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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-26960
ITLA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4596322
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
888 PROSPECT STREET, SUITE 110, LA JOLLA, CALIFORNIA 92037
(Address of Principal Executive Offices) (Zip Code)
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 16, 1999, there were issued and outstanding 7,166,484 shares
of the Registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of such stock as of March 16, 1999, was $110.6 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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ITLA CAPITAL CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 76
PART III
Item 10. Directors and Executive Officers of the Registrant 76
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management 85
Item 13. Certain Relationships and Related Transactions 86
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 87
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PART I
ITEM 1. BUSINESS
GENERAL
ITLA Capital Corporation ("ITLA Capital") became the holding company of
Imperial Thrift and Loan Association ("Imperial Thrift and Loan"), a 25 year old
California thrift and loan company, on October 1, 1996. ITLA Capital's principal
operating subsidiaries are Imperial Thrift and Loan and, to a much lesser
extent, ITLA Funding Corporation ("ITLA Funding").
Imperial Thrift and Loan is engaged in originating real estate loans
secured primarily by income producing properties for retention in its loan
portfolio, funded primarily by deposits insured by the FDIC up to applicable
limits. Imperial Thrift and Loan's lending business is conducted through six
offices in California, one office in Nevada and one office in Texas, and also
through seven regional loan officers located throughout the rest of the United
States. Deposit gathering activities are concentrated in Los Angeles and Orange
Counties, the San Francisco Bay Area, and the San Diego area. Imperial Thrift
and Loan also accepts out-of-state deposits.
In 1996, ITLA Capital established ITLA Funding formed to originate
commercial real estate loans for sale in the secondary market. See "Other
Business Activities". During 1998, ITLA Funding sold fixed rate originations on
a whole loan cash basis to conduits that issue commercial mortgage-backed
securities. ITLA Funding also originated variable rate loans that were placed in
Imperial Thrift and Loan's portfolio of loans held for investment.
In order to utilize its excess capital, ITLA Capital continuously
evaluates business expansion opportunities, including companies that originate
or purchase commercial and multi-family real estate loans as well as
non-conventional residential mortgage loans. In connection with this activity,
ITLA Capital periodically has discussions with and receives financial
information about other companies that may or may not lead to the acquisition of
all or part of that company by or joint venture opportunities with ITLA Capital.
FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: This Form 10-K contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, changes in economic
conditions in ITLA Capital's market areas, changes in policies by regulatory
agencies, the impact of competitive loan products, loan demand risks,
fluctuations in interest rates and operating results and other risks detailed
from time to time in ITLA Capital's filings with the Securities and Exchange
Commission. ITLA Capital cautions readers not to place undue reliance on
forward-looking statements. ITLA Capital does not undertake and specifically
disclaims any obligation to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements. These risks could cause ITLA Capital's actual results
for 1999 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, ITLA Capital.
LOAN PORTFOLIO
Imperial Thrift and Loan 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, whether the loan has a fixed or a variable
rate, and prevailing market rates for similar types of loans. At December 31,
1998, ITLA Capital's gross loan portfolio held for investment and held for sale
totaled $894.6 million. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition - Loans
Receivable" for additional information regarding the composition of the loan
portfolio at December 31, 1998.
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REAL ESTATE LENDING
General. While Imperial Thrift and Loan has always been a real estate
lender, the nature of its real estate lending activities has changed
significantly since 1992. Under former managements, Imperial Thrift and Loan
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 Thrift and Loan 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. Of the real estate loans outstanding at December 31, 1998,
$848.6 million or 94.8% of total gross loans outstanding were originated under
these revised real estate underwriting standards. Management believes that, in
recent years, the California economy has strengthened in some respects, which
has contributed to Imperial Thrift and Loan's improved asset quality. A
worsening of economic conditions in the state could have an adverse effect on
Imperial Thrift and Loan'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 Thrift and Loan's real estate collateral.
Imperial Thrift and Loan 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 purpose commercial properties. At
December 31, 1998, 62 real estate loans in the aggregate amount of $8.4 million
were secured by second trust deeds and two real estate loans in the aggregate
amount of $0.4 million were secured by third trust deeds, for a total of $8.8
million or 1.0% of total loans, secured by junior liens. Of these loans
collateralized by junior liens, 90.5% were secured by income producing
properties and 9.5% were secured by one-to four family residential properties.
Of the real estate loans outstanding at December 31, 1998, $14.5 million
represented loans to facilitate the sale of other real estate owned.
Most of Imperial Thrift and Loan's real estate borrowers are business
owners, individual investors or investment partnerships. The income producing
property lending that Imperial Thrift and Loan engages in typically involves
larger loans to a single borrower and is generally viewed as exposing the lender
to a greater risk of loss than one-to four family residential lending. Income
producing property values are also generally subject to greater volatility than
residential property values. The liquidation values of income producing
properties may be adversely affected by risks generally incident to interests in
real property, including changes or continued weakness in general or local
economic conditions and/or specific industry segments; declines in real estate
values; declines in rental, room or occupancy rates; increases in interest
rates, real estate and personal property tax rates, and other operating expenses
(including energy costs); the availability of refinancing; changes in
governmental rules, regulations and fiscal policies, including rent control
ordinances, environmental legislation and taxation; and other factors beyond the
control of the borrower or the lender.
Construction Loans. Imperial Thrift and Loan also originates
construction loans for income producing properties, as well as for single-family
home construction. At December 31, 1998, Imperial Thrift and Loan had $71.4
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 1998, Imperial Thrift and Loan purchased one loan
totaling $2.4 million. Imperial Thrift and Loan generally uses similar
underwriting criteria for loans purchased as for loans originated, except that
current appraisals and borrower credit reports are not obtained. In its loan
purchases, Imperial Thrift and Loan generally reserves the right to reject
particular loans from a loan package being purchased and does so for
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loans in a package that do not meet its underwriting criteria. In determining
whether to purchase a loan, Imperial Thrift and Loan reviews the borrower's
financial resources and ability to repay and the amount and stability of cash
flow, if any, from the underlying collateral. On purchases, Imperial Thrift and
Loan 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 Thrift and Loan reviews information
concerning the income, financial condition, employment and credit history of the
applicant. In addition, Imperial Thrift and Loan generally obtains an updated
title search separate from that provided by the loan seller.
Lending, Origination and Underwriting. Although Imperial Thrift and
Loan's lending and collection policy permits loan-to-value ratios up to 80% in
some cases, real estate loans are generally made in amounts up to 75% of the
appraised value of commercial properties, and generally up to 80% of the
appraised value of apartment properties. These amounts were 70% for commercial
properties and 75% for apartments in prior years. Loans are generally made for
terms up to ten years, with amortization periods up to 30 years. Depending on
market conditions at the time the loan was originated, certain loan agreements
may include prepayment penalties. Most loans are subject to a quarterly
adjustment of their interest rate based on one of several interest rate indexes.
As of December 31, 1998, Imperial Thrift and Loan's real estate loan portfolio,
including real estate loans held for sale included 60.2% indexed to the
Six-Month London Interbank Offered Rate; 16.9% indexed to the reference rate
charged by Bank of America; 9.3% indexed to the Federal Home Loan Bank 11th
District Cost of Funds Index; 7.2% fixed for an initial period and then
adjustable; 1.4% indexed to either the United States Treasury security indexes
or the Federal Home Loan Bank of San Francisco advance rate; and the balance of
5.0% was fixed rate. Most variable rate loans may not adjust downward below
their initial rate, with increases generally limited to maximum adjustments of
2% per year up to 5% for the life of the loan. The inability of Imperial Thrift
and Loan's loans to adjust downward can contribute to increased income in
periods of declining interest rates, and also assists Imperial Thrift and Loan
in its efforts to limit the risks to earnings and equity value resulting from
changes in interest rates. At December 31, 1998, 93.7% of Imperial Thrift and
Loan's variable rate loan portfolio did not adjust downward. The
weighted-average minimum interest rate on this portfolio was 9.63%. At that
date, 87.9% of the variable rate loans outstanding had a lifetime interest rate
cap. The weighted-average lifetime interest rate cap on this portfolio was
14.74%.
The maximum size of a single real estate loan made by Imperial Thrift
and Loan is limited by California law to 20% of Imperial Thrift and Loan's
equity capital. At December 31, 1998, that limit was approximately $17.5
million. Imperial Thrift and Loan's largest combined credit extension to related
borrowers was $13.9 million at December 31, 1998. At December 31, 1998, Imperial
Thrift and Loan had a total of 124 extensions of credit, with a combined
outstanding principal balance of $452.9 million, that were over $2.0 million to
a single borrower or related borrowers. One of these combined extensions of
credit, with a total principal balance of $2.3 million, was on nonaccrual status
at December 31, 1998. All other combined extensions of credit over $2.0 million
were performing in accordance with their repayment terms. At December 31, 1998,
Imperial Thrift and Loan had 1,103 secured real estate loans outstanding, with
an average balance per loan of approximately $811,000.
Competition. Imperial Thrift and Loan'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 Imperial Thrift and Loan relative
to a potential borrower in terms of a prior business relationship, wider
geographic presence or more accessible branch office locations, the ability to
offer additional services or more favorable pricing alternatives, or a lower
cost of funds structure. Imperial Thrift and Loan tries to offset the potential
effect of these factors by providing borrowers with greater individual attention
and a more flexible and time-sensitive underwriting, approval and funding
process than they might obtain elsewhere.
Marketing and Originations. Imperial Thrift and Loan originates real
estate loans through branch offices located in San Francisco, Costa Mesa,
Glendale and La Jolla, and loan production offices in San Jose, Las Vegas and
San Antonio. These offices are staffed by a total of approximately 18 loan
officers. Loan officers solicit mortgage loan brokers for loan applications that
meet Imperial Thrift and Loan's underwriting criteria, and also accept
applications directly from borrowers. A majority of the loans funded by Imperial
Thrift and Loan are
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originated through mortgage loan brokers, with the balance resulting from direct
applications from borrowers. Mortgage loan brokers act as intermediaries between
property owners and Imperial Thrift and Loan in arranging real estate loans and
earn a fee based upon the principal amount of each loan funded. Since a large
portion of Imperial Thrift and Loan's marketing effort in its branches and loan
production offices is through the contact of loan officers with mortgage loan
brokers, Imperial Thrift and Loan does not incur significant expenses for
advertising its lending services to the general public. Also, since Imperial
Thrift and Loan 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 it may be characterized more
as a transaction lender than a relationship lender.
In an effort to expand its origination capabilities, ITLA Capital and
ITLA Funding have established relationships with real estate lending
correspondents, which are typically larger mortgage brokerage firms that agree
to originate, subject to Imperial Thrift & Loan's underwriting criteria, various
types of income property secured loans and residential property secured loans to
be funded or brokered by Imperial Thrift & Loan or ITLA Funding. ITLA Capital
believes that these relationships have diversified its geographic base by
permitting it to originate loans throughout the United States. A total of $251.1
million of loans were originated through this network of real estate lending
correspondents in 1998, including $136.2 million originated for outside
investors, $102.6 million retained for Imperial Thrift and Loan's loan
portfolio, and $12.3 million of fixed rate warehouse loans classified as held
for sale.
Loan Approval Process. Imperial Thrift and Loan's loan underwriters
prepare a written presentation on every loan application submitted to its loan
committee which is comprised of Imperial Thrift and Loan's president and chief
operating officer; chief lending officer; chief credit officer; the director of
loan operations; and the manager of commercial underwriting for approval. This
presentation includes a description of the prospective borrower and any
guarantors, the collateral, and the proposed use(s) of loan proceeds, as well as
borrower and property financial statements and analysis. Each application is
evaluated from a number of underwriting perspectives, including 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 Thrift and Loan's real
estate loans are both nonrecourse and full recourse and Imperial Thrift and Loan
generally seeks to obtain personal guarantees from the principals of borrowers
which are single asset or limited liability entities (such as partnerships,
corporations or trusts) on full recourse loans. Loans up to $750,000 may be
approved by any loan committee member. Loans of $750,000 or more require
approval by Imperial Thrift and Loan's loan committee, which generally meets at
least weekly. Variable rate loans over $500,000 must generally satisfy an
interest rate sensitivity test in order for the loan to be approved; that is,
the current 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 which is 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 $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 Imperial Thrift and Loan's board of
directors. Imperial Thrift and Loan's loan underwriters are responsible for
initial reviews of borrowers, properties, loan terms, and submission of loans to
the loan committee. Following loan approval and prior to funding, Imperial
Thrift and Loan'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 Thrift and Loan's loan servicing
operations are designed to provide prompt customer service, and accurate and
timely information for account follow-up, financial reporting and management
review. Imperial Thrift and Loan's loans are serviced through the loan
administration department located in Imperial Thrift and Loan's headquarters in
Glendale, California. Following the funding of an approved loan, all pertinent
loan data is entered into Imperial Thrift and Loan's data processing system,
which provides
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monthly billing statements, tracks payment performance, and processes
contractual interest rate adjustments on variable rate loans. Regular loan
service efforts include payment processing and collection follow-up, as well as
tracking the performance of additional borrower obligations with respect to the
maintenance of casualty insurance coverage, payment of property taxes and senior
liens, if any, and periodically requesting required information, including
current borrower and property financial and operating statements. When payments
are not received by their contractual due date, collection efforts begin on the
fifth day of delinquency with a telephone contact, and proceed to written
notices that progress from reminders of the borrower's payment obligation to an
advice that a notice of default may be forthcoming. Accounts delinquent for more
than 30 days are generally transferred to Imperial Thrift and Loan'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 Thrift
and Loan has serviced and disposed of in the past three years, management
believes that Imperial Thrift and Loan has developed significant expertise in
resolving problem loans.
NONPERFORMING ASSETS AND OTHER LOANS OF CONCERN
At December 31, 1998, nonperforming assets, consisting of nonaccrual
loans and other real estate owned, totaled $6.6 million or 0.64% of total
assets. Nonaccrual loans totaled $5.4 million, consisting of nine loans. Four of
these loans had an outstanding balance greater than $500,000, and one loan had
an outstanding balance greater than $1.0 million. For additional information
regarding nonperforming assets, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Credit Risk
Elements."
In addition to nonaccrual loans, as of December 31, 1998, Imperial
Thrift and Loan had 19 loans with an aggregate outstanding loan balance of $8.6
million with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the properties securing the loans
have caused management to be concerned about the ability of the borrowers to
comply with present loan repayment terms, which may result in the future
inclusion of such loans in the nonaccrual loan category. At December 31, 1998,
seven of these loans had a book value in excess of $500,000, of which three
loans had a book value in excess of $1.0 million.
The following is a brief discussion of ITLA Capital's one nonaccrual
loan where the remaining principal balance of the loan at December 31, 1998
exceeded $1.0 million.
Loan Secured by an Office/Restaurant Complex -- Tucson, Arizona.
This loan originated in January 1997 with an original loan amount of
$1.9 million. In November 1997, an additional advance of $0.4 million
was funded to complete construction. The loan currently has a balance of
$2.3 million. The loan was placed on nonaccrual status in September 1998
because of delinquent monthly payments and the filing of a Chapter 11
bankruptcy by the borrower. Imperial Thrift & Loan is attempting to
proceed with a trustee sale, while it also pursues the guarantor for
payment.
The following is a brief discussion of Imperial Thrift & Loan's "other
loans of concern" where the remaining principal balance of the loan at December
31, 1998 exceeded $1.0 million.
Loan Secured by a Retail Center -- Northern California. This loan
was originated in 1998 with an original loan amount of $1.3 million and
currently has a balance of $1.3 million. Imperial Thrift and Loan is
monitoring the loan due to a dispute between the guarantor/shareholder
and his former spouse over rights to the borrower corporation and the
property. The loan is performing in accordance with its repayment terms.
Loan Secured by an Office Building -- Fresno, California. This
loan was originated in 1989 and was renewed in 1992. The original loan
amount was $1.5 million and currently has a balance of $1.3 million.
Imperial Thrift and Loan 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
$32,000. The loan is performing in accordance with its repayment terms.
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Loan Secured by a Leasehold Estate Interest of a Restaurant --
Marina Del Rey, California. This loan was originated in 1995 with an
original loan amount of $1.8 million and currently has a balance of $1.6
million. ITLA Capital is monitoring the loan because of delinquent
payments that arose due to the filing of a Chapter 11 bankruptcy by the
operating tenant. The borrower has taken over the restaurant operation
and has resumed making monthly payments, although the loan is still
delinquent.
CLASSIFIED ASSETS
Management uses a loan classification system consistent with the
classification system used by bank regulatory agencies to help it evaluate the
risks inherent in its real estate loan portfolio. Loans are identified as
"pass", "special mention", "substandard", "doubtful" or "loss" based upon
consideration of all sources of repayment, underlying collateral values, current
and anticipated economic conditions, trends and uncertainties, and historical
experience. Pass loans are further divided into four additional sub-categories,
based on the borrower's financial strength and ability to service the debt
and/or the value and debt service capacity of the underlying collateral.
Underlying collateral values for real estate dependent loans are supported by
property appraisals or evaluations. Imperial Thrift and Loan reviews its loan
classifications on at least a monthly basis. At December 31, 1998, Imperial
Thrift and Loan classified $8.8 million of loans as "substandard" and $5.2
million as "special mention". Of the 19 loans comprising the $8.8 million in
"substandard" loans, nine loans totaling $5.4 million were included in the
nonperforming assets table in "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition - Credit Risk Elements", and the
balance was included in the $8.6 million of "other loans of concern", discussed
above.
FUNDING SOURCES
The primary source of funding for Imperial Thrift and Loan'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 Thrift and Loan's deposits are
federally insured by the FDIC to the extent permitted by law. Imperial Thrift
and Loan's deposits are substantially all in the form of term deposits that pay
fixed rates of interest for periods ranging from 90 days to five years. Imperial
Thrift and Loan 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 Thrift and
Loan's strategy with all deposit accounts is to offer rates significantly above
those customarily offered by other financial institutions in its market.
Imperial Thrift and Loan has generally accumulated deposits by relying on
renewals of term accounts by existing depositors, participating in deposit rate
surveys which list Imperial Thrift and Loan among the higher rate paying insured
institutions, and periodically advertising in various local market newspapers
and other media. Imperial Thrift and Loan is able to pursue this strategy by
operating a savings branch system offering fewer products and services than many
institutions. Because Imperial Thrift and Loan 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 Thrift and Loan's deposit gathering strategy is
comparable to those of other thrift and loan companies pursuing a similar
strategy. However, because Imperial Thrift and Loan competes for deposits
primarily on the basis of rates, Imperial Thrift and Loan 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 Thrift and Loan
participates. Although there were no brokered deposits outstanding at December
31, 1998, Imperial Thrift and Loan may seek such deposits in the future. For
information concerning overall deposits outstanding during the periods indicated
and the rates paid thereon, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Interest Income".
Imperial Thrift and Loan has also used advances from the Federal Home
Loan Bank of San Francisco as a funding source. Imperial Thrift and Loan became
a member of the Federal Home Loan Bank of San Francisco in
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1994 and was subsequently approved for a credit line up to 25% of its total
assets. Federal Home Loan Bank advances are collateralized by pledges of
qualifying cash equivalents, investment securities, mortgage-backed securities
and whole loan collateral. At December 31, 1998, Federal Home Loan Bank advances
outstanding totaled $48.5 million, and the remaining available borrowing
capacity, based on the loans and securities pledged as collateral, totaled $22.3
million. Additionally, Imperial Thrift and Loan 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 used during 1998. See "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Notes 2, 3, 7 and 8".
OTHER BUSINESS ACTIVITIES
ITLA Funding Corporation. In 1998, ITLA Funding sold fixed rate
originations on a whole loan cash basis to conduits that issue commercial
mortgage-backed securities. ITLA Funding also originated variable rate loans
that were placed in Imperial Thrift and Loan's portfolio of loans held for
investment. ITLA Funding operates a national network of sales representatives
from its Glendale, California headquarters. During 1998, ITLA Funding originated
$136.2 million of loans which were placed with brokerage firms to be pooled into
commercial mortgage-backed securities, $102.6 million of loans placed in
Imperial Thrift and Loan's portfolio, and $12.3 million of fixed rate warehouse
loans classified as held for sale. Due to recent market conditions, however, the
amount of loans sold to third parties is expected to significantly decline in
future periods.
Other. Management intends to evaluate the feasibility of ITLA Capital
entering other financial related businesses. There can be no assurance, however,
that ITLA Capital will elect to enter such additional businesses or, if it does,
that it will achieve favorable results in any such activities.
REGULATION
Imperial Thrift and Loan is subject to supervision and regulation by the
Department of Financial Institutions of the State of California and, as an
insured institution, by the FDIC. ITLA Capital is not a bank holding company and
is not directly regulated or supervised by the Department of Financial
Institutions, the FDIC, the Federal Reserve Board or any other bank regulatory
authority, except with respect to the general regulatory and enforcement
authority of the Department of Financial Institutions and the FDIC over
transactions and dealings between ITLA Capital and Imperial Thrift and Loan, 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 Thrift and Loan.
CALIFORNIA LAW
The thrift and loan business conducted by Imperial Thrift and Loan 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
Thrift and Loan is permitted to make secured and unsecured consumer and
nonconsumer loans. Although nonconsumer secured loans of fewer than ten years
may generally be repaid in unequal periodic payments, consumer loans must
generally be repaid in substantially equal periodic payments. California law
limits lending activities outside of California by thrift and loan companies to
no more than 20% of total assets, unless prior approval is obtained, in which
case the amount may be increased to 40%. Imperial Thrift and Loan has received
approval from the Department of Financial Institutions to increase its maximum
out-of-state lending activities to 40% of total assets. At December 31, 1998,
18.9% of Imperial Thrift and Loan'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. At December 31, 1998,
Imperial Thrift and Loan satisfied all of these requirements. Management
9
<PAGE> 10
believes that Imperial Thrift and Loan can maintain compliance with such
regulatory requirements by managing the mix of its assets and loans without any
material adverse impact on earnings or liquidity.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the Department of Financial Institutions. 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. Insured depository
institutions, and their institution-affiliated parties, may be subject to
potential enforcement actions by the FDIC and the Department of Financial
Institutions for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation, or any condition imposed in writing
by the agency or any written agreement with the agency. Management is not aware
of any pending or threatened enforcement actions against Imperial Thrift and
Loan.
A thrift and loan is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
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 deposits outstanding, maintain its capital stock not less than
$1.25 million, and maintain its unimpaired paid-in surplus not less than
$750,000. At December 31, 1998, Imperial Thrift and Loan's total deposits were
9.9 times its paid-up and unimpaired capital and unimpaired surplus not
available for dividends. In addition, at December 31, 1998, Imperial Thrift and
Loan maintained a liquidity reserve in cash or cash equivalents equal to 12.3%
of its total deposits outstanding and its allowance for credit losses was $15.6
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 Department
of Financial Institutions' prior consent. All amounts borrowed in excess of 150%
of its outstanding capital stock, surplus and undivided profits must be
unsecured borrowings or, if secured, approved in advance by the Department of
Financial Institutions, and be included as investment or thrift certificates for
purposes of computing the maximum amount of certificates a thrift and loan may
issue. However, collateralized Federal Home Loan Bank advances are excluded for
this test of secured borrowings and are not specifically limited by California
law. Imperial Thrift and Loan had $48.5 million of outstanding borrowings at
December 31, 1998, consisting solely of collateralized Federal Home Loan Bank
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 Thrift
and Loan complied with these requirements at December 31, 1998.
Although the investment and other activities that Imperial Thrift and
Loan may be engaged in are generally prescribed under the California Industrial
Loan Law, certain provisions of the Federal Deposit Insurance Act may limit
Imperial Thrift and Loan's ability to engage in certain activities that
otherwise are authorized under the California Industrial Loan Law. See "Federal
Law - Restrictions on Imperial Thrift and Loan's Investments and Activities".
10
<PAGE> 11
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".
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 Thrift and Loan's Board
of Directors has passed a resolution requiring Imperial Thrift and Loan to
maintain a Tier 2 capital ratio of not less than 10.0%.
FEDERAL LAW
Our deposits are insured by the bank insurance fund of the FDIC to the
full extent permissible by law. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports, and
generally supervises the operations of institutions to which it provides deposit
insurance. The FDIC is also the federal agency charged with regulating
state-chartered banks that are not members of the Federal Reserve System, such
as Imperial Thrift and Loan. Therefore any person who wishes to acquire control
of Imperial Thrift and Loan must obtain the consent of both the FDIC and the
Department of Financial Institutions. Insured depository institutions, and their
institution-affiliated parties, may be subject to potential enforcement actions
by the FDIC and the Department of Financial Institutions for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Management is not aware of any pending or threatened
enforcement actions against Imperial Thrift and Loan.
Regulatory Capital Requirements. Federally-insured, state-chartered
banks, including thrift and loans such as Imperial Thrift and Loan, 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 Thrift and Loan is required to comply with three separate
minimum capital requirements: a "tier 1 capital ratio" and two "risk-based"
capital requirements. "Tier 1 capital" generally includes common shareholders'
equity, including retained earnings, qualifying noncumulative perpetual
preferred stock and any related surplus, and minority interests in the equity
accounts of fully consolidated subsidiaries, less intangible assets, other than
properly valued purchased mortgage servicing rights up to certain specified
limits and less net deferred tax assets in excess of certain specified limits.
Tier 1 Capital Ratio. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total average assets for the most highly-rated
state-chartered, FDIC-supervised banks. All other FDIC supervised banks must
maintain at least a 4.0% tier 1 capital ratio. Under FDIC regulations,
highly-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity and
good earnings. At December 31, 1998, Imperial Thrift and Loan's required tier 1
capital ratio was 4.0% and its actual tier 1 capital ratio was 8.66%.
Risk-Based Capital Requirements. The risk-based capital requirements
generally require Imperial Thrift and Loan to maintain a ratio of tier 1 capital
to risk-weighted assets of at least 4.0% and a ratio of total risk-based capital
to risk-weighted assets of at least 8.0%. To calculate the amount of capital
required, assets are placed in one of four categories and given a percentage
weight (0%, 20%, 50% or 100%) based on the relative risk of the category. For
example, United States Treasury Bills and Ginnie Mae securities are placed in
the 0% risk category. Fannie Mae and Freddie Mac securities are placed in the
20% risk category, loans secured by one-to four family
11
<PAGE> 12
residential properties and certain privately-issued mortgage-backed securities
are generally placed in the 50% risk category, and commercial and consumer loans
and other assets are generally placed in the 100% risk category. In addition,
certain off-balance-sheet items are converted to balance sheet credit equivalent
amounts and each amount is then assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital"
means tier 1 capital plus supplementary or tier 2 capital, so long as the amount
of supplementary or tier 2 capital that is used to satisfy the requirement does
not exceed the amount of tier 1 capital. Tier 2 capital includes cumulative or
other perpetual preferred stock, mandatory convertible subordinated debt and
perpetual subordinated debt, mandatory redeemable preferred stock,
intermediate-term preferred stock, mandatory convertible subordinated debt and
subordinated debt, and the allowance for credit losses up to a maximum of 1.25%
of risk-weighted assets. At December 31, 1998, Imperial Thrift and Loan's tier 1
risk-based and total capital ratios were 9.34% and 10.60%, respectively.
The federal banking agencies have adopted regulations specifying that
the agencies will include, in their evaluations of a bank's capital adequacy, an
assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The FDIC and the other federal banking
agencies have also promulgated final amendments to their respective risk-based
capital requirements which would explicitly identify concentration of credit
risk and certain risks arising from nontraditional activities, and the
management of such risk, as important factors to consider in assessing an
institution's overall capital adequacy. The FDIC may now require higher minimum
capital ratios based on certain circumstances, including where the institution
has significant risks from concentration of credit or certain risks arising from
nontraditional activities.
For regulatory purposes, the federal banking agencies have adopted
Statement of Financial Accounting Standards No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities" as amended, which requires that net
unrealized gains and losses on certain securities classified available for sale
be included in accumulated other comprehensive income. The FDIC requires that
the net amount of unrealized losses from available for sale equity securities
with readily determinable fair values be deducted for purposes of calculating
the tier 1 capital ratio. All other net unrealized holding gains and losses on
available for sale securities are excluded from the definition of tier 1
capital. While Imperial Thrift and Loan had no available for sale equity
securities at December 31, 1998, ITLA Capital had $0.2 million of such
securities in its investment portfolio.
Prompt Corrective Action Requirements. The FDIC has implemented a system
requiring regulatory sanctions against state-chartered banks (which, for this
purpose, includes Imperial Thrift and Loan) 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 tier 1
capital ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. Imperial Thrift and Loan
met these requirements at December 31, 1998.
The FDIC is authorized and, under certain circumstances, required to
take certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized" institution. Any such institution must
submit a capital restoration plan and, until such plan is approved by the FDIC,
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
In addition, the FDIC must appoint a receiver or conservator for an
institution, with certain limited exceptions, within 90 days after it becomes
"critically undercapitalized". Any "undercapitalized" institution is also
subject to the general enforcement authority of the FDIC, including the
appointment of a conservator or a receiver.
The FDIC is also generally authorized to reclassify an institution into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
12
<PAGE> 13
Safety and Soundness Standards. The federal banking agencies adopted
guidelines that establish standards for safety and soundness. The guidelines set
forth operational and managerial standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, fees and benefits. The
guidelines establish the safety and soundness standards that the agencies will
use to identify and address problems at insured depository institutions before
capital becomes impaired. If an institution fails to comply with a safety and
soundness standard, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.
FDIC Insurance Assessments. The FDIC assesses deposit insurance premiums
under a risk-based assessment system, which is based on the probability that the
deposit insurance fund will incur a loss with respect to the institution, the
likely amount of any loss, and the revenue needs of the deposit insurance fund.
For the fiscal year ended December 31, 1998, Imperial Thrift and Loan paid no
assessments to the FDIC.
Restrictions on Imperial Thrift and Loan's Investments and Activities. A
state-chartered bank and its subsidiaries may not engage as principal in any
activities that are not permissible for national banks and their subsidiaries
unless: (1) the bank meets the applicable FDIC capital standards described
above; and (2) the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund. With limited exceptions, the FDIC
may not use this authority to permit a state-chartered bank to engage in equity
investments (other than investments in subsidiaries) or in insurance
underwriting. Imperial Thrift and Loan's activities are permissible activities
for national banks.
In addition, federal law imposes restrictions on transactions between
Imperial Thrift and Loan and its affiliates. All these transactions, including
leases and service contracts, must be on terms and under circumstances that are
substantially the same, or at least as favorable to Imperial Thrift and Loan, as
those prevailing at the time for comparable transactions involving nonaffiliated
companies. The California Industrial Loan Law also applies certain restrictions
to transactions with affiliates. Federal and state law also places limitations
on loans by Imperial Thrift and Loan 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
Thrift and Loan is subject to certain fair lending requirements and reporting
obligations involving lending operations and Community Reinvestment Act
activities. Federal banking agencies are required to evaluate the record of
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with
such laws and into account when regulating and supervising other activities. In
its most recent examination, the FDIC rated Imperial Thrift and Loan
"satisfactory" in complying with its Community Reinvestment Act obligations.
DATA PROCESSING AGREEMENT
ITLA Capital has an agreement with a third party to provide data
processing services, including loan portfolio accounting and transaction
processing, deposit account processing, and general ledger accounting. The fees
under the agreement consist of a base monthly fee, which may vary based on the
number of accounts processed, as well as other charges based on usage. The
initial term of this agreement, 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 ITLA Capital 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 $405,000 in 1998. As of December 31, 1998, the estimated
remaining payments due under the contract, at current portfolio and service
levels, were approximately $240,000.
13
<PAGE> 14
ITEM 2. PROPERTIES
ITLA Capital leases all of its operating facilities. ITLA Capital's only
material lease obligations are for Imperial Thrift and Loan's headquarters and
for ITLA Funding's headquarters, both of which are in Glendale, California.
Imperial Thrift and Loan's 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. ITLA Funding's lease extends until 2005 with base
annual rental expense of $277,000 for the entire term, plus common area expenses
that are subject to annual increases.
The following table sets forth certain information regarding ITLA
Capital's facilities.
<TABLE>
<CAPTION>
YEAR CURRENT
SQUARE LEASE TERM
LOCATIONS OFFICE USES FOOTAGE EXPIRES
----------------- -------------------------------------------------------- ---------- -------------
<S> <C> <C> <C>
Beverly Hills, CA Savings Branch 2,218 2005
Costa Mesa, CA Real Estate Lending / Savings Branch 3,493 2000
Encino, CA Savings Branch 5,298 2004
Glendale, CA Imperial's Headquarters / Real Estate Lending / Savings
Branch 23,498 2006
Glendale, CA Funding's Headquarters / Real Estate Lending 8,932 2005
La Jolla, CA ITLA Capital's Headquarters 7,543 2003
La Jolla, CA Real Estate Lending / Savings Branch 4,551 1999
Las Vegas, NV Real Estate Lending 800 2000
San Francisco, CA Real Estate Lending / Savings Branch 5,005 2002
San Jose, CA Real Estate Lending 962 1999
</TABLE>
ITLA Capital's other out-of-state operations are conducted from
executive suites or home offices. For additional information regarding ITLA
Capital's premises, see "Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements Note 12".
Management believes that ITLA Capital's present facilities are adequate
for its current needs, and that alternative or additional space, if necessary,
will be available on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
ITLA Capital is party to certain legal proceedings incidental to its
business. Management believes that the outcome of such proceedings, in the
aggregate, will not have a material effect on ITLA Capital's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITLA Capital's common stock is traded on the Nasdaq national market
system under the symbol "ITLA". At December 31, 1998, there were approximately
12 holders of record of ITLA Capital common stock and 7,166,484 shares
outstanding.
The following table sets forth, for the periods indicated, the range of
high and low trade prices for ITLA Capital's common stock. Stock price data on
Nasdaq reflects interdealer prices, without retail mark-up, mark-down or
commission.
<TABLE>
<CAPTION>
MARKET PRICE
---------------------------------------- AVERAGE DAILY
HIGH LOW CLOSE CLOSING PRICE
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
1998
4th Quarter $ 18.00 $ 9.00 $ 15.13 $ 15.04
3rd Quarter 22.25 13.50 13.50 18.67
2nd Quarter 24.00 19.88 20.75 22.10
1st Quarter 21.25 17.88 21.25 19.47
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
</TABLE>
15
<PAGE> 16
The following table includes supplementary quarterly operating results
and per share information for the past two years. The data presented should be
read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with "Item 8. Financial Statements and
Supplementary Data" included elsewhere in this report.
QUARTERLY OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Net interest income $11,766 $12,558 $13,008 $12,946
Provision for estimated credit losses 1,400 1,600 800 750
Provision for valuation allowance -- -- 1,400 --
Noninterest income 859 646 601 341
General and administrative expense 5,198 5,166 4,906 5,394
Total real estate operations, net 80 154 130 620
Provision for income taxes 2,438 2,576 2,619 2,671
Net income 3,509 3,708 3,754 3,852
Basic Earnings Per Share $ 0.46 $ 0.48 $ 0.49 $ 0.52
Diluted Earnings Per Share $ 0.44 $ 0.46 $ 0.47 $ 0.51
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 -- --
Noninterest income 348 344 228 720
General and administrative expense 4,511 4,398 4,504 4,819
Total 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
</TABLE>
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, 1998, 1997, 1996, 1995 and
1994 and for the years then ended have been derived from the audited
consolidated financial statements of ITLA Capital. The information below
reflects an 86.4 for 1 stock split effective October 17, 1995 and is qualified
in its entirety by the detailed information included elsewhere herein and should
be read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Total interest income $ 101,665 $ 85,117 $ 69,898 $ 62,107 $ 54,306
Total interest expense 51,387 43,310 34,399 29,343 21,732
---------- ---------- ---------- ---------- ----------
Net interest income before provisions for estimated credit
losses and valuation allowance on loans held for sale 50,278 41,807 35,499 32,764 32,574
Provision for estimated credit losses 4,550 3,300 4,871 13,098 6,731
Provision for valuation allowance on loans held for sale 1,400 350 700 4,774 --
---------- ---------- ---------- ---------- ----------
Net interest income after provisions for estimated credit
losses and valuation allowance on loans held for sale 44,328 38,157 29,928 14,892 25,843
---------- ---------- ---------- ---------- ----------
Noninterest income 2,447 1,640 651 1,075 1,491
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 10,564 8,511 5,723 7,313 7,044
Occupancy and equipment 2,783 2,444 1,929 2,230 2,601
Other general and administrative expenses 7,317 7,277 5,434 5,717 6,575
Real estate operations, net 984 433 1,049 5,070 4,381
---------- ---------- ---------- ---------- ----------
Total noninterest expense 21,648 18,665 14,135 20,330 20,601
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes 25,127 21,132 16,444 (4,363) 6,733
Provision (benefit) for income taxes 10,304 8,655 6,420 (1,960) 2,729
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 14,823 $ 12,477 $ 10,024 $ (2,403) $ 4,004
========== ========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 1.95 $ 1.61 $ 1.38 $ (0.52) $ 0.93
DILUTED EARNINGS (LOSS) PER SHARE $ 1.89 $ 1.57 $ 1.36 $ (0.52) $ 0.93
Dividends paid $ -- $ -- $ -- $ -- $ --
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Cash and cash equivalents $ 125,602 $ 123,885 $ 62,599 $ 26,095 $ 13,817
Investment securities available for sale 329 35,281 36,574 -- --
Stock in Federal Home Loan Bank 12,633 11,919 8,349 12,362 3,000
Investment and mortgage-backed securities held to maturity -- 25,132 31,870 56,335 12,690
Loans held for investment, net 862,089 750,853 649,836 439,880 467,343
Loans held for sale, at lower of cost or fair market value 12,188 50,544 1,130 55,812 --
Interest receivable 6,321 4,916 4,411 3,865 3,250
Other real estate owned, net 1,201 3,946 5,416 6,103 10,544
Premises and equipment, net 3,493 3,169 2,610 3,008 3,586
Deferred income taxes 6,270 4,190 3,613 3,309 4,408
Other assets 2,521 2,074 4,035 3,904 2,768
---------- ---------- ---------- ---------- ----------
Total assets $1,032,647 $1,015,909 $ 810,443 $ 610,673 $ 521,406
========== ========== ========== ========== ==========
Deposit accounts $ 866,798 $ 843,813 $ 670,336 $ 494,793 $ 448,557
Federal Home Loan Bank advances 48,500 61,500 43,500 54,000 22,700
Accounts payable and other liabilities 11,467 11,248 7,789 5,188 6,446
Shareholders' equity 105,882 99,348 88,818 56,692 43,703
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $1,032,647 $1,015,909 $ 810,443 $ 610,673 $ 521,406
========== ========== ========== ========== ==========
Book value per share $ 14.77 $ 12.91 $ 11.35 $ 9.48 $ 10.12
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS
Return on average assets 1.46% 1.46% 1.44% (0.44%) 0.79%
Return on average shareholders' equity 13.95% 13.23% 12.86% (5.26%) 9.53%
Net interest margin(1) 4.96% 4.94% 5.19% 6.13% 6.64%
Average interest-earning assets to average
interest-bearing liabilities 113.06% 112.15% 112.14% 108.19% 107.20%
Noninterest expense to average assets 2.13% 2.19% 2.04% 3.70% 4.06%
Efficiency ratio(2) 41.06% 42.96% 39.10% 60.08% 60.48%
Efficiency ratio excluding real estate operations, net 39.19% 41.96% 36.20% 45.10% 47.61%
General and administrative expense to average assets 2.04% 2.14% 1.88% 2.78% 3.20%
Average shareholders' equity to average assets 10.47% 11.06% 11.23% 8.32% 8.28%
Nonperforming assets to total assets 0.64% 1.21% 1.56% 2.14% 5.62%
Nonperforming assets held for investment to total
assets 0.64% 1.21% 1.46% 2.08% 5.62%
Allowance for credit losses to loans held for
investment, net(3) 1.91% 1.60% 1.65% 1.81% 2.32%
Allowance for credit losses to nonaccrual loans(4) 309.37% 146.16% 169.50% 122.45% 58.98%
Net loan recoveries (charge-offs) to average loans
held for investment, net 0.01% (0.28%) (0.37%) (3.27%) (0.97%)
</TABLE>
- ----------
(1) Net interest margin represents net interest income divided by total average
interest-earning assets.
(2) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
(3) Loans held for investment before allowance for credit losses and net of
unearned finance charges and loan fees.
(4) Excludes nonaccrual loans held for sale totaling $783,000 and $366,000 in
1996 and 1995, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis reviews the financial condition
and results of operations of ITLA Capital Corporation and its principal
wholly-owned subsidiaries: Imperial Thrift and Loan Association and ITLA Funding
Corporation. On October 1, 1996, ITLA Capital was formed and became the sole
shareholder of Imperial Thrift and Loan. ITLA Funding was incorporated in
September 1996 and commenced operations on January 1, 1997.
The following discussion and analysis is intended to identify the major
factors that influenced the financial condition as of December 31, 1998 and 1997
and results of operations of ITLA Capital for the years ended December 31, 1998,
1997 and 1996. ITLA Capital's principal business involves the origination of
loans secured primarily by income producing real estate, located predominately
in California. Prior to February 1996, Imperial
18
<PAGE> 19
Thrift and Loan also purchased automobile finance contracts. During 1996,
Imperial Thrift and Loan sold substantially all of this portfolio. No gain or
loss was recognized from this sale.
Consolidated net income was $14.8 million, or $1.89 per diluted share,
in 1998 compared to $12.5 million, or $1.57 per diluted share, in 1997 and $10.0
million, or $1.36 per diluted share, in 1996.
The increase in net earnings in 1998 was due primarily to increased net
interest income, $50.3 million in 1998 compared to $41.8 million in 1997, and an
increase in fee income from mortgage banking activities, $1.6 million in 1998
compared to $1.0 million in 1997, partially offset by an increase in provisions
for estimated credit losses and valuation allowance on loans held for sale, an
aggregate of $6.0 million in 1998 compared to $3.7 million in 1997, an increase
in total real estate operations, net, $1.0 million in 1998 compared to $0.4
million in 1997, an increase in general and administrative expense, $20.7
million in 1998 compared to $18.2 million in 1997, and an increase in provision
for income taxes, $10.3 million in 1998 compared to $8.7 million in 1997.
The 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, an aggregate of $3.7 million in 1997 compared to $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, $0.4 million in 1997 compared to $1.0 million in 1996,
partially offset by an increase in general and administrative expense, $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 return on average assets was 1.46% in 1998 and 1997 and 1.44% in
1996. The return on average shareholders' equity was 13.95% in 1998 compared to
13.23% in 1997 and 12.86% in 1996.
Average total assets was $1,014.3 million in 1998 compared to $852.6
million in 1997, an increase of $161.7 million, or 19.0%, largely due to an
increase in average loans of $138.8 million, or 19.6%.
Average total assets was $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%.
Total loan production, including the unfunded portion of construction
loans, was $531.1 million for the year ended December 31, 1998, consisting of
$394.9 million originated or purchased for the portfolio and $136.2 million
originated by ITLA Funding and sold to third-party investors, compared to total
loan production of $442.0 million and $365.2 million for the years ended
December 31, 1997 and 1996, respectively.
Average deposit accounts totaled $839.3 million in 1998 compared to
$696.5 million in 1997, an increase of $142.8 million, or 20.5%. This increase
was primarily utilized to fund the increase in the loan portfolio. Federal Home
Loan Bank advances averaged $56.5 million in 1998 compared to $53.7 million in
1997, an increase of $2.8 million, or 5.3%.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents, for the periods indicated, condensed
average balance sheet information for ITLA Capital, together with interest
income and yields earned on average interest-earning assets and interest expense
and rates paid on average interest-bearing liabilities. Average balances are
computed using daily average balances. Nonaccrual loans are included in loans
receivable.
19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and investments $ 146,514 $ 7,849 5.36% $ 108,796 $ 5,971 5.49%
Mortgage-backed securities 19,162 1,209 6.31% 28,565 1,836 6.43%
Loans receivable(1):
Secured by real estate 847,219 92,607 10.93% 708,134 77,257 10.91%
Other -- -- 0.00% 313 53 16.93%
----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable 847,219 92,607 10.93% 708,447 77,310 10.91%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,012,895 $ 101,665 10.04% 845,808 $ 85,117 10.06%
=========== =========== =========== ===========
Noninterest-earning assets 16,281 17,678
Allowance for credit losses (14,841) (10,847)
----------- -----------
Total assets $ 1,014,335 $ 852,639
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 104,461 $ 5,505 5.27% $ 67,708 $ 3,508 5.18%
Time certificates 734,856 42,548 5.79% 628,759 36,698 5.84%
----------- ----------- ----------- ----------- ----------- -----------
Total deposit accounts 839,317 48,053 5.73% 696,467 40,206 5.77%
FHLB advances 56,542 3,334 5.90% 53,714 3,104 5.78%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 895,859 $ 51,387 5.74% 750,181 $ 43,310 5.77%
=========== =========== =========== ===========
Noninterest-bearing liabilities 12,256 8,144
Shareholders' equity 106,220 94,314
----------- -----------
Total liabilities and shareholders' equity $ 1,014,335 $ 852,639
=========== ===========
Net interest spread(2) 4.30% 4.29%
=========== ===========
Net interest income before provisions for
estimated credit losses and valuation
allowance on loans held for sale $ 50,278 $ 41,807
=========== ===========
Net interest margin(3) 4.96% 4.94%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1996
----------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and investments $ 86,862 $ 4,571 5.26%
Mortgage-backed securities 37,813 2,177 5.76%
Loans receivable(1):
Secured by real estate 548,471 61,423 11.20%
Other 10,804 1,727 15.98%
----------- ----------- -----------
Total loans receivable 559,275 63,150 11.29%
----------- ----------- -----------
Total interest-earning assets 683,950 $ 69,898 10.22%
=========== ===========
Noninterest-earning assets 20,179
Allowance for credit losses (9,816)
-----------
Total assets $ 694,313
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 48,713 $ 2,386 4.90%
Time certificates 507,598 29,055 5.72%
----------- ----------- -----------
Total deposit accounts 556,311 31,441 5.65%
FHLB advances 53,604 2,958 5.52%
----------- ----------- -----------
Total interest-bearing liabilities 609,915 $ 34,399 5.64%
=========== ===========
Noninterest-bearing liabilities 6,421
Shareholders' equity 77,977
-----------
Total liabilities and shareholders' equity $ 694,313
===========
Net interest spread(2) 4.58%
===========
Net interest income before provisions for
estimated credit losses and valuation
allowance on loans held for sale $ 35,499
===========
Net interest margin(3) 5.19%
===========
</TABLE>
- ----------
(1) Before allowance for credit losses and net of deferred loan fees and costs.
Net loan fee amortization of $2.7 million, $2.2 million and $2.1 million
was included in net interest income for 1998, 1997 and 1996, respectively.
(2) Average yield on interest-earning assets minus average rate paid on
interest-bearing liabilities.
(3) Net interest income divided by total average interest-earning assets.
ITLA Capital's primary source of revenue is net interest income. ITLA
Capital's net interest income is affected by (a) the difference between the
yields recognized on interest-earning assets, including loans and investments,
and the interest rates paid on interest-bearing liabilities, which is referred
to as "net interest spread", and (b) the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets equal or
exceed interest-bearing liabilities, any positive net interest spread will
generate net interest income; if interest-bearing liabilities exceed
interest-earning assets, ITLA Capital may incur a decline in net interest income
even when the net interest spread is positive. For 1998, 1997 and 1996, ITLA
Capital's ratio of average interest-earning assets to average interest-bearing
liabilities was 113.06%, 112.15% and 112.14%, respectively.
The following table sets forth a summary of the changes in interest
income and interest expense resulting from changes in average interest-earning
asset and interest-bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been allocated to
change due to volume and rate in proportion to the relationship of absolute
dollar amounts of each.
20
<PAGE> 21
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
-------------------------------------- --------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
----------------------- -----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and fees earned on:
Loans receivable, net (1) $ 15,226 $ 71 $ 15,297 $ 15,888 $ (1,728) $ 14,160
Cash and investment securities 1,952 (74) 1,878 1,224 176 1,400
Mortgage-backed securities (610) (17) (627) (495) 154 (341)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest income 16,568 (20) 16,548 16,617 (1,398) 15,219
-------- -------- -------- -------- -------- --------
Interest paid on:
Deposit accounts 7,989 (142) 7,847 8,159 606 8,765
FHLB advances 192 38 230 4 142 146
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest expense 8,181 (104) 8,077 8,163 748 8,911
-------- -------- -------- -------- -------- --------
Increase (decrease) in net
interest income $ 8,387 $ 84 $ 8,471 $ 8,454 $ (2,146) $ 6,308
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Loans receivable, net consists of loans held for investment and loans held
for sale.
1998 Compared to 1997
Net interest income totaled $50.3 million in 1998 compared to $41.8
million in 1997, an increase of $8.5 million or 20.3%. The increase in net
interest income was due primarily to growth in average interest-earning assets,
which increased from $845.8 million in 1997 to $1,012.9 million in 1998.
Interest income totaled $101.7 million in 1998 compared to $85.1 million
in 1997, an increase of $16.6 million, or 19.4%.
Interest and fee income from loans receivable totaled $92.6 million in
1998 compared to $77.3 million in 1997, an increase of $15.3 million, or 19.8%.
Interest and fee income from loans increased due to higher loan volume in 1998
and a slight increase in loan yield. The average balance of loans receivable was
$847.2 million in 1998 compared to $708.4 million in 1997, an increase of $138.8
million, or 19.6% reflecting the increase in loans held for investment. The
average yield on loans receivable was 10.93% in 1998 compared to 10.91% in 1997.
The slight increase in loan yield was primarily due to prepayment fees realized
as a result of early loan payoffs. Excluding these prepayment fees, the average
yield on loans receivable would have been 10.62% in 1998 compared to 10.63% in
1997. Although loan yields did not change significantly in 1998, the continued
origination of lower yielding real estate loans could result in ITLA Capital
achieving lower average yields in future operating periods.
Interest income from mortgage-backed securities totaled $1.2 million in
1998 compared to $1.8 million in 1997, a decrease of $0.6 million, or 34.2%, due
to a decline in the average outstanding balance and a slight decrease in yield.
The average balance of mortgage-backed securities declined to $19.2 million in
1998 from $28.6 million in 1997 due to principal repayments received during the
first nine months of 1998 and the sale of the remaining mortgage-backed
securities in the fourth quarter of 1998. The yield on the mortgage-backed
securities was 6.31% in 1998 compared to 6.43% in 1997 due to decreased yields
from the underlying adjustable rate mortgages in 1998 compared to 1997.
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<PAGE> 22
Interest income from cash and investments totaled $7.8 million in 1998
compared to $6.0 million in 1997, an increase of $1.8 million, or 31.5%, due
primarily to an increased average outstanding balance, partially offset by a
decline in yield. The average balance of cash and investment securities was
$146.5 million in 1998 compared to $108.8 million in 1997, an increase of $37.7
million, or 34.7%. The average yield on cash and investment securities was 5.36%
in 1998 compared to 5.49% in 1997, which was consistent with the decline in
short-term market interest rates.
Interest expense totaled $51.4 million in 1998 compared to $43.3 million
in 1997, an increase of $8.1 million or 18.6%.
Interest expense from deposit accounts totaled $48.1 million in 1998
compared to $40.2 million in 1997, an increase of $7.9 million, or 19.5%, due to
an increase in the volume of deposit accounts, partially offset by a decline in
the average rate paid on deposits. The average balance of deposits was $839.3
million in 1998 compared to $696.5 million in 1997, an increase of $142.8
million, or 20.5%, as ITLA Capital increased deposits to fund growth in the loan
portfolio. The average rate paid on deposits was 5.73% in 1998 compared to 5.77%
in 1997.
Interest expense from Federal Home Loan Bank advances totaled $3.3
million in 1998 compared to $3.1 million in 1997, due primarily to increases in
both the average outstanding balance and in the average rate paid on Federal
Home Loan Bank advances. The average balance of Federal Home Loan Bank advances
was $56.5 million in 1998 compared to $53.7 million in 1997, an increase of $2.8
million, or 5.3%. The average rate paid on FHLB advances was 5.90% in 1998
compared to 5.78% in 1997.
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 was due to
the pricing of real estate loans in response to competitive factors and ITLA
Capital's emphasis on attempting to manage credit risk.
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. This decrease was 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.
22
<PAGE> 23
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 ITLA Capital
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 Federal Home Loan Bank 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.
PROVISION FOR ESTIMATED CREDIT LOSSES
Provision for estimated credit losses totaled $4.6 million, $3.3 million
and $4.9 million in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
Provision for estimated credit losses totaled $4.6 million in 1998
compared to $3.3 million in 1997, an increase of $1.3 million, or 37.9%. The
increase in the provision in 1998 reflects the growth in ITLA Capital's
portfolio of loans held for investment, which increased by $115.9 million, or
15.2% from $763.0 million at December 31, 1997 to $878.9 million at December 31,
1998. The provision also increased to reflect changes in the composition of the
loan portfolio that occurred in 1998, including increased construction lending,
which totaled $71.4 million at December 31, 1998 compared to $39.7 million at
December 31, 1997, and increased risk resulting from the geographic expansion of
the loan portfolio to loans outside of the state of California, which totaled
$191.1 million at December 31, 1998 compared to $139.1 million at December 31,
1997. In addition, ITLA Capital increased by 5% its acceptable loan to value
ratios on new loan originations during 1998 in response to competitive pressures
in the marketplace. Because of the increased risk profile resulting from these
changes to the composition of ITLA Capital's loan portfolio, the provision for
estimated credit losses was increased in 1998. See also "Credit Risk Elements -
Allowance for Credit Losses and Nonperforming Assets".
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 ITLA Capital's
nonperforming assets and improved economic conditions in ITLA Capital's
marketplace. Nonperforming assets to total assets declined to 1.21% as of
December 31, 1997 from 1.56% 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 1.60% of total loans receivable held for
investment.
PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD FOR SALE
Provision for valuation allowance on loans held for sale totaled $1.4
million, $0.4 million and $0.7 million in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
Provision for valuation allowance on loans held for sale totaled $1.4
million in 1998 compared to $0.4 million in 1997, an increase of $1.0 million,
or 250.0%. In the current year, ITLA Capital designated a portfolio of loans
with a gross principal balance of $12.0 million, including $7.7 million of
nonperforming loans, previously classified as held for investment as held for
sale. ITLA Capital recorded a provision for valuation allowance on loans held
for sale totaling $1.4 million in conjunction with the designation of these
loans. These loans were sold
23
<PAGE> 24
during the year with no additional gain or loss. In the prior year, a provision
for valuation allowance on loans held for sale totaling $0.4 million was
recorded to adjust the carrying value of the remaining portfolio of automobile
contracts held for sale to their estimated fair market value.
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.
NONINTEREST INCOME
Noninterest income totaled $2.4 million, $1.6 million and $0.7 million
in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
Noninterest income totaled $2.4 million in 1998 compared to $1.6 million
in 1997, an increase of $0.8 million, or 49.2%. The increase in noninterest
income in 1998 was due primarily to an increase in fee income earned by ITLA
Funding. In 1998, ITLA Funding originated $136.2 million in fixed rate loans on
behalf of third-party investors and recognized $1.6 million of fee income from
these loans. The demand for fixed rate commercial real estate loans of the type
originated by ITLA Funding for third-party investors declined significantly in
the third quarter of 1998 due to a disruption in the market for the securities
created from these loans. Accordingly, ITLA Capital expects a reduction in the
volume of loans originated for third-party investors and a corresponding decline
in fee income from these originations. ITLA Funding also originated $102.6
million of loans on behalf of Imperial Thrift and Loan and $12.3 million of
fixed rate warehouse loans classified as held for sale. No revenues were
recognized on a consolidated basis from these intercompany originations.
1997 Compared to 1996
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 ITLA Funding from its initial
year of operations. In 1997, ITLA Funding originated $86.4 million in loans and
recognized $1.0 million of fee income from loans originated on behalf of
third-party investors. ITLA Funding also originated $32.2 million of loans on
behalf of Imperial Thrift and Loan. No revenues were recognized on a
consolidated basis from these intercompany originations.
24
<PAGE> 25
NONINTEREST EXPENSE
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense totaled $20.7 million, $18.2 million
and $13.1 million in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
General and administrative expense totaled $20.7 million in 1998
compared to $18.2 million in 1997, an increase of $2.5 million, or 13.3%.
Compensation and benefits expense totaled $10.6 million in 1998 compared
to $8.5 million in 1997, an increase of $2.1 million, or 24.1%. The increase in
compensation and benefits expense was due primarily to an increase in staffing
at ITLA Funding, as the number of average full-time equivalent employees totaled
167 during 1998 compared to 151 during 1997. Compensation and benefits expense
also increased in 1998 due to the increased origination volume by ITLA Funding,
as the commissions paid to ITLA Funding's loan origination staff are expensed as
incurred, whereas the origination costs paid by Imperial Thrift and Loan for
loans placed into the portfolio are deferred and amortized over the loan term as
an adjustment to yield.
Occupancy and equipment expense totaled $2.8 million in 1998 compared to
$2.4 million in 1997, an increase of $0.4 million, or 13.9%. The increase in
occupancy and equipment expense was due primarily to additional office space for
ITLA Funding's new headquarters in Glendale, California, and due to additional
space leased at ITLA Capital's headquarters in La Jolla, California.
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 totaled 151 during 1997
compared to 123 during 1996. This increase was due primarily to the increase in
staff at ITLA 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 ITLA 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 ITLA Funding
during its initial year of operations, which totaled $0.9 million, and to an
increase in advertising expense incurred as a result of ITLA Capital's business
expansion activities in 1997, which totaled $0.5 million.
25
<PAGE> 26
REAL ESTATE OPERATIONS, NET
Real estate operations, net, totaled $1.0 million, $0.4 million and $1.0
million in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
Real estate operations, net, totaled $1.0 million in 1998 compared to
$0.4 million in 1997, an increase of $0.6 million, or 127.3%. The increase in
real estate operations, net, in 1998 compared to 1997 is primarily due to an
increase in provisions for estimated losses recorded due to the accelerated
disposition of other real estate owned. Provision for estimated losses on other
real estate owned totaled $0.6 million in 1998 compared to $0.2 million in 1997.
Other real estate owned expenses totaled $0.3 million in 1998 compared to $0.2
million in 1997. There was a loss of $0.1 million from sales of other real
estate owned in 1998 compared to substantially no gain or loss in 1997.
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 other
real estate owned expenses in 1997 compared to 1996 is consistent with the
decline in the amount of other real estate owned held during the two periods.
The average balance of other real estate owned was $4.2 million in 1997 compared
to $6.5 million in 1996. Provision for estimated losses on other real estate
owned totaled $0.2 million in 1997 compared to $1.0 million in 1996 and other
real estate owned expenses totaled $0.2 million in 1997 compared to $0.4 million
in 1996. There was substantially no gain or loss from sales of other real estate
owned in 1997 compared to a net gain of $0.4 million in 1996.
INCOME TAXES
Provision for income taxes totaled $10.3 million, $8.7 million and $6.4
million in 1998, 1997 and 1996, respectively.
1998 Compared to 1997
Provision for income taxes totaled $10.3 million in 1998 compared to
$8.7 million in 1997, an increase of $1.6 million, or 18.4%. The increase in
provision for income taxes was due to the increase in pretax net income, as the
effective tax rate remained at 41.0% for both 1998 and 1997.
At December 31, 1998, ITLA Capital had a net deferred tax asset of $6.3
million. The deferred tax asset related primarily to loss provisions recognized
on ITLA Capital's financial statements which have not yet been recognized on
ITLA Capital's income tax returns. ITLA Capital has no deferred tax assets
relating to net operating loss carryforward deductions. The deferred tax asset
is considered fully realizable, as when the temporary differences associated
with the deferred tax asset are recognized for income tax purposes, those
deductions are expected to be fully offset, either by carryback against
previously taxed income or by future taxable income. Accordingly, ITLA Capital
has not established a valuation allowance on the deferred tax asset.
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.
26
<PAGE> 27
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
computer programs used by ITLA Capital that have time-sensitive software 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.
ITLA Capital's State of Readiness. During the first quarter of 1998,
ITLA Capital formulated its plan to address the Year 2000 issue. Since that
time, ITLA Capital has taken the following steps:
- Established a Year 2000 Project Team;
- Inventoried ITLA Capital applications and system software;
- Built an internal tracking database for application and vendor
software;
- Developed a time line for completion of Year 2000 project
milestones;
- Surveyed major customers to assess the Year 2000 impact and their
ability to honor loan obligations;
- Commenced awareness and education activities for employees;
- Processed responses to customer inquiries and educated customers
on the Year 2000 issue;
- Tested the year 2000 compliant version of ITLA Capital's core
banking system;
- Commenced processing all daily activity on the upgraded, Year
2000 compliant release of the core banking system; and
- Submitted to examinations by the FDIC to assess the adequacy of
ITLA Capital's plan for addressing the Year 2000 issue. The
results of these examinations are confidential as a matter of
law.
ITLA Capital Resources Invested in the Year 2000 Project. ITLA Capital's
Year 2000 Project Team is responsible for ensuring that all ITLA Capital systems
are identified, analyzed for Year 2000 compliance, and corrected, if necessary,
by September 30, 1999. The Year 2000 Project Team members represent all
functional areas of ITLA Capital and subsidiaries. ITLA Capital's Board of
Directors oversees the Year 2000 plan and provides guidance and resources to and
receives quarterly updates from the Year 2000 Project Team.
ITLA Capital is expensing the cost of all required system changes and
these costs are funded through operating cash flows. The total estimated cost of
the Year 2000 conversion project is not expected to materially impact ITLA
Capital's financial condition or results of operations. ITLA Capital does not
expect significant increases in future data processing costs relating to Year
2000 compliance.
The Risks of ITLA Capital's Year 2000 Issues. Not unlike other financial
service providers, ITLA Capital and its operations may be significantly affected
by the Year 2000 issue due to dependence on technology and date-sensitive data.
Computer software, hardware and other equipment, both within and outside ITLA
Capital's direct control, and third parties with whom ITLA Capital
electronically or operationally interfaces (including, without limitation, its
customers and third party vendors) are likely to be affected. If computer
systems are not modified to identify the Year 2000, computer applications could
fail or create erroneous results. Many calculations reliant on date field
information, such as interest, payment or due dates and other operating
functions, could generate erroneous results, and ITLA Capital could experience
an inability to process transactions, prepare statements or engage in similar
normal business activities. A failure to adequately address the Year 2000 issue
could adversely affect the viability of ITLA Capital's suppliers and creditors
and the creditworthiness of its borrowers. Thus, if not adequately addressed,
the Year 2000 issue could result in a significant adverse impact on ITLA
Capital's operations and, in turn, its financial condition and results of
operations.
ITLA Capital's Contingency Plan. ITLA Capital has developed or is
developing contingency plans for each of its mission critical systems. These
contingency plans include selecting a new vendor or service provider or system
conversions. In the event a current vendor's system fails during Year 2000
compliance testing and it is determined that the system failure cannot be
corrected, ITLA Capital will convert to an alternative, Year 2000 compliant
system.
ITLA Capital's core banking system is used by a number of other
financial institutions and has been examined for Year 2000 readiness by the
Federal Financial Institutions Examination Counsel and has been found to be Year
2000 compliant.
27
<PAGE> 28
FINANCIAL CONDITION
GENERAL
Total assets increased $222.2 million to $1,032.6 million at December
31, 1998 from $810.4 million at December 31, 1996, an increase of 27.4%. The
increase in assets during this two year period was funded primarily by growth of
$196.5 million in deposits, an increase of $17.1 million in shareholders'
equity, resulting primarily from the retention of earnings from 1997 and 1998
totaling $27.1 million and the issuance of $0.4 million of common stock from the
exercise of stock options, partially offset by the purchase of $10.5 million of
treasury stock, a $5.0 million increase in Federal Home Loan Bank advances, and
a $3.7 million increase in accounts payable and other liabilities. During this
period, ITLA Capital increased its efforts to originate real estate loans.
Total net loans receivable secured by real estate, including loans held
for sale, increased by $224.5 million to $874.3 million at December 31, 1998
from $649.8 million at December 31, 1996, an increase of 34.5%. Cash and
investment securities increased by $26.7 million to $125.9 million at December
31, 1998 from $99.2 million at December 31, 1996. ITLA Capital held $31.9
million of mortgage-backed securities at December 31, 1996. Mortgage-backed
securities declined to zero at December 31, 1998 due to the sale of the
securities in the fourth quarter of 1998.
At December 31, 1998 Compared with December 31, 1997
Total assets increased slightly, by $16.7 million, or 1.6%, to remain at
approximately $1.0 billion at both December 31, 1998 and December 31, 1997. This
increase was primarily due to a $72.9 million, or 9.1%, increase in net real
estate loans receivable, including real estate loans held for sale, to $874.3
million at December 31, 1998 from $801.4 million at December 31, 1997. Asset
growth also included increases in cash and cash equivalents of $1.7 million and
in Federal Home Loan Bank stock of $0.7 million. These increases were partially
offset by reductions in investment securities to $0.3 million from $35.3
million, in mortgage-backed securities to zero from $25.1 million, and in other
real estate owned to $1.2 million from $3.9 million, at December 31, 1998 and
1997, respectively. The growth in assets was funded primarily by an increase in
deposits of $23.0 million from December 31, 1997 to December 31, 1998. Deposit
growth was concentrated in money market and passbook accounts, which increased
from $76.8 million at December 31, 1997 to $132.7 million at December 31, 1998,
partially offset by a decrease in time certificates, which decreased from $767.0
million at December 31, 1997 to $734.1 million at December 31, 1998.
Shareholders' equity increased by $6.6 million, due primarily to the retention
of $14.8 million of net income as retained earnings for the year and the
issuance of $0.1 million of common stock through the exercise of employee stock
options, partially offset by the purchase of $8.2 million of ITLA Capital's
stock currently held as treasury stock and a $0.1 million increase in unrealized
loss on investment securities available for sale.
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
Federal Home Loan Bank 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 other real estate owned 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 Federal Home Loan Bank advances of $173.4
million and $18.0 million, respectively, from December 31, 1996 to December 31,
1997. Deposit growth was concentrated in time certificates, which increased from
$608.5 million at December 31, 1996 to $767.0 million at December 31, 1997, as
well as money market 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
28
<PAGE> 29
issuance of $0.3 million of common stock through the exercise of employee stock
options and payment of stock bonuses, partially offset by the purchase of $2.3
million of treasury stock.
LOANS RECEIVABLE
The following table shows the comparison of ITLA Capital's loans held
for investment and held for sale by major categories as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 811,076 $ 727,479 $ 644,079 $ 439,778 $ 413,856
Construction 71,385 39,668 22,498 14,396 12,398
Automobile finance contracts -- -- -- -- 74,183
Direct financing leases -- -- -- -- 319
--------- --------- --------- --------- ---------
882,461 767,147 666,577 454,174 500,756
Unearned income on automobile finance contracts -- -- -- -- (15,641)
Deferred loan origination fees and costs (3,561) (4,116) (5,856) (6,189) (6,696)
--------- --------- --------- --------- ---------
878,900 763,031 660,721 447,985 478,419
Allowance for credit losses (16,811) (12,178) (10,885) (8,105) (11,076)
--------- --------- --------- --------- ---------
$ 862,089 $ 750,853 $ 649,836 $ 439,880 $ 467,343
========= ========= ========= ========= =========
LOANS HELD FOR SALE (AT LOWER OF COST OR FAIR MARKET VALUE):
Real estate $ 12,188 $ 50,786 $ -- $ -- $ --
Automobile finance contracts -- -- 1,291 68,034 --
Direct financing leases -- -- 44 63 --
--------- --------- --------- --------- ---------
12,188 50,786 1,335 68,097 --
Unearned income on automobile finance contracts -- -- (205) (12,285) --
Deferred loan origination fees and costs -- (242) -- -- --
--------- --------- --------- --------- ---------
$ 12,188 $ 50,544 $ 1,130 $ 55,812 $ --
========= ========= ========= ========= =========
TOTAL LOANS RECEIVABLE:
Real estate $ 823,264 $ 778,265 $ 644,079 $ 439,778 $ 413,856
Construction 71,385 39,668 22,498 14,396 12,398
Automobile finance contracts -- -- 1,291 68,034 74,183
Direct financing leases -- -- 44 63 319
--------- --------- --------- --------- ---------
894,649 817,933 667,912 522,271 500,756
Unearned income on automobile finance contracts -- -- (205) (12,285) (15,641)
Deferred loan origination fees and costs (3,561) (4,358) (5,856) (6,189) (6,696)
--------- --------- --------- --------- ---------
891,088 813,575 661,851 503,797 478,419
Allowance for credit losses (16,811) (12,178) (10,885) (8,105) (11,076)
--------- --------- --------- --------- ---------
$ 874,277 $ 801,397 $ 650,966 $ 495,692 $ 467,343
========= ========= ========= ========= =========
</TABLE>
29
<PAGE> 30
The approximate contractual maturities of loans held for investment and
held for sale at December 31, 1998 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 $ 16,650 $111,147 $695,467 $823,264
Construction 48,778 17,156 5,451 71,385
-------- -------- -------- --------
$ 65,428 $128,303 $700,918 $894,649
======== ======== ======== ========
Loans with fixed interest rates $ 6,536 $ 21,779 $ 16,287 $ 44,602
Loans with variable interest rates 58,892 106,524 684,631 850,047
-------- -------- -------- --------
$ 65,428 $128,303 $700,918 $894,649
======== ======== ======== ========
Percentage with variable interest rates 90% 83% 98% 95%
======== ======== ======== ========
</TABLE>
The table above should not be regarded as a forecast of future cash
collections because a substantial portion of loans receivable may be renewed or
repaid prior to contractual maturity.
30
<PAGE> 31
The following table sets forth certain information regarding the real
property collateral securing ITLA Capital's loans held for investment and held
for sale as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER AVERAGE PERCENT NON-
OF GROSS LOAN OF ACCRUAL
LOANS AMOUNT BALANCE TOTAL LOANS
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential:
Five or more units 186 $146,243 $ 786.3 16.3% $ 274
One to four units 79 5,767 73.0 0.7% --
-------- -------- -------- --------
Total residential 265 152,010 573.6 17.0% 274
-------- -------- -------- --------
Commercial:
Retail 245 233,818 954.4 26.1% 137
Special purpose - hotel 74 136,348 1,842.5 15.2% 951
Office 123 108,947 885.7 12.2% 3,107
Industrial / warehouse 95 57,581 606.1 6.4% 107
Mixed-use 85 35,276 415.0 3.9% 563
Mobile home parks 28 14,360 512.9 1.6% --
Other 143 81,797 572.0 9.3% --
-------- -------- -------- --------
Total commercial 793 668,127 842.5 74.7% 4,865
-------- -------- -------- --------
Construction and Land:
Construction 35 71,385 2,039.6 8.0% --
Land 10 3,127 312.7 0.3% 295
-------- -------- -------- --------
Total construction and land 45 74,512 1,655.8 8.3% 295
-------- -------- -------- --------
1,103 $894,649 $ 811.1 100.0% $ 5,434
======== ======== ======== ========
</TABLE>
31
<PAGE> 32
The following table sets forth the location of the collateral for ITLA
Capital's loans held for investment and held for sale as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER PERCENT
OF GROSS OF
LOANS AMOUNT TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Southern California:
Los Angeles County 330 $251,523 28.1%
Orange County 54 44,063 4.9%
San Diego County 39 42,795 4.8%
Riverside County 53 40,978 4.6%
San Bernardino County 54 31,930 3.6%
All Other Southern California Counties 40 31,907 3.5%
-------- -------- --------
Total Southern California 570 443,196 49.5%
-------- -------- --------
Northern California:
San Francisco County 43 47,942 5.4%
Sacramento County 46 31,882 3.6%
Santa Clara County 43 31,464 3.5%
Alameda County 51 26,622 3.0%
Fresno County 66 23,920 2.7%
Contra Costa County 27 23,151 2.6%
All Other Northern California Counties 134 75,409 8.3%
-------- -------- --------
Total Northern California 410 260,390 29.1%
-------- -------- --------
Outside California:
Nevada 37 57,415 6.4%
Arizona 36 47,791 5.3%
Washington 9 27,132 3.0%
Colorado 6 15,271 1.7%
Oregon 6 6,343 0.7%
Arkansas 2 6,114 0.7%
Idaho 3 5,822 0.7%
Texas 7 5,452 0.6%
All Other Outside California 17 19,723 2.3%
-------- -------- --------
Total Outside California 123 191,063 21.4%
-------- -------- --------
1,103 $894,649 100.0%
======== ======== ========
</TABLE>
32
<PAGE> 33
Although ITLA Capital generally seeks to limit risks associated with its
portfolio of real estate and construction loans by limiting the geographic
concentration and by varying the types of underlying collateral, significant
risk concentrations still remain. Concentrations of loans in certain geographic
regions, for example, cause ITLA Capital's risk associated with these loans to
be closely associated with the general economic and social environment of the
region. Localized economic and competitive conditions, natural disasters or
social conditions all may affect the values of collateral located within a
particular geographic area. In addition, certain types of properties may be more
or less subject to changes in prevailing economic, competitive or social
conditions.
The following table sets forth certain information with respect to ITLA
Capital's originations and loans held for investment and loans held for sale.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31
----------------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross real estate loans originated and retained
in the Company's portfolio $380,325 $351,832 $303,091
Gross real estate loans originated by Funding
on behalf of third-party investors $136,162 $ 86,389 $ --
Gross fixed rate loans classified as
held for sale $ 12,285 $ -- $ --
Gross real estate loans purchased $ 2,361 $ 3,736 $ 62,093
Gross real estate loans at end of period $894,649 $817,933 $666,577
Weighted-average portfolio yield 10.93% 10.91% 11.20%
Average size of loans originated and retained
in the Company's portfolio $ 1,503 $ 1,530 $ 1,493
</TABLE>
33
<PAGE> 34
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table shows the amortized cost and approximate fair value
of investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- -----------------------
APPROX- APPROX- APPROX-
IMATE IMATE IMATE
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- -------- ---------- -------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency $ -- $ -- $35,056 $35,087 $35,515 $35,515
Equity securities 385 135 -- -- -- --
Certificates of deposit 194 194 194 194 1,059 1,059
------- ------- ------- ------- ------- -------
Total available-for-sale 579 329 35,250 35,281 36,574 36,574
------- ------- ------- ------- ------- -------
Held-to-maturity:
Mortgage-backed securities -- -- 25,132 25,063 31,870 31,319
------- ------- ------- ------- ------- -------
Total held-to-maturity -- -- 25,132 25,063 31,870 31,319
------- ------- ------- ------- ------- -------
Total investment and
mortgage-backed
securities $ 579 $ 329 $60,382 $60,344 $68,444 $67,893
======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1998, investment securities available for sale,
excluding equity securities, which have no contractual maturity or stated yield,
consisted of $0.2 million of certificates of deposit that mature in one year or
less with an average yield of 5.30%.
During 1998, ITLA Capital sold its "held to maturity" mortgage-backed
securities portfolio, realizing a net gain of $85,000 from the sale, and
reinvested the proceeds from the sale in higher yielding loans originated
subsequent to the sale. The mortgage-backed securities portfolio was sold
because of a change in long-term investment strategy. At the time of sale, the
mortgage-backed securities were carried at an amortized cost of $17.8 million.
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to ITLA Capital's ability to maintain cash flow
adequate to fund operations and meet obligations and other commitments on a
timely basis, including the payment of maturing deposits and the origination or
purchase of new loans receivable. ITLA Capital maintains a cash and investment
securities portfolio designed to satisfy operating and regulatory liquidity
requirements while preserving capital and maximizing yield. As of December 31,
1998 and 1997, Imperial Thrift and Loan's liquidity ratios were 12.3% and 14.1%,
respectively, exceeding the regulatory requirement of 1.5%. In addition, ITLA
Capital's liquidity position is supported by a credit facility with the Federal
Home Loan Bank of San Francisco. As of December 31, 1998, ITLA Capital had
remaining available borrowing capacity under this credit facility of $22.3
million, plus $30.0 million of unused federal funds credit facilities under
established lines of credit with two banks.
34
<PAGE> 35
Total deposit accounts increased to $866.8 million at December 31, 1998
from $843.8 million at December 31, 1997, an increase of $23.0 million, or 2.7%.
The funds provided from the increase in deposits were used primarily to fund the
growth in ITLA Capital's loan portfolio. 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 to fund the growth in ITLA Capital's loan portfolio. ITLA
Capital purchased $31.9 million of deposits in the second quarter of 1996 and
$28.0 million of deposits in the third quarter of 1996 at a total premium of
$0.5 million. ITLA Capital retained 59% and 76% of the funds from maturing time
certificates through rollover of the certificates in 1998 and 1997,
respectively. Although ITLA Capital competes for deposits primarily on the basis
of rates, based on its historical experience regarding retention of deposits,
management believes that a significant portion of deposits will remain with ITLA
Capital upon maturity on an ongoing basis.
ITLA Capital's deposits have increased from $670.3 million at December
31, 1996 to $866.8 million at December 31, 1998. The following table sets forth
information regarding deposits outstanding at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market and passbook accounts $132,697 $ 76,786 $ 61,797
Time certificates under $100,000 518,309 522,014 511,908
Time certificates $100,000 and over 215,792 245,013 96,631
-------- -------- --------
$866,798 $843,813 $670,336
======== ======== ========
</TABLE>
CAPITAL RESOURCES
As of December 31, 1998, Imperial Thrift and Loan's leverage, tier 1
risk-based and total risk-based capital ratios were 8.66%, 9.34% and 10.60%,
respectively. These ratios were 9.61%, 11.41% and 12.67% as of December 31,
1997, respectively. The minimum regulatory requirements for leverage, tier 1
risk-based and total risk-based capital ratios are 4.0%, 4.0% and 8.0%,
respectively. As of December 31, 1998, Imperial Thrift and Loan's capital
position was designated as "well capitalized" for regulatory purposes. Imperial
Thrift and Loan's capital ratios decreased in 1998 compared to 1997 because of a
$27.0 million dividend made by Imperial Thrift and Loan to ITLA Capital.
ITLA Capital's shareholders' equity increased $6.6 million from December
31, 1997 to December 31, 1998, due primarily to the accumulation of $14.8
million in net income as retained earnings for the year and a $0.1 million
increase from the issuance of common stock through the exercise of employee
stock options, partially offset by a $8.2 million reduction due to the
repurchase of 539,000 shares of ITLA Capital's stock currently held as treasury
stock and a $0.1 million increase in unrealized loss on investment securities
available for sale. There were no dividends declared or paid by ITLA Capital
during 1998.
35
<PAGE> 36
CREDIT RISK ELEMENTS
ALLOWANCE FOR CREDIT LOSSES AND NONPERFORMING ASSETS
The following table provides certain information with respect to ITLA
Capital's allowance for credit losses, including charge-offs, recoveries and
selected ratios, for the periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 12,178 $ 10,885 $ 8,105 $ 11,076 $ 8,800
Provision for estimated credit losses 4,550 3,300 4,871 13,098 6,731
Charge-offs:
Loans secured by real estate (64) (2,124) (2,237) (9,448) (2,676)
Construction loans -- -- -- (43) (27)
Automobile finance contracts -- -- -- (7,212) (1,870)
Direct financing leases -- -- -- (82) (432)
--------- --------- --------- --------- ---------
Total charge-offs (64) (2,124) (2,237) (16,785) (5,005)
--------- --------- --------- --------- ---------
Recoveries:
Loans secured by real estate 147 117 146 45 132
Automobile finance contracts -- -- -- 632 297
Direct financing leases -- -- -- 39 121
--------- --------- --------- --------- ---------
Total recoveries 147 117 146 716 550
--------- --------- --------- --------- ---------
Net recoveries (charge-offs) 83 (2,007) (2,091) (16,069) (4,455)
--------- --------- --------- --------- ---------
Balance at end of year $ 16,811 $ 12,178 $ 10,885 $ 8,105 $ 11,076
========= ========= ========= ========= =========
Loans Held for Investment:
Average loans held for investment outstanding
during the year $ 811,847 $ 708,447 $ 559,275 $ 490,826 $ 459,332
Loans held for investment, net, at end of year (1) $ 878,900 $ 763,031 $ 660,721 $ 447,985 $ 478,419
Selected Ratios:
Net recoveries (charge-offs) to average loans
held for investment 0.01% (0.28%) (0.37%) (3.27%) (0.97%)
Net recoveries (charge-offs) to loans held for
investment, net, at end of year (1) 0.01% (0.26%) (0.32%) (3.59%) (0.93%)
Allowance for credit losses to loans held for
investment, net, at end of year (1) 1.91% 1.60% 1.65% 1.81% 2.32%
Allowance for credit losses to nonaccrual loans (2) 309.37% 146.16% 169.50% 122.45% 58.98%
</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.
36
<PAGE> 37
The allowance for credit losses increased to $16.8 million, 1.91% of
loans held for investment, at December 31, 1998 from $12.2 million, 1.60% of
loans held for investment, at December 31, 1997. The increase in the allowance
was due primarily to growth in ITLA Capital's portfolio of loans held for
investment, which increased by $115.9 million, or 15.2% from $763.0 million at
December 31, 1997 to $878.9 million at December 31, 1998, as well as due to the
increased provisions for estimated credit losses recorded in 1998 due to
increased construction lending, increased out of state lending, and revised loan
underwriting criteria used in 1998. The allowance also increased due to the
lower than expected level of loan losses charged against the allowance in 1998,
as ITLA Capital received net recoveries totaling $0.1 million in 1998 compared
to net charge-offs totaling $2.0 million in 1997. ITLA Capital does not expect
its loan losses to continue in future periods at the level experienced in 1998.
The allowance for credit losses increased to $12.2 million at December
31, 1997 from $10.9 million at December 31, 1996. ITLA Capital 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 ITLA
Capital'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 ITLA Capital'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 ITLA Capital 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, ITLA Capital 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 ITLA Capital was willing to entertain for the
resolution and disposition of problem loans. The accelerated resolution strategy
involved ITLA Capital pursuing bulk sales and/or foreclosure on a greater
proportion of problem real estate loans rather than seeking workouts or
restructurings. In addition, ITLA Capital decided to shorten the marketing
period to more quickly dispose of its other real estate owned. 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 certain properties securing
ITLA Capital's real estate loans. Lastly, credit loss provisions related to ITLA
Capital's automobile finance contract portfolio were increased as a result of
ITLA Capital'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.
37
<PAGE> 38
The following table sets forth management's historical allocation of the
allowance for credit losses by loan or contract category and the percentage of
gross loans in each category to total gross loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS FOR CREDIT LOANS
LOSSES (1) LOSSES (1) LOSSES (1) LOSSES (1) LOSSES (1)
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN OR CONTRACT
CATEGORIES:
Secured by
real estate $16,811 100.0% $12,178 100.0% $10,885 99.8% $ 8,096 85.1% $ 9,306 85.1%
Automobile
finance (2) -- 0.0% -- 0.0% -- 0.2% -- 14.8% 1,750 14.8%
Direct financing
leases -- 0.0% -- 0.0% -- 0.0% 9 0.1% 20 0.1%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $16,811 100.0% $12,178 100.0% $10,885 100.0% $ 8,105 100.0% $11,076 100.0%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</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, 1998,
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 and geographic 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 ITLA Capital's allowance for credit losses as of December 31, 1998
was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While management believes the estimates and assumptions
used in its determination of the adequacy of the allowance are reasonable, there
can be no assurance that such estimates and assumptions will not be proven
incorrect in the future, or that the actual amount of future provisions will not
exceed the amount of past provisions or that any increased provisions that may
be required will not adversely impact ITLA Capital's financial condition and
results of operations. In addition, the determination of the amount of the
allowance for credit losses is subject to review by Imperial Thrift and Loan'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.
38
<PAGE> 39
The following table sets forth the delinquency status of ITLA Capital's
real estate loan portfolio at each of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
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 $ 2,699 0.30% $ 3,654 0.45% $ 3,614 0.54%
60 - 89 days 2,000 0.22% 2,833 0.35% 5,016 0.75%
90 days or more 4,023 0.45% 4,491 0.54% 4,601 0.69%
------- ------- ------- ------- ------- -------
Total loans delinquent $ 8,722 0.97% $10,978 1.34% $13,231 1.98%
======= ======= ======= ======= ======= =======
</TABLE>
ITLA Capital's loan administration, underwriting and asset management
departments all participate in various aspects of our program to monitor real
estate loan performance. The loan administration department monitors payment
performance and borrower adherence to other contractual obligations. In addition
to reviewing the quality of newly originated loans, all real estate loans of
$1.5 million or greater are reviewed annually. In addition, independent outside
consultants periodically review the real estate loan portfolio and report
findings to management and the audit committee of the board of directors. Loans
considered by any initial review source to warrant special attention are
referred to the asset management department for its analysis and action
recommendations. The asset management department may further recommend
classification of loans to Imperial Thrift and Loan's review and reserve
committee. This committee meets at least monthly to review the status of
classified loans, consider new classifications or declassifications, determine
the need for and amount of any charge offs, and recommend to Imperial Thrift and
Loan's executive committee of the board of directors the level of allowance for
credit losses to be maintained. If management believes that the collection of
the full amount of principal is unlikely and the value of the collateral
securing the obligation is insufficient, steps are generally taken to protect
and liquidate the collateral. Losses resulting from the difference between the
loan balance and the fair market value of the collateral are recognized by a
partial charge-off of the loan balance to the collateral's fair market value.
While real property collateral is held for sale, it is subject to periodic
evaluation and/or appraisal. If an evaluation or appraisal indicates that the
property will ultimately sell for less than its recorded value, the loss by a
charge to provision for estimated losses on other real estate owned is
recognized.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be 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.
39
<PAGE> 40
The following table sets forth ITLA Capital's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1):
Loans secured by real estate, net $ 5,434(3) $ 8,332 $ 6,422 $ 6,619 $18,168
Other -- -- 783 366 611
------- ------- ------- ------- -------
Total nonaccrual loans 5,434 8,332 7,205 6,985 18,779
Other real estate owned, net 1,201 3,946 5,416 6,103 10,544
------- ------- ------- ------- -------
Total nonperforming assets $ 6,635 $12,278 $12,621 $13,088 $29,323
======= ======= ======= ======= =======
Troubled debt restructurings (2) $ 805 $ 1,574 $ 2,106 $ 6,182 $15,206
Nonaccrual loans held for investment to
total gross loans held for investment 0.62% 1.09% 0.96% 1.46% 3.87%
Allowance for credit losses to
nonaccrual loans (4) 309.37% 146.16% 169.50% 122.45% 58.98%
Nonperforming assets to total assets 0.64% 1.21% 1.56% 2.14% 5.62%
Nonperforming assets held for
investment to total assets 0.64% 1.21% 1.46% 2.08% 5.62%
</TABLE>
- ----------
(1) Gross interest income that would have been recorded on nonaccrual loans
had they been current in accordance with original terms was $0.8 million
for the year ended December 31, 1998. The amount of interest income on
such nonaccrual loans included in net income for the year ended December
31, 1998 was $0.4 million.
(2) All of the restructured loans were accruing at December 31, 1998.
(3) In addition to the above, management has concerns as to the borrowers'
ability to comply with present repayment terms on $8.6 million of
accruing loans as of December 31, 1998.
(4) Excludes nonaccrual loans held for sale.
Nonaccrual loans held for investment totaled $5.4 million at December
31, 1998, consisting of nine nonaccrual real estate loans. Four of these loans
had an outstanding balance greater than $0.5 million, and one loan had an
outstanding balance greater than $1.0 million.
In 1998, $0.5 million of new other real estate owned was acquired, $2.6
million of other real estate owned was sold, and $0.6 million of write-downs
were taken, resulting in net other real estate owned at December 31, 1998 of
$1.2 million. Other real estate owned at December 31, 1998 consisted of seven
properties with an average balance of approximately $0.2 million. Only one
property had a net balance greater than $0.5 million, with a book value of $0.6
million.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITLA Capital realizes income principally from the differential or spread
between the interest earned on loans, investments and other interest-earning
assets and the interest paid on deposits and borrowings. Loan volumes and
yields, as well as the volume of and rates on investments, deposits and
borrowings, are affected by market interest rates. Additionally, because of the
terms and conditions of many of ITLA Capital's loan agreements and deposit
accounts, a change in interest rates could also affect the duration of the loan
portfolio and/or the deposit base, which could alter ITLA Capital's sensitivity
to future changes in interest rates.
ITLA Capital uses an internal earnings simulation model as a tool to
identify and manage our interest rate risk profile. The model is based on 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
40
<PAGE> 41
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
changes in interest rates on net interest income. Actual results will differ
from simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management strategies.
Interest rate risk management focuses on maintaining consistent growth
in net interest income within board-approved policy limits while taking into
consideration, among other factors, ITLA Capital's overall credit, operating
income, operating cost and capital profile. The asset/liability management
committee, which includes senior management representatives and reports to the
Board of Directors, monitors and manages interest rate risk to maintain an
acceptable level of change in net interest income as a result of changes in
interest rates.
The following table shows ITLA Capital's estimated earnings sensitivity
profile as of December 31, 1998:
<TABLE>
<CAPTION>
CHANGES IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) (12 MONTHS)
-------------- --------------------
<S> <C>
+200 Over One Year +10.21%
+100 Over One Year + 5.11%
-100 Over One Year + 8.99%
-200 Over One Year + 8.00%
</TABLE>
Another tool used to identify and manage ITLA Capital's interest rate
risk profile is the static gap analysis. Interest sensitivity gap analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods. An asset-sensitive position indicates that there
are more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a favorable
impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would
generally imply a negative impact on net interest income in periods of rising
rates and a positive impact in periods of falling rates.
In evaluating ITLA Capital's exposure to changes in interest rates,
certain risks inherent in the method of analysis presented in the following
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees and at different times to changes in market rates. Additionally, loan
prepayments and early withdrawals of time certificates could cause interest
sensitivities to vary from those that appear in the following table. Further,
certain assets, such as variable rate real estate loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. The majority of ITLA Capital's variable rate real estate loans may
not adjust downward below their initial rate, with increases generally limited
to maximum adjustments of 2% per year and up to 5% over the life of the loan.
These loans may also be subject to prepayment penalties. At December 31, 1998,
93.7% of ITLA Capital's variable rate loan portfolio would not adjust downward
below the initial interest rate with the weighted-average minimum interest rate
on this portfolio being 9.63% and 87.9% of the total loans outstanding had a
lifetime interest rate cap, with the weighted-average lifetime interest rate cap
on this portfolio being 14.74%. The anticipated effects of these various factors
are considered by management in implementing interest rate risk management
activities.
The following table presents an estimate of ITLA Capital's sensitivity
to interest rate changes as of December 31, 1998.
41
<PAGE> 42
<TABLE>
<CAPTION>
MATURING OR REPRICING IN
----------------------------------------------------------------------------------
AFTER 3 AFTER
MONTHS 1 YEAR NON-
3 MONTHS BUT WITHIN BUT WITHIN AFTER INTEREST
OR LESS 1 YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans receivable (1) $ 651,907 $ 127,317 $ 100,346 $ 15,079 $ -- $ 894,649
Cash and cash equivalents 125,602 -- -- -- -- 125,602
Investment securities available for sale -- 194 -- -- 135 329
Noninterest-earning assets less allowance
for credit losses and unearned loan fees -- -- -- -- 12,067 12,067
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 777,509 $ 127,511 $ 100,346 $ 15,079 $ 12,202 $1,032,647
========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Time certificates under $100,000 $ 183,595 $ 297,618 $ 37,096 $ -- $ -- $ 518,309
Time certificates $100,000 and over 90,746 119,134 5,912 -- -- 215,792
Money market and passbook accounts 132,697 -- -- -- -- 132,697
FHLB advances 18,750 18,000 11,750 -- -- 48,500
Other liabilities -- -- -- -- 11,467 11,467
Shareholders' equity -- -- -- -- 105,882 105,882
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity $ 425,788 $ 434,752 $ 54,758 $ -- $ 117,349 $1,032,647
========== ========== ========== ========== ========== ==========
Net repricing assets over (under) repricing
liabilities equals interest rate sensitivity
GAP $ 351,721 $ (307,241) $ 45,588 $ 15,079 $ (105,147)
========== ========== ========== ========== ==========
Cumulative interest rate sensitivity GAP $ 351,721 $ 44,480 $ 90,068 $ 105,147 $ --
========== ========== ========== ========== ==========
Cumulative GAP as a percentage of
total assets 34.1% 4.3% 8.7% 10.2% 0.0%
========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) Variable rate loans consist principally of real estate secured loans
with a maximum term of 30 years. Approximately 95% of these loans are
generally adjustable quarterly based on changes in various indexes,
subject generally to a maximum increase of 2% annually and up to 5% over
the life of the loan. Nonaccrual loans of approximately $5.4 million are
assumed to reprice after five years.
42
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on the Consolidated Financial
Statements as of December 31, 1998 and 1997 and for Each of the Three
Years in the Period Ended December 31, 1998 44
Consolidated Balance Sheets as of December 31, 1998 and 1997 45
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 46
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1996 to December 31, 1998 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 48
Notes to Consolidated Financial Statements 49
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of ITLA Capital Corporation and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of ITLA Capital
Corporation and subsidiaries ("the Company"), a Delaware corporation, as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
January 28, 1999
44
<PAGE> 45
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
----------- -----------
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 125,602 $ 123,885
Investment securities available for sale, at approximate fair value 329 35,281
Stock in Federal Home Loan Bank 12,633 11,919
Mortgage-backed securities held to maturity, at amortized cost
(fair value of $25,063 in 1997) -- 25,132
Loans held for investment, net (net of allowance for credit losses of
$16,811 and $12,178 in 1998 and 1997, respectively) 862,089 750,853
Loans held for sale, at lower of cost or fair market value 12,188 50,544
Interest receivable 6,321 4,916
Other real estate owned, net 1,201 3,946
Premises and equipment, net 3,493 3,169
Deferred income taxes 6,270 4,190
Other assets 2,521 2,074
----------- -----------
Total assets $ 1,032,647 $ 1,015,909
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 866,798 $ 843,813
Federal Home Loan Bank advances 48,500 61,500
Accounts payable and other liabilities 11,467 11,248
----------- -----------
Total liabilities 926,765 916,561
----------- -----------
Commitments and contingencies (Note 12) -- --
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Contributed capital - common stock, $.01 par value; 20,000,000
shares authorized, 8,151,916 and 7,849,484 issued and
outstanding in 1998 and 1997, respectively 55,917 53,163
Retained earnings 63,273 48,450
Accumulated other comprehensive (loss) income (150) 19
----------- -----------
119,040 101,632
Less treasury stock, at cost - 985,432 and 152,500 shares in
1998 and 1997, respectively (13,158) (2,284)
----------- -----------
Total shareholders' equity 105,882 99,348
----------- -----------
Total liabilities and shareholders' equity $ 1,032,647 $ 1,015,909
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
45
<PAGE> 46
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 92,607 $ 77,310 $ 63,150
Investment securities 7,849 5,971 4,571
Mortgage-backed securities 1,209 1,836 2,177
-------- -------- --------
Total interest income 101,665 85,117 69,898
-------- -------- --------
Interest expense:
Deposit accounts 48,053 40,206 31,441
Federal Home Loan Bank advances 3,334 3,104 2,958
-------- -------- --------
Total interest expense 51,387 43,310 34,399
-------- -------- --------
Net interest income before provisions for estimated credit losses and
valuation allowance on loans held for sale 50,278 41,807 35,499
Provision for estimated credit losses 4,550 3,300 4,871
Provision for valuation allowance on loans held for sale 1,400 350 700
-------- -------- --------
Net interest income after provisions for estimated credit losses and
valuation allowance on loans held for sale 44,328 38,157 29,928
-------- -------- --------
Noninterest income:
Fee income from mortgage banking activities 1,554 1,007 --
Gain on sale of mortgage-backed securities 85 -- --
Other 808 633 651
-------- -------- --------
Total noninterest income 2,447 1,640 651
-------- -------- --------
Noninterest expense:
Compensation and benefits 10,564 8,511 5,723
Occupancy and equipment 2,783 2,444 1,929
FDIC assessment 99 208 244
Other 7,218 7,069 5,190
-------- -------- --------
Total general and administrative 20,664 18,232 13,086
-------- -------- --------
Real estate operations, net 252 226 435
Provision for estimated losses on other real estate owned 608 216 1,038
Loss (gain) on sale of other real estate owned, net 124 (9) (424)
-------- -------- --------
Total real estate operations, net 984 433 1,049
-------- -------- --------
Total noninterest expense 21,648 18,665 14,135
-------- -------- --------
Income before provision for income taxes 25,127 21,132 16,444
Provision for income taxes 10,304 8,655 6,420
-------- -------- --------
NET INCOME $ 14,823 $ 12,477 $ 10,024
======== ======== ========
BASIC EARNINGS PER SHARE $ 1.95 $ 1.61 $ 1.38
======== ======== ========
DILUTED EARNINGS PER SHARE $ 1.89 $ 1.57 $ 1.36
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
46
<PAGE> 47
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
NUMBER OF SHARES SHAREHOLDERS' EQUITY
----------------------------------- -------------------------------------------------------------
ACCUMULATED
GROSS NET OTHER
SHARES SHARES COMPREHENSIVE TREASURY
ISSUED AND TREASURY ISSUED AND CONTRIBUTED RETAINED INCOME STOCK,
OUTSTANDING SHARES OUTSTANDING CAPITAL EARNINGS (LOSS) AT COST TOTAL
----------- ---------- ----------- ----------- ---------- ------------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 5,980,000 -- 5,980,000 $ 30,243 $ 25,949 $ -- $ -- $ 56,192
Issuance of common stock 1,844,000 -- 1,844,000 22,602 -- -- -- 22,602
Total comprehensive income -- -- -- -- 10,024 -- -- 10,024
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 7,824,000 -- 7,824,000 52,845 35,973 -- -- 88,818
Issuance of common stock -
employee stock options 25,484 -- 25,484 318 -- -- -- 318
Common stock repurchased -- (152,500) (152,500) -- -- -- (2,284) (2,284)
Total comprehensive income -- -- -- -- 12,477 19 -- 12,496
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 7,849,484 (152,500) 7,696,984 53,163 48,450 19 (2,284) 99,348
Issuance of common stock -
employee stock options 8,500 -- 8,500 109 -- -- -- 109
Issuance of common stock -
pursuant to the Long-Term
Supplemental Executive
Retirement Plan 293,932 (293,932) -- 2,645 -- -- (2,645) --
Common stock repurchased -- (539,000) (539,000) -- -- -- (8,229) (8,229)
Total comprehensive income -- -- -- -- 14,823 (169) -- 14,654
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 8,151,916 (985,432) 7,166,484 $ 55,917 $ 63,273 $ (150) $ (13,158) $ 105,882
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE INCOME
-----------------------------------------
OTHER
COMPREHENSIVE TOTAL
NET INCOME COMPREHENSIVE
INCOME (LOSS) INCOME
---------- ------------- -------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Balance at January 1, 1996
Issuance of common stock
Total comprehensive income $ 10,024 $ -- $ 10,024
========== ========== ==========
Balance at December 31, 1996
Issuance of common stock -
employee stock options
Common stock repurchased
Total comprehensive income $ 12,477 $ 19 $ 12,496
========== ========== ==========
Balance at December 31, 1997
Issuance of common stock -
employee stock options
Issuance of common stock -
pursuant to the Long-Term
Supplemental Executive
Retirement Plan
Common stock repurchased
Total comprehensive income $ 14,823 $ (169) $ 14,654
========== ========== ==========
Balance at December 31, 1998
</TABLE>
47
<PAGE> 48
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 14,823 $ 12,477 $ 10,024
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,556 1,163 601
Accretion of deferred loan origination fees, net of costs (2,730) (2,225) (963)
Provisions for estimated credit losses and valuation allowance 5,950 3,650 5,571
Provision for estimated losses on other real estate owned 608 216 1,038
Gain on sale of mortgage-backed securities (85) -- --
Loss (gain) on sales of other real estate owned 124 (9) (424)
Increase in interest receivable (1,405) (505) (546)
Benefits from deferred income taxes (1,941) (590) (304)
(Increase) decrease in other assets (934) 1,690 (201)
Increase in accounts payable and other liabilities 219 3,459 2,101
--------- --------- ---------
Net cash provided by operating activities 16,185 19,326 16,897
--------- --------- ---------
Cash Flows From Investing Activities:
Increase in loans receivable, net (90,738) (156,330) (218,569)
Purchases of investment securities available for sale (20,401) (32,995) (44,500)
Proceeds from the maturity of investment securities available for sale 55,050 34,299 8,313
Proceeds from the maturity of investment securities held to maturity -- -- 14,062
(Increase) decrease in stock in Federal Home Loan Bank (714) (3,570) 4,013
Repayment of principal on mortgage-backed securities 7,122 6,637 10,199
Proceeds from the sale of mortgage-backed securities held to maturity 17,924 -- --
Proceeds from sale of other real estate owned 2,501 3,690 7,385
Proceeds from sale of real estate loans held for sale 14,150 2,047 1,324
Proceeds from sale of automobile finance contracts -- -- 50,050
Cash paid for capital expenditures (1,227) (1,338) (329)
Other, net -- 9 13
--------- --------- ---------
Net cash used in investing activities (16,333) (147,551) (168,039)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from common stock issuance 109 318 22,602
Cash paid to acquire treasury stock (8,229) (2,284) --
Net increase in deposit accounts 22,985 173,477 175,543
(Decrease) increase in Federal Home Loan Bank advances (13,000) 18,000 (10,500)
--------- --------- ---------
Net cash provided by financing activities 1,865 189,511 187,645
--------- --------- ---------
Net increase in cash and cash equivalents 1,717 61,286 36,503
Cash and cash equivalents at beginning of period 123,885 62,599 26,096
--------- --------- ---------
Cash and cash equivalents at end of period $ 125,602 $ 123,885 $ 62,599
========= ========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 51,373 $ 42,768 $ 34,082
Cash paid during the period for income taxes $ 12,630 $ 7,500 $ 6,509
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 479 $ 2,427 $ 7,313
Loans to facilitate the sale of other real estate owned $ 1,392 $ 1,379 $ 3,570
</TABLE>
See accompanying notes to the consolidated financial statements.
48
<PAGE> 49
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - ITLA Capital Corporation and Subsidiaries ("ITLA Capital"
and with its subsidiaries "the Company") is primarily engaged in the origination
of loans secured by income producing real estate. Through its principal
operating subsidiary, Imperial 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 principal
operating subsidiary, ITLA Funding Corporation ("Funding"), the Company
originates income-producing real estate loans for placement with third-party
investors. During 1998, the Company established a third operating subsidiary,
ITLA Commercial Investment Corporation ("CIC"), which was formed to be a real
estate investment trust which would invest in commercial real estate loans.
However, due to market conditions, CIC's activities were suspended during the
year. Imperial, Funding and CIC are wholly-owned by the Company.
The Company was organized in 1996 and became the sole shareholder of
Imperial as a result of a transaction that occurred on October 1, 1996. On that
date, a nonoperating subsidiary of the Company was merged with and into
Imperial, and all outstanding shares of Imperial common stock were converted
into an equal number of shares of Company common stock. This transaction was
accounted for as a reorganization of entities under common control.
Imperial has operated as a California 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 in
California.
Funding was formed in October 1996 and commenced operations in 1997.
Funding, a Delaware corporation, was formed to originate commercial real estate
loans for sale in the secondary market. In 1998, Funding sold fixed rate
originations on a whole loan cash basis to conduits that issue commercial
mortgage-backed securities. Funding also originated variable rate loans that
were placed in Imperial's portfolio of loans held for investment. Funding
operates a national network of sales representatives from its Glendale,
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 all 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 SECURITIES - Investment securities available for sale are
carried at fair value with unrealized gains or losses reported net of taxes, as
a component of other comprehensive income, until realized.
49
<PAGE> 50
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS RECEIVABLE - Loans receivable, which includes loans held for
investment and loans held for sale, are generally carried at principal amounts
outstanding less deferred origination loan fees and other unearned income.
Deferred loan origination fees and other unearned income include deferred
unamortized fees net of direct incremental loan origination costs. Interest
income is accrued as earned. Net deferred fees are recognized as interest income
using the interest method. Loans held for sale are recorded at the lower of cost
or fair market value.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be unlikely. When a loan is placed on nonaccrual status, all
previously accrued but uncollected interest is reversed against current period
operating results. Subsequent cash collections on nonaccrual loans are either
recognized as interest income on a cash basis, if the loan is well secured and
in management's judgment the net book value is fully collectible, or recorded
entirely as a reduction of principal.
The Company considers a loan to be impaired when, based upon current
information and events, it 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 established 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.
In evaluating the adequacy of the allowance for credit losses, management
estimates the amount of the loss for each loan that has been identified as
having more than standard credit risk. Those estimates give consideration to,
among other factors, economic and social conditions, estimated real estate
collateral value and cash flow, and the financial strength and commitment of the
borrower or guarantors, where appropriate. Additionally, an estimate for credit
loss is calculated for the remaining portion of the portfolio giving
consideration to the Company's historical loss experience in the portfolio,
adjusted, as appropriate, for the estimated effects of current economic
conditions and changes in the composition of the loan portfolio over time.
Loans, or the portion thereof, which are considered uncollectible by management
are charged off.
50
<PAGE> 51
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER REAL ESTATE OWNED - Other real estate owned ("OREO"), which
represents real estate acquired through foreclosure, is carried at the lower of
cost or estimated fair value less costs of disposition. The net operating
results from OREO are recognized in the current period as noninterest expense.
PREMISES AND EQUIPMENT - Premises and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements is calculated on the straight-line method
over the shorter of the estimated useful lives of the assets or the
corresponding lease term.
INCOME TAXES - Provision for income taxes is the amount of estimated tax
due reported on the Company's tax returns and the change in the amount of
deferred tax assets and liabilities. Deferred income taxes represent the
estimated net income tax expense payable (or benefits receivable) for temporary
differences between the accounting basis and tax basis of the Company's assets
and liabilities.
EARNINGS PER SHARE - Earnings per share for all periods presented in the
consolidated statements of income are computed in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings Per
Share", and are based on the weighted-average number of shares outstanding
during each year. Basic Earnings Per Share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares. Diluted Earnings Per Share includes the effect of common stock
equivalents of the Company, which include only shares issuable on the exercise
of outstanding options. A reconciliation of the computation of Basic Earnings
Per Share and Diluted Earnings Per Share is presented in Note 14 - Earnings Per
Share.
STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation plan in accordance with Accounting Principles Board ("APB") Opinion
No. 25 - "Accounting for Stock Issued to Employees". Under APB Opinion No. 25,
no compensation expense is recognized for a stock option grant if the exercise
price of the stock option at measurement date is equal to or greater than the
fair market value of the common stock on the date of grant. The Company has
disclosed in Note 9 - Benefit Plans the pro forma effect on net income and
earnings per share as if the Company had elected to recognize compensation
expense for the stock options granted.
51
<PAGE> 52
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME - In 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 - "Reporting Comprehensive
Income". SFAS No. 130 requires that comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements with an aggregate amount of comprehensive income reported
therein. "Other comprehensive income" refers to revenues, expenses, gains and
losses that, under GAAP, are included in comprehensive income but bypass net
income. Other comprehensive income consists entirely of unrealized holding
gains/losses on securities classified as available for sale, net of the related
income tax effect. The adoption of this pronouncement affected the presentation
of the financial statements but had no impact on the Company's net income or
shareholders' equity. Prior years' amounts have been reclassified to conform to
the requirements of SFAS No. 130.
RECENT ACCOUNTING PRONOUNCEMENTS - In June of 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133 - "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, which triggers specific accounting
treatment based on the type of hedge that exists. SFAS No. 133 will become
effective for financial statements of the Company beginning in 2000. Management
believes that the adoption of this pronouncement will not be material to the
presentation of the financial statements or the financial results of the
Company.
52
<PAGE> 53
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2--INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and approximate fair value of investment and
mortgage-backed securities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED APPROXIMATE ---------------------
COST FAIR VALUE GAINS LOSSES
--------- ----------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Investment securities available for sale:
Equity securities $ 385 $ 135 $ -- $ 250
Certificates of deposit 194 194 -- --
------- ------- ------- -------
Total investment securities available for sale $ 579 $ 329 $ -- $ 250
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
At December 31, 1998, the amortized cost and approximate fair value of
investment securities available for sale, excluding equity securities, which
have no contractual maturity or stated yield, consisted of $194,000 of
certificates of deposit that mature in one year or less with an average yield of
5.30%.
During 1998, the Company sold its "held to maturity" mortgage-backed
securities portfolio, realizing a net gain of $85,000 from the sale, and
reinvested the proceeds from the sale in higher yielding loans originated
subsequent to the sale. The mortgage-backed securities portfolio was sold
because of a change in long-term investment strategy. At the time of sale, the
mortgage-backed securities were carried at an amortized cost of $17,800,000.
Because of the sale of securities from the "held to maturity" classification,
the Company will not designate any future mortgage-backed securities investments
it makes as "held to maturity" for at least two years.
During 1997, there were no transfers from the held to maturity portfolio
and no securities were sold prior to their maturity or call date.
53
<PAGE> 54
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3--LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
LOANS HELD FOR INVESTMENT:
Real estate $ 811,076 $ 727,479
Construction 71,385 39,668
--------- ---------
882,461 767,147
Deferred loan origination fees and costs (3,561) (4,116)
--------- ---------
878,900 763,031
Allowance for credit losses (16,811) (12,178)
--------- ---------
$ 862,089 $ 750,853
========= =========
LOANS HELD FOR SALE - AT LOWER OF COST OR FAIR MARKET VALUE:
Real estate $ 12,188 $ 50,786
Deferred loan origination fees and costs -- (242)
--------- ---------
$ 12,188 $ 50,544
========= =========
TOTAL LOANS RECEIVABLE:
Real estate $ 823,264 $ 778,265
Construction 71,385 39,668
--------- ---------
894,649 817,933
Deferred loan origination fees and costs (3,561) (4,358)
--------- ---------
891,088 813,575
Allowance for credit losses (16,811) (12,178)
--------- ---------
$ 874,277 $ 801,397
========= =========
</TABLE>
54
<PAGE> 55
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3--LOANS RECEIVABLE (Continued)
At December 31, 1998, approximately 91.0%, 8.3% and 0.7% 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 78.6% of the Company's loans secured by real estate
were collateralized by properties located in California.
At December 31, 1998, approximately $249,454,000 of loans receivable
were pledged to secure a line of credit at the Federal Home Loan Bank of San
Francisco ("FHLB"). See Note 8 - FHLB Advances.
The following is the activity in the allowance for credit losses for the
periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31
------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 12,178 $ 10,885 $ 8,105
Provision for estimated credit losses 4,550 3,300 4,871
Recoveries (charge-offs) on loans secured by real estate:
Charge-offs (64) (2,124) (2,237)
Recoveries 147 117 146
-------- -------- --------
Net recoveries (charge-offs) 83 (2,007) (2,091)
-------- -------- --------
Balance at end of year $ 16,811 $ 12,178 $ 10,885
======== ======== ========
</TABLE>
The provision for valuation allowance on loans held for sale totaled
$1,400,000 and $350,000 for the years ending December 31, 1998 and 1997,
respectively. During 1998, the Company designated a pool of loans previously
classified as held for investment as held for sale. In connection therewith, the
Company recorded a provision for valuation allowance of $1,400,000. These loans
were subsequently sold during the year with no additional gain or loss.
As of December 31, 1998 and 1997, the accrual of income had been
suspended on approximately $5,434,000 and $8,332,000, respectively, of loans
secured by real estate. The interest income that was contractually due on loans
that were on nonaccrual status that was not recognized during the years ended
December 31, 1998, 1997 and 1996 was approximately $326,000, $384,000 and
$366,000, respectively.
55
<PAGE> 56
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3--LOANS RECEIVABLE (Continued)
As of December 31, 1998 and 1997, restructured loans totaled $805,000
and $1,574,000, respectively. There were no related commitments to lend
additional funds on restructured loans. For the years ended December 31, 1998,
1997 and 1996, $175,000, $192,000 and $394,000, respectively, of gross interest
income would have been recorded had the loans been current in accordance with
their original terms compared to $140,000, $156,000 and $328,000, respectively,
of interest income which was included in net income for the same periods. The
average yield on restructured loans was 9.92% at December 31, 1998.
The Company's recorded investment in impaired loans, all of which were
nonaccrual loans, and the related valuation allowance, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ------------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Valuation allowance required $ 978 $ 125 $2,933 $ 629
No valuation allowance required 5,053 -- -- --
------ ------ ------ ------
Total impaired loans $6,031 $ 125 $2,933 $ 629
====== ====== ====== ======
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1998, 1997 and 1996 was $5,460,000, $3,656,000 and $3,808,000,
respectively. Interest income recognized on impaired loans for the years ended
December 31, 1998, 1997 and 1996 was $22,000, $129,000 and $413,000,
respectively.
Loans having carrying values of $479,000 and $2,427,000 were transferred
to OREO in 1998 and 1997, respectively.
56
<PAGE> 57
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4--OTHER REAL ESTATE OWNED
Other real estate owned was stated as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for sale $ 1,422 $ 4,678
Less valuation allowance (221) (732)
------- -------
Other real estate owned, net $ 1,201 $ 3,946
======= =======
</TABLE>
The activity in the valuation allowance for other real estate owned was
as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31
---------------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 732 $ 1,116 $ 2,613
Provision for estimated losses on other real estate owned 608 216 1,038
Charge-offs upon sale of other real estate owned (1,119) (600) (2,535)
------- ------- -------
Balance at end of year $ 221 $ 732 $ 1,116
======= ======= =======
</TABLE>
57
<PAGE> 58
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
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
-----------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment $ 5,287 $ 4,322
Leasehold improvements 3,154 2,976
Automobiles 320 267
------- -------
8,761 7,565
Less accumulated depreciation and amortization (5,268) (4,396)
------- -------
$ 3,493 $ 3,169
======= =======
</TABLE>
Depreciation and amortization expense on premises and equipment for the
years ended December 31, 1998, 1997 and 1996 was $903,000, $771,000 and
$715,000, respectively.
58
<PAGE> 59
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 6--DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market and passbook accounts $132,697 $ 76,786
Time certificates under $100,000 518,309 522,014
Time certificates $100,000 and over 215,792 245,013
-------- --------
$866,798 $843,813
======== ========
</TABLE>
Money market and passbook accounts have no contractual maturity and pay
interest at rates ranging from 1.00% to 7.02% per annum. Additionally, some
money market accounts have limited checking features which allow three check
withdrawals per month. Time certificates have maturities ranging from 30 days to
five years and bear interest at varying rates based on market conditions,
ranging from 3.50% to 7.87% per annum.
There were no brokered deposits at December 31, 1998. Brokered deposits
totaled $67,002,000 at December 31, 1997. Interest expense on time certificates
$100,000 and over for the years ended December 31, 1998, 1997 and 1996 amounted
to approximately $11,200,000, $3,775,000 and $1,881,000, respectively.
The Association is subject to the provisions of the California
Industrial Loan Law, which limit the amount of deposits which the Association
may have outstanding to 20 times its shareholder's equity. At December 31, 1998,
the Association's deposits are 9.9 times its shareholder's equity.
The Association is a member of the FDIC and its deposits are insured up
to $100,000 each per insured depositor.
59
<PAGE> 60
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 6--DEPOSIT ACCOUNTS (Continued)
As of December 31, 1998, the contractual maturities of time certificate
accounts were as follows:
<TABLE>
<CAPTION>
YEAR OF
MATURITY AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C>
1999 $691,093
2000 31,508
2001 5,305
2002 1,973
2003 4,222
--------
$734,101
========
</TABLE>
NOTE 7--LINES OF CREDIT
As of December 31, 1998 and 1997, the Association had uncommitted,
unsecured lines of credit with two banks renewable daily in the amount of
$30,000,000. There were no borrowings against these lines at December 31, 1998
and 1997.
60
<PAGE> 61
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8--FHLB ADVANCES
FHLB advances represent collateralized obligations with the FHLB of San
Francisco, and are summarized by contractual maturity as follows:
<TABLE>
<CAPTION>
YEAR OF
MATURITY AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C>
Renewable Daily $18,750
1999 18,000
2000 6,000
2001 --
2002 --
2003 5,750
-------
$48,500
=======
</TABLE>
The Company has pledged loans receivable secured by real estate with a
carrying value of $249,454,000 and cash equivalents with a carrying value of
$6,100,000, for a total of $255,554,000 of assets pledged as collateral for this
borrowing facility. The total borrowing capacity available from the collateral
that has been pledged is approximately $70,802,000, of which $48,500,000 has
been utilized as of December 31, 1998.
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
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum month-end balance outstanding $61,500 $61,500
Weighted-average daily balance outstanding $56,542 $53,714
Average rates paid during the year 5.90% 5.72%
Average rates on balance at year-end 5.12% 5.91%
Balance at year-end $48,500 $61,500
</TABLE>
61
<PAGE> 62
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9--BENEFIT PLANS
Salary Savings Plan. The Company has a salary savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Savings Plan, participating employees may
defer a portion of their pretax earnings, up to 15% of their compensation. The
Company matches 50% of each employee's salary deferral, up to a maximum 6% of
the employee's salary deferral. Employees vest in employer contributions and
their earnings thereon over a five year period. The Company's matching
contributions to the Savings Plan were $181,000, $174,000 and $101,000 in 1998,
1997 and 1996, respectively.
Nonqualified Deferred Compensation Plans. The Company also has deferred
compensation plans designed to provide additional retirement benefits for
certain officers and key employees who cannot take full advantage of the Savings
Plan. Costs associated with these deferred compensation plans, primarily
interest expense, amounted to $4,000, $34,000 and $7,000 in 1998, 1997 and 1996,
respectively.
Long-Term Supplemental Executive Retirement Plan. The Company has
adopted a Long-Term Supplemental Executive Retirement Plan (the "SERP") for
certain officers and key employees which provides for participants to be awarded
shares of common stock of the Company on a tax deferred basis from the current
Recognition and Retention Plan ("RRP") previously approved by the shareholders.
Such shares vest in three year cycles, and once vested, may be distributed to
participants upon a change in control or the participant's death, disability,
retirement date or date of termination of employment. During 1998, the Company
issued 293,932 shares of common stock, representing the remaining number of
shares authorized to be awarded under the RRP to the SERP, to a Rabbi Trust
managed by a third-party financial institution. Shares awarded in 1998 of 29,393
were then allocated for the future benefit of certain Company executives. Such
shares have not been earned or vested and no cash or stock has been received by
the participants. The Company recognized $265,000 of compensation expense from
the SERP in 1998.
Stock Plans. The Company adopted an employee stock incentive plan and
stock option plan for nonemployee directors (collectively, "the Stock Plan")
which provides for the award of up to 1,000,000 shares of common stock to
officers, directors and employees as compensation for future services, not to
exceed a combined 550,000 shares during 1995, the first year of the Stock Plan,
with annual awards thereafter limited to 100,000 additional shares. As of
December 31, 1998, the Company had granted an aggregate of 929,000 options under
the Stock Plan, of which 31,916 have been exercised and 151,084 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.
62
<PAGE> 63
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9--BENEFIT PLANS (Continued)
The number of options and weighted-average exercise prices of options
for each of the following groups of options, for the periods indicated, are as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICES
------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Options Outstanding at the Beginning of the Year 569,500 500,500 $ 11.39 $ 10.08
Options Granted During the Year 204,000 120,500 $ 18.00 $ 14.50
Options Exercised During the Year (8,500) (19,416) $ 12.78 $ 11.79
Options Forfeited During the Year (15,000) (32,084) $ 17.22 $ 14.07
-------- --------
Options Outstanding at the End of the Year 750,000 569,500 $ 13.05 $ 11.39
======== ========
Options Exercisable at the End of the Year 457,500 301,917 $ 10.79 $ 10.49
======== ========
</TABLE>
The fair value of each option grant was estimated on the date of grant
using an option pricing model with the following weighted-average assumptions
for option grants:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE ASSUMPTIONS FOR OPTION GRANTS
--------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend Yield 0.0% 0.0% 0.0%
Expected Volatility 28.8% 20.3% 27.5%
Risk-Free Interest Rates 5.58% 6.24% to 6.49% 6.32% to 6.83%
Expected Lives Seven Years Seven Years Seven Years
Weighted-Average Fair Value $ 7.93 $ 5.87 $ 6.61
</TABLE>
The Company accounts for the Stock Plan under APB Opinion No. 25 and,
accordingly, no compensation costs have been recognized in the accompanying
consolidated statements of income for 1998, 1997 or 1996. If compensation costs
for the Stock Plan had been determined under SFAS No. 123 - "Accounting for
Stock-Based Compensation", pro forma net income would have been $14,098,000,
$11,828,000 and $9,455,000 and Diluted Earnings Per Share would have been $1.80,
$1.49 and $1.28 for the years ended December 31, 1998, 1997 and 1996,
respectively.
63
<PAGE> 64
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10--INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Allowance for credit losses $7,005 $4,671
Accrued expenses 1,029 1,285
State income taxes 958 841
Other real estate owned expenses 132 198
Allowance for losses on other real estate owned 168 425
Unrealized loss on investment securities available for sale 124 --
------ ------
Total deferred tax assets 9,416 7,420
------ ------
Components of the deferred tax liability:
Deferred loan origination costs 2,050 2,522
FHLB stock dividends 1,014 634
Unrealized gain on investment securities available for sale -- 15
Other 82 59
------ ------
Total deferred tax liabilities 3,146 3,230
------ ------
Net deferred tax asset $6,270 $4,190
====== ======
</TABLE>
The deferred tax asset is considered fully realizable, as when the
temporary differences associated with the deferred tax asset are recognized for
income tax purposes, those deductions are expected to be fully offset, either by
carryback against previously taxed income or by future taxable income.
Accordingly, the Company has not established a valuation allowance on the
deferred tax asset.
64
<PAGE> 65
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10--INCOME TAXES (Continued)
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 9,347 $ 7,183 $ 6,043
State 2,898 2,062 681
-------- -------- --------
12,245 9,245 6,724
-------- -------- --------
Deferred:
Federal (1,630) (437) (1,036)
State (311) (153) 732
-------- -------- --------
(1,941) (590) (304)
-------- -------- --------
$ 10,304 $ 8,655 $ 6,420
======== ======== ========
</TABLE>
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 7.0% 7.0% 7.5%
State income tax credits (Enterprise Zone and LARZ)
and other benefits (1.0%) (1.0%) (3.5%)
------ ------ ------
Effective income tax rate 41.0% 41.0% 39.0%
====== ====== ======
</TABLE>
The income tax expense (benefit) component of other comprehensive income
was $112,000, ($12,000) and $0 for the years ended December 31, 1998, 1997 and
1996, respectively.
65
<PAGE> 66
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist of commitments to extend credit.
These instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company has exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit.
This exposure is represented by the contractual amount of those instruments as
the Company uses the same lending policies for these instruments as it does for
the loan portfolio. The Company had outstanding unfunded loan commitments,
including the unfunded portion of construction loans, of approximately
$112,138,000 and $43,219,000 at December 31, 1998 and 1997, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases office facilities under noncancelable operating
leases. Estimated future minimum lease payments required under leases with
initial or remaining noncancelable terms in excess of one year at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 $ 1,392
2000 1,319
2001 1,346
2002 1,252
2003 1,181
Thereafter 2,667
-------
$ 9,157
=======
</TABLE>
Certain leases contain rental escalation clauses based on increases in
the Consumer Price Index, and renewal options of up to ten years which may be
exercised by the Company. The Company incurred rent expense of $1,781,000,
$1,588,000 and $1,134,000 in 1998, 1997 and 1996, respectively. The Company
received sublease income of $78,000 in 1996. There were no subleases in 1998 and
1997.
66
<PAGE> 67
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--COMMITMENTS AND CONTINGENCIES (Continued)
CONTINGENCIES
The Company is subject to various pending legal actions which arise in
the normal course of business. The Company maintains reserves for losses from
legal actions which are both probable and estimable. Although the amount of the
ultimate exposure, if any, cannot be determined at this time, in management's
opinion, based upon advice of counsel, the disposition of claims currently
pending will not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 13--REGULATORY REQUIREMENTS
The Association is subject to supervision and regulation by the FDIC and
the Department of Financial Institutions ("DFI") of the State of California
under the provisions of the California Industrial Loan Law. These provisions
authorize the 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, Imperial was regulated by the California
Department of Corporations ("CDOC"), which merged with the DFI on that date.
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, 1998 and 1997, that the Association
meets all applicable capital adequacy requirements.
As of December 31, 1998 and 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.
67
<PAGE> 68
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--REGULATORY REQUIREMENTS (Continued)
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, 1998
Total capital
(to risk-weighted assets) $ 99,216 10.60% $ 74,911 8.00% $ 93,639 10.00%
Tier 1 capital
(to risk-weighted assets) $ 87,462 9.34% $ 37,456 4.00% $ 56,183 6.00%
Tier 1 capital
(to average total assets) $ 87,462 8.66% $ 40,381 4.00% $ 50,477 5.00%
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%
Tier 1 capital
(to average total assets) $ 97,207 9.61% $ 40,458 4.00% $ 50,572 5.00%
</TABLE>
Imperial operated under a Memorandum of Understanding ("MOU") with the
FDIC and the 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.
68
<PAGE> 69
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14--EARNINGS PER SHARE
The following is a reconciliation of the amounts used in the calculation
of Basic Earnings Per Share and Diluted Earnings Per Share.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE PER
NET SHARES SHARE
INCOME OUTSTANDING AMOUNT
--------- ------------ ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Basic Earnings Per Share $ 14,823 7,602,627 $ 1.95
Effect of Dilutive Stock Options -- 232,513 (0.06)
--------- --------- ---------
Diluted Earnings Per Share $ 14,823 7,835,140 $ 1.89
========= ========= =========
YEAR ENDED DECEMBER 31, 1997
Basic Earnings Per Share $ 12,477 7,747,788 $ 1.61
Effect of Dilutive Stock Options -- 193,132 (0.04)
--------- --------- ---------
Diluted Earnings Per Share $ 12,477 7,940,920 $ 1.57
========= ========= =========
YEAR ENDED DECEMBER 31, 1996
Basic Earnings Per Share $ 10,024 7,257,714 $ 1.38
Effect of Dilutive Stock Options -- 135,655 (0.02)
--------- --------- ---------
Diluted Earnings Per Share $ 10,024 7,393,369 $ 1.36
========= ========= =========
</TABLE>
69
<PAGE> 70
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are based on judgments regarding credit risk,
investor expectations of future economic conditions, normal cost of
administration of these instruments and other risk characteristics, including
interest rate risk and prepayment risk. These estimates are subjective in
nature, involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. The fair value estimates presented do not include the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments.
The Company uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate value:
Cash and Cash Equivalents - The carrying values reported in the
balance sheet approximate fair values due to the short-term nature of
the assets.
Investment and Mortgage-Backed Securities - Fair values are based
on bid prices and quotations published and/or received from established
securities dealers.
Stock in Federal Home Loan Bank - The fair value is based on bid
prices quoted from the FHLB.
Loans Held for Investment - The fair value is estimated using the
present value of future cash flows, discounted using the current rate at
which similar loans would be made to borrowers with similar credit
ratings and for the same maturities and giving consideration to
estimated prepayment risk and credit risk.
Loans Held for Sale - The fair value is based on bid prices
received from potential buyers.
Deposit Accounts - The fair value of money market and passbook
accounts is estimated to be the amount payable on demand. The fair
values for time certificates, both over and under $100,000, are
estimated by discounting the expected cash flows at current market rates
over expected maturities.
Federal Home Loan Bank Advances - The fair value is estimated by
discounting the expected cash flows at current market rates over
contractual maturities.
70
<PAGE> 71
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 125,602 $ 125,602 $ 123,885 $ 123,885
Investment securities 329 329 35,281 35,281
Stock in Federal Home Loan Bank 12,633 12,633 11,919 11,919
Mortgage-backed securities -- -- 25,132 25,063
Loans held for sale, net 12,188 12,188 50,544 51,294
Loans held for investment 882,461 884,607 767,147 770,740
Deferred loan origination fees and costs (3,561) -- (4,116) --
Allowance for credit losses (16,811) -- (12,178) --
----------- ----------- ----------- -----------
Net loans receivable 874,277 896,795 801,397 822,034
----------- ----------- ----------- -----------
$ 1,012,841 $ 1,035,359 $ 997,614 $ 1,018,182
=========== =========== =========== ===========
Financial liabilities:
Deposit accounts $ 866,798 $ 869,136 $ 843,813 $ 845,188
Federal Home Loan Bank advances 48,500 48,524 61,500 61,532
----------- ----------- ----------- -----------
$ 915,298 $ 917,660 $ 905,313 $ 906,720
=========== =========== =========== ===========
</TABLE>
71
<PAGE> 72
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16---BUSINESS SEGMENT INFORMATION
SFAS No. 131 - "Disclosures About Segments of an Enterprise and Related
Information" requires disclosure of segment information in a manner consistent
with the "management approach". The management approach is based on the way the
chief operating decision-maker organizes segments within a company for making
operating decisions and assessing performance.
The main factors that were used to identify the Company's operating
segments were the specific product and business lines of the various operating
segments of the Company. The Company's various operating segments are organized
separately by legal structure for each product and service offered. As of
December 31, 1998, management has identified one operating segment that meets
the criteria of being a reportable segment in accordance with the provisions of
SFAS No. 131. This reportable segment is commercial real estate lending (funded
primarily by FDIC-insured deposits) which, by its legal form, is identified as
operations of the Association. This segment derives the majority of its revenue
by originating loans secured by income producing real estate. Other operating
segments of the Company that did not meet the criteria of being a reportable
segment in accordance with SFAS No. 131 have been aggregated and reported as
"All Other". Transactions from all of the Company's operating segments occur in
the United States. The Company has no transactions with a single external
customer that exceeds ten percent of the Company's consolidated revenues.
Transactions between the reportable segment of the Company and its other
operating segments are made at terms which approximate arm's-length transactions
and in accordance with GAAP. There is no significant difference between the
measurement of the reportable segment's assets and profits and losses disclosed
below and the measurement of assets and profits and losses in the Company's
consolidated balance sheet and statement of income. Accounting allocations are
made in the same manner for all operating segments.
72
<PAGE> 73
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16---BUSINESS SEGMENT INFORMATION (Continued)
Required reported segment information for 1998 and 1997 is detailed
below:
<TABLE>
<CAPTION>
COMMERCIAL
REAL ESTATE
LENDING
(FUNDED
PRIMARILY
BY FDIC-
INSURED ALL
DEPOSITS) OTHER TOTAL
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998:
Revenues from external customers $ 100,312 $ 3,800 $ 104,112
Total interest income 99,419 2,246 101,665
Total interest expense 51,345 42 51,387
Depreciation and amortization expense 900 656 1,556
Provision (benefit) for income taxes 11,927 (1,623) 10,304
Capital expenditures 665 562 1,227
Deferred income taxes 5,775 495 6,270
Total assets 1,010,273 22,374 1,032,647
Income (loss) before provision (benefit) for income taxes 29,098 (3,971) 25,127
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1997:
Revenues from external customers $ 86,538 $ 219 $ 86,757
Total interest income 85,905 (788) 85,117
Total interest expense 43,310 -- 43,310
Depreciation and amortization expense 1,147 16 1,163
Provision (benefit) for income taxes 9,853 (1,198) 8,655
Capital expenditures 538 800 1,338
Deferred income taxes 3,931 259 4,190
Total assets 1,012,666 3,243 1,015,909
Income (loss) before provision (benefit) for income taxes 24,609 (3,477) 21,132
</TABLE>
73
<PAGE> 74
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,026 $ 704
Investment securities available for sale 135 --
Investments in wholly-owned subsidiaries:
Imperial Thrift and Loan Association 88,486 97,753
ITLA Funding Corporation 889 1,271
ITLA Commercial Investment Corporation 1,006 --
Other assets 1,388 1,297
-------- --------
Total assets $108,930 $101,025
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 3,048 $ 1,677
Shareholders' equity 105,882 99,348
-------- --------
Total liabilities and shareholders' equity $108,930 $101,025
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income $ 554 $ 95 $ 9
General and administrative expense 1,309 706 29
-------- -------- --------
Loss before income tax benefit and equity in undistributed net
income of subsidiaries (755) (611) (20)
Income tax benefit (309) (440) (8)
-------- -------- --------
Income (loss) before equity in undistributed net income of subsidiaries (446) (171) (12)
Equity in undistributed net income of subsidiaries 15,269 12,648 10,036
-------- -------- --------
NET INCOME $ 14,823 $ 12,477 $ 10,024
======== ======== ========
</TABLE>
74
<PAGE> 75
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 14,823 $ 12,477 $ 10,024
Adjustments to net income:
Equity in undistributed net income of subsidiaries (15,269) (12,648) (10,036)
Increase in other assets (1,429) (3,089) (163)
Increase in liabilities 234 1,567 --
-------- -------- --------
Net cash used in operating activities (1,641) (1,693) (175)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (375) -- --
Dividends received from Imperial Thrift and Loan Association 27,000 3,000 3,000
Capital contribution to ITLA Funding Corporation -- -- (1,500)
Capital contribution to ITLA Commercial Investment Corporation (20,025) -- --
Capital distribution from ITLA Commercial Investment Corporation 19,500 -- --
Other, net (17) -- --
-------- -------- --------
Net cash provided by investing activities 26,083 3,000 1,500
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from common stock issued through exercise of
employee stock options 109 318 38
Cash paid to acquire treasury stock (8,229) (2,284) --
-------- -------- --------
Net cash used in financing activities (8,120) (1,966) 38
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 16,322 (659) 1,363
Cash and cash equivalents at beginning of period 1,363 1,363 --
-------- -------- --------
Cash and cash equivalents at end of period $ 17,685 $ 704 $ 1,363
======== ======== ========
</TABLE>
75
<PAGE> 76
ITEM 9. CHANGES IN 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 Registrant are identified below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- ----- -----------------------------------------------------------------------------
<S> <C> <C>
George W. Haligowski 44 Chairman of the Board, President and Chief Executive Officer of ITLA Capital
Chairman of the Board and Chief Executive Officer of Imperial Thrift and Loan
Chairman of the Board of ITLA Funding
Michael A. Sicuro 40 Managing Director and Chief Financial Officer of ITLA Capital
Director and Chief Financial Officer of ITLA Funding
Timothy M. Doyle 42 Managing Director and Chief Administrative Officer of ITLA Capital
Norval L. Bruce 57 Director of ITLA Capital
Director, President and Chief Operating Officer of Imperial Thrift and Loan
Director of ITLA Funding
George J. Guarini 45 Director, President and Chief Executive Officer of ITLA Funding
Steven C. Romelt 49 Senior Vice President and Chief Lending Officer of Imperial Thrift and Loan
Anthony A. Rusnak 35 First Vice President, General Counsel and Corporate Secretary
</TABLE>
George W. Haligowski has served as Chairman of the Board, President and
Chief Executive Officer of ITLA Capital since inception, and of Imperial Thrift
and Loan from 1992 until October 1997. He has served as Chairman of the Board
and Chief Executive Officer of Imperial Thrift and Loan since October 1997. From
1990 to the present, he has also served as President, Chief Executive Officer
and Principal of Halivest International, Ltd., an international finance and
asset management company. He was previously employed as a Vice President by
Shearson Lehman Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to
1988), and by Avco Financial Services as Regional Director of its Japanese
branch operations (1976 to 1981), as Training Coordinator for Avco Thrift and
Loan (1976) and as a Branch Manager (1974 to 1976).
Michael A. Sicuro has served as Managing Director and Chief Financial
Officer of ITLA Capital since inception. He has served as Director and Chief
Financial Officer of ITLA Funding since inception. He was also Senior Vice
President and Chief Financial Officer of Imperial Thrift and Loan from June 1996
through December 1997. From 1994 to June 1996, he was employed by Blue Cross of
California, most recently as Vice President and Chief Financial Officer. He was
previously employed by U.S. Bancorp Mortgage Company as Senior Vice President
and Chief Financial Officer from 1993 to 1994; Western Federal Savings and Loan
Association as Senior Vice President and Controller from 1992 to 1993; and First
Interstate Bancorp as Vice President and Deputy Controller from 1990 to 1992. He
was an Audit Manager with Deloitte and Touche from 1984 to 1990.
76
<PAGE> 77
Timothy M. Doyle has served as Managing Director and Chief
Administrative Officer of ITLA Capital since January 1997. He was also the
Senior Vice President and Chief Administrative Officer of Imperial Thrift and
Loan from January 1997 to December 1997 and the First Vice President and
Director of Management Audit of Imperial Thrift and Loan from May 1996 to
December 1996. Before joining Imperial Thrift and Loan, he was the Controller
and Director of Operations at Northeastern Plastics from 1995 to 1996; Assistant
Controller of Alpha Wire Corporation from 1992 to 1994; and Vice President and
Chief Financial Officer of Halivest International, Ltd. from 1989 to 1991. From
1982 to 1988, he was the Corporate Controller of the Shepaug Corporation.
Norval L. Bruce has served as President and Chief Operating Officer of
Imperial Thrift and Loan since October 1997, and previously was the Executive
Vice President and Chief Credit Officer of Imperial Thrift and Loan from 1990 to
October 1997. Mr. Bruce is also a director of ITLA Capital, Imperial Thrift and
Loan and ITLA Funding. From 1988 to 1989, he served as Executive Vice President
and Chief Credit Officer of Security Pacific Bank, Nevada. He was previously
employed by Security Pacific Bank from 1965 to 1988 in a variety of positions
including management positions in which he was responsible for both loan
origination and credit quality.
George J. Guarini has served as Director, President and Chief Executive
Officer of ITLA Funding since inception. He has also served as the Senior Vice
President and Chief Lending Officer of Imperial Thrift and Loan from May 1996 to
January 1997, and previously held other lending positions with Imperial Thrift
and Loan from June 1994 to May 1996. From 1991 to 1994, he served as Senior Vice
President of Special Assets of California Republic Bank. He was employed from
1989 to 1991 by Security Pacific National Bank as a Senior Lending Officer. He
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 and Chief Lending
Officer of Imperial Thrift and Loan since January 1997. He was Director of Bank
Lending for Imperial Thrift and Loan from November 1996 to January 1997.
Previously, he was Vice President and Regional Manager for Southern Pacific
Thrift and Loan Association from March 1995 to November 1996. He also held
various senior level lending positions for Imperial Thrift and Loan from
December 1990 to March 1995 and held various lending positions with a number of
other financial institutions from 1979 to December 1990.
Anthony A. Rusnak has served as First Vice President, General Counsel
and Corporate Secretary of ITLA Capital since November 1997. Prior to joining
ITLA Capital, he was in private practice for seven years representing financial
institutions, businesses, corporations and individuals in business, real estate
transactions and litigation. Previously, he worked for law firms in the San
Diego area, as well as for San Diego Gas and Electric's in-house counsel.
The directors of the Registrant, excluding Mr. Haligowski and Mr. Bruce,
are identified below.
Jeffrey L. Lipscomb, age 44, 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 50, is a member of the State Bar of California,
and has been a member of the law firm of Tisdale & Nicholson since 1994. He
conducted his own law practice from 1983 to 1994 and was a partner in the
Financial Institutions Department of Finley, Kumble, Wagner, Heine, Underberg,
Manly & Casey, a New York-based national law firm, from 1980 to 1983.
Previously, he served as Assistant General Counsel of Hunt-Wesson Foods, Inc., a
subsidiary of Norton Simon, Inc., and was associated with two large regional law
firms in Los Angeles County. Since 1980, Mr. Mayuga's practice has focused on
the representation of financial institutions and other finance-related
businesses in corporate, transactional and regulatory matters.
Hirotaka Oribe, age 64, 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
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<PAGE> 78
Development Corporation, a firm engaged in development and construction of
single-family and multi-family housing, office buildings and retail space, and
land development. Mr. Oribe previously held other positions with affiliates of
Kajima Corporation of Japan from 1973 to 1979 and was a practicing architect
from 1962 to 1973.
Robert R. Reed, age 62, is retired from Household International where he
was employed in various positions from 1960 to 1992. Mr. Reed served as Vice
President of Household Bank from 1980 to 1992. Mr. Reed was previously employed
in management positions with Household Financial Corporation from 1962 to 1980.
EMPLOYEES
As of December 31, 1998, ITLA Capital had 151 employees. Management
believes that its relations with employees are satisfactory. ITLA Capital is not
subject to any collective bargaining agreements.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires ITLA
Capital's directors and executive officers, and persons who own more than 10% of
a registered class of ITLA Capital's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of ITLA Capital. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish ITLA Capital
with copies of all Section 16(a) forms they file.
To ITLA Capital's knowledge, based solely on a review of the copies of
such reports furnished to ITLA Capital and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
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<PAGE> 79
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of the Chief
Executive Officer and the named executive officers of ITLA Capital with salary
and bonus greater than $100,000 for the year ended December 31, 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ----------------------
RESTRICTED ALL
STOCK OTHER
SALARY BONUS OPTIONS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (9) (#) (2) ($) (10) ($)
- --------------------------------------- -------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski 1998 $345,765 $344,144 45,000 $111,717 $ 62,751(3)
Chairman of the Board, President 1997 $299,250 $374,050 20,000 $111,717 $ 59,716(3)
and Chief Executive Officer 1996 $293,316 $ 81,545(1) -- $ -- $ 65,904(3)
Norval L. Bruce 1998 $185,832 $ 71,251 30,000 $ 33,849 $ 7,400(4)
President and Chief Operating 1997 $131,670 $ 75,600 5,000 $ 33,849 $ 7,780(4)
Officer of Imperial 1996 $123,500 $ -- -- $ -- $ 8,277(4)
Michael A. Sicuro 1998 $167,979 $ 78,375 25,000 $ 32,697 $ 6,036(5)
Managing Director and Chief 1997 $156,188 $ 62,327 15,000 $ 32,697 $ 5,933(5)
Financial Officer of ITLA Capital 1996 $ 68,521(8) $ -- 25,000 $ -- $ 7,778(5)
George J. Guarini 1998 $178,667 $ 43,750 5,000 $ 34,623 $ 6,552(6)
President and Chief Executive 1997 $177,625 $ 88,200 -- $ 34,623 $ 6,386(6)
Officer of Funding 1996 $119,334 $ -- -- $ -- $ 11,495(6)
Steven C. Romelt 1998 $138,750 $ 75,000 15,000 $ 27,081 $ 14,805(7)
Senior Vice President and Chief 1997 $114,583 $ 9,508 25,000 $ 27,081 $ 12,997(7)
Lending Officer of Imperial 1996 $ 16,346(8) $ -- -- $ -- $ 1,558(7)
</TABLE>
- ----------
(1) $55,000 of the 1996 bonus was deferred at the election of the named officer
under ITLA Capital'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) $5,114 in auto related benefits, (b) $30,000 in
supplemental housing payments, (c) $7,290 in life insurance premiums, (d)
$4,800 in employer contributions to ITLA Capital's 401(k) plan and (e)
$15,547 in preferential interest on employee savings accounts in 1998. The
respective amounts were $4,288, $26,600, $7,100, $4,800 and $16,928 in 1997
and $21,000, $22,850, $6,950, $4,500 and $10,604 in 1996.
(4) Consists of (a) $2,139 in auto related benefits, (b) $136 in life insurance
premiums, (c) $4,800 in employer contributions to ITLA Capital's 401(k)
plan and (d) $325 in preferential interest on employee savings accounts in
1998. The respective amounts were $2,296, $144, $4,800 and $540 in 1997 and
$3,448, $576, $3,705 and $548 in 1996.
(5) Consists of (a) $1,236 of auto related benefits, (b) $4,800 in employer
contributions to ITLA Capital's 401(k) plan and (c) $0 of life insurance
benefits in 1998. The respective amounts were $1,133, $4,800 and $0 in 1997
and $5,600, $2,046 and $132 in 1996.
(6) Consists of (a) $1,429 of auto related benefits, (b) $4,800 in employer
contributions to ITLA Capital's 401(k) plan and (c) $322 of preferential
interest on employee savings accounts in 1998. The respective amounts were
$1,013, $4,800 and $573 in 1997 and $10,200, $1,295 and $0 in 1996.
(7) Consists of (a) $9,000 in auto related benefits, (b) $0 in life insurance
premiums, (c) $4,800 in employer contributions to ITLA Capital's 401(k)
plan and (d) $1,005 in preferential interest on employee savings accounts
in 1998. The respective amounts were $9,000, $4, $3,993 and $0 in 1997 and
$1,500, $58, $0 and $0 in 1996.
(8) Partial year.
(9) Includes ITLA Capital stock issued under the Recognition and Retention Plan
in 1997 at a price of $14.50 per share.
(10) Includes ITLA Capital stock allocated to the Long-Term Supplemental
Executive Retirement Plan under the Recognition and Retention Plan
previously approved by the shareholders. Amounts have not been earned or
vested. No cash or stock has been distributed to the named officers.
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<PAGE> 80
EMPLOYMENT AGREEMENT AND CHANGE OF CONTROL AGREEMENTS
ITLA Capital has entered into an employment agreement with Mr.
Haligowski. The employment agreement provides for an initial employment term of
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 ITLA Capital may terminate Mr. Haligowski "for cause," as defined
in the employment agreement. In the event Mr. Haligowski is involuntarily
terminated as defined in the employment agreement, including following a change
of control as defined in the employment agreement, Mr. Haligowski will be
entitled to receive during the remaining term of the agreement his base salary
calculated at the highest annual rate during the three years prior to his
involuntary termination (or for 36 months following the date of termination due
to a change in control) and the average amount of cash bonus and incentive
compensation paid for the two years prior to his involuntary termination, if
any, the continuation of all employment related benefits for the 36 months
following the date of termination and the immediate vesting of any stock options
and restricted stock awards previously granted and outstanding. As a result of a
change of control, Mr. Haligowski will also be retained as a consultant for an
eighteen month period following the change in control at a monthly consulting
fee equal to 75% of his base salary and an additional contribution to his
account in ITLA Capital's Supplemental Executive Retirement Plan equal to 3.75
times his base salary. 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. In addition ITLA Capital
shall maintain health, dental and life insurance benefits for the three years
following an involuntary termination and transfer title to the ITLA Capital
owned vehicle currently used by Mr. Haligowski.
CHANGE OF CONTROL AGREEMENTS
ITLA Capital has entered into change of control agreements with Messrs.
Bruce, Sicuro, Guarini and Romelt. The change in control agreements have initial
terms of one year and shall automatically extend for additional one-year periods
upon a change of control, as defined in the agreement, or upon their anniversary
date, unless either party provides the other with at least 90 days notice of
termination. These agreements provide that in the event the officer is
terminated within 24 months following a change of control, as defined in the
agreement, the officer shall be entitled to receive upon such termination an
amount equal to the greater of the annualized salary as in effect on the date of
the change of control or the date of termination for a period of eighteen months
and a pro rata portion of his bonus from the previous year. In addition ITLA
Capital shall maintain health, dental and life insurance benefits for the next
18 months for each officer and transfer title to the ITLA Capital owned vehicle
currently used by the officer or, in the event the officer receives a monthly
cash car allowance in lieu of the ITLA Capital vehicle, ITLA Capital shall pay
an amount equal to 18 times the monthly allowance. The annual base salary for
Messrs. Bruce, Sicuro, Guarini and Romelt is currently $182,000, $175,000,
$179,000, and $145,000, respectively.
Both the employment agreement and the change of control agreements also
will provide that to the extent any payments made may be considered excess
parachute payments under Section 280G of the Internal Revenue Code that are
subject to excise tax, ITLA Capital shall pay an additional amount needed to
insure that the amount of payments and value of benefits received equals the
same amount in the absence of any excise tax.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)
The SERP provides that the compensation committee may make restricted
stock awards under ITLA Capital's Recognition and Retention Plan (RRP) on a tax
deferred basis through the SERP. The SERP provides that Mr. Haligowski shall
receive an allocation annually, subject to the performance terms of the RRP, a
restricted stock award equal to one-third of his base salary and all other
participants shall receive an award equal to one-fifth of base salary subject to
the approval of the compensation committee, which may also allocate a greater,
lesser or no award in its discretion. For this purpose, each share of common
stock has been valued at $9.00 per share, the fair market value of the common
stock on the date of transfer to the SERP. A participant shall only have a
vested right
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<PAGE> 81
to amounts allocated to his account if the participant is employed on the last
day of a three year vesting cycle, in the event of a change of control (as
defined in the SERP), or upon normal retirement, death or disability. The last
day of the first vesting cycle is December 31, 1999.
BENEFITS
Insurance Plans. All full-time employees, after approximately three
months employment with ITLA Capital, are covered under group plans providing
major medical, dental, and vision benefits, and long-term disability, travel
accident, accidental death and dismemberment insurance, and group term life
insurance.
Salary Savings Plan. The ITLA Capital Salary Savings Plan is a cash or
deferred arrangement under Section 401(k) of the Internal Revenue Code (the
"Code") designed to provide employees with the opportunity to accumulate
retirement funds (the "401(k) Plan"). Permanent employees age 21 or more are
eligible to participate in the 401(k) Plan as of January 1 or July 1 first
following their hire date. Under the 401(k) Plan, subject to limitations imposed
under Section 401(k) and Section 415 of the Code, a participant may elect to
defer on a monthly basis up to 15% of compensation by directing ITLA Capital to
contribute such amount to the 401(k) Plan on such employee's behalf. ITLA
Capital currently makes matching contributions to the 401(k) Plan equal to 50%
of the first 6% of the participant's monthly contribution. The Board reviews the
match on an annual basis, and ITLA Capital may also make discretionary
contributions to the 401(k) Plan. "Compensation" for purposes of the 401(k) Plan
is defined as a participant's compensation from ITLA Capital as reported
annually on Form W-2, including contributions to the 401(k) Plan by the
employee, and contributions by ITLA Capital in the employee's behalf to any
other pension, insurance, welfare or other employee benefit plan. Under the
401(k) Plan, a separate account is established for each participant.
Participants are always 100% vested in their contributions and the earnings
thereon. Participants become vested in employer contributions and the earnings
thereon at the rate of 20% per year commencing with the first full year of
service (defined as completion of 12 consecutive months of work). Participants
become fully vested in employer contributions and the earnings thereon on their
fifth anniversary of employment, or in the event of death, permanent disability
or attainment of age 65 while employed by ITLA Capital. The 401(k) Plan provides
for in-service hardship distributions of elective deferrals, as well as loans of
a portion of vested account balances. Distributions from the 40l(k) Plan are
made upon termination of service in a lump sum or in annual installments over a
period of years at the election of the participant with the right to take a lump
sum payment at any time during such period.
Nonqualified Deferred Compensation Plans. ITLA Capital Corporation
Supplemental Salary Savings Plan (the "Supplemental Plan") and Nonqualified
Deferred Compensation Plan (the "Deferral Plan") are designed to provide
additional retirement benefits for certain officers and highly compensated
employees. The Supplemental Plan provides participating employees with an
opportunity to make up benefits not available under the 401(k) Plan due to any
application of limitations on compensation and maximum benefits under the 401(k)
Plan. Benefits under the Supplemental Plan are provided at the same time and in
the same form as benefits under the 401(k) Plan, and become taxable to the
participant at that point. The Deferral Plan allows a participant to defer
receipt of, and current taxation upon, designated portions of 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 ITLA Capital's general assets, and funds available to pay benefits
are subject to the claims of ITLA Capital's general creditors. ITLA Capital has
established a Rabbi Trust with a 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. ITLA Capital has adopted the 1995 Employee Stock Incentive
Plan and the 1995 Stock Option Plan for Nonemployee Directors (collectively, the
"Stock Option Plan") pursuant to which officers, directors and employees of ITLA
Capital are eligible to receive options to purchase Common Stock. The purpose of
the Stock Option Plan is to enable ITLA Capital to attract, retain and motivate
employees by providing for or increasing their proprietary interests in ITLA
Capital, and in the case of nonemployee directors, to attract such directors and
further align their interest with those of ITLA Capital. Every employee of ITLA
Capital is eligible to be considered for the grant of awards under the Stock
Option Plan. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the Stock Option Plan is 1,000,000 shares of
which a maximum of
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<PAGE> 82
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 ITLA Capital, and has full and
final authority to select the employees to receive awards and to grant such
awards. Subject to provisions of the Stock Option Plan, the Committee has a wide
degree of flexibility in determining the terms and conditions of awards and the
number of shares to be issued pursuant thereto. The expenses of administering
the Stock Option Plan are borne by ITLA Capital.
The Stock Option Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of Common Stock or any other security or benefit with a
value derived from the value of Common Stock. Awards to employees are not
restricted to any specified form or structure. Stock options to purchase 5,000
shares of Common Stock were automatically granted to the nonemployee directors
upon the completion of ITLA Capital's initial public offering and upon their
election to the Board of Directors, and options to purchase an additional 1,000
shares are granted annually thereafter, provided such individuals continue to
serve as directors.
Awards may not be granted under the Stock Option Plan after the tenth
anniversary of the adoption of the Stock Option Plan. ITLA Capital has granted
an aggregate of 933,000 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 330,000 have been granted to other
employees, of which 31,916 have been exercised and 151,084 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. ITLA Capital has adopted the Recognition
and Retention Plan ("RRP"), the purpose of which is to promote the long-term
interests of ITLA Capital and its shareholders by providing a means for
attracting and retaining officers and employees of ITLA Capital and its
affiliates. Under the RRP, awards of restricted shares of ITLA Capital's common
stock may be made to employees as additional long-term incentive compensation.
Every employee of ITLA Capital is eligible to be considered for the grant of
awards under the RRP. The maximum number of shares of common stock which may be
issued pursuant to the RRP is 300,000 shares over the ten year life of the plan.
No RRP shares may be granted in any fiscal year in which the Association fails
to maintain an "adequately capitalized" designation under the FDIC regulations
and ITLA Capital fails to achieve a return on average assets of at least 50
basis points for the fiscal year. The RRP 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.
DIRECTORS COMPENSATION
Directors Fees. Each nonemployee director was paid a monthly fee during
1998 of $1,800 for serving on ITLA Capital'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, ITLA
Capital adopted the Voluntary Retainer Stock and Deferred Compensation Plan for
Outside Directors (the "Outside Director Plan"). The Outside Director Plan
provides for the deferral of compensation earned by nonemployee directors in the
form of Stock Units ("Stock Units") in a Stock Unit account ("Stock Unit
Account"). Directors may elect to have up to 100% of their fees converted into
stock units.
For dividends paid with respect to ITLA Capital's common stock, each
nonemployee director has credited to his Stock Unit Account an additional number
of Stock Units in an amount determined under the Outside Director
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<PAGE> 83
Plan. Each nonemployee director's Stock Unit Account shall be settled by
delivering to the nonemployee director (or his beneficiary) the number of shares
of ITLA Capital common stock equal to the number of whole Stock Units then
credited to the nonemployee director's Stock Unit Account, in either (i) a lump
sum or (ii) substantially equal annual installments over a period not to exceed
ten years.
Directors Stock Option Plans. Directors are also eligible to receive
stock option grants as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the Compensation Committee was comprised of Directors
Lipscomb and Oribe.
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<PAGE> 84
OPTION GRANTS FOR 1998
The following table sets forth certain information regarding stock
options granted pursuant to the Stock Option Plan for the named executive
officers in 1998. 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 45,000 22.5% $ 18.00 2/02/08 $ 509,405 $1,290,931
Norval L. Bruce 30,000 15.0% $ 18.00 2/02/08 $ 339,603 $ 860,621
Michael A. Sicuro 25,000 12.5% $ 18.00 2/02/08 $ 283,003 $ 717,184
George J. Guarini 5,000 2.5% $ 18.00 2/02/08 $ 56,601 $ 143,437
Steven C. Romelt 15,000 7.5% $ 18.00 2/04/08 $ 169,802 $ 430,310
</TABLE>
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1998 held by the named executive
officers.
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF "IN-THE-MONEY" OPTIONS
SHARES UNEXERCISED OPTIONS AT FISCAL YEAR-END
ACQUIRED AT FISCAL YEAR-END (1)
ON VALUE ------------------------------ ----------------------------
EXERCISE REALIZED (#) ($)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ---------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George W. Haligowski -- N/A 291,667 58,333 $1,464,792 $ 8,333
Norval L. Bruce -- N/A 41,667 33,333 $ 206,042 $ 2,083
Michael A. Sicuro -- N/A 21,667 43,333 $ 15,625 $ 12,500
George J. Guarini -- N/A 40,000 5,000 $ 205,000 $ --
Steven C. Romelt -- N/A 8,333 31,667 $ 5,208 $ 10,417
</TABLE>
- ----------
(1) The difference between the aggregate option exercise price and the closing
price of $15.125 of the underlying shares at December 31, 1998.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 16, 1999, ITLA Capital had 7,166,484 shares of common stock
outstanding.
The following table sets forth, as of March 16, 1999, certain
information as to those persons who were known by management to be beneficial
owners of more than five percent of ITLA Capital common stock outstanding.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
BENEFICIAL OWNER OWNED CLASS
----------------------------------- ------------ -------
<S> <C> <C>
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663 860,700(1) 12.01%
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109 717,400(2) 10.01%
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078 709,000(3) 9.89%
Dimensional Fund Advisors
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 503,300(4) 7.02%
Friedman, Billings, Ramsey Group, Inc.
1001 19th Street North
Arlington, Virginia 22209 485,170(5) 6.77%
</TABLE>
- ----------
(1) As reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a Schedule
13G/A filed on or about January 29, 1999 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Thomson
reported sole voting power as to 537,300 shares, sole dispositive power as
to 860,700 shares, shared voting power as to 10,700 shares, and shared
dispositive power as to none of the 860,700 shares covered by
the report.
(2) As reported by Wellington Management ITLA Capital, LLP ("Wellington") on a
Schedule 13G/A filed on or about February 10, 1999 with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Wellington reported sole voting and dispositive powers as to no shares,
shared voting power as to 355,000 shares, and shared dispositive power as
to 717,400 of the 717,400 shares covered by the report.
(3) As reported by Franklin Resources, Inc. ("Franklin") on a Schedule 13G/A
filed on or about February 4, 1998 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Franklin
reported sole voting and dispositive powers as to 709,000 shares, and
shared voting and dispositive powers as to none of the 709,000 shares
covered by the report.
(4) As reported by Dimensional Fund Advisors ("Dimensional") on a Schedule 13D
dated on or about February 11, 1999 and filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Dimensional reported sole voting and dispositive powers as to 503,300
shares, and shared voting and dispositive powers as to none of the 503,300
shares covered by the report.
(5) As reported by Friedman, Billings, Ramsey Group, Inc. ("FBR") on a Schedule
13G/A filed on or about February 16, 1999 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. FBR
reported sole voting and dispositive powers as to 485,170 shares, and
shared voting and dispositive powers as to none of the 485,170 shares
covered by the report.
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<PAGE> 86
The following table sets forth, as of December 31, 1998, certain
information as to the shares of common stock beneficially owned by the directors
and named executive officers and by all directors and executive officers of ITLA
Capital as a group.
<TABLE>
<S> <C> <C>
George W. Haligowski 342,204 4.58%
Norval L. Bruce 55,116 0.76%
George J. Guarini 43,079 0.60%
Michael A. Sicuro 35,504 0.49%
Steven C. Romelt 21,666 0.30%
Sandor X. Mayuga 7,800 0.11%
Hirotaka Oribe 7,200 0.10%
Robert R. Reed 7,200 0.10%
Jeffrey L. Lipscomb 7,000 0.10%
All Directors and Executive Officers
as a Group (11 Persons) 553,437 7.20%
</TABLE>
- ----------
(1) Includes shares held directly, as well as an aggregate of 519,669 shares
which are subject to immediately exercisable options and options
exercisable within 60 days of December 31, 1998, under ITLA Capital'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 dispositive power. The above
named individuals held exercisable options and options exercisable within
60 days of December 31, 1998 as follows: Chairman Haligowski - 313,334
shares; Director Lipscomb - 7,000 shares; Director Mayuga - 7,000 shares;
Director Oribe - 7,000 shares; Director Reed - 7,000 shares; Norval L.
Bruce - 53,334 shares; George J. Guarini - 41,667 shares; Michael A. Sicuro
- 35,000 shares; and Steven C. Romelt - 21,666 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, ITLA Capital utilized the services of Tisdale &
Nicholson. Director Mayuga is a partner in that law firm. During 1998, this law
firm received $4,857 in legal fees from ITLA Capital, which was not in excess of
5% of the firm's total revenues during 1998.
During the year, ITLA Capital utilized the services of a public
relations firm which is owned by Director Lipscomb's spouse. During 1998, this
public relations firm received $35,873 in fees from ITLA Capital.
86
<PAGE> 87
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
ITLA Capital's consolidated financial statements, and Report of
Independent Public Accountants thereon, are included in this Form
10-K at the pages listed below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on the
Consolidated Financial Statements as of December 31,
1998 and 1997 and for Each of the Three Years in the
Period Ended December 31, 1998 44
Consolidated Balance Sheets as of December 31, 1998 and 1997 45
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 46
Consolidated Statements of Changes in Shareholders' Equity
for the Period January 1, 1996 to December 31, 1998 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 48
Notes to Consolidated Financial Statements 49
</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.
87
<PAGE> 88
(a)(3) EXHIBITS:
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING
REGULATION OR EXHIBIT
S-K NUMBER SEQUENTIAL
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 Regarding Computation of Per Share Earnings None Not applicable
12 Statement Regarding Computation of Ratios None Not applicable
13 Annual Report to Security Holders Not required Not applicable
18 Letter Regarding Change in Accounting Principles None Not applicable
21 Subsidiaries of the Registrant 21 Page 90
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 Not applicable
28 Information from Reports Furnished to State Insurance
Regulatory Authorities None Not applicable
</TABLE>
----------------
* Filed as exhibits to Imperial's Registration Statement on Form
S-1 (File No. 33-96518) filed with the Commission on September
1, 1995, pursuant to Section 5 of the Securities Act of 1933.
** Filed as exhibits to the Company's Registration Statement on
Form S-4 (File No. 333-03551) filed with the Commission on May
10, 1996, pursuant to Section 5 of the Securities Act of 1933.
(b) REPORTS ON FORM 8-K:
None.
88
<PAGE> 89
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, 1999 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, 1999
- ---------------------------- Chief Executive Officer
George W. Haligowski (Principal Executive Officer)
/s/ Michael A. Sicuro Managing Director and March 30, 1999
- ---------------------------- Chief Financial Officer
Michael A. Sicuro (Principal Financial and Accounting
Officer)
/s/ Norval L. Bruce Director March 30, 1999
- ----------------------------
Norval L. Bruce
/s/ Jeffrey L. Lipscomb Director March 30, 1999
- ----------------------------
Jeffrey L. Lipscomb
/s/ Sandor X. Mayuga Director March 30, 1999
- ----------------------------
Sandor X. Mayuga
/s/ Robert R. Reed Director March 30, 1999
- ----------------------------
Robert R. Reed
/s/ Hirotaka Oribe Director March 30, 1999
- ----------------------------
Hirotaka Oribe
</TABLE>
89
<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
ITLA Funding Corporation ITLA Servicing Corporation 100% Delaware
ITLA Funding Corporation ITLA Commercial Warehouse Corporation 100% Delaware
ITLA Capital Corporation ITLA Management Corporation 100% Delaware
ITLA Management Corporation ITLA Commercial Investment Corporation 100% Maryland
ITLA Commercial Investment Corporation ITLA Commercial Securitization Corporation 100% Delaware
</TABLE>
90
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,910
<INT-BEARING-DEPOSITS> 117,692
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 329
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 891,088
<ALLOWANCE> 16,811
<TOTAL-ASSETS> 1,032,647
<DEPOSITS> 866,798
<SHORT-TERM> 36,750
<LIABILITIES-OTHER> 11,467
<LONG-TERM> 11,750
0
0
<COMMON> 55,917
<OTHER-SE> 49,241
<TOTAL-LIABILITIES-AND-EQUITY> 1,032,647
<INTEREST-LOAN> 92,607
<INTEREST-INVEST> 9,058
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 101,665
<INTEREST-DEPOSIT> 48,053
<INTEREST-EXPENSE> 51,387
<INTEREST-INCOME-NET> 50,278
<LOAN-LOSSES> 4,550
<SECURITIES-GAINS> 85
<EXPENSE-OTHER> 23,048<F1>
<INCOME-PRETAX> 25,127
<INCOME-PRE-EXTRAORDINARY> 25,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,823
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 4.96
<LOANS-NON> 5,434
<LOANS-PAST> 0
<LOANS-TROUBLED> 805
<LOANS-PROBLEM> 8,577
<ALLOWANCE-OPEN> 12,178
<CHARGE-OFFS> 64
<RECOVERIES> 147
<ALLOWANCE-CLOSE> 16,811
<ALLOWANCE-DOMESTIC> 16,811
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>INCLUDED IN EXPENSE-OTHER IS PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD
FOR SALE TOTALING $1.4 MILLION
</FN>
</TABLE>
