1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-26960
ITLA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4596322
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
888 PROSPECT STREET, SUITE 110, LA JOLLA, CALIFORNIA 92037
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (858) 551-0511
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 22, 2001, there were issued and outstanding 6,596,413 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 22, 2001, was $127.4 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.)
================================================================================
2
ITLA CAPITAL CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 19
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 77
PART III
Item 10. Directors and Executive Officers of the Registrant 77
Item 11. Executive Compensation 80
Item 12. Security Ownership of Certain Beneficial Owners and Management 86
Item 13. Certain Relationships and Related Transactions 88
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 89
FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: This Form 10-K contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, changes in economic
conditions in our market areas, changes in policies by regulatory agencies, the
impact of competitive loan products, loan demand risks, fluctuations in interest
rates and operating results and other risks detailed from time to time in our
filings with the Securities and Exchange Commission. We caution readers not to
place undue reliance on forward-looking statements. We do not undertake and
specifically disclaim any obligation to revise any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements. These risks could cause our actual results
for 2000 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, us.
As used throughout this report, the terms "we", "our", "ITLA Capital" or
the "Company" refer to ITLA Capital Corporation and its consolidated
subsidiaries.
2
3
PART I
ITEM 1. BUSINESS
GENERAL
ITLA Capital Corporation is the largest financial services company
headquartered in San Diego County, California with consolidated assets of $1.4
billion, consolidated net loans of $1.3 billion, deposits of $1.0 billion and
consolidated stockholder's equity of $133.6 million as of December 31, 2000. We
conduct and manage our business principally through Imperial Capital Bank (the
"Bank"), a $1.2 billion California industrial bank, with six offices in
California, (San Francisco, Encino, Beverly Hills, Glendale, Costa Mesa and Del
Mar). The Bank has been in business for 26 years and was formally known as
Imperial Thrift and Loan Association until its name change in January 2000. Our
branch offices are primarily used for our deposit services and lending business.
The Bank became our principal operating subsidiary upon completion of its
holding company reorganization on October 1, 1996. The Bank is primarily engaged
in:
- Originating real estate loans secured by income producing properties for
retention in its loan portfolio;
- Acquiring pools of single family mortgages in the secondary market for
investment purposes; and
- Accepting customer deposits through the following products: certificates of
deposits, money market and passbook accounts. Our deposit accounts are insured
by the FDIC, up to the appropriate legal limits of individual deposit
balances.
During 2000, we acquired through our subsidiary, Imperial Capital Real
Estate Investment Trust ("Imperial Capital REIT") all of the equity and certain
collateralized mortgage obligations ("CMOs") of the ICCMAC Multi-family and
Commercial Trust 1999-1 (the "ICCMAC Trust"). On the date of acquisition, the
ICCMAC Trust held assets of $250.5 million as collateral for $205.4 million of
investment grade CMO's that had been sold to third party investors by the
previous owner. At December 31, 2000, real estate loans held in trust for the
CMO's totaled $216.3 million and the CMO's outstanding balance at that date was
$161.9 million.
We continuously evaluate business expansion opportunities, including
acquisitions or joint ventures with companies that originate or purchase
commercial and multi-family real estate loans as well as residential mortgage
loans and other types of secured commercial loans. In connection with this
activity, we periodically have discussions with and receive financial
information about other companies that may or may not lead to the acquisition
of the company, a segment or division of that company, or a joint venture
opportunity with us in order to enhance the value of our Company to our
shareholders.
The executive offices of the Company are located at 888 Prospect Street,
Suite 110, LaJolla, California 92037 and its telephone number at that address is
(858) 551-0511.
REAL ESTATE LENDING
General. We concentrate our real estate lending activities as follows:
- Originating and purchasing real estate loans secured by income producing
properties, both commercial and residential (including apartments).
- Purchasing single-family residential loans.
The interest rates charged on real estate 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 real estate loans. At December 31, 2000, the Bank's
gross real estate loan portfolio increased to $1.1 billion as compared to $974.5
million in the prior year end. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional information
regarding the composition of the our portfolio at December 31, 2000.
3
4
Marketing and Originations. We originate real estate loans through
branch offices located in San Francisco, Glendale, Costa Mesa and Del Mar. These
offices are staffed by a total of fifteen loan officers. Loan officers solicit
mortgage loan brokers for loan applications that meet our underwriting criteria,
and also accept applications directly from borrowers. A majority of the real
estate loans funded by us are originated through mortgage loan brokers. Mortgage
loan brokers act as intermediaries between us and the property owner in
arranging real estate loans and earn a fee based upon the principal amount of
each loan funded. Since a large portion of our marketing effort is through the
contact of loan officers with mortgage loan brokers, we do not incur significant
expenses for advertising our lending services to the general public. We provide
only limited deposit products and not a full range of banking services, and
generally do not market our lending services to, or receive loan applications
from our depositors.
Income Producing Property Loans. We originate and purchase real estate
loans secured primarily by first trust deeds on income producing properties.
Income property loans consist primarily of the following types of properties:
- Retail centers
- Small office and light industrial buildings
- Apartments
- Hotels
- Mobile home parks
- Mini-storage facilities
- Other mixed use or special purpose commercial properties
At December 31, 2000, the Bank had $833.1 million of income producing
property loans outstanding representing 78.1% of its total real estate loans.
Most of the Bank's real estate borrowers are business owners, individual
investors, investment partnerships or limited liability corporations. The income
producing property lending that the Bank engages in typically involves larger
loans to a single borrower and is generally viewed as exposing the lender to a
greater risk of loss than one-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, such as:
- Changes or continued weakness in general or local economic conditions;
- Changes or continued weakness in specific industry segments;
- Declines in real estate values;
- Declines in rental, room or occupancy rates in hotels, apartment complexes
or commercial properties;
- Increases in other operating expenses (including energy costs);
- The availability of refinancing at lower interest rates or better loan terms;
- Changes in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental legislation and taxation; and
- Increases in interest rates, real estate and personal property tax rates;
- Other factors beyond the control of the borrower or the lender.
Income producing property loans are generally made in amounts up to 75%
of the appraised value, however, in certain instances, multifamily originations
may be made at a loan to value ratio of 80%. Loans are generally made for terms
up to ten years, with amortization periods up to 30 years. Depending on market
conditions at the time the loan was originated, certain loan agreements may
include prepayment penalties. Most real estate loans are subject to a quarterly
adjustment of their interest rate based on one of several interest rate indexes.
As of December 31, 2000, 58.5% of the Bank's real estate loan portfolio
was indexed to the Six-Month London Interbank Offered Rate; 10.1% was indexed to
the reference rate charged by Bank of America; 3.4% was indexed to the Federal
Home Loan Bank 11th District Cost of Funds Index; 23.5% was fixed for an initial
period and then adjustable; 1.0% was indexed to either the United States
Treasury security indexes or the Federal Home Loan Bank of San Francisco advance
rate; and the balance of 3.5% was fixed rate. Most of the Bank's variable rate
real estate loans may not adjust downward below their initial rate, with
increases generally limited to maximum
4
5
adjustments of 2% per year up to 4% for the life of the loan. The inability of
the Bank's real estate loans to adjust downward can contribute to increased
income in periods of declining interest rates, and also assists the Bank in our
efforts to limit the risks to earnings and equity value resulting from changes
in interest rates. At December 31, 2000, 95.0% of the Bank's variable rate and
fixed/adjustable loan portfolio contained interest rate floors. The
weighted-average minimum interest rate on this portfolio was 9.47%. At that
date, 90.3% of the variable rate loans outstanding had a lifetime interest rate
cap. The weighted-average lifetime interest rate cap on this portfolio was
14.35%.
The underwriting standards for loans secured by income producing real
estate properties consider the borrower's financial resources and ability to
repay and the amount and stability of cash flow, if any, from the underlying
collateral, to be comparable in importance to the loan-to-value ratio as a
repayment source. Management believes that, in recent years, the California
economy has strengthened in some respects, however, a worsening of economic
conditions in the state and surrounding regions could have an adverse effect on
our 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 our real estate collateral.
A small portion of the Bank's real estate loan portfolio consists of
loans secured by junior liens on real estate. At December 31, 2000, 40 real
estate loans in the aggregate amount of $5.0 million, or 0.5% of our real estate
loan portfolio, were secured by second trust deeds. Of these loans
collateralized by junior liens, 94% were secured by income producing properties
and 6% were secured by one-four family residential properties. Of the Bank's
real estate loans outstanding at December 31, 2000, $7.9 million represented
loans to facilitate the sale of other real estate owned.
In 2000, 1999, and 1998, the Bank purchased income producing real estate
loans totaling $110.9 million, none, and $2.4 million, respectively. In its
commercial real estate loan purchases, the Bank generally reserves the right to
reject particular loans from a loan pool being purchased and does so for loans
in a pool that do not meet its underwriting criteria. In determining whether to
purchase a commercial real estate loan, the Bank reviews the borrower's
financial resources and ability to repay and the amount and stability of cash
flow, if any, from the underlying collateral. Similar to its loan originations
on commercial real estate loan purchases, the Bank reviews information
concerning the income, financial condition, employment and credit history of the
applicant, however, current appraisals and borrower credit reports are not
obtained. On commercial real estate loan purchases, the Bank reviews the
original 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. In addition, the Bank generally obtains
an updated title search separate from that provided by the loan seller. For a
further discussion of the Bank's underwriting procedures, see "Lending,
Origination, Purchasing and Underwriting" set forth below.
Construction Loans. We also originate construction loans for income
producing properties, as well as for single-family home construction. At
December 31, 2000, the Bank had $95.2 million of construction loans outstanding,
representing 8.9% of its loans receivable. In addition to the lending risks
previously discussed, construction loans also present risks associated with the
accuracy of the initial estimate of the property's value upon completion and its
actual value, the timely completion of construction activities for their
allotted costs and the time needed to stabilize income properties or sell
residential tract developments. These risks can be affected by a variety of
factors, including the oversight of the project, localized costs for labor and
materials, and the weather.
Residential Lending. In 2000, we continued to execute the strategy
commenced in 1999 to diversify our product mix and concentration of commercial
real estate loans through the bulk purchase of single-family residential loans.
Under guidelines established by the Board of Directors, the Company's loan
portfolio may consist of up to $165 million of single family residential loans.
We determine the bid prices on these loan pools on a pool by pool basis, through
an analysis of the pool's return on equity and return on assets, desired yield
spreads, acceptable risk characteristics, market conditions and a thorough
analysis of the originator/seller. After our bid is accepted by the seller, we
conduct a due diligence review of the loans in the pool. Based on due diligence
results, individual loans are kept in the proposed pool, rejected from the pool
or put on hold pending additional information or a pricing adjustment. The pool
and pricing is then finalized, a purchase and sale agreement is signed, and the
purchase is
5
6
completed. During 2000 and 1999, we bought a total of 667 loans and 805 loans
with a total outstanding principal balance of $79.0 million and $90.8 million,
paying a total premium of $1.7 million and $2.7 million to acquire these loans,
respectively. At December 31, 2000, 1,195 of these loans remained, with an
outstanding principal balance of $131.0 million and related unamortized purchase
premium of $2.4 million.
Franchise Loans. In 2000, we commenced purchasing franchise loans
through relationships with correspondent franchise loan originators. Franchise
loans are loans to owners of businesses, both franchisers and franchisees, such
as fast food restaurants or gasoline retailers, that are affiliated with
nationally or regionally recognized chains and brand names. Various combinations
of land, building, business equipment and fixtures may secure these loans, or
they may be a general obligation of the borrower based on a valuation of the
borrower's business and debt service ability. In each case, the primary source
of repayment is the cash flow of the business and not the underlying value of
the collateral. Our correspondent relationships, which may change from time to
time, allow us to purchase loans in our sole discretion which meet our
underwriting and yield criteria. As of December 31, 2000, we had purchased four
such loans, with a total commitment of $5.9 million and an outstanding balance
of $3.9 million.
Lending, Origination, Purchases and Underwriting. Many of the Bank's
income producing property loans are made to lower credit grade borrowers that
have marginal credit histories or the property has other factors such as
debt-to-income ratios or property location that prevent the borrower from
obtaining a prime interest rate. Likewise, residential loans purchased generally
do not meet the Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation's underwriting standards with respect to credit, debt
ratios and documentation, whether as a result of marginal credit histories, the
absence of credit history, high debt-to-income ratios, reliance on the
borrower's stated income with verification of employment, non-owner occupied
property, rural property, balloon payment or a variety of other exceptions from
agency guidelines. We attempt to mitigate the risk associated with these loans
by charging higher interest rates and through our loan approval and loan
purchasing process. The Bank's loan underwriters are responsible for initial
reviews of borrowers, properties, loan terms, and submission of loans to the
loan committee.
All real estate loans over $1.0 million must be submitted to the loan
committee for approval. The Bank's loan underwriters prepare a written
presentation on every loan application submitted to its loan committee, which is
comprised of the following Bank officers:
- Chairman, Chief Executive Officer, President and Chief Operating Officer
- Vice Chairman and Chief Credit Officer
- Managing Director-New Business Development
- Senior Vice President and Chief Lending Officer
- First Vice President of Credit Quality Control
- First Vice President/Director of Loan Operations
- Vice President/Portfolio Administration
The underwriter's presentation includes a description of the prospective
borrower and any guarantors, the collateral, and the proposed use(s) of loan
proceeds, as well as borrower and property financial statements and analysis.
Each application is evaluated from a number of underwriting perspectives,
including property appraised value, level of debt service coverage, remaining
economic life, use and condition, as well as borrower liquidity, net worth, cash
investment, income, credit history and operating experience. Our real estate
loans are originated on both a nonrecourse and full recourse basis and we
generally seek to obtain personal guarantees from the principals of borrowers
which are single asset or limited liability entities (such as partnerships,
corporations or trusts) on properties that have not achieved stabilization.
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. Loans up to $750,000 may be approved by any loan committee
member. Loans of $750,000 to $1.0 million require the approval by any two
members of the Bank's loan committee, while loans in excess of $1.0 million
require approval of three loan committee members. Additionally, loans over $1.5
million must be approved by the First Vice President of Credit Quality Control;
loans
6
7
over $3.0 million require the additional signature of the Vice Chairman and
Chief Credit Officer; and individual loans over $5.0 million, loans resulting in
an aggregate borrowing relationship to one borrower in excess of $7.5 million,
and all purchased loan pools must be approved by the executive committee of the
Bank's board of directors.
Variable rate loans over $500,000 must generally satisfy an interest
rate sensitivity test in order for the loan origination or purchase to be
approved; that is, the current stabilized income of real property security must
be adequate to achieve a minimum debt service coverage ratio of 90% if the
interest rate on the loan was at the maximum amount allowed under the terms of
the note, generally the fully indexed start rate plus 400 basis points.
Following loan approval and prior to funding, the Bank's underwriting and
processing departments assure that all loan approval terms have been satisfied,
that they conform with lending policies (or are properly authorized exceptions),
and all required documentation is present and in proper form.
All reviews of residential loans being considered for purchase are
initially performed through our loan acquisition department. We place bids on
pools of loans meeting its investment and credit risk objectives, subject to due
diligence and negotiation of an acceptable purchase agreement. The Bank's Vice
Chairman and Chief Credit Officer and the Chief Financial Officer must each
approve the bid prior to submission. All purchases are made within the
parameters set by the Bank's Board of Directors for loan purchases and
originations and require the approval of both the loan committee and the
asset/liability management committee.
If we are the successful bidder, a due diligence review of each loan in
the pool is completed to finalize the pool of loans to be acquired. This review
includes an evaluation of the seller's representations and warranties and of the
adequacy of the applicable loan documentation (e.g., the existence of a note,
including confirmation of the interest rate and outstanding loan balance,
mortgage, title policy, borrower financial statements, tax returns,
environmental reports, etc.). An estimate of the current value of the real
estate collateral is determined by obtaining a brokers' price opinion report for
every loan considered for purchase, which is then compared to and reconciled
with the original appraisal by staff appraisers from the Bank's appraisal
department.
The maximum size of a single real estate loan made by the Bank is
limited by California law to 25% of the Bank's equity capital. At December 31,
2000, that limit was approximately $27.7 million. The Bank's largest combined
credit extension to related borrowers was $10.9 million at December 31, 2000. At
December 31, 2000, the Bank had a total of 137 extensions of credit, with a
combined outstanding principal balance of $517.6 million, that were over $2.0
million to a single borrower or related borrowers. Two of these combined
extensions of credit, with a total principal balance of $10.4 million (and a net
book balance of $8.6 million), were on nonaccrual status at December 31, 2000.
All other combined extensions of credit over $2.0 million were performing in
accordance with their repayment terms. At December 31, 2000, the Bank had 2,223
secured real estate loans outstanding, with an average balance per loan of
approximately $480,000.
Servicing and Collections. Servicing of our purchased residential loans
is contracted to Fairbanks Capital Corporation, an organization specializing in
the collection and servicing of residential loans. Commercial real estate loans
held by the Bank are serviced by the Bank's loan servicing department, which is
designed to provide prompt customer service, and accurate and timely information
for account follow-up, financial reporting and management review. As discussed
below, servicing of the loans held in the ICCMAC Trust is performed by a
third-party servicer. Following the funding or purchase of an approved loan, all
pertinent loan data is entered into the Bank's data processing system, which
provides monthly billing statements, tracks payment performance, and processes
contractual interest rate adjustments on variable rate loans. Regular loan
service efforts include payment processing and collection follow-up, as well as
tracking the performance of additional borrower obligations with respect to the
maintenance of casualty insurance coverage, payment of property taxes and senior
liens, if any, and periodically requesting required information, including
current borrower and property financial and operating statements. Additional
services are performed by the Bank in connection with the monitoring of loans to
borrowers secured by stabilizing projects. These projects involve lease-up or
renovation activities. The Bank monitors these loans to ensure that projects are
performing as underwritten. This monitoring allows the Bank to take a proactive
approach to addressing projects that do not perform as planned. When payments
are not received by their contractual due date, collection efforts begin on the
fifth day of delinquency with a telephone contact, and proceed to written
notices that progress from reminders of the borrower's payment obligation to an
advice that a notice of default may be forthcoming. Accounts delinquent for more
than 30 days are generally transferred to the Bank's asset management
7
8
department which, following a review of the account and management approval,
implements a collection or restructure plan, or a disposition strategy, and
evaluates any potential loss exposure on the asset.
Competition. Our competition in originating real estate loans is
principally from community banks, savings and loan associations, other
industrial banks, real estate financing conduits, small insurance companies, and
occasionally larger banks. Many of these entities enjoy competitive advantages
over us relative to a potential borrower in terms of a prior business
relationship, wider geographic presence or more accessible branch office
locations, the ability to offer additional services or more favorable pricing
alternatives, or a lower cost of funds structure. We attempt to offset the
potential effect of these factors by providing borrowers with greater individual
attention and a more flexible and time-sensitive underwriting, approval and
funding process than they might obtain elsewhere.
IMPERIAL CAPITAL REAL ESTATE INVESTMENT TRUST
During 2000, we acquired all of the equity and certain CMO's of the
ICCMAC Trust through our real estate investment trust subsidiary, Imperial
Capital REIT. On the date of acquisition, the ICCMAC Trust held assets of $250.5
million, comprised of approximately 65 percent and 35 percent of multifamily and
commercial loans, respectively, with over 50 percent of the loans secured by
property located in California. Over two-thirds of the loans are adjustable rate
mortgages. On the date of acquisition the ICCMAC Trust's loans were held as
collateral for $205.4 million of investment grade CMO's sold to third party
investors. Through this investment, we established a new source of cash flow for
ITLA Capital other than distributions from the Bank. As of December 31, 2000,
the ICCMAC Trust's loan pool had decreased to $209.3 million due to normal
amortization and payoffs of the loans in the pool. The cash flow from the ICCMAC
Trust's loan pool pays principal and interest on the CMO's, and also provides
cash flow on a monthly basis to ITLA Capital. At December 31, 2000, the CMO's
had an outstanding balance of $161.9 million, and ITLA Capital had recorded $4.6
million of pre-tax income from its investment in the ICCMAC Trust.
Servicing of the ICCMAC Trust loans is performed by Banc One Mortgage
Capital Markets, LLC ("Banc One"), a Delaware limited liability company. Under
the servicing agreement, Banc One is required to service and administer the
commercial mortgage loans held in trust solely on behalf of the best interests
of and for the benefit of the holders of the CMO's in accordance with the terms
of the servicing agreement and the commercial mortgage loans. Banc One is
required to perform other customary functions of a servicer of comparable loans,
including monitoring insurance coverage; maintaining escrow or impoundment
accounts of borrowers for payment of taxes, insurance and other items required
to be paid pursuant to the loan agreement; processing assumptions or
substitutions in those cases where the loan servicer has determined not to
enforce any applicable due-on-sale clause; demanding that the borrower cure
delinquencies; inspecting and managing commercial mortgaged properties under
certain circumstances; and maintaining records relating to the commercial
mortgage loans.
NONPERFORMING ASSETS AND OTHER LOANS OF CONCERN
At December 31, 2000, nonperforming assets totaled $20.4 million or
1.44% of total assets. Nonperforming assets consisted of $18.1 million of
nonaccrual real estate loans and $2.3 million of other real estate owned held by
the Bank. Three of our nonperforming real estate loans had an outstanding
balance greater than $1.0 million. For additional information regarding
nonperforming assets see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Credit Risk Elements".
The following is a brief discussion of our three nonaccrual loans where
the remaining principal balance of the loan at December 31, 2000, exceeded $1.0
million.
Loan Secured by a Distribution Warehouse Facility - Mississippi.
This loan was originated by the Bank in February 1999 with a total loan
amount of $8.5 million. In January 2000, the building's single tenant
filed for bankruptcy protection. In November 2000, the lease was
rejected through the bankruptcy court and tenant vacated the building.
The Bank has entered into a forbearance agreement with the borrower who
has commenced to market the property for sale or lease.
8
9
Loan Secured by an Office/Restaurant Complex - Arizona. This
loan was originated by the Bank in January 1997 with an original loan
amount of $1.9 million. In November 1997, an additional advance of
$400,000 was funded to complete construction. The loan was placed on
nonaccrual status in September 1998 due to delinquent monthly payments
and the bankruptcy filing by borrower. During 1999 and 2000, the loan
was written down to its book balance at December 31, 2000 of $1.4
million. Although the borrower's plan of reorganization was confirmed
on July 26, 2000 and principal and interest payments commenced under the
plan on September 26, 2000, we have applied all payments received to
date against the principal balance of the loan and intend to do so until
a satisfactory payment history has been established.
Loan Secured by a Senior Apartment Complex - California. This
loan was originated by the Bank in December 1997 with an original loan
commitment of $1.6 million, which included funds to convert the property
into senior apartments. No payments have been received since August
2000. The loan balance as of December 31, 2000 was $1.6 million. The
loan matured in November 2000, and we have filed a notice of default.
The property was 89% occupied as of December 2000.
As of December 31, 2000, we had outstanding loans with an aggregate
outstanding balance of $70.9 million with respect to which known information
concerning possible credit problems with the borrowers or the cash flows of the
properties securing the respective loans has caused management to be concerned
about the ability of the borrowers to comply with present loan repayment terms,
which may result in the future inclusion of such loans in the nonaccrual loan
category. The following is a brief discussion of our "other loans of concern"
where the remaining principal balance of the loan at December 31, 2000 exceeded
$2.0 million.
Loan Secured by Gas Station, Convenience Store and Car Wash -
California. This construction loan was originated by the Bank in August
1999. The outstanding principal balance at December 31, 2000 was $5.0
million. This loan matured on September 1, 2000, and is delinquent more
than 90 days due to a dispute among the partners of the borrowing
entity. The Bank currently holds $400,000 of the guarantors' funds in a
pledged passbook account, and intends to offset these funds against the
amounts due on our note. We consider this loan a performing asset
because, based on the cash collateral the Bank holds, and the cashflow
now being generated from the operations of the real estate collateral,
this loan is well secured and in the process of collection.
Loan Secured by a Hotel - California. This is a participation
loan where the Bank purchased a 29.4% share ($5.0 million) of a $17.0
million loan that was originated by another financial institution in
October 1998. Our outstanding balance was $4.8 million as of December
31, 2000. The loan matured in August 2000 and was extended under a
forbearance agreement to October 2000 to allow the borrower time to
refinance the property with another lender. Notice of default was filed
in October 2000, as no take out financing materialized during the
forbearance period. The monthly payments on the loan are being received
at the default rate of interest, however, the loan is delinquent due to
its matured status. The loan is well secured and in the process of
collection, based on the borrowers' efforts to refinance the property,
the cash flow from the property's operations, which result in a debt
service coverage ratio of 1.67, and the estimated loan to value ratio of
73%.
Loan Secured by Office Complex - Alabama. This loan was
originated by the Bank in February 1999 with an original amount of $4.0
million. The outstanding balance as of December 31, 2000 was $3.8
million. In December 2000, a large tenant vacated the space it occupied
upon maturity of its lease, which brought the occupancy down to 66%. To
date, all monthly payments have been made as agreed. We continue to
monitor the borrowers' efforts to lease the vacant space.
Loan Secured by Hotel - Arizona. This loan was originated by the
Bank in July 1998 with an original commitment of $4.0 million secured by
a 99-unit hotel. The outstanding principal balance at
9
10
December 31, 2000 was $3.8 million. The loan has paid as agreed since
inception, however, the cash flow from the operations of the collateral
has been less than the debt service on our loan for the last three
years. We continue to monitor the borrowers' efforts to improve the
cashflow of the hotel.
Loan Secured by Hotel - Arizona. This loan was originated by the
Bank in March 1998 with an original commitment of $3.5 million secured
by a 138-unit hotel. The outstanding principal balance at December 31,
2000 was $3.0 million; as the guarantor made a principal reduction
payment of $500,000 in November 2000. The loan has paid as agreed since
inception, however, the cash flow from the operations of the collateral
has been less than the debt service on our loan, and there has been a
deterioration in the value of the property securing the loan. We
continue to monitor the borrower's efforts to improve the cash flow of
the hotel.
Loan Secured by Office Complex - Nevada. This loan was
originated by the Bank in May 2000 as a refinance of a Bank construction
loan that was originally funded in 1998. The original loan amount was
$4.2 million and the current outstanding balance as of December 31, 2000
was $3.4 million. The loan is being monitored due to the slow lease-up
of the office buildings that were built in the complex. At December 31,
2000, three of the four buildings in the complex are nearing stabilized
occupancy, and the remaining building is nearing completion and leasing
efforts are under way.
Loan Secured by Three Separate Apartment Buildings - Florida.
This loan was originated by the Bank in December 1998 with an original
balance of $3.2 million and currently has an outstanding balance of $3.1
million as of December 31, 2000. Since inception this loan has been a
constant collection problem with several late payments and several
payments returned for non-sufficient funds. In October 2000 a
foreclosure action was again initiated and is currently progressing. As
of December 31, 2000, the loan was delinquent less than 90 days,
however, no payments have been received to date.
Loan Secured by a Hotel - Washington. This loan was originated
by the Bank in February 1998 with an original commitment of $3.7 million
secured by 123-unit hotel. The outstanding principal balance at December
31, 2000 was $3.1 million. The loan has paid as agreed since inception,
however, the cash flow from the operations of the collateral has been
less than the debt service on our loan and the occupancy rate has been
low for the last 2 years. We continue to monitor the borrower's efforts
to improve the cash flow of the hotel.
Loan Secured by Motel - Arizona. This loan was originated by the
Bank in May 1997 with an original commitment of $2.2 million secured by
a 90-unit motel. The outstanding principal balance at December 31, 2000
was $2.0 million. The loan has paid as agreed since inception, however,
the cash flow from the operations of the collateral has been less than
the debt service on our loan for the last two years. We continue to
monitor the borrower's efforts to improve the cash flow of the motel.
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. We review our loan classifications on at
least a quarterly basis. At December 31, 2000, we classified $45.9 million of
loans as "substandard" and $43.1 million as "special mention". Of the loans
comprising the $45.9 million in "substandard" loans, $18.1 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 $70.9 million of "other loans of
concern", discussed above.
FUNDING SOURCES
The primary source of funding for the Bank's lending operations and
investments are investment certificates, which are functionally equivalent to
certificates of deposit at banks and savings and loan associations and are
hereinafter referred to as "deposits". The Bank's deposits are federally insured
by the FDIC to the extent permitted by law. Approximately 90% of the Bank's
deposits are term deposits that pay fixed rates of interest for periods ranging
from 90 days to five years. The remaining 10% of the Bank's deposits are
variable rate passbook accounts and a variable rate money market accounts with
limited checking features.
10
11
As with many other industrial banks in California, the Bank's strategy
with all deposit accounts is to offer rates significantly above those
customarily offered by other financial institutions in its market. The Bank has
generally accumulated deposits by relying on renewals of term accounts by
existing depositors, participating in deposit rate surveys which list the Bank
among the higher rate paying insured institutions, and periodically advertising
in various local market newspapers and other media. The Bank is able to pursue
this strategy by operating a savings branch system offering fewer products and
services than many institutions. Because the Bank does not provide demand
checking accounts, safe deposit boxes, money orders, trust services, and various
other retail banking services, management believes its staffing and overhead
costs are significantly lower than banks and savings institutions. Management
further believes that its deposits are a reliable funding source and that the
cost of funds resulting from the Bank's deposit gathering strategy is comparable
to those of other industrial banks pursuing a similar strategy. However, because
the Bank competes for deposits primarily on the basis of rates, the Bank could
experience difficulties in attracting deposits if it could not continue to offer
deposit rates at levels above those of the 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 the Bank
is included. Although there were no brokered deposits outstanding at December
31, 2000, the Bank may seek such deposits in the future. For information
concerning overall deposits outstanding during the periods indicated and the
rates paid thereon, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Interest Income".
The Bank has also used advances from the Federal Home Loan Bank of San
Francisco as a funding source. The Bank became a member of the Federal Home Loan
Bank of San Francisco in 1994 and was subsequently approved for a credit line up
to 25% of its total assets. Federal Home Loan Bank advances are collateralized
by pledges of qualifying cash equivalents, investment securities,
mortgage-backed securities and whole loan collateral. At December 31, 2000,
Federal Home Loan Bank advances outstanding totaled $79.3 million, and the
remaining available borrowing capacity, based on the loans and securities
pledged as collateral, totaled $157.7 million, net of the $8.3 million of
additional FHLB Stock that we would be required to purchase to support the
additional borrowings. Additionally, the Bank also has uncommitted, unsecured
lines of credit with other banks renewable daily in the amount of $30.0 million.
See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Notes 2, 3, 7 and 8".
REGULATION
The Bank is an industrial bank that is subject to examination,
supervision and regulation by the Department of Financial Institutions of the
State of California (the "Department") and, as an insured institution, by the
FDIC. As a result of legislation enacted September 30, 2000, industrial banks,
formerly known as industrial loan companies, are now generally subject to
California banking law. Industrial banks are now generally able to engage in all
the activities of a California commercial bank, including, subject to approval,
the trust business. Notwithstanding the new legislation, industrial banks such
as Imperial Capital Bank may not accept demand deposits. The Bank's holding
company, ITLA Capital, is not a bank holding company for federal bank holding
company purposes and is not directly regulated or supervised by the Department,
the FDIC, the FRB or any other bank regulatory authority, except with respect to
the general regulatory and enforcement authority of the Department and the FDIC
over transactions and dealings between us and the Bank, and except with respect
to both the specific limitations regarding ownership of the capital stock of the
parent corporation of any industrial bank.
CALIFORNIA LAW
The industrial banking business conducted by the Bank, formerly governed
by the California Industrial Loan Law, is now subject to the California Banking
Laws and the rules and regulations pertaining thereto as regulated by the
Department. The regulations of the Department govern most aspects of the Bank's
businesses and operations, including, but not limited to, the scope of its
business, investments, the nature and amount of any collateral for loans, the
issuance of securities, the payment of dividends, bank expansion and bank
activities. The Department's supervision of the Bank includes comprehensive
reviews of all aspects of the Bank's business and condition, and the Department
possesses broad remedial enforcement authority to influence the Bank's
operations, both formally and informally.
11
12
FEDERAL LAW
Because our deposits are insured by the Bank Insurance Fund of the FDIC,
the FDIC, in addition to the Department, also broadly regulates the Bank. As an
insurer of deposits, the FDIC issues regulations, conducts examinations,
requires the filing of reports, and generally supervises the operations of
institutions to which it provides deposit insurance. The FDIC is also the
federal agency charged with regulating state-chartered banks that are not
members of the Federal Reserve System, such as the Bank. Therefore any person
who wishes to acquire control of the Bank must obtain the consent of both the
FDIC and the Department of Financial Institutions. Insured depository
institutions, and their institution-affiliated parties, may be subject to
potential enforcement actions by the FDIC and the Department for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Management is not aware of any pending or
threatened enforcement actions against the Bank.
Regulatory Capital Requirements. Federally-insured, state-chartered
banks, including industrial banks such as the Bank, are required to maintain
minimum levels of regulatory capital as specified in the FDIC's capital
maintenance regulations. The FDIC also is authorized to impose capital
requirements in excess of these standards on individual banks on a case-by-case
basis.
The Bank is required to comply with three separate minimum capital
requirements: a "tier 1 capital ratio" and two "risk-based" capital
requirements. "Tier 1 capital" generally includes common shareholders' equity,
including retained earnings, qualifying noncumulative perpetual preferred stock
and any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, less intangible assets, other than properly valued
purchased mortgage servicing rights up to certain specified limits and less net
deferred tax assets in excess of certain specified limits.
Tier 1 Capital Ratio. FDIC regulations establish a minimum 3.0% ratio of
Tier 1 capital to total average assets for the most highly-rated
state-chartered, FDIC-supervised banks. All other FDIC supervised banks must
maintain at least a 4.0% tier 1 capital ratio. 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, 2000, the Bank's required tier 1 capital ratio
was 4.0% and its actual tier 1 capital ratio was 9.1%.
Risk-Based Capital Requirements. The risk-based capital requirements
generally require the Bank to maintain a ratio of tier 1 capital to
risk-weighted assets of at least 4.0% and a ratio of total risk-based capital to
risk-weighted assets of at least 8.0%. To calculate the amount of capital
required, assets are placed in one of four categories and given a percentage
weight (0%, 20%, 50% or 100%) based on the relative risk of the category. For
example, United States Treasury Bills and Ginnie Mae securities are placed in
the 0% risk category. Fannie Mae and Freddie Mac securities are placed in the
20% risk category, loans secured by one-to four family residential properties
and certain privately-issued mortgage-backed securities are generally placed in
the 50% risk category, and commercial and consumer loans and other assets are
generally placed in the 100% risk category. In addition, certain
off-balance-sheet items are converted to balance sheet credit equivalent amounts
and each amount is then assigned to one of the four categories.
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 loan losses up to a maximum of 1.25% of
risk-weighted assets. At December 31, 2000 the Bank's tier 1 risk-based and
total capital ratios were 10.4% and 11.6%, 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
12
13
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. At December 31, 2000, the Bank had no equity securities classified as
available for sale.
Prompt Corrective Action Requirements. The FDIC has implemented a system
requiring regulatory sanctions against state-chartered banks (which, for this
purpose, includes the Bank) that are not adequately capitalized, with the
sanctions growing more severe the lower the institution's capital. The FDIC has
established specific capital ratios for five separate capital categories: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized".
An institution is treated as "well capitalized" if its total risk based
capital ratio is 10.0% or more, its tier 1 risk-based ratio is 6.0% or more, its
tier 1 capital ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. The Bank exceeded these
requirements at December 31, 2000.
The FDIC is authorized and, under certain circumstances, required to
take certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized" institution. Any such institution must
submit a capital restoration plan and, until such plan is approved by the FDIC,
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
In addition, the FDIC must appoint a receiver or conservator for an
institution, with certain limited exceptions, within 90 days after it becomes
"critically undercapitalized". Any "undercapitalized" institution is also
subject to the general enforcement authority of the FDIC, including the
appointment of a conservator or a receiver.
The FDIC is also generally authorized to reclassify an institution into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
Safety and Soundness Standards. The federal banking agencies adopted
guidelines that establish standards for safety and soundness. The guidelines set
forth operational and managerial standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, 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.
Regulatory Guidance on Subprime Lending. The federal banking agencies
have recently issued interagency guidance on subprime lending, which is defined
in the guidance as extending credit to borrowers who have a significantly
higher risk of default than traditional bank lending customers. The guidance
provides that institutions should recognize the additional risks inherent in
subprime lending and determine if these risks are acceptable and controllable
given the institution's staff, financial condition, size and level of capital
support. Institutions that engage in subprime lending in any significant way
should have board-approved policies and procedures, as well as internal
controls that identify, measure, monitor and control these additional risks. If
assets are considered subprime, additional capital is required, ranging from
1.5 times to three times the amount of capital required for like kind assets
that are not subprime. We believe that the Bank is conducting its residential
lending operations in accordance with the regulatory guidance that is currently
in effect.
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, 2000, the Bank paid $188,000 of
assessments to the FDIC.
13
14
Restrictions on Imperial Capital Bank's Investments and Activities. A
state-chartered bank and its subsidiaries may not engage as principal in any
activities that are not permissible for national banks and their subsidiaries
unless: (1) the bank meets the applicable FDIC capital standards described
above; and (2) the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund. With limited exceptions, the FDIC
may not use this authority to permit a state-chartered bank to engage in equity
investments (other than investments in subsidiaries) or in insurance
underwriting. The Bank's activities are permissible activities for national
banks.
In addition, federal law imposes restrictions on transactions between
the Bank and its affiliates. All these transactions, including leases and
service contracts, must be on terms and under circumstances that are
substantially the same, or at least as favorable to the Bank, as those
prevailing at the time for comparable transactions involving nonaffiliated
companies. The California banking law also applies certain restrictions to
transactions with affiliates. Federal and state law also places limitations on
loans by the Bank to its directors, officers and controlling persons. Among
other things, such loans must be made on terms substantially the same as for
loans to unaffiliated persons.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to certain fair lending requirements and reporting obligations involving
lending operations and Community Reinvestment Act activities. Federal banking
agencies are required to evaluate the record of financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws into account when
regulating and supervising other activities. In its most recent examination, the
FDIC rated the Bank "satisfactory" in complying with its Community Reinvestment
Act obligations.
Fiscal and Monetary Policies. Our business and earnings are affected
significantly by the fiscal and monetary policies of the federal government and
its agencies. We are particularly affected by the policies of the Federal
Reserve Board, which regulates the supply of money and credit in the United
States. Among the instruments of monetary policy available to the Federal
Reserve Board are (a) conducting open market operations in United States
government securities; (b) changing the discount rates of borrowings of
depository institutions, (c) imposing or changing reserve requirements against
depository institutions' deposits, and (d) imposing or changing reserve
requirements against certain borrowings by banks and their affiliates. These
methods are used in varying degrees and combinations to directly affect the
availability of bank loans and deposits, as well as the interest rates charged
on loans and paid on deposits. The policies of the Federal Reserve Board may
have a material effect on the Company's business, results of operations and
financial condition.
Privacy Provisions of the Gramm-Leach-Bliley Act. Federal banking
regulators, as required under the Gramm-Leach-Bliley Act (the "GLB Act"), have
adopted rules limiting the ability of banks and other financial institutions to
disclose nonpublic information about consumers to nonaffiliated third parties.
The rules became effective November 13, 2000, but compliance before July 1, 2001
is optional. The rules require disclosure of privacy policies to consumers and,
in some circumstances, allow consumers to prevent disclosure of certain personal
information to nonaffiliated third parties. The privacy provisions of the GLB
Act will affect how consumer information is transmitted through diversified
financial service companies and conveyed to outside vendors. It is not possible
at this time to assess fully the impact of the privacy provisions on our
business, results of operations or financial condition.
Future Legislation. Various legislation, including proposals to change
substantially the financial institution regulatory system, is from time to time
introduced in Congress. This legislation may change banking statutes and the
operating environment of the Company in substantial and unpredictable ways. If
enacted, this legislation could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. We
cannot predict whether any of this potential legislation will be enacted and, if
enacted, the effect that it, or any implementing regulations, would have on our
business, results of operations or financial condition.
14
15
DATA PROCESSING AGREEMENT
We have 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. This agreement is
renewed on an annual basis. Charges under the agreement totaled approximately
$356,000 in 2000. As of December 31, 2000, the estimated remaining payments due
under the contract, at current portfolio and service levels, were approximately
$425,000.
ITEM 2. PROPERTIES
ITLA Capital leases approximately 62,000 square feet of office space for
its operations as shown below.
YEAR CURRENT
SQUARE LEASE TERM
LOCATIONS OFFICE USES FOOTAGE EXPIRES
------------------ ----------------------------------------------------- ------- ------------
La Jolla, CA Corporate Headquarters 10,582 2003
Glendale, CA Loan Operations Division / Real Estate Lending 8,932 2005
San Francisco, CA Retail Deposit Branch / Real Estate Lending 5,005 2002
Beverly Hills, CA Retail Deposit Branch 2,218 2005
Costa Mesa, CA Retail Deposit Branch / Money Desk Operations / 3,609 2006
Real Estate Lending
Del Mar, CA Retail Deposit Branch / Savings Operations Division / 2,847 2004
Real Estate Lending
Encino, CA Retail Deposit Branch / Operations Support Division 5,298 2004
Glendale, CA Retail Deposit Branch / Loan Administration Division 23,498 2006
For additional information regarding our premises, see "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 15".
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
We are party to certain legal proceedings incidental to our business.
Management believes that the outcome of such proceedings, in the aggregate, will
not have a material effect on our business, financial condition or results of
operations.
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,
2000.
15
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ national market system under
the symbol "ITLA". At December 31, 2000, there were approximately eight holders
of record of our common stock representing approximately 1,000 shareholders and
6,660,413 shares outstanding.
The following table sets forth, for the periods indicated, the range of
high and low trade prices for our common stock. Stock price data on NASDAQ
reflects interdealer prices, without retail mark-up, mark-down or commission.
Market Price
-------------------------------------------- Average Daily
High Low Close Closing Price
------ ------ ------ -------------
2000
4th Quarter $19.13 $14.25 $19.13 $15.09
3rd Quarter 15.31 13.88 14.81 14.45
2nd Quarter 15.00 12.75 14.50 13.51
1st Quarter 13.00 10.75 12.75 11.71
1999
4th Quarter $15.25 $12.00 $12.56 $14.16
3rd Quarter 16.50 14.63 14.75 15.68
2nd Quarter 17.50 14.50 15.75 15.35
1st Quarter 15.50 13.38 14.50 14.69
16
17
The following table includes supplementary quarterly operating results
and per share information for the past two years. The data presented should be
read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with "Item 8. Financial Statements and
Supplementary Data" included elsewhere in this report.
QUARTERLY OPERATIONS (UNAUDITED)
For the Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands except per share amounts)
2000
Net interest income $12,917 $13,880 $14,080 $ 14,256
Provision for loan losses 600 1,200 1,525 1,450
Noninterest income 1,574 144 208 405
General and administrative expense 6,665 5,101 5,006 5,282
Total real estate owned expense, net 159 (54) 36 (3)
Provision for income taxes 2,823 3,184 2,999 2,874
Net income 4,244 4,593 4,623 4,679
Basic Earnings Per Share $ 0.59 $ 0.64 $ 0.66 $ 0.69
Diluted Earnings Per Share $ 0.58 $ 0.63 $ 0.65 $ 0.66
1999
Net interest income $12,670 $13,271 $13,318 $ 13,494
Provision for loan losses 1,200 1,200 1,400 1,150
Noninterest income 278 310 201 112
General and administrative expense 5,102 5,425 5,117 5,113
Total real estate owned expense, net 8 147 21 296
Provision for income taxes 2,724 2,788 2,862 2,896
Net income 3,914 4,021 4,119 4,151
Basic Earnings Per Share $ 0.55 $ 0.56 $ 0.57 $ 0.58
Diluted Earnings Per Share $ 0.53 $ 0.54 $ 0.55 $ 0.57
ITEM 6. SELECTED FINANCIAL DATA
The following condensed statements of operations and financial condition
and selected performance ratios as of December 31, 2000, 1999, 1998, 1997, and
1996 and for the years then ended have been derived from our audited
consolidated financial statements. The information below is qualified in its
entirety by the detailed information included elsewhere herein and should be
read along with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations".
17
18
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONDENSED STATEMENTS OF OPERATIONS
Total interest income $ 123,775 $ 101,213 $ 101,665 $ 85,117 $ 69,898
Total interest expense 68,642 48,460 51,387 43,310 34,399
---------- ---------- ---------- ---------- --------
Net interest income before provisions for loan
losses and valuation allowance on loans held
for sale 55,133 52,753 50,278 41,807 35,499
Provision for loan losses 4,775 4,950 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 losses
and valuation allowance on loans held for sale 50,358 47,803 44,328 38,157 29,928
---------- ---------- ---------- ---------- --------
Noninterest income 2,331 901 2,447 1,640 651
---------- ---------- ---------- ---------- --------
Noninterest expense:
Compensation and benefits 9,958 9,739 10,564 8,511 5,723
Occupancy and equipment 2,567 2,788 2,783 2,444 1,929
Other general and administrative expenses 8,129 8,230 7,317 7,277 5,434
Real estate owned expense, net 138 472 984 433 1,049
---------- ---------- ---------- ---------- --------
Total recurring noninterest expense 20,792 21,229 21,648 18,665 14,135
Nonrecurring expense 1,400(1) -- -- -- --
---------- ---------- ---------- ---------- --------
Total noninterest expense 22,192 21,229 21,648 18,665 14,135
---------- ---------- ---------- ---------- --------
Income before provision for income 30,497 27,475 25,127 21,132 16,444
taxes and minority interest income of subsidiary
Minority interest in income of subsidiary 478 -- -- -- --
---------- ---------- ---------- ---------- --------
Income before provision for income taxes 30,019 27,475 25,127 21,132 16,444
Provision for income taxes 11,880 11,270 10,304 8,655 6,420
---------- ---------- ---------- ---------- --------
NET INCOME $ 18,139 $ 16,205 $ 14,823 $ 12,477 $ 10,024
========== ========== ========== ========== ========
BASIC EARNINGS PER SHARE $ 2.57 $ 2.26 $ 1.95 $ 1.61 $ 1.38
DILUTED EARNINGS PER SHARE $ 2.51 $ 2.21 $ 1.89 $ 1.57 $ 1.36
Dividends paid $ -- $ -- $ -- $ -- $ --
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Cash and cash equivalents $ 70,950 $ 72,242 $ 125,602 $ 123,885 $ 62,599
Investment securities available for sale, at
fair value 46,325 59,247 329 35,281 36,574
Stock in Federal Home Loan Bank 3,963 8,894 12,633 11,919 8,349
Investment and mortgage-backed securities held
to maturity -- -- -- 25,132 31,870
Real estate loans, net 1,045,927 951,480 862,089 750,853 649,836
Real estate loans held in trust 211,722 -- -- -- --
Loans held for sale, at lower of cost or fair
market value -- -- 12,188 50,544 1,130
Interest receivable 11,821 7,383 6,321 4,916 4,411
Other real estate owned, net 2,250 1,041 1,201 3,946 5,416
Premises and equipment, net 2,690 3,253 3,493 3,169 2,610
Deferred income taxes 11,302 9,401 6,270 4,190 3,613
Other assets 8,193 2,882 2,521 2,074 4,035
---------- ---------- ---------- ---------- --------
Total assets $1,415,143 $1,115,823 $1,032,647 $1,015,909 $810,443
========== ========== ========== ========== ========
Deposit accounts $1,015,699 $ 913,613 $ 866,798 $ 843,813 $670,336
Collateralized mortgage obligations 161,852 -- -- -- --
Federal Home Loan Bank advances 79,250 67,250 48,500 61,500 43,500
Accounts payable and other liabilities 11,269 11,265 11,467 11,248 7,789
Guaranteed preferred beneficial interests in
Company's junior subordinated deferrable
interest debentures 13,519 -- -- -- --
Shareholders' equity 133,554 123,695 105,882 99,348 88,818
---------- ---------- ---------- ---------- --------
Total liabilities and shareholders' equity $1,415,143 $1,115,823 $1,032,647 $1,015,909 $810,443
========== ========== ========== ========== ========
Book value per share $ 20.05 $ 17.22 $ 14.77 $ 12.91 $ 11.35
------------------
(1) Represents expenses related to the consolidation of the Bank's headquarters
with ITLA Capital's headquarters in La Jolla, California.
18
19
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
SELECTED PERFORMANCE RATIOS
Return on average assets 1.47% 1.57% 1.46% 1.46% 1.44%
Return on average shareholders' equity 13.95% 14.23% 13.95% 13.23% 12.86%
Net interest margin (1) 4.47% 5.11% 4.96% 4.94% 5.19%
Average interest-earning assets to average
interest-bearing liabilities 113.49% 113.74% 113.06% 112.15% 112.14%
Noninterest expense to average assets 1.79% 2.05% 2.13% 2.19% 2.04%
Efficiency ratio (2) 38.62% 39.57% 41.06% 42.96% 39.10%
Efficiency ratio excluding real estate operations, and
nonrecurring expense, net 35.94% 38.69% 39.19% 41.96% 36.20%
General and administrative expense to average assets 1.78% 2.01% 2.04% 2.14% 1.88%
Average shareholders' equity to average assets 10.86% 11.01% 10.47% 11.06% 11.23%
Nonperforming assets to total assets 1.44% 0.81% 0.64% 1.21% 1.56%
Allowance for loan losses to loans held for
investment, net (3) 2.12% 2.05% 1.91% 1.60% 1.65%
Allowance for loan losses to nonaccrual loans (4) 149.85% 249.40% 309.37% 146.16% 169.50%
Net loan charge-offs (recoveries) to average loans
held for investment, net 0.18% 0.20% (0.01%) 0.28% 0.37%
------------------
(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 before provision for loan losses.
(3) Real estate loans before allowance for loan losses and net of unearned
finance charges and loan fees.
(4) Excludes nonaccrual loans held for sale totaling $783,000 in 1996.
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 our consolidated operations, including our consolidated
subsidiaries: Imperial Capital Bank and the Imperial Capital Real Estate
Investment Trust.
The following discussion and analysis is intended to identify the major
factors that influenced our financial condition as of December 31, 2000 and 1999
and our results of operations for the years ended December 31, 2000, 1999 and
1998. Our business involves the origination and purchase of loans secured
primarily by income producing real estate, located predominately in California
and, to a lesser extent, the purchase of pools of non-conventional residential
mortgage loans located throughout the United States.
Consolidated net income in 2000 was $18.1 million, or $2.51 per diluted
share, compared to $16.2 million, or $2.21 per diluted share, in 1999 and $14.8
million, or $1.89 per diluted share, in 1998. The increase in net earnings in
2000 was primarily due to an increase in net interest income to $55.1 million
for 2000 as compared to $52.8 million in 1999 and gain on sale of investment
securities available for sale of $1.4 million in 2000. These
19
20
items were partially offset by nonrecurring expenses of $1.4 million relating to
the consolidation of the Bank's headquarters with ITLA Capital's headquarters in
La Jolla, California and a $600,000 increase in provision for income taxes.
The increase in net earnings in 1999 was primarily due to an increase in
net interest income to $52.8 million in 1999 compared to $50.3 million in 1998,
a decrease in provisions for loan losses and valuation allowance on loans held
for sale to $5.0 million in 1999 compared to $6.0 million in 1998, and a decline
in real estate owned expense to $472,000 in 1999 compared to $984,000 in 1998,
partially offset by a decrease in noninterest income derived from mortgage
banking activities to $73,000 in 1999 compared to $1.6 million in 1998 and an
increase in provision for income taxes to $11.3 million in 1999 compared to
$10.3 million in 1998
The return on average assets was 1.47% in 2000 compared to 1.57% and
1.46% in 1999 and 1998, respectively. The return on average shareholders' equity
was 13.95% in 2000 compared to 14.23% in 1999 and 13.95% in 1998. During 2000,
we purchased all the equity securities and certain collateralized mortgage
obligations ("CMO's") of the ICCMAC Multifamily and Commercial Trust 1999-1
("ICCMAC Trust"). On the date of acquisition, the ICCMAC Trust held assets of
$250.5 million. Primarily as a result of this acquisition, average total assets
increased to $1.2 billion in 2000 compared to $1.0 billion in 1999.
Total loan production, including the unfunded portion of construction
loans, was $653.9 million for the year ended December 31, 2000, consisting of
$198.2 million originated for the portfolio, $440.4 million purchased for the
portfolio, and $15.3 million brokered for outside investors, compared to total
loan production of $394.3 million and $531.1 million for the years ended
December 31, 1999 and 1998, respectively.
Average deposit accounts totaled $913.6 million in 2000 compared to
$870.1 million in 1999, an increase of $43.5 million, or 5.0%. This increase was
primarily utilized to fund the increase in the loan portfolio. Federal Home Loan
Bank advances averaged $30.4 million in 2000 compared to $37.2 million in 1999,
a decrease of $6.8 million, or 18.2%. The average balance of the CMO's was
$141.8 million during 2000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents, for the periods indicated, our condensed
average balance sheet information, together with interest income and yields
earned on average interest-earning assets and interest expense and rates paid on
average interest-bearing liabilities. Average balances are computed using daily
average balances. Nonaccrual loans are included in loans receivable.
20
21
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2000 1999
---------------------------------- -----------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- --------- ------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and investments $ 84,660 $ 5,164 6.10% $ 106,953 $ 5,910 5.53%
Mortgage-backed securities -- -- -- --
Real estate loans (1) 964,620 102,419 10.62% 925,059 95,303 10.30%
Real estate loans held in trust 182,982 16,192 8.85% -- -- --
---------- -------- ----- ---------- -------- -----
Total loans receivable 1,147,602 118,611 10.34% 925,059 95,303 10.30%
---------- -------- ----- ---------- -------- -----
Total interest-earning assets 1,232,262 $123,775 10.04% 1,032,012 $101,213 9.81%
========== ======== ===== ========== ======== =====
Noninterest-earning assets 28,963 20,456
Allowance for loan losses (24,571) (18,298)
---------- ----------
Total assets $1,236,654 $1,034,170
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 115,035 $ 6,384 5.55% $ 130,995 $ 6,477 4.95%
Time certificates 798,599 49,584 6.21% 739,111 39,975 5.41%
---------- -------- ----- ---------- -------- ------
Total deposit accounts 913,634 55,968 6.13% 870,106 46,452 5.34%
Collateralized mortgage obligations 141,796 10,901 7.69% -- -- --
FHLB advances 30,366 1,773 5.84% 37,235 2,008 5.39%
---------- -------- ----- ---------- -------- ------
Total interest-bearing liabilities 1,085,796 $ 68,642 6.32% 907,341 $ 48,460 5.34%
======== ===== ======== =====
Noninterest-bearing liabilities 16,586 12,966
---------- ----------
Shareholders' equity 134,272 113,863
========== ==========
Total liabilities and shareholders' equity $1,236,654 $1,034,170
========== ==========
Net interest spread (2) 3.72% 4.47%
===== ====
Net interest income before provisions for
estimated credit losses and valuation
allowance on loans held for sale $ 55,133 $ 52,753
======== ========
Net interest margin (3) 4.47% 5.11%
===== ====
YEARS ENDED DECEMBER 31,
--------------------------------------
1998
--------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
---------- -------- ------
ASSETS
Cash and investments $ 146,514 $ 7,849 5.36%
Mortgage-backed securities 19,162 1,209 6.31%
Real estate loans (1) 847,219 92,607 10.93%
Real estate loans held in trust -- -- --
---------- -------- -----
Total loans receivable 847,219 92,607 10.93%
---------- -------- -----
Total interest-earning assets 1,012,895 $101,665 10.04%
======== =====
Noninterest-earning assets 16,281
Allowance for loan losses (14,841)
----------
Total assets $1,014,335
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposit accounts:
Money market and passbook accounts $ 104,461 $ 5,505 5.27%
Time certificates 734,856 42,548 5.79%
---------- -------- -----
Total deposit accounts 839,317 48,053 5.73%
Collateralized mortgage obligations -- -- --
FHLB advances 56,542 3,334 5.90%
---------- -------- -----
Total interest-bearing liabilities 895,859 $ 51,387 5.74%
======== =====
Noninterest-bearing liabilities 12,256
Shareholders' equity 106,220
----------
Total liabilities and shareholders' equity $1,014,335
==========
Net interest spread (2) 4.30%
=====
Net interest income before provisions for
estimated credit losses and valuation
allowance on loans held for sale $ 50,278
========
Net interest margin (3) 4.96%
=====
-----------------------
(1) Before allowance for loan losses and net of deferred loan fees and costs.
Net loan fee amortization of $2.8 million, $2.5 million and $2.7 million was
included in net interest income for 2000, 1999 and 1998, respectively.
(2) Average yield on interest-earning assets minus average rate paid on
interest-bearing liabilities.
(3) Net interest income divided by total average interest-earning assets.
Our primary source of revenue is net interest income. Our net interest
income is affected by (a) the difference between the yields 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,
we may incur a decline in net interest income even when the net interest spread
is positive. For 2000, 1999 and 1998, our ratio of average interest-earning
assets to average interest-bearing liabilities was 113.49%, 113.74% and 113.06%,
respectively.
The following table sets forth a summary of the changes in interest
income and interest expense resulting from changes in average interest-earning
asset and interest-bearing liability balances and changes in average interest
rates. The change in interest due to both volume and rate has been allocated to
change due to volume and rate in proportion to the relationship of absolute
dollar amounts of each.
21
22
2000 VS. 1999 1999 VS. 1998
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
------------------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- ------- ------- -------
(IN THOUSANDS)
Interest and fees earned on:
Real estate loans, net $ 4,175 $ 2,941 $ 7,116 $ 8,216 $(5,520) $ 2,696
Cash and investment securities (1,357) 611 (746) (2,181) 242 (1,939)
Real estate loans held in trust 16,192 -- 16,192 -- -- --
Mortgage-backed securities -- -- -- (1,209) -- (1,209)
-------- ------- -------- ------- ------- -------
Total increase (decrease) in
interest income 19,010 3,552 22,562 4,826 (5,278) (452)
-------- ------- -------- ------- ------- -------
Interest paid on:
Deposit accounts 2,661 6,855 9,516 1,732 (3,333) (1,601)
Collateralized mortgage obligations 10,901 -- 10,901 -- -- --
FHLB advances (402) 167 (235) (1,058) (268) (1,326)
-------- ------- -------- ------- ------- -------
Total increase (decrease) in
interest expense 13,160 7,022 20,182 674 (3,601) (2,927)
-------- ------- -------- ------- ------- -------
Increase (decrease) in net
interest income $ 5,850 $(3,470) $ 2,380 $ 4,152 $(1,677) $ 2,475
======== ======= ======== ======= ======= =======
2000 Compared to 1999
Net interest income increased $2.3 million or 4.4% to $55.1 million in
2000 compared to $52.8 million in 1999. The increase in net interest income was
due primarily to net interest income related to the acquisition of the ICCMAC
Trust and an increase in interest income on our loans. These items were
partially offset by an increase in interest expense on deposits and a decrease
in interest income on investment securities.
Interest income increased $22.6 million or 22.3% to $123.8 million in
2000 compared to $101.2 million in 1999. The increase in interest income was due
primarily to a $7.1 million increase in real estate loan income to $102.4
million and the acquisition of the ICCMAC Trust, which generated $16.2 million
in interest income. Interest and fee income from loans increased due to higher
loan volume in 2000 and an increase in loan yield. The average balance of the
Bank's real estate loans increased $39.6 million to $964.6 million in 2000
compared to $925.1 million in 1999. The average yield on these real estate loans
was 10.62% in 2000 compared to 10.30% in 1999. The increase in yield was due to
increases in market interest rates (which increased the yield of our adjustable
rate loans upon repricing and the yield received at the time of origination).
Market interest rates have recently declined which could result in our achieving
lower average yields in future operating periods. Interest and fee income earned
on real estate loans in 2000 and 1999 includes income recognized from the early
payoff of loans. Excluding this income from prepayments, the yields on the
Bank's real estate loans would have been 10.34% in 2000 and 10.06% in 1999.
Interest income from cash and investments decreased to $5.2 million in
2000 compared to $5.9 million in 1999, due primarily to a decrease in the
average outstanding balance, partially offset by an increase in yield. The
average balance of cash and investment securities decreased $22.3 million or
20.8% to $84.7 million in 2000 compared to $107.0 million in 1999. The average
yield on cash and investment securities was 6.10% in 2000 compared to 5.53% in
1999, which was consistent with the increase in short-term market interest
rates.
22
23
Interest expense increased $20.1 million or 41.4% to $68.6 million in
2000 compared to $48.5 million in 1999 primarily due to increases in interest
expense on deposits and the addition of the CMO's, partially offset by a
decrease in interest expense on Federal Home Loan Bank advances. Interest
expense from deposit accounts increased $9.5 million or 20.4% to $56.0 million
in 2000 compared to $46.5 million in 1999 due to increases in the average rate
paid on deposits and to a lesser extent the average balance of deposit accounts.
The average rate paid on deposits was 6.13% in 2000 compared to 5.34% in 1999.
The average balance of deposits increased $43.5 million or 5.00% to $913.6
million in 2000 compared to $870.1 million in 1999 as we increased deposits to
fund growth in the loan portfolio.
Interest expense from the CMO's totaled $10.9 million in 2000. The
increase was due to the acquisition of the ICCMAC Trust in 2000. The average
balance and average yield on the CMO's from the date of acquisition through
December 31, 2000 was $141.8 million and 7.69%, respectively.
Interest expense from Federal Home Loan Bank advances decreased $200,000
to $1.8 million in 2000 compared to $2.0 million in 1999, due to a decrease in
the average outstanding balance partially offset by an increase in the average
rate paid on Federal Home Loan Bank advances. The average balance of Federal
Home Loan Bank advances decreased $6.8 million or 18.3% to $30.4 million in 2000
compared to $37.2 million in 1999. The average rate paid on Federal Home Loan
Bank advances was 5.84% in 2000 compared to 5.39% in 1999.
1999 Compared to 1998
Net interest income totaled $52.8 million in 1999 compared to $50.3
million in 1998, an increase of $2.5 million or 4.9%. The increase in net
interest income was due primarily to growth in average interest-earning assets,
which increased $19.1 million or 1.9%.
Interest income totaled $101.2 million in 1999 compared to $101.7
million in 1998, a decrease of $452,000, or 0.4%. Interest and fee income from
loans receivable totaled $95.3 million in 1999 compared to $92.6 million in
1998, an increase of $2.7 million, or 2.9%. Interest and fee income from loans
increased due to higher loan volume in 1999, partially offset by a decrease in
loan yield. The average balance of loans receivable was $925.1 million in 1999
compared to $847.2 million in 1998, an increase of $77.9 million, or 9.2%
reflecting the increase in loans held for investment. The average yield on loans
receivable was 10.30% in 1999 compared to 10.93% in 1998. The decline in yield
on loans receivable was due to declines in market interest rates (which reduced
the yield of adjustable rate loans in the portfolio upon repricing and the yield
received at the time of origination) and due to the payoff of higher yielding
commercial mortgages, as borrowers refinanced these loans at lower interest
rates. Interest and fee income earned on loans receivable in 1999 and 1998
includes income recognized from the early payoff of loans. Excluding this income
from prepayments, the yields on loans receivable would have been 10.06% in 1999
and 10.62% in 1998.
There was no interest income from mortgage-backed securities in 1999
compared to $1.2 million in 1998. The mortgage-backed securities were sold in
the fourth quarter of 1998.
Interest income from cash and investments totaled $5.9 million in 1999
compared to $7.8 million in 1998, a decrease of $1.9 million, or 24.7%, due
primarily to a decrease in the average outstanding balance, partially offset by
an increase in yield. The average balance of cash and investment securities was
$107.0 million in 1999 compared to $146.5 million in 1998, a decrease of $39.5
million, or 27.0%. The average yield on cash and investment securities was 5.53%
in 1999 compared to 5.36% in 1998, which was consistent with the increase in
short-term market interest rates.
23
24
Interest expense totaled $48.5 million in 1999 compared to $51.4 million
in 1998, a decrease of $2.9 million or 5.7%. Interest expense from deposit
accounts totaled $46.5 million in 1999 compared to $48.1 million in 1998, a
decrease of $1.6 million or 3.3%, due to a decrease in the average rate paid on
deposits, partially offset by an increase in the average balance of deposit
accounts. The average rate paid on deposits was 5.34% in 1999 compared to 5.73%
in 1998. The average balance of deposits was $870.1 million in 1999 compared to
$839.3 million in 1998, an increase of $30.8 million, or 3.7%, as we increased
deposits to fund growth in the loan portfolio.
Interest expense from Federal Home Loan Bank advances totaled $2.0
million in 1999 compared to $3.3 million in 1998, due to decreases in both the
average outstanding balance and in the average rate paid on Federal Home Loan
Bank advances. The average balance of Federal Home Loan Bank advances was $37.2
million in 1999 compared to $56.5 million in 1998, a decrease of $19.3 million,
or 34.1%. The average rate paid on Federal Home Loan Bank advances was 5.39% in
1999 compared to 5.90% in 1998.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $4.8 million, $5.0 million and $4.6
million in 2000, 1999 and 1998, respectively.
2000 Compared to 1999
Provision for loan losses decreased slightly to $4.8 million in 2000
compared to $5.0 million in 1999. The provision in 2000 reflects the growth in
loans held by us, including the increase in purchased residential loans.
Generally, we consider first mortgage loans on one-four family owner occupied
residential properties to involve a lesser degree than compared to loans secured
by commercial real estate properties. Purchased residential loans increased to
$134.1 million at December 31, 2000 compared to $90.6 million at December 31,
1999. Additionally, the provision was due to the increase in our nonperforming
loans to 1.42% of total gross loans at December 31, 2000, compared to 0.82% of
total gross loans as of December 31, 1999. See also "Credit Risk Elements --
Allowance for Loan Losses and Nonperforming Assets."
1999 Compared to 1998
Provision for loan losses totaled $5.0 million in 1999 compared to $4.6
million in 1998, an increase of $0.4 million, or 8.8%. The increase in the
provision in 1999 reflects the growth in our portfolio of real estate loans,
which increased by $92.5 million, or 10.5% from $878.9 million at December 31,
1998 to $971.4 million at December 31, 1999. The provision also increased due to
an increased concentration in construction lending and the continued geographic
expansion of the commercial and residential real estate loan portfolios to loans
outside of the state of California. Construction loans totaled $107.8 million at
December 31, 1999 compared to $71.4 million at December 31, 1998, an increase of
$36.4 million or 51.0%. Loans outside the state of California totaled $326.5
million at December 31, 1999 compared to $191.1 million at December 31, 1998, to
comprise 33.5% of our total real estate loan portfolio at year end compared to
21.4% at the prior year end. Because of the increased risk profile resulting
from these changes to the composition of our loan portfolio, the provision for
loan losses was increased in 1999.
PROVISION FOR VALUATION ALLOWANCE ON LOANS HELD FOR SALE
There was no provision for valuation allowance on loans held for sale in
2000 and 1999 compared to $1.4 million in 1998, respectively. The $1.4 million
provision for valuation allowance on loans held for sale was recorded in 1998 in
conjunction with the marketing and sale of a $12.0 million portfolio of loans.
24
25
NONINTEREST INCOME
Noninterest income totaled $2.3 million, $901,000 and $2.4 million in
2000, 1999 and 1998, respectively.
2000 Compared to 1999
Noninterest income increased $1.4 million to $2.3 million in 2000
compared to $901,000 in 1999. The increase in noninterest income was due
primarily to a $1.4 million gain realized on the sale investment securities.
Other noninterest income increased slightly in the aggregate to $919,000 in 2000
compared to $901,000 in 1999.
1999 Compared to 1998
Noninterest income totaled $901,000 in 1999 compared to $2.4 million in
1998, a decrease of $1.5 million, or 63.2%. The decrease in noninterest income
in 1999 was due primarily to a decrease in fee income earned. In 1999, $9.1
million of commercial real estate loans for third-party investors were
originated compared to $136.2 million of loans funded in 1998. The demand for
fixed rate commercial real estate loans of the type originated for purchase by
third-party investors declined significantly in the third quarter of 1998 due to
a disruption in the market for the securities created from these loans.
Accordingly, we experienced a reduction in the volume of loans originated for
third-party investors and a corresponding decline in fee income from these
originations.
NONINTEREST EXPENSE
General and Administrative Expense
General and administrative expense totaled $22.1 million, $20.8 million
and $20.7 million in 2000, 1999 and 1998, respectively. In 2000, our ratio of
recurring general and administrative expenses to average assets was 1.67%,
compared to 2.01% and 2.04% in 1999 and 1998, respectively. Our efficiency
ratio, excluding real estate owned and nonrecurring expenses, was 35.94% in 2000
compared to 38.69% and 39.19% in 1999 and 1998, respectively.
2000 Compared to 1999
General and administrative expense increased $1.3 million to $22.1
million in 2000 compared to $20.8 million in 1999. The increase in noninterest
expense was due primarily to $1.4 million of nonrecurring general and
administrative expenses recorded in the first quarter of 2000 related to the
consolidation of the Bank's headquarters with ITLA Capital's headquarters in La
Jolla, California. Excluding this nonrecurring relocation expense, general and
administrative expenses did not change significantly in 2000 as compared to
1999.
1999 Compared to 1998
General and administrative expense totaled $20.8 million in 1999
compared to $20.7 million in 1998, an increase of $0.1 million, or 0.5%.
Compensation and benefits expense totaled $9.7 million in 1999 compared
to $10.6 million in 1998, a decrease of $825,000, or 7.8%. The decrease in
compensation and benefits expense was due primarily to a decrease in staffing,
as the number of average full-time equivalent employees totaled 132 during 1999
compared to 167 during 1998. The decrease in staffing was due to the
discontinued operations of our subsidiary ITLA Funding Corporation, as well as a
15% workforce reduction, including management positions, in the third quarter as
a result of a decrease in loan production and general cost saving initiatives.
Compensation and benefits also decreased due to a decrease in commissions paid
for loans sold to third party investors, due to the decline in loan volume.
Occupancy and equipment expense totaled $2.8 million in both 1999 and
1998. Other general and administrative expenses totaled $8.1 million in 1999
compared to $7.2 million in 1998, an increase of $913,000 or 12.6%. The increase
in other general and administrative expenses was due primarily to an increase in
expenses incurred for corporate development activities.
REAL ESTATE OWNED EXPENSE
Real estate owned expense, net, totaled $138,000, $472,000 and $984,000
in 2000, 1999 and 1998, respectively.
25
26
2000 Compared to 1999
Real estate owned expense, net, decreased to $138,000 in 2000 compared
to $472,000 in 1999. The decrease in real estate owned expense in 2000 compared
to 1999 was primarily due to a decrease in losses from the accelerated
disposition of other real estate owned in 1999. The outstanding balance of other
real estate owned was $2.3 million at December 31, 2000 compared to $1.0 million
at December 31, 1999. Provision for losses on other real estate owned totaled
$167,000 in 2000 compared to $195,000 in 1999. Other real estate owned income
was $31,000 in 2000 compared to expenses of $72,000 in 1999. The net loss from
sales of other real estate owned decreased to $2,000 in 2000 compared to
$205,000 in 1999.
1999 Compared to 1998
Real estate owned expense, net, decreased to $472,000 in 1999 compared
to $984,000 in 1998, a decrease of $512,000, or 52.0%. The decrease in real
estate owned expense in 1999 compared to 1998 was primarily due to a decrease in
provisions for estimated losses recorded due to the accelerated disposition of
other real estate owned. Provision for estimated losses on other real estate
owned totaled $195,000 in 1999 compared to $608,000 in 1998. Other real estate
owned expenses totaled $72,000 in 1999 compared to $252,000 in 1998. The loss
from sales of other real estate owned increased to $205,000 in 1999 compared to
$124,000 in 1998.
INCOME TAXES
Provision for income taxes totaled $11.9 million, $11.3 million and
$10.3 million in 2000, 1999 and 1998, respectively.
2000 Compared to 1999
Provision for income taxes increased to $11.9 million in 2000 compared
to $11.3 million in 1999. The increase in provision for income taxes was due to
the increase in pretax net income. The effective tax rate was 39.6% and 41.0%
for 2000 and 1999, respectively. The effective tax rate differed from the
applicable statutory federal tax rate due to state income taxes and the state
income tax deduction for tax exempt income on loans located in designated
redevelopment and enterprise zones and due to federal income tax credits
received from a low income housing tax credit investment.
At December 31, 2000, we had a net deferred tax asset of $11.3 million.
The deferred tax asset related primarily to loss provisions recognized on our
financial statements which have not yet been recognized on our income tax
returns. During 2000, we had 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, we have not established a valuation
allowance on the deferred tax asset.
1999 Compared to 1998
Provision for income taxes totaled $11.3 million in 1999 compared to
$10.3 million in 1998, an increase of $1.0 million, or 9.4%. The increase in
provision for income taxes was due to the increase in pretax net income. The
effective tax rate was 41.0% for both 1999 and 1998.
The effective tax rate differed from the applicable statutory federal
tax rate due to state income taxes and the state income tax deduction for tax
exempt income on loans located in designated redevelopment and enterprise zones.
26
27
FINANCIAL CONDITION
At December 31, 2000 Compared with December 31, 1999
Total assets increased by $299.3 million, or 26.8%, to $1.4 billion at
December 31, 2000 compared to $1.1 billion at December 31, 1999. This increase
was primarily due to a $306.2 million, or 32.2%, increase in net real estate
loans receivable, including real estate loans held in trust, to $1.3 billion at
December 31, 2000 from $951.5 million at December 31, 1999. Asset growth also
included increases in interest receivable of $4.4 million, deferred income taxes
of $1.9 million, other real estate owned, net, of $1.2 million and other assets
of $5.3 million. These increases were partially offset by reductions in
investment securities available for sale of $12.9 million, cash and cash
equivalents of $1.3 million, Federal Home Loan Bank stock of $4.9 million, and
premises and equipment, net, of $563,000. The growth in assets was funded
primarily by an increase in deposits of $102.1 million and CMO'S of $161.9
million. Deposit growth was concentrated in time certificates, which increased
from $787.1 million at December 31, 1999 to $912.8 million at December 31, 2000,
partially offset by a decrease in money market and passbook accounts, which
decreased from $126.5 million at December 31, 1999 to $102.9 million at December
31, 2000. Shareholders' equity increased primarily due to the retention of $18.1
million of net income as retained earnings for the year, partially offset by the
purchase of $7.7 million of ITLA Capital's stock currently held as treasury
stock and a $615,000 decrease due to unrealized losses on investment securities
available for sale.
At December 31, 1999 Compared with December 31, 1998
Total assets increased by $83.2 million, or 8.1%, to $1.1 billion at
December 31, 1999 compared to $1.0 billion at December 31, 1998. This increase
was primarily due to a $77.2 million, or 8.8%, increase in net real estate loans
receivable, including real estate loans held for sale, to $951.5 million at
December 31, 1999 from $874.3 million at December 31, 1998. Asset growth also
included increases in investment securities available for sale of $58.9 million,
deferred income taxes of $3.1 million, interest receivable of $1.1 million and
other assets of $361,000. These increases were partially offset by reductions in
cash and cash equivalents of $53.4 million, Federal Home Loan Bank stock of $3.7
million, other real estate owned, net, of $160,000 and premises and equipment,
net, of $240,000. The growth in assets was funded primarily by an increase in
deposits of $46.8 million. Deposit growth was concentrated in time certificates,
which increased from $734.1 million at December 31, 1998 to $787.1 million at
December 31, 1999, partially offset by a slight decrease in money market and
passbook accounts, which decreased from $132.7 million at December 31, 1998 to
$126.5 million at December 31, 1999. Shareholders' equity increased due to the
retention of $16.2 million of net income as retained earnings for the year, the
vesting of $725,000 of shares allocated under the Supplemental Executive
Retirement Plan (SERP) funded by the Recognition and Retention Plan (RRP)
previously approved by the shareholders, and a $856,000 increase due to
unrealized appreciation of investment securities available for sale, partially
offset by the purchase of $515,000 of ITLA Capital's stock currently held as
treasury stock.
27
28
REAL ESTATE LOANS
The following table shows the comparison of our real estate loan
portfolio by major categories as of the dates indicated.
DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- --------- --------- --------- ---------
(IN THOUSANDS)
REAL ESTATE LOANS
Real estate loans $ 1,176,988 $ 864,048 $ 811,076 $ 727,479 $ 644,079
Construction loans 95,206 107,833 71,385 39,668 22,498
Other 3,912 -- -- -- --
----------- --------- --------- --------- ---------
1,276,106 971,881 882,461 767,147 666,577
Unamortized premium 11,300 2,590 -- -- --
Deferred loan origination fees and costs (2,571) (3,096) (3,561) (4,116) (5,856)
----------- --------- --------- --------- ---------
1,284,835 971,375 878,900 763,031 660,721
Allowance for loan losses (27,186) (19,895) (16,811) (12,178) (10,885)
----------- --------- --------- --------- ---------
$ 1,257,649 $ 951,480 $ 862,089 $ 750,853 $ 649,836
=========== ========= ========= ========= =========
REAL ESTATE LOANS HELD FOR SALE (AT LOWER OF COST
OR FAIR MARKET VALUE)
Real estate loans $ -- $ -- $ 12,188 $ 50,786 $ --
Other loans -- -- -- -- 1,335
----------- --------- --------- --------- ---------
Gross loans held for sale -- -- 12,188 50,786 1,335
Unearned income (205)
Deferred loan origination fees and costs -- -- -- (242) --
----------- --------- --------- --------- ---------
Net loans held for sale $ -- $ -- $ 12,188 $ 50,544 $ 1,130
=========== ========= ========= ========= =========
TOTAL REAL ESTATE LOANS
Real estate loans 1,176,988 864,048 823,264 778,265 644,079
Construction loans 95,206 107,833 71,385 39,668 22,498
Other loans 3,912 -- -- -- 1,335
----------- --------- --------- --------- ---------
1,276,106 971,881 894,649 817,933 667,912
Unamortized premium 11,300 2,590 -- -- --
Deferred loan origination fees and costs (2,571) (3,096) (3,561) (4,358) (5,856)
Unearned income -- -- -- -- (205)
----------- --------- --------- --------- ---------
1,284,835 971,375 891,088 813,575 661,851
Allowance for loan losses (27,186) (19,895) (16,811) (12,178) (10,885)
----------- --------- --------- --------- ---------
Consolidated net loans receivable $ 1,257,649 $ 951,480 $ 874,277 $ 801,397 $ 650,966
=========== ========= ========= ========= =========
28
29
The approximate contractual maturities of our loan portfolio at
December 31, 2000 are as follows:
LOANS MATURING IN
------------------------------------------
BETWEEN GREATER
LESS THAN ONE AND THAN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans $ 24,661 $ 72,236 $1,080,090 $1,176,987
Construction loans 82,394 11,763 1,050 95,207
Other loans -- -- 3,912 3,912
-------- ---------- ---------- ----------
$107,055 $ 83,999 $1,085,052 $1,276,106
======== ========== ========== ==========
Loans with fixed interest rates $ 22,570 $ 6,642 $ 85,748 $ 114,960
Loans with variable interest rates 84,485 77,357 999,304 1,161,146
-------- ---------- ---------- ----------
$107,055 $ 83,999 $1,085,052 $1,276,106
======== ========== ========== ==========
Percentage with variable interest rates 78.9% 92.1% 92.1% 91.0%
======== ========== ========== ==========
The table above should not be regarded as a forecast of future cash
collections because a substantial portion of real estate loans may be renewed or
repaid prior to contractual maturity.
29
30
The following table sets forth certain information regarding the real
property collateral securing our real estate loan portfolio as of December 31,
2000.
NUMBER PERCENT PRINCIPAL BALANCE NON-
OF GROSS OF --------------------------------- ACCRUAL
LOANS AMOUNT TOTAL MIN MAX AVERAGE LOANS
------ ---------- ------- ------- ---------- ------- -------
(DOLLARS IN THOUSANDS)
Income Producing Property Loans:
Office 83 $ 103,204 8.1% $ 51 $ 10,058 $1,243 $ --
Retail 191 214,023 16.8% 14 11,000 1,121 --
Multi-family (5 or more units) 548 330,887 25.9% 41 11,264 604 3,080
Industrial/warehouse 57 31,331 2.5% 13 5,922 550 7,343
Hotel 59 124,533 9.8% 36 7,478 2,110 838
Mixed-use 65 25,008 2.0% 20 1,877 385 868
Mobile home parks 26 13,606 1.1% 87 2,188 523 --
Other 540 199,796 15.7% 11 5,913 370 --
----- ---------- ------ -------
Total commercial 1,569 1,042,388 81.7% 12,129
----- ---------- ------ -------
Construction and Land:
Construction 29 95,206 7.5% 91 12,880 3,283 --
Land 10 4,369 0.3% 42 907 437 --
----- ---------- ------ -------
Total construction and land 39 99,575 7.8% --
----- ---------- ------ -------
Single-family mortgages:
Single-family (1-4 units) 1,225 134,143 10.5% $ 2 $ 598 $ 110 6,012
----- ---------- ------ -------
Total single-family 1,225 134,143 10.5% 6,012
----- ---------- ------ -------
2,833 $1,276,106 100.0% $18,141
===== ========== ====== =======
30
31
The following table sets forth the location of the collateral for our
loan portfolios as of December 31, 2000.
NUMBER PERCENT
OF GROSS OF
LOANS AMOUNT TOTAL
----- ---------- -------
Southern California:
Los Angeles County 640 $ 355,250 27.8%
Orange County 110 57,498 4.5%
San Diego County 65 62,382 4.9%
Riverside County 51 36,432 2.9%
San Bernardino County 67 44,295 3.5%
All Other Southern California Counties 84 32,732 2.6%
----- ---------- -----
Total Southern California 1,017 588,589 46.2%
----- ---------- -----
Northern California:
San Francisco County 58 63,954 5.0%
Sacramento County 37 20,022 1.6%
Santa Clara County 44 26,109 2.0%
Alameda County 55 23,528 1.8%
Fresno County 55 18,450 1.4%
Contra Costa County 19 7,666 0.6%
All Other Northern California Counties 145 77,097 6.0%
----- ---------- -----
Total Northern California 413 236,826 18.4%
----- ---------- -----
Outside California:
Arizona 144 83,839 6.6%
Nevada 59 49,351 3.9%
Washington 96 37,525 2.9%
Colorado 77 34,860 2.7%
Texas 75 32,790 2.6%
Florida 99 20,598 1.6%
Missouri 22 15,918 1.2%
Utah 59 14,783 1.2%
New Jersey 59 10,568 0.8%
Michigan 59 5,559 0.4%
Other U.S. States 654 144,900 11.5%
----- ---------- -----
Total Outside California 1,403 450,691 35.4%
----- ---------- -----
2,833 $1,276,106 100.0%
===== ========== =====
31
32
Although we generally seek to limit risks associated with our portfolio
of real estate and construction loans by limiting the geographic concentration
and by varying the types of underlying collateral, significant risk
concentrations still remain. Concentrations of loans in certain geographic
regions, for example, cause our risk associated with these loans to be closely
associated with the general economic and social environment of the region.
Localized economic and competitive conditions, natural disasters or social
conditions all may affect the values of collateral located within a particular
geographic area. In addition, certain types of properties may be more or less
subject to changes in prevailing economic, competitive or social conditions.
The following table sets forth certain information with respect to our
real estate originations and real estate loans held in trust. Premiums paid and
discounts taken on loans purchased in the secondary market are not included
below.
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---------- -------- --------
(DOLLARS IN THOUSANDS)
Gross real estate loans originated and retained
in the portfolio $ 198,163 $293,781 $380,325
Gross real estate loans originated
on behalf of third-party investors 15,300 9,089 136,162
Gross fixed rate loans originated and
classified as held for sale -- -- 12,285
Gross real estate loans purchased(1) 440,417 91,402 2,361
---------- -------- --------
Total loan production $ 653,880 $394,272 $531,133
========== ======== ========
Gross real estate loans at end of period $1,276,106 $971,881 $894,649
Gross real estate loans weighted-average
portfolio yield 10.62% 10.30% 10.93%
Average size of real estate loans originated
and retained in the Company's portfolio $ 2,359 $ 2,260 $ 1,503
(1) Includes $250.5 million of real estate loans acquired through the ICCMAC
Trust Acquisition in 2000.
32
33
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table shows the amortized cost and approximate fair value
of investment securities at the dates indicated.
DECEMBER 31,
------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -----
(IN THOUSANDS)
U.S. government agency $46,196 $46,319 $43,260 $43,012 $ -- $ --
Equity securities 22 6 14,786 16,235 385 135
Certificates of deposit -- -- -- -- 194 194
------- ------- ------- ------- ---- ----
Total investment securities
available-for-sale $46,218 $46,325 $58,046 $59,247 $579 $329
======= ======= ======= ======= ==== ====
During 1998, we sold our "held to maturity" mortgage-backed securities
portfolio, realizing a net gain of $85,000 from the sale, and reinvested the
proceeds from the sale in higher yielding loans originated subsequent to the
sale. The mortgage-backed securities portfolio was sold because of a change in
long-term investment strategy. At the time of the sale, the mortgage-backed
securities were carried at an amortized cost of $17.8 million.
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to our ability to maintain cash flow adequate to fund
operations and meet obligations and other commitments on a timely basis,
including the payment of maturing deposits and the origination or purchase of
new real estate loans. We maintain a cash and investment securities portfolio
designed to satisfy operating and regulatory liquidity requirements while
preserving capital and maximizing yield. As of December 31, 2000 and 1999, the
Bank's liquidity ratios were 11.7% and 11.8%, respectively, exceeding the
regulatory requirement of 1.5%. In addition, our liquidity position is supported
by a credit facility with the Federal Home Loan Bank of San Francisco. As of
December 31, 2000, we had remaining available borrowing capacity under this
credit facility of $157.7 million, net of the $8.3 million of additional Federal
Home Loan Bank Stock that we would be required to purchase to support those
additional borrowings, and $30.0 million of unused federal funds credit
facilities under established lines of credit with two banks.
Total deposit accounts increased approximately $102.1 million to $1.0
billion at December 31, 2000 from $913.6 million at December 31, 1999. Total
deposit accounts increased $46.8 million to $913.6 million at December 31, 1999
from $866.8 million at December 31, 1998. In both 2000 and 1999, the funds
provided from the increase in deposits were used to fund the growth in our loan
portfolio. We retained 80% and 57% of the funds from maturing time certificates
through rollover of the certificates in 2000 and 1999, respectively. Although we
compete for deposits primarily on the basis of rates, based on our historical
experience regarding retention of deposits, management believes that a
significant portion of deposits will remain with us upon maturity on an ongoing
basis.
33
34
The following table sets forth information regarding deposits
outstanding at the dates indicated.
December 31,
-------------------------------------------
2000 1999 1998
---------- -------- --------
(in thousands)
Money market and passbook accounts $ 102,868 $126,529 $132,697
Time certificates under $100,000 572,851 522,227 518,309
Time certificates $100,000 and over 339,980 264,857 215,792
---------- -------- --------
$1,015,699 $913,613 $866,798
========== ======== ========
CAPITAL RESOURCES
As of December 31, 2000, the Bank's leverage, tier 1 risk-based and
total risk-based capital ratios were 9.1%, 10.4% and 11.6%, respectively. These
ratios were 9.0%, 10.1% and 11.4% as of December 31, 1999, 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, 2000, the Bank's capital position was designated as "well capitalized" for
regulatory purposes.
Our shareholders' equity increased $9.9 million to $133.6 million at
December 31, 2000 compared to $123.7 million at December 31, 1999, due primarily
to the accumulation of $18.1 million in net income as retained earnings. These
increases were partially offset by a $7.7 million reduction due to the
repurchase of shares of our common stock currently held as treasury stock and a
$615,000 decrease due to the change in accumulated other comprehensive income.
There were no dividends declared or paid by us during 2000.
34
35
CREDIT RISK ELEMENTS
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
The following table provides certain information with respect to our
total allowance for loan losses, including charge-offs, recoveries and selected
ratios, for the periods indicated.
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 19,895 $ 16,811 $ 12,178 $ 10,885 $ 8,105
Provision for loan losses 4,775 4,950 4,550 3,300 4,871
Addition due to purchase of the ICCMAC Trust 4,614 -- -- -- --
Charge-offs:
Real estate loans (1,489) (2,088) (64) (2,108) (2,237)
Construction loans (1,000) -- -- (16) --
----------- --------- --------- --------- ---------
Total charge-offs (2,489) (2,088) (64) (2,124) (2,237)
----------- --------- --------- --------- ---------
Recoveries:
Real estate loans 391 222 147 116 146
Other loans -- -- -- 1 --
----------- --------- --------- --------- ---------
Total recoveries 391 222 147 117 146
----------- --------- --------- --------- ---------
Net (charge-offs) recoveries (2,098) (1,866) 83 (2,007) (2,091)
----------- --------- --------- --------- ---------
Balance at end of year $ 27,186 $ 19,895 $ 16,811 $ 12,178 $ 10,885
=========== ========= ========= ========= =========
Average real estate loans
outstanding during the year $ 1,147,602 $ 925,059 $ 811,847 $ 708,447 $ 559,275
Real estate loans, net, at
end of year (1) $ 1,284,835 $ 971,375 $ 878,900 $ 763,031 $ 660,721
Selected Ratios:
Net (charge-offs) recoveries to
average real estate loans outstanding (0.18)% (0.20)% 0.01% (0.28)% (0.37)%
Net (charge-offs) recoveries to real estate
loans, net(1) (0.16)% (0.19)% 0.01% (0.26)% (0.32)%
Allowance for loan losses to real estate loans,
net(1) 2.12% 2.05% 1.91% 1.60% 1.65%
Allowance for loan losses to nonaccrual loans (2) 149.85% 249.40% 309.37% 146.16% 169.50%
(1) Real estate loans, before allowance for loan losses and net of premium,
unearned finance charges and loan fees.
(2) Excludes nonaccrual loans held for sale.
The allowance for loan losses increased to $27.2 million or 2.12% of our
total real estate loan portfolio, at December 31, 2000 from $19.9 million or
2.05% of our total real estate loan portfolio, at December 31, 1999. The
increase in the allowance was due primarily to (1) the allowance for loan losses
of $4.6 million recorded upon the purchase of the ICCMAC Trust (2) provisions
for loan losses recorded in 2000 totaling $4.8 million. These increases in the
allowance for loan losses were partially offset by higher net charge-offs which
totaled $2.1 million in 2000 compared to $1.9 million in 1999.
The allowance for loan losses increased to $19.9 million or 2.05% of our
real estate loan portfolio, at December 31, 1999 from $16.8 million, 1.91% of
our real estate loan portfolio, at December 31, 1998. The increase in the
allowance was due primarily to growth in our portfolio of real estate loans,
net, which increased by $92.5
35
36
million, or 10.52% from $878.9 million at December 31, 1998 to $971.4 million at
December 31, 1999, as well as due to the increased provisions for loan losses
recorded in 1999 due to increased construction lending and increased out of
state lending in 1999.
The allowance for loan losses increased to $16.8 million or 1.91% of
our total real estate loan portfolio, at December 31, 1998 from $12.2 million or
1.60% of our total real estate loan portfolio at December 31, 1997. The increase
in the allowance was due primarily to growth in our real estate loan portfolio
of loans held for investment, which increased by $115.9 million, or 15.2% from
$763.0 million at December 31, 1997 to $878.9 million at December 31, 1998, as
well as due to increased provisions for loan losses recorded in 1998 due to
increased construction lending, increased out of state lending, and revised loan
underwriting criteria used in 1998. The allowance also increased due to lower
than expected level of loan losses charged against the allowance in 1998, as we
received net recoveries totaling $83,000 in 1998 compared to net charge offs
totaling $2.0 million in 1997.
The following table sets forth management's historical allocation of the
allowance for loan losses by loan or contract category and the percentage of
gross loans in each category to total gross loans at the dates indicated.
DECEMBER 31,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------- ------------------- -------------------
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)
LOAN OR CONTRACT CATEGORY:
Secured by real estate $27,186 100.0% $19,895 100.0% $16,811 100.0% $12,178 100.0% $10,885 100.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $27,186 100.0% $19,895 100.0% $16,811 100.0% $12,178 100.0% $10,885 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
---------------
(1) Percentage represents the percent of gross loans in category to total gross
loans.
Management periodically assesses the adequacy of the allowance for loan
losses by reference to many factors which may be weighted differently at various
times depending on prevailing conditions. These factors include, among other
elements:
- general portfolio trends relative to asset and portfolio size;
- asset categories;
- potential credit and geographic concentrations;
- delinquency trends and nonaccrual loan levels;
- historical loss experience and risks associated with changes in
economic, social and business conditions; and
- The underwriting standards in effect when the loan was made.
Accordingly, the calculation of the adequacy of the allowance for loan
losses is not based solely on the level of nonperforming assets. Management
believes that our allowance for loan losses as of December 31, 2000 was adequate
to absorb the known and inherent risks of loss in the loan portfolio at that
date. While management believes the estimates and assumptions used in its
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations. In
addition, the determination of the amount of the Bank's allowance for loan
losses is subject to review by bank regulators, as part of the routine
examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination.
36
37
The following table sets forth the delinquency status of our loan
portfolios at each of the dates indicated.
DECEMBER 31
---------------------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
PERIOD OF DELINQUENCY:
30 - 59 days $12,245 0.96% $ 7,147 0.73% $2,699 0.30%
60 - 89 days 15,640 1.23% 988 0.10% 2,000 0.22%
90 days or more 16,226 1.27% 7,614 0.78% 4,023 0.45%
------- ---- ------- ---- ------ ----
Total loans delinquent $44,111 3.46% $15,749 1.61% $8,722 0.97%
======= ==== ======= ==== ====== ====
Our loan delinquencies increased to $44.1 million or 3.46% of our gross
loan portfolio at December 31, 2000 as compared to $15.7 million or 1.61% and
$8.7 million or 0.97% at December 31, 1999 and 1998, respectively. The increase
in delinquent real estate loans in 2000 was due primarily to (1) an $18.2
million increase in past due commercial real estate loans (2) a $6.6 million
increase in past due one-four family real estate loans and (3) $3.6 million of
past due loans held in the ICCMAC Trust.
The Company has established a policy that all real estate loans greater
than $1.5 million are reviewed annually. This review usually involves obtaining
updated information about the collateral property's leasing status and cash flow
from operations. In addition, independent outside consultants periodically
review the Bank's real estate loan portfolio and report findings to management
and the audit committee of the board of directors. Loans considered to warrant
special attention are presented to the review and reserve committee, which meets
at least monthly to review the status of classified loans, consider new
classifications or declassifications, determine the need for and amount of any
charge offs, and recommend to our executive committee of the board of directors
the level of allowance for loan losses to be maintained. If management believes
that the collection of the full amount of principal is unlikely and the value of
the collateral securing the obligation is insufficient, 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 our recorded
value, the loss is recognized by a charge to provision for estimated losses on
other real estate owned.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be doubtful, unless the loan is considered well secured and in
the process of collection. Subsequent cash collections on nonaccrual loans are
either recognized as interest income on a cash basis, if the loan is well
secured and in management's judgment the net book value is fully collectible, or
recorded entirely as a reduction of principal.
37
38
The following table sets forth our nonperforming assets by category and
troubled debt restructurings as of the dates indicated:
DECEMBER 31
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans (1):
Real estate (2) $ 9,430 (3) $ 7,977 $ 5,434 $ 8,332 $ 6,422
Construction 8,712 -- -- -- --
Other -- -- -- -- 783
Other real estate owned, net 2,250 1,041 1,201 3,946 5,416
------- ------- ------- ------- -------
Total nonperforming assets 20,392 9,018 6,635 12,278 12,621
Accruing loans past due 90 days
or more with respect to principal
or interest 9,765 -- -- -- --
Performing troubled debt restructurings 3,002 13,996 805 1,574 2,106
------- ------- ------- ------- -------
$33,159 $23,014 $ 7,440 $13,852 $14,727
======= ======= ======= ======= =======
Non accrual loans to total gross loans
and real estate loans held in trust 1.42% 0.82% 0.62% 1.09% 0.96%
Allowance for credit losses to
nonaccrual loans (4) 149.85% 249.40% 309.37% 146.16% 169.50%
Nonperforming assets to total assets 1.44% 0.81% 0.64% 1.21% 1.56%
(1) Gross interest income that would have been recorded on nonaccrual loans had
they been current in accordance with original terms was $826,000 for the
year ended December 31, 2000. The amount of interest income on such
nonaccrual loans included in net income for the year ended December 31, 2000
was $780,000.
(2) Includes one loan with a net book balance of $1.4 million that is a
nonperforming troubled debt restructuring.
(3) In addition to the above, management has concerns as to the borrowers'
ability to comply with present repayment terms on $70.9 million of accruing
loans as of December 31, 2000.
(4) Excludes nonaccrual loans held for sale.
Our nonaccrual real estate loans totaled $18.1 million at December 31,
2000. Three of these loans had an outstanding balance greater than $1.0 million.
In 2000, $3.0 million of new other real estate owned was acquired, $1.9
million of other real estate owned was sold, and $178,000 of write-downs were
taken, resulting in net other real estate owned at December 31, 2000 of $2.3
million. Other real estate owned at December 31, 2000 consisted of eight
properties with an average balance of approximately $281,000. The other real
estate owned property with the largest net book balance totaled $1.2 million.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We realize income principally from the differential or spread between
the interest earned on loans, investments and other interest-earning assets and
the interest paid on deposits and borrowings. Loan volumes and yields, as well
as the volume of and rates on investments, deposits and borrowings, are affected
by market interest rates. Additionally, because of the terms and conditions of
many of our loan agreements and deposit accounts, a change in interest rates
could also affect the duration of the loan portfolio and/or the deposit base,
which could alter our sensitivity to future changes in interest rates.
We use an internal earnings simulation model as a tool to identify and
manage our interest rate risk profile. The model is based on projected cash
flows and repricing characteristics for all financial instruments and
incorporates market-based assumptions regarding the impact of changing interest
rates on current volumes of applicable financial instruments, considering
applicable interest rate floors and caps and prepayment penalties associated
with each financial instrument. These assumptions are inherently uncertain and,
as a result, the model cannot precisely measure net interest income or precisely
predict the impact of changes in interest rates on net interest income. Actual
results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
38
39
Interest rate risk management focuses on maintaining consistent growth
in net interest income within board-approved policy limits while taking into
consideration, among other factors, our overall credit, operating income,
operating cost and capital profile. The asset/liability management committee,
which includes senior management representatives and reports to the Board of
Directors, monitors and manages interest rate risk to maintain an acceptable
level of change in net interest income as a result of changes in interest rates.
The following table shows our estimated earnings sensitivity profile as
of December 31, 2000:
CHANGES IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) (12 MONTHS)
------------------ --------------------
+200 Over One Year - 2.0%
+100 Over One Year + 0.6%
-100 Over One Year - 2.4%
-200 Over One Year + 6.4%
Another tool used to identify and manage our interest rate risk profile
is the static gap analysis. Interest sensitivity gap analysis measures the
difference between the assets and liabilities repricing or maturing within
specific time periods. 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 our 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 our variable rate real estate loans may not adjust
downward below their initial rate, with increases generally limited to maximum
adjustments of 2% per year and up to 4% over the life of the loan. These loans
may also be subject to prepayment penalties. At December 31, 2000, 95.0% of our
variable rate loan portfolio would not adjust downward below the initial
interest rate with the weighted-average minimum interest rate on this portfolio
being 9.47% and 90.3% of the total loans outstanding had a lifetime interest
rate cap, with the weighted-average lifetime interest rate cap on this portfolio
being 14.35%. The anticipated effects of these various factors are considered by
management in implementing interest rate risk management activities.
39
40
The following table presents an estimate of our static GAP analysis as
of December 31, 2000.
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)
ASSETS
------
Real estate loans (1) $ 880,702 $ 96,248 $ 71,969 $ 17,890 $ -- $1,066,809
Real estate loans held in trust (2) 59,681 69,401 4,245 75,970 -- 209,297
Cash and cash equivalents 70,942 -- -- -- 8 70,950
Investment securities available for sale -- 33,260 13,000 -- 65 46,325
Noninterest-earning assets less allowance
for credit losses and unearned loan fees -- -- -- -- 21,762 21,762
---------- --------- -------- -------- --------- ----------
Total assets $1,011,325 $ 198,909 $ 89,214 $ 93,860 $ 21,835 $1,415,143
========== ========= ======== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Time certificates under $100,000 $ 185,464 $ 326,770 $ 59,433 $ -- $ -- $ 571,667
Time certificates $100,000 and over 158,575 166,751 15,838 -- -- 341,164
Money market and passbook accounts 102,868 -- -- -- -- 102,868
FHLB advances 52,500 10,000 16,750 -- -- 79,250
Collateralized mortgage obligations 161,852 -- -- -- -- 161,852
Other liabilities -- -- -- -- 24,788 24,788
Shareholders' equity -- -- -- -- 133,554 133,554
---------- --------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity $ 661,259 $ 503,521 $ 92,021 $ -- $ 158,342 $1,415,143
========== ========= ======== ======== ========= ==========
Net repricing assets over (under) repricing
liabilities equals interest rate
sensitivity GAP $ 350,066 $(304,612) $ (2,807) $ 93,860 $(136,507)
========== ========= ======== ======== =========
Cumulative interest rate sensitivity GAP $ 350,066 $ 45,454 $ 42,647 $136,507 $ --
========== ========= ======== ======== =========
Cumulative GAP as a percentage of
total assets 24.7% 3.2% 3.0% 9.6% 0.0%
========== ========= ======== ======== =========
(1) Variable rate loans consist principally of real estate secured loans with a
maximum term of 30 years. Approximately 73% of these loans are generally
adjustable quarterly based on changes in various indexes, subject generally
to a maximum increase of 2% annually and up to 4% over the life of the loan.
Approximately 22% of these loans are fixed for an initial period of two to
five years from origination, and then are adjustable quarterly based on
changes in various indexes. Nonaccrual loans of approximately $17.4 million
are assumed to reprice after five years.
(2) Nonaccrual loans of approximately $740,000 are assumed to reprice after five
years.
40
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants 42
Consolidated Balance Sheets as of December 31, 2000 and 1999 43
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998 44
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1998 to December 31, 2000 45
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 46
Notes to Consolidated Financial Statements 47
41
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
ITLA Capital Corporation
We have audited the accompanying consolidated balance sheets of ITLA Capital
Corporation and subsidiaries ("the Company"), a Delaware corporation, as of
December 31, 2000 and 1999, 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, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ITLA Capital Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Los Angeles, California
January 26, 2001
42
43
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------------------------
2000 1999
------------- -------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
Cash and cash equivalents $ 70,950 $ 72,242
Investment securities available for sale, at fair value 46,325 59,247
Stock in Federal Home Loan Bank 3,963 8,894
Real estate loans, net (net of allowance for loan
losses of $22,608 and $19,895 in 2000 and 1999, respectively) 1,045,927 951,480
Real estate loans held in trust (net of allowance for
loan losses of $4,578 in 2000) 211,722 --
Interest receivable 11,821 7,383
Other real estate owned, net 2,250 1,041
Premises and equipment, net 2,690 3,253
Deferred income taxes 11,302 9,401
Other assets 8,193 2,882
----------- -----------
Total assets $ 1,415,143 $ 1,115,823
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 1,015,699 $ 913,613
Collateralized mortgage obligations 161,852 --
Federal Home Loan Bank advances 79,250 67,250
Accounts payable and other liabilities 11,269 11,265
----------- -----------
Total liabilities 1,268,070 992,128
----------- -----------
Commitments and contingencies (notes 15 and 16)
Guaranteed preferred beneficial interests in company's junior
subordinated deferrable interest debentures 13,519 --
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Contributed capital - common stock, $.01 par value; 20,000,000
shares authorized, 8,206,749 and 8,202,916 issued and
outstanding in 2000 and 1999, respectively 57,120 57,184
Retained earnings 97,617 79,478
Accumulated other comprehensive income 91 706
----------- -----------
154,828 137,368
Less treasury stock, at cost - 1,546,336 and 1,021,432 shares in
2000 and 1999, respectively (21,274) (13,673)
----------- -----------
Total shareholders' equity 133,554 123,695
----------- -----------
Total liabilities and shareholders' equity $ 1,415,143 $ 1,115,823
=========== ===========
See accompanying notes to the consolidated financial statements.
43
44
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
------------------------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income:
Real estate loans, including fees $ 102,419 $ 95,303 $ 92,607
Real estate loans held in trust 16,192 -- --
Cash and investment securities 5,164 5,910 9,058
--------- -------- --------
Total interest income 123,775 101,213 101,665
--------- -------- --------
Interest expense:
Deposit accounts 55,968 46,452 48,053
Collateralized mortgage obligations 10,901 -- --
Federal Home Loan Bank advances 1,773 2,008 3,334
--------- -------- --------
Total interest expense 68,642 48,460 51,387
--------- -------- --------
Net interest income before provisions for loan losses
and valuation allowance on loans held for sale 55,133 52,753 50,278
Provision for loan losses 4,775 4,950 4,550
Provision for valuation allowance on loans held for sale -- -- 1,400
--------- -------- --------
Net interest income after provisions for loan
losses and valuation allowance on loans held for sale 50,358 47,803 44,328
--------- -------- --------
Noninterest income:
Gain on sale of investment securities 1,412 -- 85
Fee income from mortgage banking activities 47 73 1,554
Other 872 828 808
--------- -------- --------
Total noninterest income 2,331 901 2,447
--------- -------- --------
Noninterest expense:
Compensation and benefits 9,958 9,739 10,564
Occupancy and equipment 2,567 2,788 2,783
FDIC assessment 188 99 99
Other 7,941 8,131 7,218
--------- -------- --------
Total recurring general and administrative 20,654 20,757 20,664
Nonrecurring expense 1,400 -- --
--------- -------- --------
Total general and administrative 22,054 20,757 20,664
--------- -------- --------
Real estate owned (income) expense, net (31) 72 252
Provision for losses on other real estate owned 167 195 608
Loss on sale of other real estate owned, net 2 205 124
--------- -------- --------
Total real estate owned expense, net 138 472 984
--------- -------- --------
Total noninterest expense 22,192 21,229 21,648
--------- -------- --------
Income before provision for income taxes and
minority interest income of subsidiary 30,497 27,475 25,127
Minority interest in income of subsidiary 478 -- --
--------- -------- --------
Income before provision for income taxes 30,019 27,475 25,127
Provision for income taxes 11,880 11,270 10,304
--------- -------- --------
NET INCOME $ 18,139 $ 16,205 $ 14,823
========= ======== ========
BASIC EARNINGS PER SHARE $ 2.57 $ 2.26 $ 1.95
========= ======== ========
DILUTED EARNINGS PER SHARE $ 2.51 $ 2.21 $ 1.89
========= ======== ========
See accompanying notes to the consolidated financial statements.
44
45
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK
NUMBER OF SHARES
----------------------------------------
GROSS NET
SHARES SHARES
ISSUED AND TREASURY ISSUED AND
OUTSTANDING SHARES OUTSTANDING
----------- ---------- -----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at January 1, 1998 7,849,484 (152,500) 7,696,984
Issuance of common stock -
employee stock options 8,500 -- 8,500
Issuance of common stock -
pursuant to the
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan 293,932 (293,932) --
Common stock repurchased -- (539,000) (539,000)
Net income -- -- --
Total comprehensive income -- -- --
--------- ---------- ---------
Balance at December 31, 1998 8,151,916 (985,432) 7,166,484
========= ========== =========
Issuance of common stock -
employee stock options 51,000 -- 51,000
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan -- -- --
Common stock repurchased -- (36,000) (36,000)
Net income -- -- --
Total comprehensive income -- -- --
--------- ---------- ---------
Balance at December 31, 1999 8,202,916 (1,021,432) 7,181,484
========= ========== =========
Issuance of common stock -
employee stock options 3,833 -- 3,833
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan -- 11,115 11,115
Common stock repurchased -- (536,019) (536,019)
Net income -- -- --
Total comprehensive income -- -- --
--------- ---------- ---------
Balance at December 31, 2000 8,206,749 (1,546,336) 6,660,413
========= ========== =========
SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------
CONTRIBUTED CAPITAL ACCUMULATED
----------------------------------------------- OTHER
TOTAL COMPREHENSIVE TREASURY
SHARE EARNED CONTRIBUTED RETAINED INCOME STOCK,
CAPITAL COMPENSATION CAPITAL EARNINGS (LOSS) AT COST TOTAL
---------- ------------ ----------- ---------- ------------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at January 1, 1998 53,163 -- 53,163 48,450 19 (2,284) 99,348
Issuance of common stock -
employee stock options 109 -- 109 -- -- -- 109
Issuance of common stock -
pursuant to the
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan 2,645 -- 2,645 -- -- (2,645) --
Common stock repurchased -- -- -- -- -- (8,229) (8,229)
Net income -- -- -- 14,823 -- -- 14,823
Total comprehensive income -- -- -- -- (169) -- (169)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 55,917 -- 55,917 63,273 (150) (13,158) 105,882
========== ========== ========== ========== ========== ========== ==========
Issuance of common stock -
employee stock options 542 -- 542 -- -- -- 542
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan -- 725 725 -- -- -- 725
Common stock repurchased -- -- -- -- -- (515) (515)
Net income -- -- -- 16,205 -- -- 16,205
Total comprehensive income -- -- -- -- 856 -- 856
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 56,459 725 57,184 79,478 706 (13,673) 123,695
========== ========== ========== ========== ========== ========== ==========
Issuance of common stock -
employee stock options 36 -- 36 -- -- -- 36
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan -- (100) (100) -- -- 100 --
Common stock repurchased -- -- -- -- -- (7,701) (7,701)
Net income -- -- -- 18,139 -- -- 18,139
Total comprehensive income -- -- -- -- (615) -- (615)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 $ 56,495 $ 625 $ 57,120 $ 97,617 $ 91 $ (21,274) $ 133,554
========== ========== ========== ========== ========== ========== ==========
COMPREHENSIVE INCOME
---------------------------------------------------------------------
RECLASSIFICATION OF
UNREALIZED REALIZED GAINS
GAIN (LOSS) PREVIOUSLY RECOGNIZED TOTAL
NET ON SECURITIES, IN COMPREHENSIVE COMPREHENSIVE
INCOME NET OF TAX INCOME, NET OF TAX INCOME
---------- ------------- --------------------- -------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at January 1, 1998
Issuance of common stock -
employee stock options
Issuance of common stock -
pursuant to the
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan
Common stock repurchased
Net income
Total comprehensive income $ 14,823 $ (118) $ (51) $ 14,654
========== ========== ========== ==========
Balance at December 31, 1998
Issuance of common stock -
employee stock options
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan
Common stock repurchased
Net income
Total comprehensive income $ 16,205 $ 856 $ -- $ 17,061
========== ========== ========== ==========
Balance at December 31, 1999
Issuance of common stock -
employee stock options
Earned compensation from
Supplemental Executive
Retirement Plan / Recognition
and Retention Plan
Common stock repurchased
Net income
Total comprehensive income $ 18,139 $ 232 $ (847) $ 17,524
========== ========== ========== ==========
Balance at December 31, 2000
See accompanying notes to the consolidated financial statements
45
46
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income $ 18,139 $ 16,205 $ 14,823
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 796 987 1,556
Amortization of premium on purchased loans 2,755 391 --
Amortization of original issue discount and deferred debt issuance costs
on CMO's 874 -- --
Amortization of deferred loan origination fees, net of costs (1,745) (2,513) (2,730)
Provision for loan losses 4,775 4,950 5,950
Provision for losses on other real estate owned 167 195 608
Gain on sale of investment securities available for sale (1,412) -- --
Gain on sale of mortgage-backed securities -- -- (85)
Loss on sales of other real estate owned 2 205 124
Increase in interest receivable (2,466) (1,062) (1,405)
Deferred income tax benefit (1,321) (3,851) (1,941)
Increase in other assets (115) (361) (934)
Increase (decrease) in accounts payable and other liabilities (346) 132 219
--------- --------- ---------
Net cash provided by operating activities 20,103 15,278 16,185
--------- --------- ---------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (17,998) (57,345) (20,401)
Proceeds from the maturity of investment securities available for sale 15,000 -- 55,050
Proceeds from the sale of investment securities for sale 16,176 -- --
Purchase of CRA investment (4,766) -- --
Decrease (increase) in stock in Federal Home Loan Bank 4,931 3,739 (714)
Repayment of principal on mortgage-backed securities held to maturity -- -- 7,122
Proceeds from the sale of mortgage-backed securities held to maturity -- -- 17,924
Cash paid to acquire ICCMAC Multifamily and Commercial Trust 1999-1 (51,069) -- --
Purchases of loans receivable (189,889) (91,402) (2,361)
Decrease (increase) in loans receivable, net 75,264 (16,562) (88,377)
Repayment of loans held in trust 41,264 -- --
Proceeds from sale of real estate loans held for sale 12,720 23,501 14,150
Proceeds from sale of other real estate owned 1,685 4,586 2,501
Cash paid for capital expenditures (798) (857) (1,227)
Other, net 33 110 --
--------- --------- ---------
Net cash used in investing activities (97,447) (134,230) (16,333)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from exercise of employee stock options 36 542 109
Cash paid to acquire treasury stock (7,701) (515) (8,229)
Proceeds from issuance of trust preferred securities 13,580 -- --
Principal payments on collateralized mortgage obligations (43,949) -- --
Net increase in deposit accounts 102,086 46,815 22,985
Amounts borrowed from the Federal Home Loan bank 246,000 254,000 80,500
Repayment of amounts borrowed from Federal Home Loan Bank (234,000) (235,250) (93,500)
--------- --------- ---------
Net cash provided by financing activities 76,052 65,592 1,865
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (1,292) (53,360) 1,717
Cash and cash equivalents at beginning of period 72,242 125,602 123,885
--------- --------- ---------
Cash and cash equivalents at end of period $ 70,950 $ 72,242 $ 125,602
========= ========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 68,625 $ 48,150 $ 51,373
Cash paid during the period for income taxes $ 13,550 $ 15,245 $ 12,630
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 3,063 $ 4,826 $ 479
Loans to facilitate the sale of other real estate owned $ -- $ 390 $ 1,392
See accompanying notes to the consolidated financial statements.
46
47
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - ITLA Capital Corporation and Subsidiaries ("ITLA Capital",
"the Company", or "we") is primarily engaged in the origination of loans secured
by income producing real estate. Through our principal operating subsidiary,
Imperial Capital Bank ("Imperial" or "the Bank"), the Company accepts deposits
insured by the Federal Deposit Insurance Corporation ("FDIC") which are used
primarily to fund the investment in variable rate commercial and residential
real estate loans. During 2000, we acquired 100 percent of the equity and
certain collateralizerd mortgage obligations ("CMO's") of the ICCMAC Multifamily
and Commercial Trust 1999-1 (the "ICCMAC Trust"), through our Imperial Capital
Real Estate Investment Trust ("Imperial Capital REIT") subsidiary. Additionally,
we formed, ITLA Capital Statutory Trust I (the "Trust Preferred I"), a
subsidiary whose sole purpose was to issue Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Deferrable Interest Debentures
(the "Trust Preferred securities").
We were 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 our common stock. This transaction was accounted for as a
reorganization of entities under common control.
Imperial has operated as a California industrial bank since 1974, and
became a publicly traded company in October 1995, when its shares were sold in
an initial public offering. Imperial operates six deposit branches in
California. From its formation in 1974 until December 31, 1999, Imperial
operated under the name Imperial Thrift and Loan Association. Effective January
1, 2000, Imperial changed its name to Imperial Capital Bank.
In prior years, we also operated ITLA Funding Corporation ("Funding"),
which was formed to originate commercial real estate loans for sale in the
secondary market. In 1998, Funding sold fixed rate originations on a table
funded basis to conduits that issue commercial mortgage-backed securities. In
1999, Funding suspended separate operations and all of its ongoing operations
were merged into Imperial.
FINANCIAL STATEMENT PRESENTATION - The accounting and reporting policies
of the Company conform to accounting principles generally accepted in the United
States ("GAAP") and to prevailing practices within the financial services
industry. The consolidated financial statements include the accounts of the
Company and it's wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain amounts in prior periods
have been reclassified to conform to the presentation in the current period. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - We consider all highly liquid investments
with original maturities of three months or less 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.
47
48
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REAL ESTATE LOANS -- Real estate loans, which includes real estate loans
and real estate loans held in trust, are generally carried at principal amounts
outstanding plus purchase premiums, less charge-offs, net deferred loan
origination fees and other unearned income. Deferred loan origination fees and
other unearned income include deferred unamortized fees net of direct
incremental loan origination costs. Interest income is accrued as earned. Net
purchase premiums or discounts and deferred loan origination fees are amortized
or accreted into interest income using the interest method.
Loans are placed on nonaccrual status when they become 90 days or more
contractually delinquent, or earlier if the collection of interest is considered
by management to be unlikely. When a loan is placed on nonaccrual status, all
previously accrued but uncollected interest is reversed against current period
operating results. Subsequent cash collections on nonaccrual loans are either
recognized as interest income on a cash basis if the loan is well secured and in
management's judgment the net book value is fully collectible, or recorded
entirely as a reduction of principal.
Loans secured by income producing real estate are considered impaired
when, based upon current information and events, it is probable that the 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. The Company
evaluates impairment on a loan by loan basis. Once such a loan is determined to
be impaired, the impairment is measured based on the present value of the
expected future cash flows discounted at the loan's effective interest rate or
by using the loan's most recent market price or the fair value of the collateral
if the loan is collateral dependent.
When the measurement of an impaired income producing real estate loan is
less than the recorded amount of the loan, a valuation allowance is established
by a corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
Our policy for recognizing interest income on impaired loans is the same
as that for nonaccrual loans.
ALLOWANCE FOR LOAN LOSSES - We maintain an allowance for loan losses at a
level considered adequate to cover probable losses on loans. In evaluating the
adequacy of the allowance for loan losses, management estimates the amount of
the loss for each loan that has been identified as having more than standard
credit risk. Those estimates give consideration to, among other factors,
economic conditions, estimated real estate collateral value and cash flow, and
the financial strength and commitment of the borrower or guarantors, where
appropriate. Additionally, an estimate for loan loss is calculated for the
remaining portion of the portfolio giving consideration to the Company's
historical loss experience in the portfolio, adjusted, as appropriate, for the
estimated effects of current economic conditions and changes in the composition
of the loan portfolio over time. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance, or portion
thereof, has been confirmed.
48
49
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER REAL ESTATE OWNED -- Other real estate owned ("OREO") represents
real estate acquired through or in lieu of foreclosure. OREO is held for sale
and is initially recorded at fair value at the date of foreclosure, establishing
a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of cost or
estimated fair value less costs of disposition. The net operating results from
OREO are recognized in the current periods as non-interest expense.
PREMISES AND EQUIPMENT - Premises and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets ranging
from three to twelve years. Amortization of leasehold improvements is calculated
on the straight-line method over the shorter of the estimated useful lives of
the assets or the corresponding lease term.
INCOME TAXES - Provision for income taxes is the amount of estimated tax
due reported on the our tax returns and the change in the amount of deferred tax
assets and liabilities. Deferred income taxes represent the estimated net income
tax expense payable (or benefits receivable) for temporary differences between
the accounting basis and tax basis of our 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 shareholders by the weighted-average number
of common shares. Diluted Earnings Per Share includes the effect of common stock
equivalents of the Company, which include only shares issuable on the exercise
of outstanding options. A reconciliation of the computation of Basic Earnings
Per Share and Diluted Earnings Per Share is presented in Note 14 - Earnings Per
Share.
STOCK-BASED COMPENSATION - We account for our 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. We have disclosed in
Note 12 - Benefit Plans the pro forma effect on net income and earnings per
share as if the we had elected to recognize compensation expense for the stock
options granted.
COMPREHENSIVE INCOME - Other comprehensive income is displayed in the
Consolidated Statement of Changes in Shareholders' Equity and consists entirely
of the change in net unrealized holding gain or loss on securities classified as
available for sale, net of the related income tax effect.
49
50
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). The statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or a liability measured at its fair value. The statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allow a derivative's gain and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133". The FASB concluded that, due
to effected entities and their auditors requesting more time to study,
understand, and implement the provisions of this statement, it is appropriate to
defer the effective date of SFAS No. 133. This statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 on January 1, 2001. The impact of the adoption did not
have a material effect on the Company's financial position or results of
operations.
In September of 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
-- a replacement of FASB Statement No. 125." As of December 31, 2000, the
Company has adopted accounting and disclosure requirements of SFAS No. 140 as
set forth in paragraphs 15 and 17 of the Statement, respectively. The adoption
of SFAS No. 140 did not have an impact on the financial condition or the results
of operations of the Company.
50
51
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 2---INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of December
31, 2000 and 1999 are as follows:
GROSS UNREALIZED
AMORTIZED --------------------
COST FAIR VALUE GAINS LOSSES
--------- ---------- ------- -------
(IN THOUSANDS)
DECEMBER 31, 2000:
Investment securities available for sale:
U.S. Government Agency $46,196 $46,319 $ 123 $ --
Equity securities 22 6 -- 16
------- ------- ------- -------
Total investment securities available for sale $46,218 $46,325 $ 123 $ 16
======= ======= ======= =======
DECEMBER 31, 1999:
Investment securities available for sale:
US Governement Agency $43,260 $43,012 $ -- $ 248
Equity securities 14,786 16,235 1,449 --
------- ------- ------- -------
Total investment securities available for sale $58,046 $59,247 $ 1,449 $ 248
======= ======= ======= =======
At December 31, 2000, the carrying value of U.S. government securities
available for sale consisted of $33.3 million of securities that mature in one
year or less with an average yield of 6.22%, $10.0 million of securities that
mature within two years with an average yield of 7.05%, which are callable on
February 28, 2001, and $3.0 million of securities maturing within three years
with an average yield of 6.80%, which are callable on October 11, 2001.
At December 31, 1999, the carrying value of U.S. government securities
available for sale consisted of $10 million of securities that mature in one
year or less with an average yield of 5.06%, with the remaining $33.0 million of
securities maturing within two years with an average yield of 6.22%.
During 2000 and 1999, there were no transfers from the held to maturity
portfolio and no securities were sold prior to their maturity or call date.
Gross realized gains on investment securities were $1.4 million and
$85,000 for the years ended December 31, 2000 and 1998, respectively. There
were no gross realized gains on investment securities in 1999. There were no
gross realized losses on investment securities for the years ended December 31,
2000, 1999 and 1998, respectively.
51
52
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 3--REAL ESTATE LOANS
Real estate loans are held in the Bank's portfolio and consist of the
following:
DECEMBER 31
-----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Real estate loans $ 967,691 $ 864,048
Construction loans 95,206 107,833
Other 3,912 --
----------- -----------
1,066,809 971,881
Unamortized premium 4,297 2,590
Deferred loan origination fees, net of costs (2,571) (3,096)
----------- -----------
1,068,535 971,375
Allowance for loan losses (22,608) (19,895)
----------- -----------
$ 1,045,927 $ 951,480
=========== ===========
At December 31, 2000, approximately 78.1%, 9.3% and 12.6% of the Bank's
loans collateralized by real estate are secured by income producing properties,
properties under development and residential one-to-four family properties,
respectively. Approximately 65.8% of our loans secured by real estate were
collateralized by properties located in California.
At December 31, 2000, approximately $283.7 million of real estate loans
were pledged to secure a line of credit at the Federal Home Loan Bank of San
Francisco ("FHLB"). (See Note 10 - FHLB Advances.)
52
53
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 3--REAL ESTATE LOANS (Continued)
The following is the activity in the allowance for loan losses on real
estate loans for the periods indicated.
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year $ 19,895 $ 16,811 $ 12,178
Provision for loan losses 4,775 4,950 4,550
Charge-offs:
Real estate loans (1,453) (2,088) (64)
Construction loans (1,000) -- --
-------- -------- --------
Total charge-offs (2,453) (2,088) (64)
-------- -------- --------
Recoveries:
Real estate loans 391 222 147
-------- -------- --------
Total recoveries 391 222 147
-------- -------- --------
Net (charge-offs) recoveries (2,062) (1,866) 83
-------- -------- --------
Balance at end of year $ 22,608 $ 19,895 $ 16,811
======== ======== ========
As of December 31, 2000 and 1999, the accrual of income had been
suspended on approximately $17.4 million and $8.0 million, respectively, of
loans secured by real estate. Interest income that was contractually due on
loans that were on nonaccrual status that was not recognized during the years
ended December 31, 2000, 1999 and 1998 was approximately $679,000, $574,000 and
$326,000 respectively.
The provision for valuation allowance on loans held for sale totaled $1.4
million for the year ending December 31, 1998. During 1998, we designated a pool
of loans previously classified as held for investment as held for sale. In
connection therewith, we recorded a provision for valuation allowance of $1.4
million. These loans were subsequently sold during the year with no additional
gain or loss.
As of December 31, 2000 and 1999, restructured loans totaled $4.4 million
and $14.0 million respectively. There were no related commitments to lend
additional funds on restructured loans. For the years ended December 31, 2000,
1999 and 1998, $826,000, $1.4 million and $175,000, respectively, of gross
interest income would have been recorded had the loans been current in
accordance with their original terms compared to $780,000, $1.4 million and
$140,000, respectively, of interest income which was included in net income for
the same periods. The average yield on restructured loans was 9.28% at December
31, 2000.
53
54
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 3--REAL ESTATE LOANS (Continued)
The Bank's recorded investment in impaired loans, and the related
valuation allowance, were as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- ----------------------
RECORDED VALUATION RECORDED VALUATION
INVESTMENT ALLOWANCE INVESTMENT ALLOWANCE
---------- --------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Valuation allowance required $11,086 $ 1,818 $ 3,724 $ 734
No valuation allowance required 7,021 -- 16,602 --
------- ------- ------- -------
Total impaired loans $18,107 $ 1,818 $20,326 $ 734
======= ======= ======= =======
All impaired loans with a valuation allowance were on nonaccrual status
at December 31, 2000. The average recorded investment in impaired loans for the
years ended December 31, 2000, 1999 and 1998 was $13.4 million, $8.7 million and
$5.5 million, respectively. Interest income recognized on impaired loans for the
years ended December 31, 2000, 1999 and 1998 was $368,000, $414,000 and $22,000,
respectively.
Loans having carrying values of $3.0 million and $4.8 million were
transferred to OREO in 2000 and 1999, respectively.
54
55
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 4--ACQUISITION OF ICCMAC MULTIFAMILY AND COMMERCIAL TRUST 1999-1
On March 28, 2000, ITLA Capital completed the acquisition of the ICCMAC
Trust. The acquisition of the ICCMAC Trust has been recorded using the purchase
method of accounting. At the time of the acquisition, the ICCMAC Trust contained
$250.5 million of loans, consisting of approximately 35% commercial real estate
and 65% multi-family real estate loans. The ICCMAC Trust's loans were held as
collateral for $205.4 million of bonds in the form of CMO's. ITLA Capital's
investment in the ICCMAC Trust is held through Imperial Capital REIT, its
qualified Real Estate Investment Trust subsidiary. ITLA Capital paid $51.1
million to acquire 100 percent of the equity and certain CMO's of the ICCMAC
Trust. As of December 31, 2000, and for the period from March 28 to December 31,
2000 the financial condition and results of operations of the ICCMAC Trust have
been included in the accompanying consolidated financial statements of ITLA
Capital.
Real estate loans held in trust for collateralized mortgage obligations
consisted of the following at December 31, 2000:
BALANCE
------------
(IN THOUSANDS)
Real estate loans $ 209,297
Unamortized premium 7,003
---------
216,300
Allowance for loan losses (4,578)
---------
$ 211,722
=========
The following is the activity in the allowance for loan losses relating
to real estate loans held in the ICCMAC Trust from the date of acquisition to
December 31, 2000:
BALANCE
------------
(IN THOUSANDS)
Balance at beginning of year $ --
Additions due to purchases 4,614
Charge-offs (36)
-------
Balance at end of year $ 4,578
=======
At December 31, 2000, our recorded investment in impaired loans of the
ICCMAC Trust was $740,000. There was no valuation allowance required on these
loans.
The average recorded investment in impaired real estate loans of the
ICCMAC Trust from the date of acquisition through December 31, 2000 was
$946,000. There was no interest income recognized on these impaired loans for
the year ended December 31, 2000.
55
56
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 4--ACQUISITION OF THE ICCMAC MULTIFAMILY AND COMMERCIAL TRUST 1999-1
(Continued)
The following is a summary of the outstanding CMO's of the ICCMAC Trust
as of December 31, 2000:
ESTIMATED
INTEREST RATE WEIGHTED
RECORDED MARGIN OVER 6 AVERAGE
CLASS AMOUNT MONTH LIBOR LIFE RATING
-------- ------------ ------------- --------- ------
(IN THOUSANDS) (IN YEARS)
A-1 $ 18,540 0.28% 0.2 AAA
A-2 94,831 0.42% 1.1 AAA
S 5,400 zero coupon 3.2 AAA
A-3 17,447 0.60% 2.4 AAA
B 11,631 0.88% 2.8 AA
C 14,539 1.55% 3.3 A
--------
162,388
Discount (536)
--------
$161,852
========
The interest rate on the variable rate CMO's adjusts monthly and the
repayment of the bonds is based on the cash flows of the underlying loan
portfolio.
NOTE 5--OTHER REAL ESTATE OWNED
Other real estate owned was stated as follows:
DECEMBER 31
---------------------
2000 1999
------- -------
(IN THOUSANDS)
Real estate owned held for sale $ 2,377 $ 1,248
Less valuation allowance (127) (207)
------- -------
Other real estate owned, net $ 2,250 $ 1,041
======= =======
56
57
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 5--OTHER REAL ESTATE OWNED (Continued)
The activity in the allowance for other real estate owned was as follows:
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year $ 207 $ 221 $ 732
Provision for estimated losses on other real estate owned 167 195 608
Charge-offs upon sale of other real estate owned (247) (209) (1,119)
------- ------- -------
Balance at end of year $ 127 $ 207 $ 221
======= ======= =======
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization and consist of the following:
DECEMBER 31
---------------------
2000 1999
------- -------
(IN THOUSANDS)
Furniture, fixtures and equipment $ 3,706 $ 5,171
Leasehold improvements 4,487 3,918
Automobiles 265 282
------- -------
8,458 9,371
Accumulated depreciation and amortization (5,768) (6,118)
------- -------
$ 2,690 $ 3,253
======= =======
Depreciation and amortization expense on premises and equipment for the
years ended December 31, 2000, 1999 and 1998 was $796,000, $987,000 and
$903,000, respectively.
57
58
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 7--DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
DECEMBER 31
--------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Money market and passbook accounts $ 102,868 $ 126,529
Time certificates under $100,000 572,851 522,227
Time certificates $100,000 and over 339,980 264,857
---------- ----------
$1,015,699 $ 913,613
========== ==========
Money market and passbook accounts have no contractual maturity and pay
interest at rates ranging from 1.00% to 8.16% 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 2.46% to 8.77% per annum.
There were no brokered deposits at December 31, 2000. Interest expense on
time certificates $100,000 and over for the years ended December 31, 2000, 1999
and 1998 amounted to approximately $17.4 million, $12.9 million and $11.2
million, respectively.
The Bank is a member of the FDIC and its deposits are insured up to
$100,000 each per insured depositor.
As of December 31, 2000, the contractual maturities of time certificate
accounts were as follows:
YEAR OF
MATURITY AMOUNT
-------- ------------
(IN THOUSANDS)
2001 $ 837,560
2002 68,758
2003 5,419
2004 1,094
---------
$ 912,831
=========
58
59
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 8--LINES OF CREDIT
As of December 31, 2000 and 1999, the Bank had uncommitted, unsecured
lines of credit with two banks renewable daily in the amount of $30.0 million.
There were no borrowings against these lines at December 31, 2000 and 1999.
NOTE 9--GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
In September 2000, the Company formed a wholly-owned trust subsidiary,
ITLA Capital Statutory Trust I ("Statutory Trust I") and sold $14.0 million of
10.60% cumulative trust preferred securities which are reflected on the
Consolidated Statement of Financial Condition as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Deferrable Interest Debentures
(the "Trust Preferred securities"). The Trust Preferred securities mature on
September 7, 2030 and pay dividends each March 7 and September 7 during the term
of this security. Statutory Trust I used the proceeds from the sale of the Trust
Preferred securities to purchase 10.60% junior subordinated deferrable interest
debentures issued by the Company. The sole assets of the Statutory Trust I are
$14.0 million of junior subordinated deferrable interest debentures, which
eliminate in consolidation and have the same maturities, dividend payment and
terms as the Trust Preferred securities. The obligations of the Company related
to the Statutory Trust I constitute a full and unconditional guarantee by the
Company of the Statutory Trust I issuer's obligations under the Trust Preferred
securities. We used the proceeds from the junior subordinated debentures for
general corporate purposes, including a $13.5 million capital contribution to
the Bank to support future growth. The dividends payable on the Trust Preferred
securities are reflected as minority interest in income of subsidiary in the
consolidated financial statements. From the date of sale through December 31,
2000, we recorded minority interest in income of subsidiary totaling $478,000.
The recorded balance of Trust Preferred securities was $13.5 million at December
31, 2000. The deferred issuance costs of the Trust Preferred Securities are
being amortized over a ten year period.
59
60
NOTE 10--FHLB ADVANCES
FHLB advances represent collateralized obligations with the FHLB of San
Francisco, and are summarized by contractual maturity as follows:
YEAR OF
MATURITY AMOUNT
-------- ------------
(IN THOUSANDS)
2001 $62,500
2002 5,000
2003 5,750
2004 6,000
-------
$79,250
=======
We have pledged real estate loans with a carrying value of $283.7
million, and cash equivalents and investment securities available for sale with
a carrying value of $46.3 million, for a total of $330.0 million of assets
pledged as collateral for this borrowing facility. The total borrowing capacity
available from the collateral that has been pledged is approximately $245.3
million, of which $79.3 million has been utilized as of December 31, 2000.
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:
DECEMBER 31
---------------------
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
Maximum month-end balance outstanding $79,250 $67,250
Weighted-average daily balance outstanding $30,366 $37,235
Average rates paid during the year 5.84% 5.39%
Average rates on balance at year-end 6.56% 5.61%
Balance at year-end $79,250 $67,250
60
61
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 11--NONRECURRING GENERAL AND ADMINISTRATIVE EXPENSES
Nonrecurring general and administrative expenses of $1.4 million were
recognized during the year ended December 31, 2000. The nonrecurring expenses
consist primarily of the write-off of fixed assets, leasehold improvements and
estimated costs related to sublease contracts on leased premises at market rates
that are lower than the contractual lease rate. These expenses were the result
of the consolidation of the Bank's headquarters with the Company's headquarters
in La Jolla, California, effective during the March 2000 quarter.
Activity in the allowance for restructuring charges during 2000 was as
follows:
DECEMBER 31, 2000
--------------------------------
ALLOWANCE CHARGES
PROVIDED INCURRED BALANCE
-------- -------- -------
(DOLLARS IN THOUSANDS)
Write-off of fixed assets,
leasehold improvements $ 847 $ (693) $ 154
Costs related to sublease
contract 553 (211) 342
------ ------ ------
Total $1,400 $ (904) $ 496
====== ====== ======
NOTE 12--BENEFIT PLANS
Salary Savings Plan. We have 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. We match
50% of each employee's salary deferral, up to a maximum 6% of the employee's
salary. Employees vest in employer contributions and the earnings thereon over a
five year period. Our matching contributions to the Savings Plan were $118,000,
$147,000 and $181,000 in 2000, 1999 and 1998, respectively.
Nonqualified Deferred Compensation Plans. We have deferred compensation
plans designed to provide additional retirement benefits for certain officers
and key employees who cannot take full advantage of the Savings Plan. There were
no costs associated with these deferred compensation plans in 2000 and 1999.
Costs associated with these deferred compensation plans, primarily interest
expense, amounted to $4,000 in 1998.
61
62
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 12--BENEFIT PLANS (Continued)
Long-Term Supplemental Executive Retirement Plan. We have 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 or earlier at the discretion of the
Compensation Committee of the Board of Directors, and once vested, may be
distributed to participants upon a change in control or the participant's death,
disability, retirement date or date of termination of employment. During 1998,
we issued shares of common stock, representing the remaining number of unissued
shares authorized to be awarded under the RRP, to a Rabbi Trust managed by a
third-party financial institution. No shares were allocated during 2000. For
1999 and 1998, 58,017 and 29,393 shares, respectively, were then allocated to
designated SERP accounts for the future benefit of certain Company executives.
(The 1999 amount consisted of 28,624 shares allocated for 1999 and a retroactive
allocation of 29,393 shares for 1997.) We recognized $264,000 and $528,000 of
compensation expense from the SERP/RRP in 2000 and 1999 respectively.
Stock Plans. We 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, 2000, we
granted an aggregate of 1,152,000 options under the Stock Plan, of which 86,749
have been exercised and 309,001 have been forfeited. The exercise price per
share of the options so granted ranges from $10 to $18 per share and will
generally vest 33-1/3% per year, beginning with the first anniversary of the
date of each individual grant.
62
63
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 12--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:
WEIGHTED-AVERAGE
NUMBER OF OPTIONS EXERCISE PRICES
---------------------- ------------------
2000 1999 2000 1999
------- ------- ------ ------
Options outstanding at the beginning of the year 789,500 750,000 $13.26 $13.05
Options granted during the year 119,000 100,000 $12.20 $14.00
Options exercised during the year (3,833) (51,000) $10.35 $10.64
Options forfeited during the year (148,417) (9,500) $15.07 $17.63
------- -------
Options outstanding at the end of the year 756,250 789,500 $12.75 $13.26
======= =======
Options exercisable at the end of the year 569,333 534,500 $12.33 $11.99
======= =======
The fair value of each option grant was estimated on the date of grant
using an option pricing model with the following weighted-average assumptions
for option grants:
WEIGHTED-AVERAGE ASSUMPTIONS FOR OPTION GRANTS
-------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Dividend Yield 0.0% 0.0% 0.0%
Expected Volatility 31.2% 31.9% 28.8%
Risk-Free Interest Rates 5.89% - 6.79% 4.72% 5.58%
Expected Lives Seven Years Seven Years Seven Years
Weighted-Average Fair Value $5.36 - $6.84 $6.18 $7.93
We account 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 2000, 1999 or 1998. 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 $17.8 million, $15.7 million
and $14.2 million and Diluted Earnings Per Share would have been $2.46, $2.14
and $1.82 for the years ended December 31, 2000, 1999 and 1998, respectively.
63
64
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities are as
follows:
DECEMBER 31
----------------------
2000 1999
------- -------
(IN THOUSANDS)
Components of the deferred tax asset:
Allowance for loan losses $ 8,903 $ 8,818
Accrued expenses 2,655 2,658
State income taxes 1,198 1,059
Premiums on purchased loans 606 --
Other real estate owned 144 278
Permanent impairment on equity security 156 186
Unrealized loss on investment securities available for sale -- 123
------- -------
Total deferred tax assets 13,662 13,122
------- -------
Components of the deferred tax liability:
Deferred loan origination costs 1,116 1,645
FHLB stock dividends 1,195 1,234
Unrealized gain on investment securities available for sale 16 719
Other 33 123
------- -------
Total deferred tax liabilities 2,360 3,721
------- -------
Net deferred tax asset $11,302 $ 9,401
======= =======
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, we have not established a valuation allowance on the deferred tax
asset.
64
65
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 13--INCOME TAXES (Continued)
A summary of the provision for income taxes follows:
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Current:
Federal $ 9,912 $ 11,362 $ 9,347
State 3,289 3,759 2,898
-------- -------- --------
13,201 15,121 12,245
-------- -------- --------
Deferred:
Federal (804) (2,841) (1,630)
State (517) (1,010) (311)
-------- -------- --------
(1,321) (3,851) (1,941)
-------- -------- --------
$ 11,880 $ 11,270 $ 10,304
======== ======== ========
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is as follows:
YEARS ENDED DECEMBER 31
----------------------------
2000 1999 1998
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 7.0% 7.0% 7.0%
State income tax credits and other benefits (2.4%) (1.0%) (1.0%)
---- ---- ----
Effective income tax rate 39.6% 41.0% 41.0%
==== ==== ====
The income tax (benefit) expense component of other comprehensive income
was $(580,000), $595,000 and $(112,000) for the years ended December 31, 2000,
1999 and 1998, respectively.
65
66
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
We are a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of our customers.
These financial instruments consist of commitments to extend credit. These
instruments may involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement we
have in particular classes of financial instruments.
We have exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit. This
exposure is represented by the contractual amount of those instruments as the
Company uses the same lending policies for these instruments as it does for the
loan portfolio. We had outstanding unfunded loan commitments, including the
unfunded portion of construction loans, of approximately $53.1 million and $71.7
million at December 31, 2000 and 1999, respectively.
NOTE 15--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
We lease office facilities under noncancelable operating leases.
Estimated future minimum lease payments required under leases with initial or
remaining noncancelable terms in excess of one year at December 31, 2000 are as
follows:
(IN THOUSANDS)
2001 $ 1,603
2002 1,509
2003 1,384
2004 1,150
2005 1,101
Thereafter 719
-------
$ 7,466
=======
Certain leases contain rental escalation clauses based on increases in
the Consumer Price Index, and renewal options of up to ten years which may be
exercised by the Company. We incurred rent expense of $1.6 million, $1.7 million
and $1.8 million in 2000, 1999 and 1998, respectively.
66
67
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 15--COMMITMENTS AND CONTINGENCIES (Continued)
CONTINGENCIES
We are subject to various pending legal actions which arise in the normal
course of business. We maintain reserves for losses from legal actions which are
both probable and estimable. Although the amount of the ultimate exposure, if
any, cannot be determined at this time, in management's opinion, based upon
advice of counsel, the disposition of claims currently pending will not have a
material adverse effect on our financial condition or results of operations.
NOTE 16--REGULATORY REQUIREMENTS
The Bank is subject to supervision and regulation by the FDIC and the
Department of Financial Institutions ("DFI") of the State of California under
the provisions of the California Banking Law. These provisions authorize the
Bank's issuance of certificates of deposit, place limits on the size of loans
the Bank can make, and specify the maintenance of minimum liquidity levels.
The Bank is also subject to various capital requirements administered by
the FDIC. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary action by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements and ultimately the consolidated financial statements of the Company.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the following table) of Total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average total assets ("Leverage Ratio"). Management believes,
as of December 31, 2000, that the Bank meets all applicable capital adequacy
requirements.
As of December 31, 2000, the most recent notification from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum Total Risk-Based, Tier 1 Risk-Based and Tier 1 Leverage Ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's category.
67
68
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 16--REGULATORY REQUIREMENTS (Continued)
The Bank's actual regulatory capital amounts and ratios are presented in
the following table:
MINIMUM CAPITAL REQUIRED
REQUIREMENT FOR TO MAINTAIN
CAPITAL ADEQUACY "WELL CAPITALIZED"
ACTUAL PURPOSES DESIGNATION
------------------ ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 2000
-----------------------
Total capital
(to risk-weighted assets) $124,025 11.6% $ 85,403 8.0% $106,754 10.0%
Tier 1 capital
(to risk-weighted assets) $110,581 10.4% $ 42,702 4.0% $ 64,052 6.0%
Tier 1 capital
(to average total assets) $110,581 9.1% $ 48,504 4.0% $ 60,630 5.0%
AS OF DECEMBER 31, 1999
-----------------------
Total capital
(to risk-weighted assets) $110,531 11.4% $ 77,770 8.0% $ 97,213 10.0%
Tier 1 capital
(to risk-weighted assets) $ 98,299 10.1% $ 38,885 4.0% $ 58,328 6.0%
Tier 1 capital
(to average total assets) $ 98,299 9.0% $ 43,485 4.0% $ 54,356 5.0%
68
69
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 17--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.
WEIGHTED-
AVERAGE PER
NET SHARES SHARE
INCOME OUTSTANDING AMOUNT
------- ----------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000
----------------------------
Basic Earnings Per Share $18,139 7,046 $2.57
Dilutive Effect of Stock Options -- 192 (0.06)
------- ----- -----
Diluted Earnings Per Share $18,139 7,238 $2.51
======= ===== =====
YEAR ENDED DECEMBER 31, 1999
----------------------------
Basic Earnings Per Share $16,205 7,182 $2.26
Dilutive Effect of Stock Options -- 157 (0.05)
------- ----- -----
Diluted Earnings Per Share $16,205 7,339 $2.21
======= ===== =====
YEAR ENDED DECEMBER 31, 1998
----------------------------
Basic Earnings Per Share $14,823 7,603 $1.95
Dilutive Effect of Stock Options -- 232 (0.06)
------- ----- -----
Diluted Earnings Per Share $14,823 7,835 $1.89
======= ===== =====
69
70
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 18--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.
We use the following methods and assumptions to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
value:
Cash and Cash Equivalents - The carrying values reported in the
balance sheet approximate fair values due to the short-term nature of the
assets.
Investment Securities - Fair values are based on bid prices and
quotations published and/or received from established securities dealers.
Stock in Federal Home Loan Bank - The fair value is based on bid
prices quoted from the FHLB.
Real estate loans - The fair value is estimated using the present
value of future cash flows, discounted using the current rate at which
similar loans would be made to borrowers with similar credit ratings and
for the same maturities and giving consideration to estimated prepayment
risk and credit risk.
Real Estate Loans Held in Trust for Collateralized Mortgage
Obligations - The fair value is estimated using the present value of
future cash flows, discounted using the current rate at which similar
loans would be made to borrowers with similar credit ratings and for the
same maturities and giving consideration to estimated prepayment risk and
credit risk.
Accrued Interest Receivable -- The carrying values reported in the
balance sheet approximate the fair values due to the short-term nature of
the asset.
Deposit Accounts - The fair value of 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
71
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 18--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of our financial
instruments are as follows:
DECEMBER 31
----------------------------------------------------------
2000 1999
-------------------------- --------------------------
COST OR COST OR
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents $ 70,950 $ 70,950 $ 72,242 $ 72,242
Investment securities 46,325 46,325 58,046 58,046
Stock in Federal Home Loan Bank 3,963 3,963 8,894 8,894
Real estate loans, net 1,045,927 1,057,537 951,480 974,024
Real estate loans held in trust, net 211,722 206,271 -- --
Accrued interest receivable $ 11,821 $ 11,821 $ 7,383 $ 7,383
Financial liabilities:
Deposit accounts $1,015,699 $1,002,831 $ 913,613 $ 911,531
Federal Home Loan Bank advances 79,250 79,292 67,250 66,598
Collateralized mortgage obligations 161,852 161,963 -- --
Guaranteed preferred beneficial interests
in company's junior subordinated deferrable
interest debentures 13,519 13,526 -- --
71
72
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 19---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 we used to identify our operating segments were the
specific product and business lines of the various operating segments of the
Company. Our operating segments are organized separately by product and service
offered. As of December 31, 2000, we have identified one operating segment that
meets the criteria of being a reportable segment in accordance with the
provisions of SFAS No. 131. This reportable segment is the origination and
purchase of commercial and residential real estate loans, which by its legal
form, is identified as operations of the Bank and Imperial Capital REIT. This
segment derives the majority of its revenue by originating and purchasing 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 our 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 our consolidated
balance sheet and statement of income. Accounting allocations are made in the
same manner for all operating segments.
72
73
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 19--BUSINESS SEGMENT INFORMATION (Continued)
Required reported segment information for 2000, 1999 and 1998 is detailed
below:
ORIGINATION
AND PURCHASE
OF REAL ESTATE ALL
LOANS OTHER ELIMINATIONS CONSOLIDATED
-------------- ---------- ------------ ------------
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 2000:
Revenues from external customers $ 126,499 $ 1,468 $ (1,861) $ 126,106
Total interest income 124,168 1,468 (1,861) 123,775
Total interest expense 70,029 464 (1,851) 68,642
Depreciation and amortization expense 425 371 -- 796
Provision (benefit) for income taxes 10,492 1,388 -- 11,880
Capital expenditures 387 474 -- 861
Deferred income taxes 8,481 2,821 -- 11,302
Total assets 1,426,298 21,079 (32,234) 1,415,143
Income before provision for income taxes $ 29,757 $ 740 $ -- $ 30,497
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1999:
Revenues from external customers $ 99,888 $ 2,226 $ -- $ 102,114
Total interest income 98,889 2,324 -- 101,213
Total interest expense 48,402 58 -- 48,460
Depreciation and amortization expense 690 297 -- 987
Provision (benefit) for income taxes 11,643 (373) -- 11,270
Capital expenditures 497 360 -- 857
Deferred income taxes 8,050 1,351 -- 9,401
Total assets 1,087,162 28,661 -- 1,115,823
Income (loss) before provision (benefit) for income taxes $ 28,392 $ (917) $ -- $ 27,475
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998:
Revenues from external customers $ 100,312 $ 3,800 $ -- $ 104,112
Total interest income 99,419 2,246 -- 101,665
Total interest expense 51,345 42 -- 51,387
Depreciation and amortization expense 900 656 -- 1,556
Provision (benefit) for income taxes 11,927 (1,623) -- 10,304
Capital expenditures 665 562 -- 1,227
Deferred income taxes 5,775 495 -- 6,270
Total assets 1,010,273 22,374 -- 1,032,647
Income (loss) before provision (benefit) for income taxes $ 29,098 $ (3,971) $ -- $ 25,127
73
74
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 410 $ 8,217
Investment securities available for sale 6 16,235
Investments in wholly-owned subsidiaries:
Imperial Capital Bank 110,811 98,338
Imperial Capital Real Estate Investment Trust 33,954 --
ITLA Capital Statutory Trust 1 416 --
Other subsidiaries 609 1,567
Other assets 5,195 2,571
-------- --------
Total assets $151,401 $126,928
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Junior subordinated debentures $ 14,000 $ --
Liabilities 3,847 3,233
Shareholders' equity 133,554 123,695
-------- --------
Total liabilities and shareholders' equity $151,401 $126,928
======== ========
74
75
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Interest income $ 962 $ 2,263 $ 554
Interest expense 464 -- --
-------- -------- --------
Net interest income 498 2,263 554
Noninterest income:
Gain on sale of investment
securities available for sale 1,412 -- --
Other (6) -- --
-------- -------- --------
Total noninterest income 1,406 -- --
Noninterest expense:
General and administrative expense 1,517 2,832 1,309
-------- -------- --------
Income before income tax benefit and equity in
net income of subsidiaries 387 (569) (755)
Income tax expense (benefit) 1,431 (225) (309)
-------- -------- --------
Loss before equity in net income of
subsidiaries (1,044) (344) (446)
Equity in net income of subsidiaries 19,183 16,549 15,269
-------- -------- --------
NET INCOME $ 18,139 $ 16,205 $ 14,823
======== ======== ========
75
76
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income $ 18,139 $ 16,205 $ 14,823
Adjustments to net income:
Equity in undistributed net income of subsidiaries (19,193) (16,549) (15,269)
Permanent impairment on investment in equity securities -- 375 --
Gain on sale of investment securities (1,412) -- --
Increase in other assets (2,200) (1,010) (1,429)
Increase in liabilities 1,091 910 234
-------- -------- --------
Net cash used in operating activities (3,575) (69) (1,641)
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sale of investment securities available for sale 16,176 -- --
Purchases of investment securities available for sale -- (14,776) (375)
Cash paid to acquire ICCMAC Trust (33,497) -- --
Capital contribution to Imperial Capital Bank, net (13,475) (25) --
Cash paid for common equity of Trust Preferred I (433) -- --
Dividends received from Imperial Capital Bank 17,300 6,000 27,000
Dividends received from ITLA Management Company 1,000 -- --
Dividends received from Imperial Capital Real Estate Investment Trust 2,775 -- --
Capital contribution to ITLA Commercial Investment Corporation -- -- (20,025)
Capital distribution from ITLA Commercial Investment Corporation -- 25 19,500
Other, net 7 9 (17)
-------- -------- --------
Net cash (used in) provided by investing activities (10,147) (8,767) 26,083
-------- -------- --------
Cash Flows From Financing Activities:
Sale of subordinated debentures to Trust Preferred I, net 13,580 -- --
Proceeds from exercise of employee stock options 36 542 109
Cash paid to acquire treasury stock (7,701) (515) (8,229)
-------- -------- --------
Net cash provided by (used in) financing activities 5,915 27 (8,120)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (7,807) (8,809) 16,322
Cash and cash equivalents at beginning of period 8,217 17,026 704
-------- -------- --------
Cash and cash equivalents at end of period $ 410 $ 8,217 $ 17,026
======== ======== ========
76
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers of the Registrant are identified below.
NAME AGE POSITION
--------------------- ----- -----------------------------------------------------------
George W. Haligowski 46 Chairman of the Board, President and Chief Executive
Officer of ITLA Capital and the Bank
Norval L. Bruce 59 Vice Chairman of the Board and Chief Credit Officer of ITLA
Capital and the Bank
Timothy M. Doyle 44 Managing Director and Chief Financial Officer of ITLA
Capital and the Bank
Don Nickbarg 48 Managing Director-- Asset Acquisition and New Business
Development of ITLA Capital and the Bank
Mark E. Jaques 49 Managing Director-- Chief Administrative Officer of ITLA
Capital and the Bank
Steven C. Romelt 51 Senior Vice President and Chief Lending Officer of ITLA
Capital and the Bank
Scott A. Wallace 38 Deputy Managing Director-- Chief Accounting Officer of ITLA
Capital and the Bank
Anthony A. Rusnak 37 First Vice President, General Counsel and Corporate
Secretary of ITLA Capital and the Bank
George W. Haligowski has served as ITLA Capital's Chairman of the Board,
President and Chief Executive Officer since inception. He has also served as the
Bank's Chairman of the Board and Chief Executive Officer since 1992, and was the
Bank's President from 1992 to October 1997. In 2000 he was reinstated as the
President of the Bank. 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).
Norval L. Bruce has served as the Vice Chairman and Chief Credit Officer
for ITLA Capital and the Bank since June of 1999. He was previously President
and Chief Operating Officer of the Bank from October 1997 to June 1999, and
previously was the Executive Vice President and Chief Credit Officer of the Bank
from 1990 to October 1997. Mr. Bruce is also a director of the Bank. 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
77
78
to 1988 in a variety of positions including management positions in which he was
responsible for both loan origination and credit quality.
Timothy M. Doyle has served as Managing Director and Chief Financial
Officer of ITLA Capital and the Bank since May 2000. He was previously Managing
Director and Chief Administrative Officer of ITLA Capital and the Bank since
1996. Before joining the Bank, he was the Controller and Director of Operations
at Northeastern Plastics from 1995 to 1996; Assistant Controller of Alpha Wire
Corporation from 1992 to 1994; and Vice President and Chief Financial Officer of
Halivest International, Ltd. from 1989 to 1991. From 1982 to 1988, he was the
Corporate Controller of the Shepaug Corporation.
Don Nickbarg is Managing Director -- Asset Acquisition and New Business
Development of ITLA Capital and the Bank. He has served in several other
capacities, including Managing Director and Chief Administrative Officer as well
as Treasurer. Prior to joining ITLA Capital in 1998, he was a consultant with
Centennial International LLC from 1996 to 1998; Chief Financial Officer of AIOC
Corporation from 1994 to 1996; Vice President and Team Leader at The Chase
Manhattan Bank from 1991 to 1994; Vice President and Treasurer of Drexel Burnham
Lambert Holdings, Ltd. from 1986 to 1990; Vice President with The Hong Kong and
Shanghi Banking Company from 1980 to 1986; and Assistant Treasurer with the
Swiss Bank Corporation from 1976 to 1980.
Mark E. Jaques is Managing Director and Chief Administrative Officer of
ITLA Capital and the Bank. He has served in several other capacities, including
Director of both Loan Operations and Residential Real Estate Loan Acquisitions.
Prior to joining the Bank in 1998 he was President and CEO of Secure Savings
Bank from 1993 to 1997; Senior Vice President and Chief Financial Officer of the
Bank of Hemet from 1992 to 1993; President and CEO of Inland Savings and Loan
from 1991 to 1992; President and CEO of Westwood Savings from 1987 to 1990; and
Vice President, CFO and Treasurer of Central Savings from 1985 to 1987. From
1976 to 1987, Mr. Jaques held various positions with Far West Federal.
Steven C. Romelt has served as Senior Vice President and Chief Lending
Officer of the Bank since January 1997. He was Director of Bank Lending for the
Bank from November 1996 to January 1997. Previously, he was Vice President and
Regional Manager for Southern Pacific Bank from March 1995 to November 1996. He
also held various senior level lending positions for the Bank from December 1990
to March 1995 and held various lending positions with a number of other
financial institutions from 1979 to December 1990.
Scott A. Wallace is the Deputy Managing Director -- Chief Accounting
Officer of ITLA Capital and the Bank. Prior to joining the Bank in September
1996, he was Vice President -- Finance of Westfield Corporation, Inc. in 1996
and was Vice President -- Controller of First Los Angeles Bank in 1995. From
1984 to 1994, he was a senior manager with Kenneth Leventhal & Company.
Anthony A. Rusnak has served as ITLA Capital and the Bank's First Vice
President, General Counsel and Corporate Secretary since November 1997. Prior
to joining us, 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 corporate in-house
counsel.
The directors of the Registrant, excluding Mr. Haligowski and Mr. Bruce,
are identified below.
Jeffrey L. Lipscomb, age 46, is an Investment Advisory Associate with AXA
Advisors and formerly was a Registered Principal and Assistant Manager of the
San Diego office of Equitable Financial Companies since 1986, handling corporate
group benefits and personal financial planning, and also was with Kidder Peabody
from 1983 to 1986.
Sandor X. Mayuga, age 52, is a member of the California State Bar 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
78
79
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 66, is a licensed architect with international
experience in real estate development and urban planning. Since 1993, Mr. Oribe
has served as an advisor to Kajima Development Resources, Inc. From 1979 to
1993, Mr. Oribe was Executive Vice President, Chief Operating Officer and a
Director of Kajima Development Corporation, a firm engaged in development and
construction of single-family and multi-family housing, office buildings, retail
space and land development. Mr. Oribe previously held other positions with
affiliates of Kajima Corporation of Japan from 1973 to 1979 and was a practicing
architect from 1962 to 1973.
Robert R. Reed, age 64, 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, 2000, we had 124 employees. Management believes that
its relations with employees are satisfactory. We are 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 our equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of ITLA Capital. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish ITLA Capital with
copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended December 31, 2000, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with. During fiscal 1999, Director Jeffrey L.
Lipscomb inadvertently failed to timely report one transaction on a Form 4.
79
80
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer and the named executive officers of ITLA Capital with salary and bonus
greater than $100,000 for the year ended December 31, 2000.
RESTRICTED ALL
STOCK OTHER
SALARY BONUS OPTIONS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) (1) ($) (9) ($)
--------------------------- ---- --------- --------- ------- --------- ------------
George W. Haligowski 2000 $ 396,249 $ 582,125 -- $ -- $ 76,255 (3)
Chairman of the Board, President 1999 $ 350,013 $ 402,500 (2) 10,000 $ 114,327 $ 63,123 (3)
and Chief Executive Officer 1998 $ 345,765 $ 344,144 45,000 $ 111,717 $ 62,751 (3)
Norval L. Bruce 2000 $ 192,064(11) $ 110,825 (11) 5,000 $ -- $ 14,399 (4)
Vice Chairman of the Board, Chief 1999 $ 181,103 $ 87,500 15,000 $ 35,964 $ 8,991 (4)
Credit Officer 1998 $ 185,832 $ 71,251 30,000 $ 33,849 $ 7,400 (4)
Michael A. Sicuro (10) 2000 $ 82,281 $ 107,711 5,000 $ -- $ 5,913 (5)
Former Managing Director and 1999 $ 174,894 $ 84,500 20,000 $ 34,641 $ 10,446 (5)
Chief Financial Officer 1998 $ 167,979 $ 78,375 25,000 $ 32,697 $ 6,036 (5)
Steven C. Romelt 2000 $ 153,697 $ 72,660 (12) -- $ -- $ 14,805 (6)
Senior Vice President and Chief 1999 $ 144,975 $ 84,000 10,000 $ 28,764 $ 14,437 (6)
Lending Officer of Imperial 1998 $ 138,750 $ 75,000 15,000 $ 27,081 $ 14,805 (6)
Timothy M. Doyle 2000 $ 150,499 $ 65,913 5,000 $ -- $ 11,519 (7)
Managing Director and Chief 1999 $ 131,429 $ 63,500 15,000 $ 26,100 $ 11,169 (7)
Financial Officer 1998 $ 124,917 $ 51,000 15,000 $ 24,570 $ 15,000 (7)
Scott A. Wallace 2000 $ 119,604 $ 36,300 2,000 $ -- $ 7,253 (8)
Deputy Managing Director 1999 $ 107,400 $ 32,667 5,000 $ -- $ 10,942 (8)
and Chief Accounting Officer 1998 $ 98,000 $ 29,042 4,000 $ -- $ 10,800 (8)
----------
(1) Options were granted on various dates and vest one-third on each of the
three subsequent anniversary dates of issuance.
(2) $329,513 of the 1999 bonus was deferred at the election of the named
executive officer under ITLA Capital's Nonqualified Deferred Compensation
plan.
(3) Consists of (a) $23,400 in auto related benefits, (b) $30,000 in
supplemental housing payments, (c) $7,760 in life insurance premiums, (d)
$5,100 in employer contributions to ITLA Capital's 401(k) plan and (e)
$9,995 in preferential interest on employee savings accounts in
2000. The respective amounts were $4,685, $30,000, $7,553, $4,800 and
$16,085 in 1999 and $5,114, $30,000, $7,290, $4,800 and $15,547 in 1998.
(4) Consists of (a) $2,182 in auto related benefits, (b) $1,724 in life
insurance premiums, (c) $5,100 in employer contributions to ITLA
Capital's 401(k) plan and (d) $5,393 in preferential interest on employee
savings accounts and (e) $45 of reimbursed gym fees in 1999. The
respective amounts were $2,139, $2,017, $4,800 and $35 in 1999 and
$2,139, $136, $4,800 and $325 in 1999.
(5) Consists of (a) $691 of auto related benefits, (b) $5,100 in employer
contributions to ITLA Capital's 401(k) plan and (c) $122 of life
insurance benefits in 2000. The respective amounts were $1,236, $4,800
and $4,410 in 1999 and $1,236, $4,800 and none in 1998.
(6) Consists of (a) $9,000 in auto related benefits, (b) $705 in life
insurance premiums, (c) $5,100 in employer contributions to ITLA
Capital's 401(k) plan and (d) $5,873 in preferential interest on employee
savings accounts in 2000. The respective amounts were $9,000, $463 in
1999 and $9,000, none, $4,800 and $1,005 in 1998.
(7) Consists of (a) $1,476 in auto related benefits, (b) $5,100 in employer
contributions to ITLA Capital's 401(k) plan and (c) $4,943 in life
insurance benefits in 2000. The respective amounts were $1,476, $4,800,
and $4,893 in 1999 and $10,200, $4,800 and none in 1998.
(8) Consists of (a) $1,950 in auto related benefits, (b) $5,100 in employer
contributions to ITLA Capital's 401(K) plan and (c) $203 in life
insurance benefits. The respective amounts were $6,000, $4,800 and $142
in 1999 and $6,000, $4,800 and none in 1998.
(9) Includes ITLA Capital stock granted and allocated to the Long-Term
Supplemental Executive Retirement Plan under the Recognition and
Retention Plan previously approved by the shareholders.
(10) Mr. Sicuro resigned from the company effective May 5, 2000.
(11) $46,124 of the 2000 salary and $85,636 of the 2000 bonus was deferred at
the election of the named executive officer under ITLA Capital's
Nonqualified Deferred Compensation Plan.
(12) $61,770 of the 2000 bonus was deferred at the election of the named
executive officer under ITLA Capitals Nonqualified Deferred Compensation
Plan.
80
81
AGREEMENTS WITH MR. HALIGOWSKI
We have entered into an employment agreement with Mr. Haligowski. The
employment agreement provides for an initial employment term of five years, with
the agreement automatically annually extending for an additional one-year period
each year unless either party provides the other with at least 90 days notice of
the nonextension or termination. The employment agreement provides that we may
terminate Mr. Haligowski "for cause," as defined in the employment agreement. In
the event Mr. Haligowski is involuntarily terminated as defined in the
employment agreement, including following a change of control as defined in the
employment agreement, Mr. Haligowski will be entitled to receive during the
remaining term of the agreement his base salary calculated at the highest annual
rate during the three years prior to his involuntary termination and the average
amount of cash bonus and incentive compensation paid for the two years prior to
his involuntary termination, if any, the continuation of all employment related
benefits for the 60 months following the date of termination and the immediate
vesting of any stock options and restricted stock awards previously granted and
outstanding. As a result of a change of control, Mr. Haligowski will also be
retained as a consultant for an eighteen month period following the change in
control at a monthly consulting fee equal to 75% of his base salary and an
additional contribution to his account in our Supplemental Executive Retirement
Plan equal to 3.95 times his base salary. In addition, the terms of the
employment agreement shall be extended 60 months and stock options and
restricted stock awards previously granted and outstanding, salary continuation
plans, equity club memberships and other fringe benefits shall immediately vest
following a change of control. The annual base salary for Mr. Haligowski under
the employment agreement is currently $395,000 (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 and salary continuation plans, and other fringe benefits,
including a supplemental housing payment of not less than $2,500 per month, an
automobile allowance of not less than $1,950 per month, and life insurance
coverage in an amount not less than four times Mr. Haligowski's annual salary.
In addition we shall maintain health, dental and life insurance benefits for the
60 months following an involuntary termination and transfer title to our owned
vehicle currently used by Mr. Haligowski. In March 2000, we adopted a Salary
Continuation Plan for the benefit of Mr. Haligowski. Under the terms of this
plan, Mr. Haligowski will be entitled to receive monthly payments, based on 75%
of his average monthly base salary for the three years preceding the year in
which the plan benefits become payable, for a 15 year period. The benefits under
the plan become payable on the earlier of Mr. Haligowski's retirement upon
reaching age 65, or his death, disability, or involuntary termination (other
than a termination for cause, as defined in the agreement). If Mr. Haligowski
voluntarily terminates his employment prior to reaching age 65, the benefit
payable to him under the plan will be prorated based on the ratio of the actual
period that he worked while the plan is in effect to the scheduled period of
time that he would have worked if he had continued to work until reaching age
65. If we undergo a change of control, the vesting of plan benefits accelerates
and become payable monthly over a ten year period, with an increased monthly
payment to reflect the shorter payment period.
CHANGE OF CONTROL AGREEMENTS
We have entered into change of control agreements with Messrs. Bruce,
Doyle, Romelt and Wallace. 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
involuntarily 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
up to 18 months and a pro rata portion of his bonus from the previous year. In
addition we will maintain health, dental and life insurance benefits for the
next 18 months for each officer and transfer title to our owned vehicle
currently used by the officer or, in the event the officer receives a monthly
cash car allowance in lieu of the use of our vehicle, we shall pay an amount
equal to 18 times the monthly allowance. Stock options and restricted stock
awards previously granted and outstanding will also immediately vest. The annual
base salary for Messrs. Bruce, Doyle, Romelt and Wallace is currently $201,000,
$167,000, $159,000 and $120,000, respectively.
Both Mr. Haligowski's employment agreement and the change of control
agreements also 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, we will 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 further provides that Mr. Haligowski
shall receive an allocation annually, subject to the performance terms of the
RRP, of 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 or
81
82
lesser award or no award in its discretion. For this purpose, each share of
common stock has been valued at $9.00 per share, the fair market value of the
common stock on the date of issuance to the SERP. A participant shall only have
a vested right to amounts allocated to his or her account if the participant is
employed on the last day of a three year vesting cycle or earlier at the
discretion of the compensation committee. Upon a change in control (as defined
in the SERP), the participant shall have an accelerated vesting of all shares
allocated to his or her account. The participant shall only have a right to
vested shares in his or her account upon normal retirement, death, disability or
termination. The last day of the next vesting cycle for shares allocated to the
SERP accounts for the benefit of the participants for the years 2000, 2001 and
2002 is December 31, 2002. For additional discussion, please see Benefits -
Recognition and Retention Plan.
BENEFITS
Insurance Plans. All full-time employees, after approximately three
months employment with us, 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 older 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 us to contribute
such amount to the 401(k) Plan on such employee's behalf. We currently make
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 we 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 us as reported annually on Form W-2, including contributions
to the 401(k) Plan by the employee, and contributions by us 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 us. The 401(k) Plan provides for
in-service hardship distributions of elective deferrals, as well as loans of a
portion of vested account balances. Distributions from the 40l(k) Plan are made
upon termination of service in a lump sum or in annual installments over a
period of years at the election of the participant with the right to take a lump
sum payment at any time during such period.
Nonqualified Deferred Compensation Plans. The ITLA Capital Corporation
Supplemental Salary Savings Plan (the "Supplemental Plan") and Nonqualified
Deferred Compensation Plan (the "Deferral Plan") are designed to provide
additional retirement benefits for certain officers and highly compensated
employees. The Supplemental Plan provides participating employees with an
opportunity to make up benefits not available under the 401(k) Plan due to any
application of limitations on compensation and maximum benefits under the 401(k)
Plan. Benefits under the Supplemental Plan are provided at the same time and in
the same form as benefits under the 401(k) Plan, and become taxable to the
participant at that point. The Deferral Plan allows a participant to defer
receipt of, and current taxation upon, designated portions of the participant's
direct cash compensation until a future date specified by the participant. Both
of these plans are unfunded plans, meaning that all benefits payable thereunder
are payable from our general assets, and funds available to pay benefits are
subject to the claims of our general creditors. We have established a Rabbi
Trust with a third party FDIC insured financial institution which holds the
contributions to the Supplemental Plan and Deferral Plan, for the purpose of
providing the benefits set forth under the terms of the plans. Participants only
have the rights of unsecured creditors with respect to the Rabbi Trust assets.
82
83
Stock Plans. We have 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 our employees are
eligible to receive options to purchase Common Stock. The purpose of the Stock
Option Plan is to enable us to attract, retain and motivate employees by
providing for or increasing their proprietary interests in ITLA Capital, and in
the case of nonemployee directors, to attract such directors and further align
their interests with our interests. Every one of our employees is eligible to be
considered for the grant of awards under the Stock Option Plan. The maximum
number of shares of Common Stock that may be issued pursuant to awards granted
under the Stock Option Plan is 1,000,000 shares of which a maximum of 550,000
shares may be awarded during the first year of the Stock Option Plan, with
annual awards thereafter limited to 100,000 additional shares during each of the
next five years of the Stock Option Plan (with the shares subject to the Stock
Option Plan and all grants thereunder being subject to adjustments to prevent
dilution).
The Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, except that grants to nonemployee directors are made by
the Board of Directors pursuant to a predetermined formula, as described below.
The Committee consists of two or more nonemployee directors of ITLA Capital, and
has full and final authority to select the employees to receive awards and to
grant such awards. Subject to provisions of the Stock Option Plan, the Committee
has a wide degree of flexibility in determining the terms and conditions of
awards and the number of shares to be issued pursuant thereto. The expenses of
administering the Stock Option Plan are borne by us.
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 our 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. We have granted an
aggregate of 1,152,000 options under the Stock Option Plan, of which 360,000
have been granted to Mr. Haligowski, 95,000, 60,000, 50,000 and 17,000 have been
granted to Messrs. Bruce, Doyle, Romelt and Wallace, respectively, 39,000 have
been granted to nonemployee directors, and 531,000 have been granted to other
employees, of which 86,749 have been exercised and 309,001 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. We have adopted the Recognition and
Retention Plan ("RRP"), the purpose of which is to promote our long-term
interests and our 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 our common stock may be made to employees as additional
long-term incentive compensation. Every one of our employees is eligible to be
considered for the grant of awards under the RRP. The maximum number of shares
of common stock which may be issued pursuant to the RRP is 300,000 shares over
the ten year life of the plan. No RRP shares may be granted in any fiscal year
in which the Bank fails to maintain an "adequately capitalized" designation
under the FDIC regulations and ITLA Capital fails to achieve a return on average
assets of at least 50 basis points for the fiscal year. The RRP was approved by
the shareholders and is administered by the Compensation Committee of the Board
of Directors which has a wide degree of flexibility, within the provisions of
the RRP, in determining the terms and conditions of awards and the number of
shares to be issued pursuant thereto. The RRP shares granted to date have been
allocated through the Supplemental Executive Retirement Plan as discussed above.
DIRECTORS COMPENSATION
Directors Fees. Each nonemployee director was paid a monthly fee during
2000 of $1,800 for serving on our Board of Directors. Each nonemployee director
is paid $500 for each Board or Committee meeting attended for service on such
committee.
83
84
Voluntary Retainer Stock and Deferred Compensation Plan. In 1996, we
adopted the Voluntary Retainer Stock and Deferred Compensation Plan for Outside
Directors (the "Outside Director Plan"). The Outside Director Plan provides for
the deferral of compensation earned by 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 our common stock, each nonemployee
director has credited to his Stock Unit Account an additional number of Stock
Units in an amount determined under the Outside Director Plan. Each nonemployee
director's Stock Unit Account will be settled by delivering to the nonemployee
director (or his beneficiary) the number of shares of our 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 2000, the Compensation Committee was comprised of Directors
Lipscomb and Oribe.
OPTION GRANTS FOR 2000
The following table sets forth certain information regarding stock
options granted pursuant to the Stock Option Plan for the named executive
officers in 2000. No stock appreciation rights have been granted pursuant to the
Stock Option Plan.
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 ($) ($)
-------------------- --------- --------- --------- ---------- -------- --------
George W. Haligowski -- -- -- -- -- --
Norval L. Bruce 5,000 4.1% $ 11.00 1/31/10 $ 34,589 $ 87,656
Michael A. Sicuro (1) 5,000 4.1% $ 11.00 1/31/10 $ 34,589 $ 87,646
Steven C. Romelt -- -- -- -- -- --
Timothy M. Doyle 5,000 4.1% $ 11.00 1/31/10 $ 34,589 $ 87,656
Scott A. Wallace 2,000 1.7% $ 11.00 1/31/10 $ 13,836 $ 35,062
----------
(1) Mr. Sicuro resigned from the company effective May 5, 2000, and the stock
options awarded to him in the current year were forfeited.
84
85
The following table sets forth certain information concerning the number
and value of stock options at December 31, 2000 held by the named executive
officers.
OPTION VALUES AT DECEMBER 31, 2000
-----------------------------------------------------------------------------------------------------------------------
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
-------------------- -------- -------- ----------- ------------- ----------- -------------
George W. Haligowski -- N/A 338,333 21,667 $2,743,957 $ 51,043
Norval L. Bruce -- N/A 70,000 25,000 $ 436,250 $103,125
Michael A. Sicuro (2) -- N/A -- -- $ -- $ --
Steven C. Romelt -- N/A 38,333 11,667 $ 143,957 $ 39,793
Timothy M. Doyle -- N/A 40,000 20,000 $ 151,876 $ 97,500
Scott A. Wallace -- N/A 10,334 6,666 $ 39,293 $ 34,832
----------
(1) The difference between the aggregate option exercise price and the
closing price of $19.125 of the underlying shares at December 31, 2000.
(2) Mr. Sicuro resigned from the company effective May 5, 2000.
85
86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 22, 2001, we had 6,596,413 shares of common stock outstanding.
The following table sets forth, as of March 22, 2001, certain information
as to those persons who were known by management to be beneficial owners of more
than five percent of our common stock outstanding.
SHARES PERCENT
BENEFICIALLY OF
BENEFICIAL OWNER OWNED CLASS
----------------------------------- ------------ -------
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078 689,000 (1) 10.45%
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663 614,900 (2) 9.32%
Dimensional Fund Advisors
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 559,800 (3) 8.49%
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109 534,700 (4) 8.11%
T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202 508,550 (5) 7.71%
Dalton, Greenier, Hartman, Mahar & Co.
565 Fifth Avenue, Suite 2101
New York, New York 10017 475,700 (6) 7.21%
Friedman, Billings, Ramsey Group, Inc.
1001 19th Street North
Arlington, Virginia 22209 434,370 (7) 6.58%
George W. Haligowski
888 Prospect Street, Suite 110
La Jolla, California 92037 423,065 (8) 6.08%
Deprince, Race & Zollo, Inc.
201 S. Orange Avenue, Suite 850
Orlando, Florida 32801 363,400 (9) 5.51%
(1) As reported by Franklin Resources, Inc. ("Franklin") on a Schedule 13G/A
filed on or about January 18, 2000 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended.
Franklin reported sole voting and dispositive powers as to 689,000
shares, and shared voting and dispositive powers as to none of the
689,000 shares covered by the report.
(2) As reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a Schedule
13G/A filed on or about January 18, 2000 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Thomson
reported sole voting power as
86
87
to 260,000 shares, sole dispositive power as to 614,900 shares, shared
voting and dispositive power as to none of the 614,900 shares covered by
the report.
(3) As reported by Dimensional Fund Advisors ("Dimensional") on a Schedule
13G/A dated on or about February 6, 2001 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
559,800 shares, and shared voting and dispositive powers as to none of
the 559,800 shares covered by the report.
(4) As reported by Wellington Management LLP ("Wellington") on a Schedule
13G/A filed on or about February 13, 2001 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 504,700 shares, and shared dispositive
power as to 534,700 of the 534,700 shares covered by the report.
(5) As reported by T. Rowe Price Associates, Inc. ("Price Associates") on a
schedule 13G dated on or about February 14, 2001 and filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Price Associates reported sole voting power as to
192,300 shares, sole dispositive power as to 508,550 shares, and shared
voting and dispositive power as to none of the 508,550 shares covered by
the report.
(6) As reported by Dalton, Grenier, Hartman, Mahar & Co. ("Dalton") on a
schedule 13G filed on or about February 5, 2001 with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended. Dalton reported sole voting and dispositive powers as to 475,700
of the shares covered by the report, and shared voting and dispositive
powers as to none of the 475,700 shares covered by the report.
(7) As reported by Friedman, Billings, Ramsey Group, Inc. ("FBR") on a
Schedule 13G/A filed on or about February 15, 2001 with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as
amended. FBR reported sole voting and dispositive powers as to 434,370
shares, and shared voting and dispositive powers as to none of the
434,370 shares covered by the report.
(8) Includes 356,666 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days of March 22,
2001.
(9) As reported by Deprince, Race & Zollo, Inc. ("Deprince") on a schedule
13G filed on or about February 9, 2001 with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended.
Deprince reported sole voting and dispositive powers as to 363,400 shares
and shared voting and dispositive powers as to none of the 363,400 shares
covered by the report.
87
88
The following table sets forth, as of March 22, 2001, 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.
SHARES
BENEFICIALLY PERCENT
OWNED OF
BENEFICIAL OWNER (1) CLASS
------------------------------------ ------------ -------
George W. Haligowski 423,065 6.08%
Norval L. Bruce 99,967 1.50%
Michael A. Sicuro (2) -- 0.00%
Steven C. Romelt 55,880 0.84%
Timothy M. Doyle 60,027 0.90%
Scott A. Wallace 14,001 0.21%
Sandor X. Mayuga 11,800 0.18%
Hirotaka Oribe 11,200 0.17%
Robert R. Reed 9,200 0.15%
Jeffrey L. Lipscomb 11,400 0.17%
All Directors and Executive Officers
as a Group (12 Persons) 727,541 10.07%
----------
(1) Includes shares held directly, as well as an aggregate of 629,668 shares
which are subject to immediately exercisable options and options
exercisable within 60 days of March 22, 2001, under ITLA Capital's Stock
Option Plan, vested shares held by the SERP, and shares held in
retirement accounts or by certain members of the named individual's
families or corporations for which an individual is an officer or
director or held by trust of which an individual is trustee or a
substantial beneficiary, over which shares the individual may be deemed
to have sole or shared voting and/or dispositive power. The above named
individuals held exercisable options and options exercisable within 60
days of March 22, 2001 as follows: Chairman Haligowski -- 356,666 shares;
Director Lipscomb -- 11,000 shares; Director Mayuga -- 11,000 shares;
Director Oribe -- 11,000 shares; Director Reed -- 10,000 shares; Norval
L. Bruce -- 86,667 shares; Timothy M. Doyle -- 51,667 shares; Steven C.
Romelt -- 46,666 shares and Scott A. Wallace -- 14,001 shares.
(2) Mr. Sicuro resigned from the company effective May 5, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year, we utilized the services of Tisdale & Nicholson.
Director Mayuga is a partner in that law firm. During 2000, this law firm
received $13,826 in legal fees from ITLA Capital, which was not in excess of 5%
of the firm's total revenues for the year.
During the year, we utilized the services of a public relations firm
which is owned by Director Lipscomb's spouse. During 2000, this public relations
firm received $37,289 in fees from ITLA Capital.
88
89
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
Our consolidated financial statements, and Report of Independent
Public Accountants thereon, are included in this Form 10-K at the
pages listed below:
PAGE
----
Report of Independent Public Accountants 42
Consolidated Balance Sheets as of December 31, 2000 and 1999 43
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998 44
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1998 to December 31, 2000 45
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 46
Notes to Consolidated Financial Statements 47
(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.
89
90
(a)(3) EXHIBITS:
REFERENCE TO
PRIOR FILING
REGULATION OR EXHIBIT
S-K NUMBER
EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
------------ ----------------------------------------------------- ------------
3.1 Certificate of Incorporation, as amended **
3.2 Bylaws, as amended **
4 Instruments Defining the Rights of Security Holders,
Including Indentures None
9 Voting Trust Agreement None
10.1 1995 Stock Option Plan for Nonemployee Directors *
10.2 1995 Employee Stock Incentive Plan *
10.3 Nonqualified Deferred Compensation Plan ***
10.4 Supplemental Salary Savings Plan *
10.5 Glendale Headquarters Lease Agreement *
10.6 Data Processing Agreement *
10.7 Employment Agreement with George W. Haligowski *
10.8 Change of Control Agreements ***
10.9 Recognition and Retention Plan **
10.10 Voluntary Retainer Stock and Deferred Compensation
Plan for Outside Directors **
10.11 Supplemental Executive Retirement Plan ***
10.12 ITLA Capital Corporation Rabbi Trust Agreement ***
10.13 Salary Continuation Plan 10.13
11 Statement Regarding Computation of Per Share Earnings None
12 Statement Regarding Computation of Ratios None
13 Annual Report to Security Holders Not required
18 Letter Regarding Change in Accounting Principles None
21 Subsidiaries of the Registrant 21
22 Published Report Regarding Matters Submitted to Vote
of Security Holders None
23 Consent of Independent Certified Public Accountants 23
24 Power of Attorney Not required
28 Information from Reports Furnished to State Insurance
Regulatory Authorities None
----------
* 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.
*** Previously filed on Registrants Form 10-K405 for the year
ended December 31, 1999.
(b) REPORTS ON FORM 8-K:
None
90
91
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: April 2, 2001 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George W. Haligowski Chairman of the Board, President and April 2, 2001
----------------------------- Chief Executive Officer
George W. Haligowski (Principal Executive Officer)
/s/ Timothy M. Doyle Managing Director and April 2, 2001
----------------------------- Chief Financial Officer
Timothy M. Doyle (Principal Financial and Accounting Officer)
/s/ Norval L. Bruce Director April 2, 2001
-----------------------------
Norval L. Bruce
/s/ Jeffrey L. Lipscomb Director April 2, 2001
-----------------------------
Jeffrey L. Lipscomb
/s/ Sandor X. Mayuga Director April 2, 2001
-----------------------------
Sandor X. Mayuga
/s/ Robert R. Reed Director April 2, 2001
-----------------------------
Robert R. Reed
/s/ Hirotaka Oribe Director April 2, 2001
-----------------------------
Hirotaka Oribe
91