plan in accordance with Accounting Principles Board Opinion ("APB")
No. 25 -- "Accounting for Stock Issued to Employees". Under APB No. 25, no
compensation expense is recognized for a stock option grant if the exercise
price of the stock option at measurement date is equal to or greater than the
fair market value of the common stock on the date of grant. See Note 9 --
Benefit Plans.
RECENT ACCOUNTING PRONOUNCEMENT -- In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. SFAS No. 130 requires that an entity classify
other comprehensive income by its nature on the face of the statement of income,
or disclose it in the notes to the financial statements, and display the
accumulated balance of other comprehensive income separately in the equity
section of the balance sheet. SFAS No. 130 will become effective for financial
statements of the Company in 1998. The adoption of this pronouncement will not
be material to the presentation of the financial statements or the financial
results of the Company.
NOTE 2 -- INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and approximate fair value of investment securities and
mortgage-backed securities as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
- ---------------------------------------------------------------------------------------------------------------
AMORTIZED APPROXIMATE
COST FAIR VALUE GAINS LOSSES
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Investment securities available for sale:
U.S. government agency securities $ 35,056 $ 35,087 $ 31 $ -
Certificates of deposit 194 194 - -
- ---------------------------------------------------------------------------------------------------------------
Total investment securities available for sale $ 35,250 $ 35,281 $ 31 $ -
===============================================================================================================
Mortgage-backed securities held to maturity $ 25,132 $ 25,063 $ 14 $ 83
===============================================================================================================
DECEMBER 31, 1996:
Investment securities available for sale:
U.S. government agency securities $ 35,515 $ 35,515 $ - $ -
Certificates of deposit 1,059 1,059 - -
- ---------------------------------------------------------------------------------------------------------------
Total investment securities available for sale $ 36,574 $ 36,574 $ - $ -
===============================================================================================================
Mortgage-backed securities held to maturity $ 31,870 $ 31,319 $ 11 $ 562
===============================================================================================================
</TABLE>
The amortized cost and approximate fair value of investment securities
available for sale, by contractual maturity, at December 31, 1997 are shown
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
AMORTIZED APPROXIMATE
COST FAIR VALUE
- ----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 10,244 $ 10,244
Due from one to five years 25,006 25,037
- ----------------------------------------------------------------------------------------
$ 35,250 $ 35,281
========================================================================================
</TABLE>
The remaining contractual maturity and estimated weighted-average life of
the mortgage-backed securities was approximately 19.0 and 3.6 years,
respectively, at December 31, 1997. The weighted-average life of mortgage-backed
securities differs from the contractual maturity due to anticipated principal
prepayments.
40
<PAGE> 41
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
At December 31, 1997, approximately $35,182,000 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 1997 and 1996, there were no transfers from the held to maturity
portfolio and no securities were sold prior to their maturity or call date.
NOTE 3 -- LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 727,479 $ 644,079
Construction 39,668 22,498
- --------------------------------------------------------------------------------------
767,147 666,577
Deferred loan origination fees and other unearned income (4,116) (5,856)
- --------------------------------------------------------------------------------------
763,031 660,721
Allowance for credit losses (12,178) (10,885)
- --------------------------------------------------------------------------------------
$ 750,853 $ 649,836
======================================================================================
LOANS HELD FOR SALE -- AT LOWER OF COST OR FAIR MARKET
VALUE:
Real estate $ 50,786 $ -
Automobile finance contracts - 1,291
Direct financing leases - 44
- --------------------------------------------------------------------------------------
50,786 1,335
Deferred loan origination fees and other unearned income (242) -
Unearned income on automobile finance contracts - (205)
- --------------------------------------------------------------------------------------
$ 50,544 $ 1,130
======================================================================================
</TABLE>
At December 31, 1997, approximately 94.2%, 4.9% and 0.9% of the Company's
loans collateralized by real estate are secured by income producing properties,
properties under development, and residential one-to-four properties,
respectively. Approximately 83.0% of the Company's loans secured by real estate
were collateralized by properties located in California.
At December 31, 1997, approximately $178,020,000 of loans receivable were
pledged to secure a line of credit at the FHLB. See Note 8 to the consolidated
financial statements.
The following is the activity in the allowance for credit losses for the
years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 10,885 $ 8,105 $ 11,076
Provision for estimated credit losses 3,300 4,871 13,098
Charge-offs:
Loans secured by real estate (2,124) (2,237) (9,491)
Automobile finance contracts, direct financing leases and
other - - (7,294)
- --------------------------------------------------------------------------------------------------
Total charge-offs (2,124) (2,237) (16,785)
- --------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 117 146 45
Automobile finance contracts, direct financing leases and
other - - 671
- --------------------------------------------------------------------------------------------------
Total recoveries 117 146 716
- --------------------------------------------------------------------------------------------------
Net charge-offs (2,007) (2,091) (16,069)
- --------------------------------------------------------------------------------------------------
Balance at end of year $ 12,178 $ 10,885 $ 8,105
==================================================================================================
</TABLE>
As of December 31, 1997, the accrual of income had been suspended on
approximately $8,332,000 of loans secured by real estate. At December 31, 1996,
the accrual of income had been suspended on approximately $7,205,000 of loans
secured by real estate and $783,000 of other loans. The interest income that was
41
<PAGE> 42
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
contractually due on loans that were on nonaccrual status that was not
recognized during the years ended December 31, 1997, 1996 and 1995 was
approximately $384,000, $366,000 and $501,000, respectively.
As of December 31, 1997 and 1996, restructured loans totaled $1,574,000 and
$2,106,000, respectively. There were no related commitments to lend additional
funds on restructured loans. For the years ended December 31, 1997, 1996 and
1995, $192,000, $394,000 and $800,000, respectively, of gross interest income
would have been recorded had the loans been current in accordance with their
original terms compared to $156,000, $328,000 and $667,000, respectively, of
interest income which was included in net income for the same periods. The
average yield on restructured loans was 9.2% at December 31, 1997.
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>
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Valuation allowance required $ 2,933 $ 629 $ 3,627 $ 778
No valuation allowance required - - 699 -
- ----------------------------------------------------------------------------------------------------------------------
Total impaired loans $ 2,933 $ 629 $ 4,326 $ 778
======================================================================================================================
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1997, 1996 and 1995 was $3,656,000, $3,808,000 and $12,196,000,
respectively. Interest income recognized on impaired loans for the years ended
December 31, 1997, 1996 and 1995 was $129,000, $413,000 and $551,000,
respectively.
Loans having carrying values of $2,427,000 and $7,313,000 were transferred
to OREO in 1997 and 1996, respectively.
NOTE 4 -- OTHER REAL ESTATE OWNED
Other real estate owned was stated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DECEMBER 31
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for sale $ 4,678 $ 6,532
Less valuation allowance (732) (1,116)
- ----------------------------------------------------------------------------------
$ 3,946 $ 5,416
==================================================================================
</TABLE>
The activity in the valuation allowance for other real estate owned was as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 1,116 $ 2,613 $ 3,603
Provision for estimated losses 216 1,038 4,169
Charges upon sale of other real estate owned (600) (2,535) (5,159)
- -----------------------------------------------------------------------------------------------
$ 732 $ 1,116 $ 2,613
===============================================================================================
</TABLE>
42
<PAGE> 43
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment $ 4,322 $ 3,772
Leasehold improvements 2,976 2,427
Automobiles 267 98
- ----------------------------------------------------------------------------------
7,565 6,297
Less accumulated depreciation and amortization (4,396) (3,687)
- ----------------------------------------------------------------------------------
$ 3,169 $ 2,610
==================================================================================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 was $771,000, $715,000 and $789,000, respectively.
NOTE 6 -- DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Money market savings and passbook accounts $ 76,786 $ 61,797
Time certificates under $100,000 522,014 511,908
Time certificates over $100,000 245,013 96,631
- --------------------------------------------------------------------------------------
$ 843,813 $ 670,336
======================================================================================
</TABLE>
Money market savings and passbook accounts have no contractual maturity and
pay interest at rates ranging from 1.00% to 7.59% 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
8.04% per annum.
Brokered deposits totaled $67,002,000 at December 31, 1997. There were no
brokered deposits outstanding at December 31, 1996. Interest expense on time
certificates over $100,000 for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $3,775,000, $1,881,000 and $1,193,000, 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, 1997, the
Association's deposits are 8.7 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, 1997, the contractual maturities of time certificate
accounts were as follows:
<TABLE>
<CAPTION>
- -------------------------
YEAR OF
MATURITY AMOUNT
- -------------------------
(IN THOUSANDS)
<S> <C>
1998 $ 713,556
1999 43,287
2000 7,288
2001 1,362
2002 1,534
- -------------------------
$ 767,027
=========================
</TABLE>
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, 1997.
43
<PAGE> 44
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 -- FHLB ADVANCES
FHLB advances represent collateralized obligations with the FHLB of San
Francisco. The outstanding balance of these advances was $61,500,000 and
$43,500,000 at December 31, 1997 and 1996, respectively. The FHLB advances will
mature in 1998.
The Company has pledged loans receivable secured by real estate with a
carrying value of $178,020,000, investment securities available for sale with a
carrying value of $10,050,000 and mortgage-backed securities with a carrying
value of $25,132,000, for a total of $213,202,000 of assets pledged as
collateral for this borrowing facility. The total borrowing capacity available
from the collateral that has been pledged is approximately $99,783,000, of which
$61,500,000 has been utilized as of December 31, 1997.
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
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum month-end balance $ 61,500 $ 54,000
Weighted-average daily balance $ 53,714 $ 53,604
Average rates paid 5.78% 5.52%
Average rates on balance at year-end 5.91% 5.52%
Balance at year-end $ 61,500 $ 43,500
</TABLE>
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 15% 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
$174,000, $101,000 and $128,000 in 1997, 1996 and 1995, respectively.
The Company also has a deferred compensation plan designed to provide
additional retirement benefits for certain officers and key employees who cannot
take full advantage of the Savings Plan. Costs associated with this deferred
compensation plans amounted to $34,000, $7,000 and $25,000 in 1997, 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, 1997, the
Company had granted an aggregate of 593,916 options under the Stock Plan, net of
forfeitures totaling 135,084, 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 and weighted-average exercise prices of options for
each of the following groups of options, for the periods indicated, are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICES
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding at the Beginning of the Year 500,500 509,500 $ 10.08 $ 10.04
Options Outstanding at the End of the Year 569,500 500,500 $ 11.39 $ 10.08
Options Exercisable at the End of Year 301,917 154,917 $ 10.49 $ 10.13
Options Granted During the Year 120,500 95,000 $ 14.50 $ 14.26
Options Exercised During the Year 19,416 4,500 $ 11.79 $ 10.25
Options Forfeited During the Year 32,084 99,500 $ 14.07 $ 10.13
</TABLE>
44
<PAGE> 45
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS FOR OPTION GRANTS
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend Yield 0% 0% 0%
Expected Volatility 20.3% 27.5% 27.6%
Risk-Free Interest Rates 6.24% to 6.49% 6.32% to 6.83% 5.65% to 6.01%
Expected Lives Seven Years Seven Years Seven Years
Weighted-Average Fair Value of Options Granted $ 5.87 $ 6.61 $ 4.45
</TABLE>
The Company accounts for the Stock Plan under APB No. 25 and, accordingly,
no compensation costs have been recognized in the accompanying consolidated
statements of operations for 1997, 1996 or 1995. If compensation costs for the
Stock Plan had been determined under SFAS No. 123, pro forma net income would
have been $11,828,000 and $9,455,000 and Diluted Earnings Per Share would have
been $1.49 and $1.28 for 1997 and 1996, respectively, and pro forma net loss and
Diluted Loss Per Share would have been $(2,498,000) and $(.54), respectively,
for 1995.
NOTE 10 -- INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Allowance for credit losses $ 4,671 $ 3,383
Accrued expenses 1,285 585
State income taxes 841 342
Other real estate owned expenses 198 249
Allowance for losses on other real estate owned 425 165
- ----------------------------------------------------------------------------------
Total deferred tax assets 7,420 4,724
- ----------------------------------------------------------------------------------
Components of the deferred tax liability:
Deferred loan origination costs 2,522 568
FHLB stock dividends 634 308
Other 74 235
- ----------------------------------------------------------------------------------
Total deferred tax liabilities 3,230 1,111
- ----------------------------------------------------------------------------------
Net deferred tax asset $ 4,190 $ 3,613
==================================================================================
</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.
45
<PAGE> 46
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
A summary of the provision (benefit) for income taxes for the years ended
December 31 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 7,183 $ 6,043 $ (2,813)
State 2,062 681 (246)
- --------------------------------------------------------------------------------------------------
9,245 6,724 (3,059)
- --------------------------------------------------------------------------------------------------
Deferred:
Federal (437) (1,036) 1,589
State (153) 732 (490)
- --------------------------------------------------------------------------------------------------
(590) (304) 1,099
- --------------------------------------------------------------------------------------------------
$ 8,655 $ 6,420 $ (1,960)
==================================================================================================
</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
- ----------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% (34.0%)
State income tax, net of federal income tax benefit 7.0% 7.5% (7.5%)
State income tax LARZ credits and other benefits (1.0%) (3.5%) (3.4%)
- ----------------------------------------------------------------------------------------------
41.0% 39.0% (44.9%)
==============================================================================================
</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 $43,219,000 and $34,572,000 at December 31, 1997 and 1996,
respectively.
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, 1997 are approximately
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(IN THOUSANDS)
- ----------------------------------------------------------------------------
<S> <C>
1998 $ 1,068
1999 968
2000 919
2001 952
2002 858
Thereafter 3,447
- ----------------------------------------------------------------------------
$ 8,212
============================================================================
</TABLE>
46
<PAGE> 47
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 $1,588,000,
$1,134,000 and $1,373,000 in 1997, 1996 and 1995, respectively. The Company
received sublease income of $78,000 and $116,000 in 1996 and 1995, respectively.
There were no subleases in 1997.
CONTINGENCIES
The Company is subject to various pending legal actions which arise in the
normal course of business. The Company maintains reserves for losses from legal
actions which are both probable and estimable. Although the amount of the
ultimate exposure, if any, cannot be determined at this time, in management's
opinion, based upon advice of counsel, the disposition of claims currently
pending will not have a material adverse effect on the Company's financial
position or results of operations.
NOTE 13 -- REGULATORY REQUIREMENTS
The Association is subject to supervision and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Department of Financial
Institutions ("DFI") of the State of California under the provisions of the
California Industrial Loan Law. These provisions authorize the 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. Prior to July 1, 1997, the
Association was regulated by the California Department of Corporations ("CDOC").
The Association is also subject to various capital requirements
administered by the FDIC. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary action by
regulators that, if undertaken, could have a direct material effect on the
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
following table) of Total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average total assets (leverage ratio). Management believes, as
of December 31, 1997, that the Association meets all applicable capital adequacy
requirements.
As of December 31, 1997, 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 1 risk-based, and Tier
1 leverage ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have changed the
Association's category.
The Association's actual regulatory capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MINIMUM CAPITAL REQUIRED
REQUIREMENT FOR TO MAINTAIN
CAPITAL ADEQUACY "WELL CAPITALIZED"
ACTUAL PURPOSES DESIGNATION
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total capital (to risk-weighted assets) $ 107,875 12.67% $ 68,156 8.00% $ 85,195 10.00%
Tier 1 capital (to risk-weighted assets) $ 97,207 11.41% $ 34,078 4.00% $ 51,117 6.00%
Core capital (to average total assets) $ 97,207 9.61% $ 40,458 4.00% $ 50,572 5.00%
AS OF DECEMBER 31, 1996
Total capital (to risk-weighted assets) $ 94,791 13.25% $ 57,236 8.00% $ 71,545 10.00%
Tier 1 capital (to risk-weighted assets) $ 85,843 12.00% $ 28,618 4.00% $ 42,927 6.00%
Core capital (to average total assets) $ 85,843 10.64% $ 32,260 4.00% $ 40,325 5.00%
</TABLE>
Imperial operated under a Memorandum of Understanding ("MOU") with the FDIC
and CDOC, 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 1993 until the first quarter of 1996, when the MOU was terminated.
47
<PAGE> 48
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 -- EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
in the calculation of Basic EPS and Diluted EPS.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------
WEIGHTED-
NET AVERAGE PER
INCOME SHARES SHARE
(LOSS) OUTSTANDING AMOUNT
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
1997
Basic Earnings Per Share $ 12,477 7,747,788 $ 1.61
Effect of Dilutive Stock Options - 193,132 -
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 12,477 7,940,920 $ 1.57
=================================================================================================================
1996
Basic Earnings Per Share $ 10,024 7,257,714 $ 1.38
Effect of Dilutive Stock Options - 135,655 -
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 10,024 7,393,369 $ 1.36
=================================================================================================================
1995
Basic Loss Per Share $ (2,403) 4,629,260 $ (0.52)
Effect of Dilutive Stock Options - 16,932 -
- -----------------------------------------------------------------------------------------------------------------
Diluted Loss Per Share $ (2,403) 4,646,192 $ (0.52)
=================================================================================================================
</TABLE>
NOTE 15 -- RESTATEMENT OF PREVIOUSLY REPORTED INFORMATION
During 1997, the Company discovered that certain offering costs related to
the 1995 initial public offering should have been recorded during the year of
the offering. Accordingly, the 1995 financial statements have been restated to
include the effect of these costs, which reduced the previously reported
increase in contributed capital in 1995, relating to the issuance of common
stock in that year, by $500,000 from $15,392,000 to $14,892,000. The related
balances in the Company's shareholders' equity for subsequent periods are
accordingly restated by this same amount.
NOTE 16 -- 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. Fair value estimates
are based on judgments regarding credit risk, investor expectations of future
economic conditions, normal cost of administration of these instruments and
other risk characteristics, including interest rate risk and prepayment risk.
These estimates are subjective in nature, involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. The fair value
estimates presented do not include the value of anticipated future business and
the value of assets and liabilities that are not considered financial
instruments.
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate value:
Cash and Cash Equivalents -- The carrying values reported in the balance
sheet approximate fair values due to the short-term nature of the assets.
Investment and Mortgage-Backed Securities -- Fair values are based on
bid prices and quotations published and/or received from established
securities dealers.
FHLB Stock -- Fair values are based on bid prices quoted from the FHLB.
Loans Held for Investment -- 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.
Loans Held for Sale -- The fair value is based on bid prices received
from potential buyers.
Deposit Accounts -- The fair value of money market savings and passbook
accounts is estimated to be the amount payable on demand. The fair values
for time certificates, both over and under $100,000, are estimated by
discounting the expected cash flows at current market rates over expected
maturities.
FHLB Advances -- The fair value of FHLB advances is estimated by
discounting the expected cash flows at current market rates over contractual
maturities.
48
<PAGE> 49
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 123,885 $ 123,885 $ 62,599 $ 62,599
Investment securities 35,281 35,281 36,574 36,574
Stock in FHLB 11,919 11,919 8,349 8,349
Mortgage-backed securities 25,132 25,063 31,870 31,319
Loans held for sale, net 50,544 51,294 1,130 1,130
Loans held for investment 767,147 770,740 666,577 671,366
Deferred loan fees and other unearned income (4,116) - (5,856) -
Allowance for credit losses (12,178) - (10,885) -
- --------------------------------------------------------------------------------------------------------------------------
Net loans receivable 801,397 822,034 650,966 672,496
- --------------------------------------------------------------------------------------------------------------------------
$ 997,614 $ 1,018,182 $ 790,358 $ 811,337
==========================================================================================================================
Financial liabilities:
Deposits $ 843,813 $ 845,188 $ 670,336 $ 671,040
FHLB advances 61,500 61,532 43,500 43,500
- --------------------------------------------------------------------------------------------------------------------------
$ 905,313 $ 906,720 $ 713,836 $ 714,540
==========================================================================================================================
</TABLE>
NOTE 17 -- PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
DECEMBER 31
- -------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 704 $ 1,363
Investment in Imperial Thrift and Loan Association 97,561 86,286
Investment in ITLA Funding Corporation 408 1,506
Other assets 2,352 163
- -------------------------------------------------------------------------------------
Total assets $ 101,025 $ 89,318
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 1,677 $ -
Shareholders' equity 99,348 89,318
- -------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 101,025 $ 89,318
=====================================================================================
</TABLE>
49
<PAGE> 50
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DECEMBER 31
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Interest income $ 95 $ 9
General and administrative expenses 706 29
- ------------------------------------------------------------------------------------
Loss before income tax benefit and equity in undistributed
income of subsidiaries (611) (20)
Income tax benefit (440) (8)
- ------------------------------------------------------------------------------------
Loss before equity in undistributed net income of
subsidiaries (171) (12)
Equity in undistributed net income of subsidiaries 12,648 10,036
- ------------------------------------------------------------------------------------
Net income $ 12,477 $ 10,024
====================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
DECEMBER 31
- -----------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 12,477 $ 10,024
Adjustments to net income:
Equity in undistributed net income of subsidiaries (12,648) (10,036)
Increase in other assets (3,089) (163)
Increase in liabilities 1,567 -
- -----------------------------------------------------------------------------------------
Net cash used in operating activities (1,693) (175)
- -----------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Dividend received from Imperial Thrift and Loan
Association 3,000 3,000
Capital contribution to ITLA Funding Corporation - (1,500)
- -----------------------------------------------------------------------------------------
Net cash provided by investing activities 3,000 1,500
- -----------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from common stock issued through exercise of
employee stock options 318 38
Cash paid to acquire treasury stock (2,284) -
- -----------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,966) 38
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (659) 1,363
Cash and cash equivalents at beginning of period 1,363 -
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 704 $ 1,363
=========================================================================================
</TABLE>
50
<PAGE> 51
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George W. Haligowski 43 Chairman of the Board, President and Chief Executive
Officer of ITLA Capital; Chairman of the Board and Chief
Executive Officer of Imperial; Chairman of the Board of Funding
Michael A. Sicuro 39 Managing Director and Chief Financial Officer of ITLA Capital;
Director and Chief Financial Officer of Funding
Timothy M. Doyle 41 Managing Director and Chief Administrative Officer of ITLA Capital
Norval L. Bruce 56 Director of ITLA Capital; Director, President and Chief Operating
Officer of Imperial; Director of Funding
George J. Guarini 44 Director, President and Chief Executive Officer of Funding
Steven C. Romelt 48 Senior Vice President and Chief Lending Officer of Imperial
Anthony A. Rusnak 34 First Vice President, General Counsel and Corporate Secretary
</TABLE>
George W. Haligowski has served as Chairman of the Board and Chief
Executive Officer of the Company since inception and of Imperial since 1992, and
was President of Imperial from 1992 until October 1997. From 1990 to the
present, he has also served as President, Chief Executive Officer and Principal
of Halivest International, Ltd., an international finance and asset management
company. He was previously employed as a Vice President by Shearson Lehman
Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to 1988), and by
Avco Financial Services as Regional Director of its Japanese branch operations
(1976 to 1981), as Training Coordinator for Avco Thrift and Loan (1976) and as a
Branch Manager (1974 to 1976).
Michael A. Sicuro has served as Managing Director and Chief Financial
Officer of the Company since inception and Senior Vice President and Chief
Financial Officer of Imperial from June 1996 through December 1997. 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 since January 1997, and was also the
Senior Vice President - Chief Administrative Officer of Imperial from January
1997 to December 1997 and the First Vice President - Director of Management
Audit of Imperial from May 1996 to December 1996. Before joining Imperial, Mr.
Doyle was the Controller and Director of Operations at Northeastern
51
<PAGE> 52
Plastics from 1995 to 1996; Assistant Controller of Alpha Wire Corporation from
1992 to 1994; and Vice President and Chief Financial Officer of Halivest
International, Ltd. from 1989 to 1991. From 1982 to 1988, Mr. Doyle was the
Corporate Controller of the Shepaug Corporation.
Norval L. Bruce has served as President and Chief Operating Officer of
Imperial since October 1997, and previously was the Executive Vice President and
Chief Credit Officer of Imperial since 1990. Mr. Bruce is also a director of the
Company, Imperial and Funding. 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 from May 1996 to January 1997, and previously held other lending
positions with Imperial from 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 in a variety of management positions.
Steven C. Romelt has served as Senior Vice President - Chief Lending
Officer of Imperial since January 1997 and as 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.
Anthony A. Rusnak has served as First Vice President, General Counsel
and Corporate Secretary of the Company since November 1997. Prior to joining
the Company, Mr. Rusnak was in private practice for seven years representing
financial institutions, business, corporations and individuals in business,
and real estate transactions and litigation. Previously, Mr. Rusnak worked
for law firms in the San Diego area, as well as San Diego Gas and Electric's
in-house counsel.
The directors of the registrant, excluding Mr. Haligowski and Mr. Bruce,
are identified below.
Jeffrey L. Lipscomb, age 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 49, 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 63, 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 61, 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.
52
<PAGE> 53
EMPLOYEES
As of December 31, 1997, the Company had approximately 165 full-time
equivalent employees. Management believes that its relations with employees are
satisfactory. The Company is not subject to any collective bargaining
agreements.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires 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, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
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 $100,000 for the year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ------------ ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (9) (#) (2) ($)
-------------------------- ----- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
George W. Haligowski 1997 $299,250 $374,050 20,000 $ 59,716(3)
Chairman of the Board, President 1996 $293,316 $ 81,545(1) -- $ 65,904(3)
and Chief Executive Officer 1995 $174,058 $136,888 285,000 $ 70,572(3)
George J. Guarini 1997 $177,625 $ 88,200 -- $ 6,386(4)
President and Chief Executive 1996 $119,334 $ -- -- $ 11,495(4)
Officer of Funding 1995 $ 89,796 $ 8,500 40,000 $ 12,445(4)
Michael A. Sicuro 1997 $156,188 $ 62,327 15,000 $ 5,933(5)
Managing Director and Chief 1996 $ 68,521(8) $ -- 25,000 $ 7,778(5)
Financial Officer of ITLA Capital 1995 $ -- $ -- -- $ --
Norval L. Bruce 1997 $131,670 $ 75,600 5,000 $ 7,780(6)
President and Chief Operating 1996 $123,500 $ -- -- $ 8,277(6)
Officer of Imperial 1995 $108,125 $ 13,500 40,000 $ 15,168(6)
Steven C. Romelt 1997 $114,583 $ 9,508 25,000 $ 12,997(7)
Senior Vice President and Chief 1996 $ 16,346(8) $ -- -- $ 1,558(7)
Lending Officer of Imperial 1995 $ 17,010(8) $ 10,000 -- $ 1,875(7)
</TABLE>
- ----------
(1) $55,000 of the 1996 bonus was deferred at the election of the named
officer under the Company's Nonqualified Deferred Compensation Plan.
(2) Options were granted on various dates and vest one-third on each of the
three subsequent anniversary dates of issuance.
(3) Consists of (a) $4,288 in auto related benefits, (b) $26,600 in
supplemental housing payments, (c) $7,100 in life insurance premiums,
(d) $4,800 in employer contributions to the Company's 401(k) plan and
(e) $16,928 in preferential interest on employee savings accounts in
1997. The respective amounts were $21,000, $22,850, $6,950, $4,500 and
$10,604 in 1996 and $19,321, $22,850, $7,154, $6,682 and $14,565 in
1995.
(4) Consists of (a) $1,013 of auto related benefits, (b) $4,800 in employer
contributions to the Company's 401(k) plan and (c) $573 of preferential
interest on employee savings accounts in 1997. The respective amounts
were $10,200, $1,295 and $0 in 1996 and $9,600, $2,845 and $0 in 1995.
(5) Consists of $1,133 of auto related benefits and $4,800 in employer
contributions to the Company's 401(k) plan in 1997. Consists of (a)
$5,600 of auto related benefits, (b) $2,046 in employer contributions to
the Company's 401(k) plan and (c) $132 of life insurance benefits in
1996.
(6) Consists of (a) $2,296 in auto related benefits, (b) $144 in life
insurance premiums, (c) $4,800 in employer contributions to the
Company's 401(k) plan and (d) $540 in preferential interest on employee
savings accounts in 1997. The respective amounts were $3,448, $576,
$3,705 and $548 in 1996 and $8,750, $576, $5,492 and $350 in 1995.
(7) Consists of (a) $9,000 in auto related benefits, (b) $4 in life
insurance premiums and (c) $3,993 in employer contributions to the
Company's 401(k) plan in 1997. Consists of (a) $1,500 in auto related
benefits and (b) $58 in life insurance premiums in 1996, and $1,875 of
auto related benefits in 1995.
(8) Partial year.
(9) Includes Company stock issued under the Recognition and Retention Plan
in 1997 at a price of $14.50 per share.
53
<PAGE> 54
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, Guarini and
Sicuro. 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 $350,000 (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 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, Guarini and Sicuro is currently $175,000, $179,000 and $169,000,
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 up to 15% of 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%
54
<PAGE> 55
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 40l(k) Plan are made upon termination
of service in a lump sum or in annual installments over a period of years at the
election of the participant with the right to take a lump sum payment at any
time during such period.
Nonqualified Deferred Compensation Plans. 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 has
established a Rabbi Trust with a bank which holds the contributions to the
Supplemental Plan and Deferral Plan, for the purpose of providing the benefits
promised under the terms of the plans. Participants only have the rights of
unsecured creditors with respect to the Rabbi Trust 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, as described below. The Committee
consists of two or more nonemployee directors of the Company, and has full and
final authority to select the employees to receive awards and to grant such
awards. Subject to provisions of the Stock Option Plan, the Committee has a wide
degree of flexibility in determining the terms and conditions of awards and the
number of shares to be issued pursuant thereto. The expenses of administering
the Stock Option Plan are borne by 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
55
<PAGE> 56
to the Board of Directors, and options to purchase an additional 1,000
shares are granted annually thereafter, provided such individuals continue to
serve as directors.
Awards may not be granted under the Stock Option Plan after the tenth
anniversary of the adoption of the Stock Option Plan. The Company has granted an
aggregate of 929,000 options under the Stock Option Plan, of which 350,000 have
been granted to Mr. Haligowski, 75,000, 45,000, 65,000 and 40,000 have been
granted to Messrs. Bruce, Guarini, Sicuro and Romelt, respectively, 24,000 have
been granted to nonemployee directors, and 345,000 have been granted to other
employees, of which 23,416 have been exercised and 136,084 have been forfeited.
The exercise price per share of the options so granted ranges from $10.00 to
$18.00 per share and will generally vest 33-1/3% per year, beginning with the
first anniversary of the date of the grant.
Recognition and Retention Plan. 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
maintain an "adequately capitalized" designation under the FDIC regulations and
fails to achieve a return on average assets of at least 50 basis points for the
fiscal year. 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. 6,068 shares were awarded under the RRP in 1997.
DIRECTORS COMPENSATION
Directors Fees. Each nonemployee director was paid a monthly fee during
1997 of $1,250 for serving on the Company's Board of Directors. Each nonemployee
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 nonemployee directors in the
form of Stock Units ("Stock Units") in a Stock Unit account ("Stock Unit
Account"). Directors may elect to have up to 100% of their fees converted into
stock units.
For dividends paid with respect to the Company's common stock, each
nonemployee 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 nonemployee director's Stock Unit Account shall be settled by delivering to
the nonemployee director (or his beneficiary) the number of shares of Company
common stock equal to the number of whole Stock Units then credited to the
nonemployee director's Stock Unit Account, in either (i) a lump sum or (ii)
substantially equal annual installments over a period not to exceed ten years.
Directors Stock Option Plans. Directors are also eligible to receive
stock option grants as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Compensation Committee was comprised of Directors
Lipscomb and Oribe.
56
<PAGE> 57
OPTION GRANTS FOR 1997
The following table sets forth certain information regarding stock
options granted pursuant to the Stock Option Plan for the named executive
officers in 1997. No stock appreciation rights have been granted pursuant to the
Stock Option Plan.
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES OR BASE -----------------------
GRANTED IN FISCAL PRICE EXPIRATION 5% 10%
NAME (#) YEAR ($/SHARE) DATE ($) ($)
---- ---------- ----------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski 20,000 16.6% $ 14.50 1/23/07 $182,379 $462,185
Michael A. Sicuro 15,000 12.4% $ 14.50 1/23/07 $136,785 $346,639
Norval L. Bruce 5,000 4.1% $ 14.50 1/23/07 $ 45,595 $115,546
Steven C. Romelt 25,000 20.7% $ 14.50 1/23/07 $227,974 $577,732
</TABLE>
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1997 held by the named executive
officers.
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
ON VALUE ------------------------------ -------------------------------
EXERCISE REALIZED (#) ($)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski -- N/A 190,000 115,000 $1,757,500 $ 973,750
George J. Guarini -- N/A 26,667 13,333 $ 246,667 $ 123,333
Norval L. Bruce -- N/A 26,667 18,333 $ 246,667 $ 147,083
Michael A. Sicuro -- N/A 8,333 31,667 $ 40,625 $ 152,500
Steven C. Romelt -- N/A -- 25,000 $ -- $ 118,750
</TABLE>
- ----------
(1) The difference between the aggregate option exercise price and the
closing price of $19.25 of the underlying shares at December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 24, 1998, the Company had 7,697,984 shares of common stock
outstanding.
57
<PAGE> 58
The following table sets forth, as of March 24, 1998, 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
BENEFICIALLY OF
BENEFICIAL OWNER OWNED CLASS
---------------- ------------ -------
<S> <C> <C>
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663 811,300(1) 10.54%
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109 776,600(2) 10.09%
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078 709,000(3) 9.21%
FBR Ashton, Limited Partnership
1001 19th Street, North, 18th Floor
Arlington, Virginia 22209 467,670(4) 6.08%
Wanger Asset Management, L.P.
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606 446,000(5) 5.79%
Corbyn Investment Management, Inc.
2330 West Joppa Road, Suite 108
Lutherville, Maryland 21093 410,912(6) 5.34%
</TABLE>
- ----------
(1) As reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a
Schedule 13G dated on or about January 27, 1998 and filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Thomson reported sole voting power as to 496,300
shares, sole investment power as to 811,300 shares, shared voting power
as to 9,800 shares, and shared investment power as to none of the
811,300 shares covered by the report.
(2) As reported by Wellington Management Company, LLP ("Wellington") on a
Schedule 13G dated on or about January 14, 1998 and filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Wellington reported sole voting and investment powers
as to no shares, shared voting power as to 466,200 shares, and shared
investment power as to 776,600 of the 776,600 shares covered by the
report.
(3) As reported by Franklin Resources, Inc. ("Franklin") on a Schedule 13G
dated on or about January 30, 1998 and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended. Franklin reported sole voting and investment powers as to
709,000 shares, and shared voting and investment powers as to none of
the 709,000 shares covered by the report.
(4) As reported by FBR Ashton Limited Partnership ("FBR") on a Schedule 13D
dated on or about December 23, 1997 and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended. FBR reported sole voting power as to 395,250 shares, sole
investment power as to 395,250 shares, shared voting power as to
467,670 shares and shared investment power as to 467,670 of the 467,670
shares covered by the report.
(5) As reported by Wanger Asset Management, L.P. ("Wanger") on a Schedule
13G dated on or about February 6, 1998 and filed with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as
amended. Wanger reported sole voting and investment powers as to no
shares, and shared voting and investment powers as to 446,000 of the
446,000 shares covered by the report.
(6) As reported by Corbyn Investment Management, Inc. ("Corbyn") on a
Schedule 13G dated on or about January 8, 1998 and filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Corbyn reported sole voting and investment powers as
to 410,912 shares, and shared voting and investment powers as to none
of the 410,912 shares covered by the report.
58
<PAGE> 59
The following table sets forth, as of December 31, 1997, 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 PERCENT
BENEFICIALLY OF
BENEFICIAL OWNER OWNED (1) CLASS
---------------- ------------- -------
<S> <C> <C>
George W. Haligowski 225,537 2.86%
Norval L. Bruce 30,116 0.39%
George J. Guarini 28,079 0.36%
Michael A. Sicuro 13,837 0.18%
Steven C. Romelt 8,333 0.11%
Sandor X. Mayuga 6,800 0.09%
Hirotaka Oribe 6,200 0.08%
Robert R. Reed 6,200 0.08%
Jeffrey L. Lipscomb 6,000 0.08%
All Directors and Executive Officers
as a Group (11 Persons) 339,435 4.24%
</TABLE>
- ----------
(1) Includes shares held directly, as well as an aggregate of 305,667 shares
which are subject to immediately exercisable options and options
exercisable within 60 days of December 31, 1997, under the Company's
Stock Option Plan, 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, 1997 as follows:
Chairman Haligowski - 196,667 shares; Director Lipscomb - 6,000 shares;
Director Mayuga - 6,000 shares; Director Oribe - 6,000 shares; Director
Reed - 6,000 shares; Norval L. Bruce - 28,334 shares; George J. Guarini
- 26,667 shares; Michael A. Sicuro - 13,333 shares; and Steven C. Romelt
- 8,333 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, the Company utilized the services of Tisdale &
Nicholson. Director Mayuga is a partner in that law firm. During 1997, this law
firm received $12,475 in legal fees from the Company, which was not in excess of
5% of the firm's total revenues during 1997.
During the year, the Company utilized the services of a public relations
firm which is owned by Director Lipscomb's spouse. During 1997, this public
relations firm received $62,657 of fees from the Company.
59
<PAGE> 60
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 auditor's report
thereon, are included in this Form 10-K at the pages listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on Consolidated Financial Statements as
of December 31, 1997 and 1996 and for Each of the
Three Years in the Period Ended December 31, 1997 34
Consolidated Balance Sheets as of December 31, 1997 and 1996 35
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 36
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1995 to December 31, 1997 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 38
Notes to Consolidated Financial Statements 39
</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.
60
<PAGE> 61
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING
OR EXHIBIT
REGULATION NUMBER SEQUENTIAL
S-K EXHIBIT ATTACHED PAGE
NUMBER DOCUMENT HERETO NUMBER
- ----------- -------- ------------ -------------
<S> <C> <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 63
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 27
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.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ITLA CAPITAL CORPORATION
Date: March 30, 1998 By: /s/ George W. Haligowski
-------------------------------------
George W. Haligowski
Chairman of the Board, President
and Chief Executive Officer
(Duly Authorized Representative)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George W. Haligowski Chairman of the Board, President and March 30, 1998
- ----------------------------- Chief Executive Officer
George W. Haligowski (Principal Executive Officer)
/s/ Michael A. Sicuro Managing Director, Chief Financial March 30, 1998
- ----------------------------- Officer (Principal Financial and
Michael A. Sicuro Accounting Officer)
/s/ Norval L. Bruce Director March 30, 1998
- -----------------------------
Norval L. Bruce
/s/ Jeffrey L. Lipscomb Director March 30, 1998
- -----------------------------
Jeffrey L. Lipscomb
/s/ Sandor X. Mayuga Director March 30, 1998
- -----------------------------
Sandor X. Mayuga
/s/ Robert R. Reed Director March 30, 1998
- -----------------------------
Robert R. Reed
/s/ Hirotaka Oribe Director March 30, 1998
- -----------------------------
Hirotaka Oribe
</TABLE>
62
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
PERCENTAGE INCORPORATION
OF OR
PARENT SUBSIDIARY OWNERSHIP ORGANIZATION
------ ---------- --------- ------------
<S> <C> <C> <C>
ITLA Capital Corporation Imperial Thrift and Loan Association 100% California
ITLA Capital Corporation ITLA Funding Corporation 100% Delaware
</TABLE>
63
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 123,885
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,281
<INVESTMENTS-CARRYING> 25,132
<INVESTMENTS-MARKET> 25,063
<LOANS> 813,575
<ALLOWANCE> 12,178
<TOTAL-ASSETS> 1,015,909
<DEPOSITS> 843,813
<SHORT-TERM> 61,500
<LIABILITIES-OTHER> 11,248
<LONG-TERM> 0
0
0
<COMMON> 53,163
<OTHER-SE> 46,185
<TOTAL-LIABILITIES-AND-EQUITY> 1,015,909
<INTEREST-LOAN> 77,310
<INTEREST-INVEST> 7,807
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 85,117
<INTEREST-DEPOSIT> 40,206
<INTEREST-EXPENSE> 43,310
<INTEREST-INCOME-NET> 41,807
<LOAN-LOSSES> 3,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,015
<INCOME-PRETAX> 21,132
<INCOME-PRE-EXTRAORDINARY> 21,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,477
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 4.94
<LOANS-NON> 8,332
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,574
<LOANS-PROBLEM> 10,152
<ALLOWANCE-OPEN> 10,885
<CHARGE-OFFS> 2,124
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 12,178
<ALLOWANCE-DOMESTIC> 12,178
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 1.38
<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> 0
<FN>
INCLUDED IN NONINTEREST EXPENSE IS $700,000 OF PROVISION FOR
VALUATION ALLOWANCE ON LOANS HELD FOR SALE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 40,503
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,180
<INVESTMENTS-CARRYING> 29,871
<INVESTMENTS-MARKET> 29,121
<LOANS> 664,922
<ALLOWANCE> 10,847
<TOTAL-ASSETS> 810,494
<DEPOSITS> 669,582
<SHORT-TERM> 33,500
<LIABILITIES-OTHER> 9,235
<LONG-TERM> 6,000
0
0
<COMMON> 53,398
<OTHER-SE> 38,779
<TOTAL-LIABILITIES-AND-EQUITY> 810,494
<INTEREST-LOAN> 17,795
<INTEREST-INVEST> 1,961
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,756
<INTEREST-DEPOSIT> 9,480
<INTEREST-EXPENSE> 10,069
<INTEREST-INCOME-NET> 9,687
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,526
<INCOME-PRETAX> 4,909
<INCOME-PRE-EXTRAORDINARY> 2,906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,906
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 9.90
<LOANS-NON> 8,688
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,102
<LOANS-PROBLEM> 8,829
<ALLOWANCE-OPEN> 10,885
<CHARGE-OFFS> 648
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 10,847
<ALLOWANCE-DOMESTIC> 10,847
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 56,332
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,226
<INVESTMENTS-CARRYING> 28,446
<INVESTMENTS-MARKET> 27,991
<LOANS> 704,613
<ALLOWANCE> 10,539
<TOTAL-ASSETS> 850,201
<DEPOSITS> 689,021
<SHORT-TERM> 39,500
<LIABILITIES-OTHER> 6,246
<LONG-TERM> 22,000
0
0
<COMMON> 53,496
<OTHER-SE> 39,938
<TOTAL-LIABILITIES-AND-EQUITY> 850,201
<INTEREST-LOAN> 35,977
<INTEREST-INVEST> 3,537
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 39,514
<INTEREST-DEPOSIT> 18,735
<INTEREST-EXPENSE> 20,009
<INTEREST-INCOME-NET> 19,505
<LOAN-LOSSES> 850
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,337<F1>
<INCOME-PRETAX> 10,010
<INCOME-PRE-EXTRAORDINARY> 5,920
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,920
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 10.00
<LOANS-NON> 6,302
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,402
<LOANS-PROBLEM> 9,561
<ALLOWANCE-OPEN> 10,885
<CHARGE-OFFS> 1,221
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 10,539
<ALLOWANCE-DOMESTIC> 10,539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>INCLUDED IN EXPENSE-OTHER IS $350,000 OF PROVISION FOR VALUATION ALLOWANCE ON
LOANS HELD FOR SALE
</FN>
</TABLE>
<TABLE> <S> <C>
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<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,785
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,223
<INVESTMENTS-CARRYING> 27,031
<INVESTMENTS-MARKET> 26,869
<LOANS> 760,132
<ALLOWANCE> 11,034
<TOTAL-ASSETS> 901,555
<DEPOSITS> 736,398
<SHORT-TERM> 55,500
<LIABILITIES-OTHER> 7,021
<LONG-TERM> 6,000
0
0
<COMMON> 53,635
<OTHER-SE> 43,001
<TOTAL-LIABILITIES-AND-EQUITY> 901,555
<INTEREST-LOAN> 55,874
<INTEREST-INVEST> 5,863
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 61,737
<INTEREST-DEPOSIT> 29,302
<INTEREST-EXPENSE> 31,452
<INTEREST-INCOME-NET> 30,285
<LOAN-LOSSES> 1,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,886
<INCOME-PRETAX> 15,419
<INCOME-PRE-EXTRAORDINARY> 9,108
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<CHANGES> 0
<NET-INCOME> 9,108
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 10.04
<LOANS-NON> 7,276
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,389
<LOANS-PROBLEM> 10,346
<ALLOWANCE-OPEN> 10,885
<CHARGE-OFFS> 1,855
<RECOVERIES> 104
<ALLOWANCE-CLOSE> 11,034
<ALLOWANCE-DOMESTIC> 11,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,988
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 94,092
<INVESTMENTS-MARKET> 92,841
<LOANS> 507,159
<ALLOWANCE> 9,211
<TOTAL-ASSETS> 655,435
<DEPOSITS> 536,724
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,774
<LONG-TERM> 54,000
0
0
<COMMON> 30,749
<OTHER-SE> 28,188
<TOTAL-LIABILITIES-AND-EQUITY> 655,435
<INTEREST-LOAN> 15,109
<INTEREST-INVEST> 1,572
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,881
<INTEREST-DEPOSIT> 7,472
<INTEREST-EXPENSE> 747
<INTEREST-INCOME-NET> 8,462
<LOAN-LOSSES> 1,721
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,426
<INCOME-PRETAX> 3,625
<INCOME-PRE-EXTRAORDINARY> 2,240
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,240
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 10.60
<LOANS-NON> 6,177
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,404
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,105
<CHARGE-OFFS> 623
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 9,211
<ALLOWANCE-DOMESTIC> 9,211
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,534
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 71,287
<INVESTMENTS-MARKET> 70,665
<LOANS> 557,052
<ALLOWANCE> 9,673
<TOTAL-ASSETS> 669,534
<DEPOSITS> 527,039
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,632
<LONG-TERM> 54,000
0
0
<COMMON> 53,309
<OTHER-SE> 30,558
<TOTAL-LIABILITIES-AND-EQUITY> 669,534
<INTEREST-LOAN> 29,712
<INTEREST-INVEST> 3,492
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 33,204
<INTEREST-DEPOSIT> 14,843
<INTEREST-EXPENSE> 16,327
<INTEREST-INCOME-NET> 16,877
<LOAN-LOSSES> 2,821
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,200
<INCOME-PRETAX> 7,421
<INCOME-PRE-EXTRAORDINARY> 7,421
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,609
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.68
<YIELD-ACTUAL> 5.27
<LOANS-NON> 5,146
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,974
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,105
<CHARGE-OFFS> 1,290
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 9,673
<ALLOWANCE-DOMESTIC> 9,673
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,234
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,810
<INVESTMENTS-CARRYING> 43,944
<INVESTMENTS-MARKET> 43,608
<LOANS> 615,459
<ALLOWANCE> 10,074
<TOTAL-ASSETS> 735,544
<DEPOSITS> 588,282
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,762
<LONG-TERM> 54,000
0
0
<COMMON> 53,309
<OTHER-SE> 33,191
<TOTAL-LIABILITIES-AND-EQUITY> 735,544
<INTEREST-LOAN> 45,402
<INTEREST-INVEST> 4,919
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50,321
<INTEREST-DEPOSIT> 22,512
<INTEREST-EXPENSE> 24,741
<INTEREST-INCOME-NET> 25,580
<LOAN-LOSSES> 3,771
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,883
<INCOME-PRETAX> 11,745
<INCOME-PRE-EXTRAORDINARY> 11,745
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,204
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 5.21
<LOANS-NON> 4,863
<LOANS-PAST> 4,863
<LOANS-TROUBLED> 5,193
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,105
<CHARGE-OFFS> 1,935
<RECOVERIES> 133
<ALLOWANCE-CLOSE> 10,074
<ALLOWANCE-DOMESTIC> 10,074
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
