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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.)
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ITLA CAPITAL CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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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.
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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.
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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
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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".
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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.
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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
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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.
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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