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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

     
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

OR

     
[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________________ To __________________

Commission File Number 0-26960

ITLA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

     
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
 
888 Prospect Street, Suite 110, La Jolla, California
(Address of Principal Executive Offices)
  95-4596322
(I.R.S. Employer Identification No.)
 

92037
(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. [   ]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [   ].

     As of March 21, 2003, there were issued and outstanding 6,061,575 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 June 28, 2002, was $180.5 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.)



 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Control and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 21
EXHIBIT 23.01
EXHIBIT 23.02
EXHIBIT 99


Table of Contents

ITLA CAPITAL CORPORATION

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

                 
            Page
           
PART I
Item 1   Business     3  
Item 2   Properties     14  
Item 3   Legal Proceedings     14  
Item 4   Submission of Matters to a Vote of Security Holders     14  
PART II
Item 5   Market for Registrant's Common Equity and Related Stockholder Matters     14  
Item 6   Selected Financial Data     16  
Item 7   Management's Discussion and Analysis of Financial Condition and Results of Operations     17  
Item 7.A   Quantitative and Qualitative Disclosures About Market Risk     34  
Item 8   Financial Statements and Supplementary Data     37  
Item 9   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure     75  
PART III
Item 10   Directors and Executive Officers of the Registrant     75  
Item 11   Executive Compensation     78  
Item 12   Security Ownership of Certain Beneficial Owners and Management     83  
Item 13   Certain Relationships and Related Transactions     85  
Item 14   Control and Procedures     85  
PART IV
Item 15   Exhibits, Financial Statement Schedules and Reports on Form 8-K     86  
    Signatures     89  
    Certifications     90  

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, the quality or composition of our loan or investment portfolios, fluctuations in interest rates and changes in the relative differences between short and long term interest rates, levels of nonperforming assets and operating results, the impact of terrorist actions 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 2003 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 $1.7 billion, consolidated net loans of $1.3 billion, consolidated deposits of $1.1 billion and consolidated shareholders’ equity of $156.7 million as of December 31, 2002. We conduct and manage our business principally through our wholly-owned subsidiary, Imperial Capital Bank (the “Bank”), a $1.6 billion institution, with eight offices in California, (San Francisco, Encino, Beverly Hills, Glendale, Century City, Santa Monica, Costa Mesa and Del Mar), one office in Carson City, Nevada (opened in January 2003) and one office in Tempe, Arizona, which will open on April 1, 2003. Effective January 1, 2003, the Bank converted from a California industrial bank to a California-chartered commercial bank, and the Company became a bank holding company. The Bank has been in business for 28 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 is primarily engaged in:

     Originating real estate loans secured by income producing properties for retention in its loan portfolio;
 
     Originating film finance loans, franchise loans, tax refund anticipation loans, private label small business revolving credit loans; and
 
     Accepting customer deposits through the following products: certificates of deposits, money market, passbook accounts and effective January 2003, demand deposit accounts. Our deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”), up to the appropriate legal limits.

     During 2001 and 2000, the Bank was also engaged in the acquisition of pools of single family mortgages in the secondary market for investment purposes. On March 28, 2002, the Bank disposed of virtually all of its residential loan portfolios through the securitization of $86.3 million of its performing single family mortgages and sale of $17.6 million of the remaining single family mortgages in a whole loan sale.

     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 CMOs that had been sold to third party investors by the previous owner. At December 31, 2002 and 2001, real estate loans held in trust, net, for the CMOs totaled $121.9 million and $162.2 million and the CMOs outstanding balance was $69.1 million and $109.6 million, respectively.

     During the first quarter of 2002, we completed our acquisition of Asahi Bank of California (“Asahi Bank”) a wholly-owned subsidiary of Asahi Bank Ltd - Japan (“ABLJ”), for approximately $14.9 million in cash. On the date of acquisition, Asahi Bank had total assets of approximately $50.0 million, including $35.0 million of commercial real estate and business loans and $15.0 million of cash and securities. Upon completion of the acquisition, Asahi Bank was merged into the Bank.

     On October 25, 2002, we acquired the operating assets and the performing film finance loan portfolio of the Lewis Horwitz Organization (“LHO”), in an all cash transaction valued at approximately $93.0 million. LHO is an internationally recognized lender to the independent film and television production industry. LHO is currently operating as a division of the Bank.

     In November 2002, we entered into a strategic business relationship with various subsidiaries of Household International, Inc. (“Household”) relating to certain tax refund products. In connection with this relationship, the Bank originates tax refund anticipation loans and sells Household a non-recourse participation interest representing substantially all of the outstanding loan balance. Under the agreement, Household supports the Bank’s credit administration, compliance and accounting functions with a range of services relating to the origination process, and services the loans on behalf of the Bank. Substantially all of the tax refund lending volume is generated during the first quarter of the year. The tax refund agreement is for a four-year term, with substantial break-up fees to apply in the event that Household terminates the agreement during the first two years of the agreement.

     We also entered into an agreement in December 2002 with Household pursuant to which the Bank originates relatively small private label commercial revolving loans to small businesses. This agreement is for a two year term. These loans are used primarily to fund purchases from major retailers. Pursuant to this agreement, the Bank sells Household a non-recourse participation interest representing substantially all of the outstanding loan balance.

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     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 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.

     The executive offices of the Company are located at 888 Prospect Street, Suite 110, La Jolla, California 92037 and its telephone number at that address is (858) 551-0511.

Lending Activities

     General. During 2002, we concentrated our lending activities as follows:

     Originating and purchasing real estate loans, including construction loans, secured by income producing properties.
 
     Originating and purchasing franchise and film finance loans.

     Income Producing Property Loans. We originate and purchase real estate loans secured primarily by first trust deeds on income producing properties. Income property loan collateral consists primarily of the following types of properties:

             
  Apartments     Mini-storage facilities
  Retail centers     Mobile home parks
  Small office and light industrial buildings     Other mixed use or special purpose commercial properties
  Hotels        

     At December 31, 2002, the Bank had $1.3 billion of income producing property loans outstanding representing 92.1% of its total real estate loans and 81.0% of its gross loan portfolio. 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- to four-family residential lending. During 2002, we launched Imperial Capital Express, a new real estate lending platform focusing on originating smaller balance income producing property loans. 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;
    Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;



  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);
 

  Increases in interest rates, real estate and personal property tax rates; and
Other factors beyond the control of the borrower or the lender.

     We originate real estate loans through offices located in San Francisco, Glendale, Santa Monica, Costa Mesa and Del Mar. These offices are staffed by a total of twenty-four 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.

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     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.

     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. As of December 31, 2002, 61.5% of the Bank’s real estate loan portfolio was indexed to the Six-Month London Interbank Offered Rate; 17.1% was indexed to the reference rate charged by Bank of America; 3.2% was indexed to the one-month London Interbank offered rate; 1.5% was indexed to the Federal Home Loan Bank (“FHLB”) 11th District Cost of Funds Index; 9.5% was fixed for an initial period and then adjustable; 2.0% was indexed to either the United States Treasury security indexes or the FHLB of San Francisco advance rate; and the balance of 5.2% 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 adjustments of 2% per year up to 5% 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 resulting from changes in interest rates, subject to the risk that borrowers may refinance these loans during periods of declining interest rates. At December 31, 2002, 85.9% 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 7.84%. At that date, 79.5% of the variable rate loans outstanding had a lifetime interest rate cap. The weighted-average lifetime interest rate cap on this portfolio was 10.03%.

     In 2002, 2001, and 2000, the Bank purchased income producing real estate loans totaling $83.6 million, $176.9 million, and $110.9 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.

     Construction Loans. We also originate construction loans for income producing properties, as well as for single-family home construction. At December 31, 2002, the Bank had $101.4 million of construction loans outstanding, representing 7.5% 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 compared to 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.

     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 franchisors 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. During 2002 and 2001, we purchased three loans and 17 loans, with a total commitment of $7.3 million and $53.3 million, respectively. The outstanding balance of these loans as of December 31, 2002 and 2001 was $54.7 million and $57.6 million, respectively. We expect to increase our franchise loan originations in 2003 through the recent opening of our Imperial Capital Franchise Finance lending platform located in Tempe, Arizona.

     Film Finance Loans. We acquired LHO in October 2002 and are operating LHO as a division of the Bank. LHO is an internationally recognized commercial finance lender engaged in providing financing for independent motion picture and television production. Typically, LHO lends to independent producers of film and television on a senior secured basis, basing its credit decisions on the creditworthiness and reputation of distributors and sales agents who have contracted to distribute the films. LHO provides loans (with a typical term of 12 to 18 months) and letters of credit for the production of motion pictures and television shows or series that have a predictable market worldwide, and therefore, a predictable level of revenue arising from licensing of the distribution rights throughout the world.

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     LHO lends to independent producers of film and television, many of which are located in California. LHO also has borrowing clients outside of the United States. Independent producers tend to be those producers that do not have major studio distribution outlets for their product. Large film and television studios generally maintain their own distribution outlets and finance their projects with internally generated financing. In addition to funding production loans against a number of distribution contracts, LHO has pioneered a valuation of selected unsold rights to permit financing of a portion of the production budget. Typically, this unsecured amount does not exceed 10% of the total loan. LHO’s lending officers review the quality of the distributors and their contracts, the budget, the schedule of advances, and valuation of all distribution rights when considering a new lending opportunity. All LHO loans require the borrower to provide a completion bond that guarantees the completion of the film or the payoff of the outstanding balance of the loan in the event the film is not completed. After closing, each requested advance is approved by the bonding company on a weekly basis to ensure that LHO is not advancing ahead of an agreed-upon cash flow schedule. The loan documentation grants LHO the right to impose certain penalties on the borrower and exercise certain other rights, including replacing the sales agent, if sales are not consummated within the appropriate time. Loans are repaid principally from revenue received from distribution contracts. In many instances, the distribution contracts provide for multiple payments payable at certain milestones (such as execution of contract, commencement of principal photography or completion of principal photography). The maturity date of the loan is generally six to nine months after completion of the production. Delivery of the completed production is made to the various distributors only upon or after their minimum guarantees have been paid in full. To the extent a distributor fails to make payment upon completion of the film, or the predicted level of revenue is less than expected, the Bank may incur a loss.

     LHO typically charges its customers an interest rate ranging from the prime rate to prime plus a margin (exclusive of loan fees) on the outstanding balance of the loan. Loan fees typically range from, 1.00% to 2.50% with an additional fee up to 7.0% depending on the unsecured amount of the production budget being financed.

     At December 31, 2002 our film finance portfolio totaled $119.3 million, of which approximately $48.8 million were issued to producers domiciled outside of the United States. These foreign loans were primarily issued to producers in Australia, Canada, and Germany. Approximately $600,000 of interest income was earned during fiscal 2002 in connection with these loans. There were no non-performing assets attributable to the LHO division at December 31, 2002.

     Loan Underwriting. Many of the Bank’s 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. 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, collateral, loan terms, and 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     Managing Director/Director of Loan Operations
  Vice Chairman and Chief Credit Officer     Deputy Managing Director/Production Manager
  Senior Managing Director/Chief Banking Officer     First Vice President of Business Lending Loan Operations
  Senior Managing Director/Chief Lending Officer     Vice President/Portfolio Administration
  Managing Director/Director of Portfolio Management        

     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 during 2002, both California and the United States economy continued to experience an economic shock. We believe that a continued decline in economic conditions in California, and in the surrounding states, coupled with the potential threat of a terrorist attack on the United States, could have a material 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.

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     All real estate secured loans over $2.0 million must be submitted to the loan committee for approval. At least one loan committee member or designee must personally conduct on-site inspections of any property involved in connection with a real estate loan recommendation of $1.0 million or more. Loans up to $750,000 may be approved by any loan committee member. Loans of $750,000 to $1.5 million require approval by any two members of the Bank’s loan committee, while loans in excess of $1.5 million require approval of three loan committee members. Additionally, loans over $2.0 million must be approved by the Managing Director/Director of Portfolio Management; loans 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.

     All franchise and film finance loans must be submitted to the loan committee for approval regardless of the amount of the loan request. Loan amounts up to $2.0 million require the approval of three loan committee members. Loans over $2.0 million must be approved by the First Vice President of Business Lending Operations and loans over $3.0 million must be approved by the Vice Chairman and Chief Credit Officer.

     Our loans are originated on both a non-recourse 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).

     The maximum size of a single loan made by the Bank is limited by California law to 25% of the Bank’s equity capital. At December 31, 2002, that limit was approximately $47.1 million. The Bank’s largest combined credit extension to related borrowers was $14.5 million at December 31, 2002. At December 31, 2002, the Bank had a total of 218 extensions of credit, with a combined outstanding principal balance of $730.8 million, that were over $2.0 million to a single borrower or related borrowers. All combined extensions of credit over $2.0 million were performing in accordance with their repayment terms. At December 31, 2002, the Bank had 1,524 secured real estate loans outstanding, with an average balance per loan of approximately $884,000.

     Servicing and Collections. Real estate and construction 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. Film finance loans, are serviced by LHO personnel using the Bank’s servicing platform. Servicing of substantially all of the franchise loan portfolio and loans held in the ICCMAC Trust is performed by third party servicers. The Bank monitors its 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 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, construction, franchise and film finance loans is principally from community banks, savings and loan associations, industrial banks, real estate financing conduits, specialty finance companies, small insurance companies, and 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.

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Household Strategic Alliance

     Tax Refund Lending. In November 2002, we entered into a strategic business relationship with various subsidiaries of Household relating to certain tax refund anticipation loans. In connection with this relationship, the Bank originates tax refund anticipation loans, and sells to Household a non-recourse participation interest representing substantially all of the outstanding loan balance. The tax refund agreement with Household is for a four — year term, with substantial break-up fees to apply in the event that Household terminates the agreement during the initial two year period. Household, a leader in the structuring and implementation of tax refund lending programs, supports our credit administration, compliance, treasury and accounting functions with a range of services relating to the administration of this lending program. The Bank would not originate these loans without the involvement of Household.

     Pursuant to our agreement with Household, the Bank offers tax refund anticipation loans (“RALs”) to taxpayers who have filed their returns electronically with the IRS and do not want to wait for the IRS to send them their refund check. For this product, a taxpayer requests a loan through a tax preparer, with the anticipated tax refund as the source of repayment. The taxpayer’s application is then subjected to an automated credit review process. If the application passes this review, the Bank advances to the taxpayer the amount of the refund due on the taxpayer’s return up to specified amounts based on certain criteria, less a pre-paid finance charge and certain other fees. Each taxpayer signs an agreement permitting the IRS to send their refund directly to the Bank instead of to the taxpayer. The refund received from the IRS is used to pay off the loan. Any amount due the taxpayer above the amount of the RAL is then sent to the taxpayer. The Bank also provides refund transfers to customers who do not want or do not qualify for loans. The transfer product facilitates the receipt of the refund by the customer by authorizing the customer’s tax preparer to print a check for the customer after the refund has been received by the Bank from the IRS (“RACs”). Because of the mid-April tax-filing deadline, almost all of the loans and transfers are made and repaid during the first quarter of the year. The Bank’s revenue, under the program, consists of RAL and RAC transaction fees and the earnings stream from RALs originated under the program to the extent of its retained interest in such RALs.

     There is a higher credit risk associated with refund loans than with other types of loans because (1) the Bank does not have personal contact with the customers of this product; and (2) the customers conduct no business with the Bank other than this once a year transaction. Much of this risk is eliminated due to the immediate sale by the Bank to Household, of a participation interest representing virtually all of the RAL outstanding balance.

     Because these programs relate to the filing of income tax returns, activity is concentrated in the first quarter of each year. This causes first quarter net income to become a greater percentage of each year’s net income. This seasonality impacts a number of performance ratios, including return on assets (ROA), return on equity (ROE) and the operating efficiency ratio. These impacts should be apparent in both the first quarter of 2003 and the year-to-date ratios in subsequent quarters.

     Private Label Commercial Revolving Credit Loans. We also entered into an agreement in December, 2002 with Household pursuant to which the Bank originates private label small commercial revolving loans to small businesses. This agreement is for a two year term. These loans are used primarily for purchases from major retailers. Pursuant to this agreement, the Bank sells Household a non-recourse participation interest representing substantially all of the outstanding loan balance. The Bank participates in the earnings stream from the loans originated under the program to the extent of its retained interest in such loans. At December 31, 2002, our retained interest in commercial revolving credit loans aggregated $4.2 million.

Imperial Capital Real Estate Investment Trust

     During 2000, we acquired all of the equity and certain CMOs of the ICCMAC Trust through our real estate investment trust subsidiary, Imperial Capital REIT. At December 31, 2002, the ICCMAC Trust held real estate loans of $121.9 million, comprised of approximately 74 percent and 26 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. At December 31, 2002, the ICCMAC Trust’s real estate loans were held as collateral for $69.1 million of investment grade CMOs sold to third party investors. The cash flow from the ICCMAC Trust’s loan pool pays principal and interest on the CMOs, and also provides cash flow on a monthly basis to ITLA Capital. ITLA Capital recorded $7.9 million of pre-tax income from its investment in the ICCMAC Trust during the year ended December 31, 2002.

     Servicing of the ICCMAC Trust loans is performed by Orix Capital Markets, LLC (“Orix”), a Delaware limited liability company. Under the servicing agreement, Orix is required to service and administer the commercial mortgage loans held in trust solely for the benefit of the holders of the CMOs in accordance with the terms of the servicing agreement and the commercial mortgage loans.

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     Orix 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, 2002, nonperforming assets totaled $18.5 million or 1.07% of total assets. Nonperforming assets consisted of $5.9 million of nonaccrual loans and $12.6 million of other real estate owned. Two of our nonperforming 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 the non-accrual loans where the remaining principal balance of the loan at December 31, 2002, exceeded $1.0 million.
          
       Loan Secured by 4 Office Buildings — Nevada. This loan was originated by the Bank in May 2000 with an original commitment of $4.2 million, which included funds to finish the construction of one of the buildings. One building and 2 vacant lots were released for consideration during the loan’s history. No payments have been received since June 2002. The loan balance as of December 31, 2002 was $3.0 million. The property was 78% occupied as of December 2002. A notice of default has been filed and the loan is currently in foreclosure.
 
       Loan Secured by a Truck Stop — Texas. This loan was purchased by the Bank in June 2001 with an original commitment of $2.0 million, which included funds to repave the collateral site. The loan balance as of December 31, 2002 was $2.0 million. The operation has been under-performing, with cash flows insufficient to make its debt service payments. A notice of default has been filed and the loan is currently in foreclosure.

     As of December 31, 2002, we had loans with an aggregate outstanding balance of $35.5 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 non-accrual loan category. All of these loans are classified as substandard pursuant to the regulatory guidelines discussed below. The following is a brief discussion of our “other loans of concern” where the remaining principal balance of the loan at December 31, 2002 exceeded $2.0 million.
          
       Loan Secured by Office Building — Missouri. This loan was originated by the Bank in June 1999 with an original commitment of $10.2 million to refinance a 20-story office tower. The outstanding principal balance at December 31, 2002 was $9.8 million. The property has suffered from high market vacancy and the cash flow is currently insufficient to cover the debt service on our loan. The property was 55% occupied and the loan was performing in accordance with its payment terms, as of December 31, 2002. On February 21, 2003 the loan was placed on nonaccrual status and a notice of default was filed. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 23.”
 
       Loan Secured by Office with Retail Building — California. This loan was originated by the Bank in July 2001 with an original commitment of $8.4 million. The outstanding principal balance at December 31, 2002 was $7.8 million. The loan has paid as agreed since inception, however, the occupancy has declined to 63% as of December 2002. We continue to monitor the borrowers’ efforts to improve the occupancy.
 
       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 December 31, 2002 was $2.8 million. The loan is current pursuant to the repayment terms of its forbearance agreement. The cash flow from the operations of the collateral has been less than the debt service on our loan for the last four years. We continue to monitor the borrowers’ efforts to improve the cash flow of the hotel.
 
       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 a 123-unit hotel. The outstanding principal balance at December 31, 2002 was $2.8 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. A demand for payoff has been issued. In January 2003, the loan was paid off and resulted in a loss of approximately $200,000.

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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”, “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 coverage 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, 2002, we classified $41.4 million of loans as “substandard”, none as “doubtful” and none as “loss”. $5.9 million of these classified loans were included in the nonperforming assets table in “Item 7. Management’s Discussion and Analysis of Results of Financial Condition and Operations - Credit Risk Elements”, and the balance was included in the $35.5 million of “other loans of concern”, discussed above.

Funding Sources

     The primary source of funding for the Bank’s lending operations and investments are deposits. The Bank’s deposits are federally insured by the FDIC to the maximum extent permitted by law. Approximately 83.3% 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 16.7% of the Bank’s deposits are variable rate passbook accounts and variable rate money market accounts with limited checking features.

     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 promote the rate offered by the Bank on its deposit products, 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 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 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 other financial 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. At December 31, 2002, the Bank had $103.6 million of brokered deposits.

     We intend to begin offering our customers in 2003 commercial banking products and services, including consumer and business checking accounts. As the Bank acquires non-interest bearing checking account balances, it anticipates that its dependence on interest rate sensitive certificates of deposit as a funding source will slowly diminish.

     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 FHLB of San Francisco as a funding source. FHLB advances are collateralized by pledges of qualifying cash equivalents, investment securities, mortgage-backed securities and whole loan collateral. At December 31, 2002, FHLB advances outstanding totaled $338.7 million, and the remaining available borrowing capacity, based on the loans and securities pledged as collateral, totaled $65.2 million, net of the $3.4 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. In connection with our tax refund lending business, ITLA Capital had a $35.0 million revolving credit facility with a bank commencing on January 24, 2003, and matured on March 31, 2003. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Notes 3, 4, 8, and 9”.

Regulation

     On January 1, 2003, the Bank converted from a California industrial bank to a California-chartered commercial bank, and the Company became a bank holding company. As a result, the Company is now regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Bank continues to be regulated by the California Department of Financial Institutions (the “DFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). Due to legislation which became effective in October 2000, California industrial banks are now generally subject to the same California banking laws as California commercial banks. Accordingly, the regulatory oversight to which the Bank is now subject as a commercial bank is not significantly different from the regulatory oversight to which it was subject as an industrial bank.

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     Holding Company Regulation. Bank holding companies are subject to comprehensive regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, and the regulations of the Federal Reserve Board. As a bank holding company, the Company is required to file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require, and the Company and its non-bank subsidiaries are subject to examination by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a bank holding company divest subsidiaries, including its bank subsidiaries. In general, enforcement actions may be initiated for violations of law and regulation as well as unsafe or unsound practices.

     Under Federal Reserve Board policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy, the Federal Reserve Board may require, and has required in the past, bank holding companies to contribute additional capital to undercapitalized subsidiary banks.

     Under the Bank Holding Company Act of 1956, a bank holding company must obtain Federal Reserve Board approval before, among other matters:

          acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of these shares (unless it already owns or controls a majority of these shares);
 
          acquiring all or substantially all of the assets of another bank or bank holding company; or
 
          merging or consolidating with another bank holding company.

     This statute also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks.

     Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality and overall financial condition. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if any of the holding company’s bank subsidiaries are classified as “undercapitalized.”

     Repurchase or Redemption of Equity Securities. A bank holding company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order, or any condition imposed by, or written agreement with, the Federal Reserve Board. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a “2” and is not subject to any unresolved supervisory issues.

     Capital Requirements. The Federal Reserve Board has established capital requirements for bank holding companies that generally parallel the capital requirements for insured depository institutions. The Company was not subject to any minimum capital requirements prior to becoming a bank holding company. The Company currently is deemed “well capitalized” under the Federal Reserve Board capital requirements.

     Bank Regulation — California Law

     The regulations of the DFI 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 DFI’s supervision of the Bank includes comprehensive reviews of all aspects of the Bank’s business and condition, and the DFI possesses broad remedial enforcement authority to influence the Bank’s operations, both formally and informally.

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     Bank Regulation — Federal Law

     Because our deposits are insured by the Bank Insurance Fund of the FDIC, the FDIC, in addition to the DFI, 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. Insured depository institutions, and their institution-affiliated parties, may be subject to potential enforcement actions by the FDIC and the DFI for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Management is not aware of any pending or threatened enforcement actions against the Bank.

     Regulatory Capital Requirements. Federally-insured, state-chartered 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. At December 31, 2002, the Bank’s required tier 1 capital ratio was 4.0% and its actual tier 1 capital ratio was 13.0%.

     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, 2002 the Bank’s tier 1 risk-based and total capital ratios were 13.2% and 14.4%, respectively.

     The federal banking agencies have adopted regulations specifying that the agencies will include, in their evaluation of a bank’s capital adequacy, an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. The FDIC and the other federal banking agencies have also promulgated final amendments to their respective risk-based capital requirements which 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 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.

     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, 2002.

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     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.

     Community Reinvestment Act and Fair Lending Requirements. 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 such as mergers and acquisitions. 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 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. In California, the attempt in the state legislature to pass a California version of a privacy bill failed in 2001, but it is expected that the proponents of such privacy proposals will re-introduce financial privacy bills in the next session in 2003. The GLB Act permits states to enact their own privacy rules which may be stricter than those under the GLB Act. We cannot predict at this time what terms will be considered in any proposed California privacy legislation, whether any such proposed legislation will be enacted and if so, when such legislation may become effective. Therefore, 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 our operating environment 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.

Employees

     As of December 31, 2002, we had 178 employees. Management believes that its relations with employees are satisfactory. We are not subject to any collective bargaining agreements.

Segment Reporting

     Financial and other information regarding our operating segments is contained in Note 21 to our audited consolidated financial statements included in Item 8 of this report.

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Internet Website

     We maintain a website with the address www.itlacapital.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.

Item 2. Properties

     ITLA Capital leases approximately 74,500 square feet of office space for its operations as shown below.

                         
                    Year Current Lease
Locations   Office Uses   Square Footage   Term Expires

 
 
 
La Jolla, CA
  Corporate Headquarters     16,403       2008  
La Jolla, CA
  Audit and Marketing     2,325       2006  
Glendale, CA
  Loan Operations Division/Real Estate Lending     8,932       2005  
San Francisco, CA
  Retail Deposit Branch/Real Estate Lending     5,005       2007  
Beverly Hills, CA
  Retail Deposit Branch     2,218       2005  
Costa Mesa, CA
  Retail Deposit Branch/Money Desk Operations/Real                
 
  Estate Lending     3,609       2006  
Del Mar, CA
  Retail Deposit Branch/Savings Operations                
 
  Division/Real Estate Lending     2,847       2004  
Encino, CA
  Retail Deposit Branch     5,298       2004  
Santa Monica, CA
  Loan Operations/Imperial Capital Express     4,991       2004  
Encino, CA
  Operations Support     3,170       2004  
Glendale, CA
  Retail Deposit Branch/Loan Administration Division     6,257       2006  
Century City, CA
  Lewis Horwitz Organization 2003     7,003       2003  
Carson City, NV
  Savings Branch/Tax Refund Lending/ Private Label                
 
  Credit Card     2,500       2003
Tempe, AZ
  Loan Operations/Imperial Capital Franchise Finance     3,920       2006  

     For additional information regarding our premises, see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements - - Note 17”.

     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, 2002.

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”. As of December 31, 2002, there were nine holders of record of our common stock representing an estimated 1,000 beneficial shareholders with a total of 6,061,575 shares outstanding. We have not paid any cash dividends since our holding company reorganization in 1996.

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     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 inter-dealer prices, without retail mark-up, mark-down or commission.

                                   
      Market Price        
     
  Average Daily
      High   Low   Close   Closing Price
     
 
 
 
2002
                               
 
4th Quarter
  $ 36.25     $ 26.37     $ 33.23     $ 31.36  
 
3rd Quarter
    31.25       27.18       30.19       29.66  
 
2nd Quarter
    31.15       25.05       29.69       29.25  
 
1st Quarter
    20.75       20.25       24.75       22.39  
2001
                               
 
4th Quarter
  $ 21.05     $ 17.86     $ 20.96     $ 19.20  
 
3rd Quarter
    20.25       17.57       20.25       18.22  
 
2nd Quarter
    19.75       15.90       18.00       17.55  
 
1st Quarter
    20.00       18.75       20.00       19.56  

     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)
2002
                               
 
Interest income
  $ 27,035     $ 26,570     $ 27,380     $ 29,623  
 
Interest expense
    10,489       9,076       8,800       8,957  
 
Net interest income before provision for loan losses
    16,546       17,494       18,580       20,666  
 
Provision for loan losses
    1,325       2,100       2,700       2,905  
 
Non-interest income
    125       102       (54 )     200  
 
General and administrative expense
    6,318       6,312       6,459       7,943  
 
Total real estate owned expense, net
    467       508       71       277  
 
Provision for income taxes
    3,043       3,074       3,326       3,345  
 
Net income
    4,719       4,805       5,155       5,326  
 
Basic earnings per share
  $ 0.79     $ 0.80     $ 0.86     $ 0.89  
 
Diluted earnings per share
  $ 0.74     $ 0.75     $ 0.80     $ 0.84  
2001
                               
 
Interest income
  $ 32,266     $ 31,428     $ 29,633     $ 29,768  
 
Interest expense
    18,638       16,913       15,223       13,089  
 
Net interest income before provision for loan losses
    13,628       14,515       14,410       16,679  
 
Provision for loan losses
    450       500       1,500       2,125  
 
Non-interest income
    314       239       251       255  
 
General and administrative expense
    5,131       5,781       5,672       6,234  
 
Total real estate owned expense, net
    169       47       68       103  
 
Provision for income taxes
    2,905       2,911       2,583       2,994  
 
Net income
    4,713       4,719       4,039       4,680  
 
Basic earnings per share
  $ 0.70     $ 0.71     $ 0.64     $ 0.77  
 
Diluted earnings per share
  $ 0.67     $ 0.69     $ 0.62     $ 0.74  

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Item 6. Selected Financial Data

     The following condensed consolidated statements of operations and financial condition and selected performance ratios as of December 31, 2002, 2001, 2000, 1999, and 1998 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” and “Item 8. Financial Statement and Supplementary Data.”

                                                 
            As of and for the years ended December 31,
           
            2002   2001   2000   1999   1998
           
 
 
 
 
Condensed Consolidated Statements of Operations   (in thousands except per share amount)

 
Total interest income
  $ 110,608     $ 123,095     $ 123,775     $ 101,213     $ 101,665  
Total interest expense
    37,322       63,863       68,642       48,460       51,387  
 
   
     
     
     
     
 
 
Net interest income before provisions for loan losses and valuation allowance on loans held for sale
    73,286       59,232       55,133       52,753       50,278  
Provision for loan losses
    9,030       4,575       4,775       4,950       4,550  
Provision for valuation allowance on loans held for sale
                            1,400  
 
   
     
     
     
     
 
 
Net interest income after provisions for losses and valuation allowance on loans held for sale
    64,256       54,657       50,358       47,803       44,328  
 
   
     
     
     
     
 
Non-interest income
    373       1,059       2,331       901       2,447  
 
   
     
     
     
     
 
Non-interest expense:
                                       
 
Compensation and benefits
    13,954       11,778       9,958       9,739       10,564  
 
Occupancy and equipment
    3,165       2,968       2,567       2,788       2,783  
 
Other general and administrative expenses
    9,913       8,072       8,129       8,230       7,317  
 
Real estate owned expense, net
    1,323       387       138       472       984  
 
   
     
     
     
     
 
     
Total recurring non-interest expense
    28,355       23,205       20,792       21,229       21,648  
 
Nonrecurring expense
                (1) 1,400              
 
   
     
     
     
     
 
     
Total non-interest expense
    28,355       23,205       22,192       21,229       21,648  
 
   
     
     
     
     
 
 
Income before provision for income taxes and minority interest in income of subsidiary
    36,274       32,511       30,497       27,475       25,127  
 
Minority interest in income of subsidiary(2)
    3,481     2,967     478            
 
   
     
     
     
     
 
 
Income before provision for income taxes
    32,793       29,544       30,019       27,475       25,127  
Provision for income taxes
    12,788       11,393       11,880       11,270       10,304  
 
   
     
     
     
     
 
NET INCOME
  $ 20,005     $ 18,151     $ 18,139     $ 16,205     $ 14,823  
 
   
     
     
     
     
 
BASIC EARNINGS PER SHARE
  $ 3.35     $ 2.82     $ 2.57     $ 2.26     $ 1.95  
DILUTED EARNINGS PER SHARE
  $ 3.16     $ 2.72     $ 2.51     $ 2.21     $ 1.89  
Dividends paid
  $     $     $     $     $  
 
Condensed Consolidated Statements of Financial Condition
                                       

 
Cash and cash equivalents
  $ 160,848     $ 134,241     $ 70,950     $ 72,242     $ 125,602  
Investment securities available for sale, at fair value
    54,677       29,411       46,325       59,247       329  
Stock in Federal Home Loan Bank
    16,934       13,464       3,963       8,894       12,633  
Loans, net
    1,316,298       1,122,370       1,045,927       951,480       862,089  
Real estate loans held in trust, net
    121,936       162,158       211,722              
Loans held for sale, at lower of cost or fair market value
                            12,188  
Interest receivable
    9,158       11,144       11,821       7,383       6,321  
Other real estate owned, net
    12,593       13,741       2,250       1,041       1,201  
Premises and equipment, net
    4,197       2,177       2,690       3,253       3,493  
Deferred income taxes
    13,822       11,869       11,302       9,401       6,270  
Goodwill
    3,118                          
Other assets
    8,384       7,733       8,193       2,882       2,521  
 
   
     
     
     
     
 
   
Total Assets
  $ 1,721,965     $ 1,508,308     $ 1,415,143     $ 1,115,823     $ 1,032,647  
 
   
     
     
     
     
 
Deposit accounts
  $ 1,065,911     $ 953,654     $ 1,015,699     $ 913,613     $ 866,798  
Collateralized mortgage obligations
    69,077       109,648       161,852              
Federal Home Loan Bank advances
    338,685       269,285       79,250       67,250       48,500  
Account payable and other liabilities
    10,006       9,674       11,269       11,265       11,467  
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures
    81,595       28,118       13,519              
Shareholders’ equity
    156,691       137,929       133,554       123,695       105,882  
 
   
     
     
     
     
 
       
Total Liabilities and Shareholders’ Equity
  $ 1,721,965     $ 1,508,308     $ 1,415,143     $ 1,115,823     $ 1,032,647  
 
   
     
     
     
     
 
Book value per share
  $ 27.11     $ 23.54     $ 20.05     $ 17.22     $ 14.77  
 
   
     
     
     
     
 


(1)   Represents expenses related to the consolidation of the Bank’s headquarters with ITLA Capital’s headquarters in La Jolla, California.
(2)   Represents accrued distributions payable on our trust preferred securities.

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    As of and for the years ended December 31,
   
    2002   2001   2000   1999   1998
   
 
 
 
 
Selected Performance Ratios
                                       
Return on average assets
    1.41 %     1.32 %     1.47 %     1.57 %     1.46 %
Return on average shareholders’ equity
    13.56 %     13.28 %     13.95 %     14.23 %     13.95 %
Net interest margin (1)
    5.30 %     4.33 %     4.47 %     5.11 %     4.96 %
Average interest-earning assets to average interest bearing liabilities
    113.94 %     113.80 %     113.49 %     113.74 %     113.06 %
Efficiency ratio (2)
    38.50 %     38.49 %     38.62 %     39.57 %     41.06 %
Efficiency ratio excluding real estate operations and nonrecurring expense, net
    36.70 %     37.85 %     35.94 %     38.69 %     39.19 %
Total recurring general and administrative expense to average assets
    1.90 %     1.66 %     1.78 %     2.01 %     2.04 %
Average shareholders’ equity to average assets
    10.36 %     9.93 %     10.86 %     11.01 %     10.47 %
Nonperforming assets to total assets
    1.08 %     1.92 %     1.44 %     0.81 %     0.64 %
Allowance for loan losses to loans held for investment, net (3)
    2.31 %     2.16 %     2.12 %     2.05 %     1.91 %
Allowance for loan loss to nonaccrual loans
    555.61 %     174.30 %     149.85 %     249.40 %     309.37 %
Net charge-offs (recoveries) to average loans held for investment, net
    0.36 %     0.39 %     0.18 %     0.20 %     (0.01 %)


(1)   Net interest margin represents net interest income divided by total average interest-earning assets.
(2)   Efficiency ratio represents non-interest expense divided by non-interest 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.

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, 2002 and 2001 and our results of operations for the years ended December 31, 2002, 2001 and 2000. Our primary business involves the origination and purchase of loans secured by income producing real estate, located predominately in California and, to a lesser extent, the purchase of franchise loans and the funding of film finance loans.

     Consolidated net income in 2002 was $20.0 million, or $3.16 per diluted share, compared to $18.2 million, or $2.72 per diluted share, in 2001 and $18.1 million, or $2.51 per diluted share, in 2000. The increase in net income in 2002 was primarily due to an increase in net interest income to $73.3 million for 2002 as compared to $59.2 million in 2001. This increase was partially offset by a $4.5 million increase in provision for loan losses and a $5.2 million increase in non-interest expense.

     The increase in net income in 2001 was primarily due to an increase in net interest income to $59.2 million for 2001 as compared to $55.1 million in 2000. This increase was partially offset by a $2.5 million increase in minority interest in income of subsidiary, a decrease of $1.3 million in non-interest income and an increase of $1.0 million in non-interest expense.

     Total loan production including the unfunded portion of construction loans was $674.1 million for the year ended December 31, 2002, as compared to $502.1 million and $653.9 million for the years ended December 31, 2001 and 2000. Loan production in 2002 consisted of real estate loan originations of $412.3 million, real estate loan purchases of $120.4 million (including the $36.8 million of loans relating to the acquisition of Asahi Bank of California), the acquisition of $92.6 million and the origination of $34.3 million of film finance loans and the purchase of $7.3 million of franchise loans. In addition, at December 31, 2002, we held $4.2 million of commercial revolving credit loans relating to our strategic alliance with Household.

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     Our average total assets increased approximately 3.4% during 2002 to $1.4 billion. Average deposit accounts totaled $931.4 million in 2002 compared to $960.0 million in 2001, a decrease of $28.6 million, or 3.0%. FHLB advances averaged $194.2 million in 2002, compared to $103.7 million in 2001, an increase of $90.5 million, or 87.3%. This increase in average FHLB advances was primarily utilized to fund the increase in the loan portfolio. The average balance of the CMOs was $88.5 million during 2002 compared to $139.3 million in 2001 reflecting repayments on loans held in trust.

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.

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      Years Ended December 31,
     
      2002   2001   2000
     
 
 
      Average   Income/   Yield/   Average   Income/   Yield/   Average   Income/   Yield/
      Balance   Expense   Rate   Balance   Expense   Rate   Balance   Expense   Rate
     
 
 
 
 
 
 
 
 
      (dollars in thousands)
Assets
                                                                       
Cash and investment securities
  $ 77,384     $ 3,475       4.49 %   $ 73,823     $ 3,192       4.32 %   $ 84,660     $ 5,164       6.10 %
Loans (1)
    1,083,645       91,066       8.40 %     1,072,792       102,233       9.53 %     964,620       102,419       10.62 %
Real estate loans held in trust
    143,705       10,239       7.13 %     189,349       14,954       7.90 %     182,982       16,192       8.85 %
Franchise loans
    60,492       4,479       7.40 %     32,956       2,716       8.24 %                  
Motion picture financing
    18,060       1,349       7.47 %                                    
 
   
     
     
     
     
     
     
     
     
 
 
Total loans receivable
    1,305,902       107,133       8.20 %     1,295,097       119,903       9.26 %     1,147,602       118,611       10.34 %
 
   
     
     
     
     
     
     
     
     
 
Total interest earning assets
    1,383,286     $ 110,608       8.00 %     1,368,920     $ 123,095       8.99 %     1,232,262     $ 123,775       10.04 %
 
           
     
             
     
             
     
 
Non-interest-earning assets
    70,468                       34,218                       28,963                  
Allowance for loan losses
    (30,071 )                     (26,835 )                     (24,571 )                
 
   
                     
                     
                 
 
Total assets
  $ 1,423,683                     $ 1,376,303                     $ 1,236,654                  
 
   
                     
                     
                 
Liabilities and Shareholders’ Equity
                                                                       
Deposit accounts:
                                                                       
Money market and passbook accounts
  $ 151,258     $ 2,873       1.90 %   $ 119,022     $ 4,767       4.01 %   $ 115,035     $ 6,384       5.55 %
Time certificates
    780,168       26,476       3.39 %     841,002       48,097       5.72 %     798,599       49,584       6.21 %
 
   
     
     
     
     
     
     
     
     
 
 
Total deposit accounts
    931,426       29,349       3.15 %     960,024       52,864       5.51 %     913,634       55,968       6.13 %
Collateralize mortgage obligations
    88,485       2,301       2.60 %     139,267       6,209       4.46 %     141,796       10,901       7.69 %
FHLB Advances
    194,160       5,672       2.92 %     103,675       4,790       4.62 %     30,366       1,773       5.84 %
 
   
     
     
     
     
     
     
     
     
 
Total interest bearing liabilities
    1,214,071     $ 37,322       3.07 %     1,202,966     $ 63,863       5.31 %     1,085,796     $ 68,642       6.32 %
 
           
     
             
     
             
     
 
Noninterest-bearing liabilities
    62,080                       36,644                       16,586                  
Shareholders’ equity
    147,532                       136,693                       134,272                  
 
   
                     
                     
                 
 
Total liabilities and shareholders’ equity
  $ 1,423,683                     $ 1,376,303                     $ 1,236,654                  
 
   
                     
                     
                 
Net interest spread (2)
                    4.93 %                     3.68 %                     3.72 %
 
                   
                     
                     
 
Net interest income before provisions for loan losses
          $ 73,286                     $ 59,232                     $ 55,133          
 
           
                     
                     
         
Net interest margin (3)
                    5.30 %                     4.33 %                     4.47 %
 
                   
                     
                     
 


(1)   Before allowance for loan losses and net of deferred loan fees and costs. Net loan fee amortization of $1.7 million, $1.3 million and $1.7 million was included in net interest income for 2002, 2001 and 2000, 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. As of December 31, 2002, 2001 and 2000, our ratio of average interest-earning assets to average interest-bearing liabilities was 113.93%, 113.80% and 113.49%, 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 the absolute dollar amounts of each.

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            2002 vs. 2001   2001 vs. 2000
           
 
            Increase (Decrease)   Increase (Decrease)
            Due to:   Due to:
           
 
            Volume   Rate   Total   Volume   Rate   Total
           
 
 
 
 
 
            (in thousands)
Interest and fees earned on:
                                               
   
Loans, net
  $ 4,695     $ (12,750 )   $ (8,055 )   $ 13,414     $ (10,884 )   $ 2,530  
   
Cash and investment securities
    159       124       283       (467 )     (1,505 )     (1,972 )
   
Real estate loans held in trust
    (3,256 )     (1,459 )     (4,715 )     502       (1,740 )     (1,238 )
 
   
     
     
     
     
     
 
Total increase (decrease) in interest income
    1,598       (14,085 )     (12,487 )     13,449       (14,129 )     (680 )
 
   
     
     
     
     
     
 
Interest paid on:
                                               
 
Deposit accounts
    (899 )     (22,616 )     (23,515 )     2,557       (5,661 )     (3,104 )
 
Collateralized mortgage obligations
    (1,319 )     (2,589 )     (3,908 )     (113 )     (4,579 )     (4,692 )
FHLB advances
    2,644       1,762       882       3,387       (370 )     3,017  
 
   
     
     
     
     
     
 
     
Total increase (decrease) in interest expense
    426       (26,967 )     (26,541 )     5,831       (10,610 )     (4,779 )
 
   
     
     
     
     
     
 
       
Increase (decrease) net interest income
  $ 1,172     $ 12,882     $ 14,054     $ 7,618     $ (3,519 )   $ 4,099  
 
   
     
     
     
     
     
 

2002 Compared to 2001

     Net interest income increased $14.1 million or 23.8% to $73.3 million in 2002 compared to $59.2 million in 2001. The increase in net interest income was primarily attributable to the improvement in net interest spread caused by the declining rate environment, which lowered our average cost of funds and resulted in most of our loans reaching their interest rate floors.

     Interest income decreased $12.5 million or 10.1% to $110.6 million in 2002 compared to $123.1 million in 2001. The decrease in interest income was due primarily to our loans being originated or repricing at lower rates due to the general decline in market interest rates. The average yield on our loans was 8.40% in 2002 compared to 9.53% in 2001. Our commercial real estate loan portfolio is primarily comprised of adjustable rate mortgages indexed to the six month LIBOR. Approximately 91.6% of our real estate loan portfolio (including real estate loans held in trust) were adjustable rate mortgages at December 31, 2002. These adjustable rate mortgages generally re-price on a quarterly basis and, as of December 31, 2002, approximately $1.1 billion or 87.1% of our real estate loan portfolio contained interest rate floors, below which the loans’ contractual interest rate may not adjust. At December 31, 2002, the weighted average floor interest rate of these loans was 7.45%. At that date, approximately $1.1 billion or 97.9% of those loans were at the floor interest rate.

     Interest expense on interest-bearing liabilities decreased $26.5 million or 41.6% to $37.3 million in 2002 compared to $63.9 million in 2001 primarily due to a decrease in interest expense on deposits and CMOs. Interest expense from deposit accounts decreased $23.5 million or 44.5% to $29.3 million in 2002 compared to $52.9 million in 2001 due to decreases in the average rate paid on deposits as a result of lower market interest rates. The average rate paid on deposits was 3.15% in 2002 compared to 5.51% in 2001.

     Interest expense from the CMOs decreased $3.9 million or 62.9% to $2.3 million in 2002 as compared to $6.2 million in 2001. The decrease was primarily due to a decrease in rates paid on CMOs, as well as a decline in average balance of CMOs. The average balance and average yield on the CMOs was $88.5 million and 2.60% in 2002 as compared to $139.3 million and 4.46% in 2001, respectively.

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     Interest expense from FHLB advances increased $0.9 million to $5.7 million in 2002 compared to $4.8 million in 2001, due to an increase in the average outstanding balance, which was partially offset by a decrease in the average rate paid on FHLB advances. The average balance of FHLB advances increased $90.5 million or 87.3% to $194.2 million in 2002 compared to $103.7 million in 2001. The average rate paid on FHLB advances was 2.92% in 2002 compared to 4.62% in 2001. We have used our borrowing capacity under our FHLB credit line to take advantage of the current favorable short-term rate environment through effective liability management, which has lowered our cost of funds and enhanced our net interest income.

Provision for Loan losses

     Provision for loan losses increased to $9.0 million in 2002 compared to $4.6 million in 2001. The current period provision for loan losses was recorded to provide the reserves adequate to support the known and inherent risk of loss resulting from the current growth in the loan portfolio and due to the increase in other loans of concern to $35.5 million from $21.5 million at December 31, 2001. See also “Credit Risk Elements – Allowance for Loan Losses and Nonperforming Assets”.

Non-interest Income

     Non-interest income decreased $0.7 million to $0.4 million in 2002 compared to $1.1 million in 2001. The decrease in non-interest income was due primarily to a $0.5 million net valuation provision recorded in 2002 for the Company’s residual interest relating to the securitization of our residential loan portfolio.

Non-interest Expense

General and Administrative Expense

     General and administrative expense totaled $27.0 million and $22.8 million in 2002 and 2001, respectively. In 2002, our ratio of recurring general and administrative expenses to average assets was 1.90%, compared to 1.66% in 2001. This increase was primarily attributable to the additions made to the retail and wholesale loan originations sales and support staff, and certain infrastructure costs relating to the charter conversion activities, including core processing system conversion costs, and additions to the information technology and savings and operation staff. Full time equivalent associates averaged 154 in 2002 compared to 133 in 2001.

Real Estate Owned Expense

     Real estate owned expense, net, increased to $1.3 million in 2002 compared to $0.4 million in 2001. The increase was primarily attributable to a $0.5 million increase in real estate owned expense and to the $0.5 million increase in the provision for losses on other real estate owned (“OREO”). These increases were offset by a $0.1 million increase in gain on sale of OREO, net. See also “Credit Risk Elements – Allowance for Loan Losses and Nonperforming Assets”.

Income Taxes

     Provision for income taxes increased to $12.8 million in 2002 compared to $11.4 million in 2001. The increase in provision for income taxes was primarily due to an increase in taxable income. The effective tax rate was 39.0% and 38.6% for 2002 and 2001, respectively. The effective tax rate differed from the applicable statutory federal tax rate due to state income taxes and the state income tax deduction for tax exempt income on loans located in designated redevelopment and enterprise zones and due to federal income tax credits received from a low income housing tax credit investment.

     At December 31, 2002, we had a net deferred tax asset of $13.8 million. The deferred tax asset related primarily to loss provisions recognized on our financial statements that have not yet been recognized on our income tax returns. During 2002, we had no deferred tax assets relating to net operating loss carry forward deductions. The deferred tax asset is considered fully realizable, as when the temporary differences associated with the deferred tax assets are recognized for income tax purposes, those deductions are expected to be fully offset, either by carryback against previously taxed income or by a reduction of future taxable income. Accordingly, we have not established a valuation allowance on the deferred tax asset.

Minority Interest in Income of Subsidiary

     Minority interest in income of subsidiary, consisting of accrued distributions payable on our Trust Preferred securities, was $3.5 million in 2002 as compared to $3.0 million in 2001. The increase was due to the additional issuance of $55.0 million of variable rate cumulative Trust Preferred securities in 2002, as well as the Trust Preferred securities issued in 2001 being outstanding for the entire fiscal year in 2002. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements – Note 10”.

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2001 Compared to 2000

     Net interest income increased $4.1 million or 7.4% to $59.2 million in 2001 compared to $55.1 million in 2000. The increase in net interest income was primarily attributable to the improvement in net interest spread realized by the REIT due to its liability sensitive position as its liabilities re-priced faster than its assets during the year. The net interest income of the Bank increased as the interest income attributable to the growth in the average balance of its loan portfolio was offset by the spread compression experienced due to the general market decline in interest rates during the year.

     Interest income decreased $680,000 or 0.5% to $123.1 million in 2001 compared to $123.8 million in 2000. The decrease in interest income was due primarily to a $2.0 million decrease in interest income from cash and investment securities and a $1.2 million decrease in interest income from real estate loans held in trust, partially offset by a $2.5 million increase in interest income from real estate loans. Interest and fee income from real estate loans increased due to higher loan volume in 2001, partially offset by a decrease in loan yield. The average balance of the Bank’s real estate loans increased $108.2 million to $1.1 billion in 2001 compared to $964.6 million in 2000. The average yield on these real estate loans was 9.53% in 2001 compared to 10.62% in 2000. The average balance of the real estate loans held in trust increased $6.4 million to $189.3 million in 2001 compared to $183.0 million in 2000. The average yield on these loans was 7.90% in 2001 compared to 8.85% in 2000. The decrease in the yield on real estate loans was primarily due to the repricing of variable rate loans at lower interest rates resulting from the general decline in market interest rates. Our commercial real estate loan portfolio is primarily comprised of adjustable rate mortgages indexed to the six month LIBOR. Approximately 92.8% of our real estate loan portfolio (including real estate loans held in trust) were adjustable rate mortgages at December 31, 2001. These adjustable rate mortgages generally reprice on a quarterly basis and approximately $1.1 billion or 94.1% of our real estate loan portfolio contained interest rate floors, below which the loans’ contractual interest rate may not adjust. At December 31, 2001, the weighted average floor interest rate of these loans was 8.97%. At that date, approximately $1.1 billion or 95.5% of those loans were at the floor interest rate, approximately $41.4 million or 3.7% were within 50 basis points of their floor interest rate, and approximately $46.6 million or 4.2% were greater than 50 but less than 100 basis points from their floor interest rate. Excluding this income from prepayments, the yields on the Bank’s real estate loans would have been 9.30% in 2001 and 10.34% in 2000 and the yields on the real estate loans held in trust would have been 7.81% in 2001 and 8.65% in 2000.

     Interest income from cash and investments decreased to $3.2 million in 2001 compared to $5.2 million in 2000, due primarily to a decrease in yield and a decrease in the average outstanding balance. The average balance of cash and investment securities decreased $10.9 million or 12.9% to $73.8 million in 2001 compared to $84.7 million in 2000. The average yield on cash and investment securities was 4.32% in 2001 compared to 6.10% in 2000, which was consistent with the decrease in short-term market interest rates.

     Interest expense on interest-bearing liabilities decreased $4.8 million or 6.9% to $63.9 million in 2001 compared to $68.6 million in 2000 primarily due to a decrease in interest expense on deposits and CMOs partially offset by an increase in interest expense on FHLB advances. Interest expense from deposit accounts decreased $3.1 million or 5.5% to $52.9 million in 2001 compared to $56.0 million in 2000 due to decreases in the average rate paid on deposits. The average rate paid on deposits was 5.51% in 2001 compared to 6.13% in 2000. The average balance of deposits increased $46.4 million or 5.1% to $960.0 million in 2001 compared to $913.6 million in 2000 as we increased deposits to fund growth in the loan portfolio.

     Interest expense from the CMOs decreased $4.7 million or 43.1% to $6.2 million in 2001 as compared to $10.9 million in 2000. The decrease is primarily due to a decrease in rates paid on CMOs partially offset by a higher average balance of CMOs. The average balance and average yield on the CMOs was $139.3 million and 4.46% in 2001 as compared to $141.8 million and 7.69% in 2000, respectively.

     Interest expense from FHLB advances increased $3.0 million to $4.8 million in 2001 compared to $1.8 million in 2000, due to an increase in the average outstanding balance partially offset by a decrease in the average rate paid on FHLB advances. The average balance of FHLB advances increased $73.3 million or 241.4% to $103.7 million in 2001 compared to $30.4 million in 2000. The average rate paid on FHLB advances was 4.62% in 2001 compared to 5.84% in 2000.

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Provision for Loan losses

     Provision for loan losses decreased to $4.6 million in 2001 compared to $4.8 million in 2000. The decrease in the provision for loan losses was due to the reduction in our nonperforming loans to 1.17% of total gross loans at December 31, 2001, compared to 1.42% of total gross loans as of December 31, 2000, and the decline in other loans of concern of $49.4 million since December 31, 2000. In addition, the provision also reflects the reallocation of $2.7 million of allowance for loan losses from the Imperial Capital REIT to the Bank, as actual loan losses related to real estate loans held in trust had been negligible, and this loan portfolio had decreased due to principal payments. See also “Credit Risk Elements – Allowance for Loan Losses and Nonperforming Assets”.

Non-interest Income

     Non-interest income decreased $1.2 million to $1.1 million in 2001 compared to $2.3 million in 2000. The decrease in non-interest income was due primarily to a $1.4 million gain realized on the sale investment securities in 2000. Excluding this gain on sale of investment securities in 2000, other non-interest income increased slightly to $1.1 million in 2001 compared to $0.9 million in 2000.

Non-interest Expense

General and Administrative Expense

     General and administrative expense totaled $22.8 million and $22.1 million in 2001 and 2000, respectively. In 2001, our ratio of recurring general and administrative expenses to average assets was 1.66%, compared to 1.78% in 2000. Our efficiency ratio, excluding real estate owned and nonrecurring expenses, was 37.85% in 2001 compared to 35.94% in 2000.

     General and administrative expense increased $0.8 million to $22.8 million in 2001 compared to $22.1 million in 2000. The previous year’s non-interest expense included a $1.4 million non-recurring charge relating to the consolidation of the Bank’s headquarters with ITLA Capital’s headquarters in La Jolla, California. Compensation and benefits expense totaled $11.8 million in 2001 compared to $10.0 million in 2000. The increase in compensation and benefits expense was primarily due to additions made to the retail and wholesale loan originations sales and support staff. Full time equivalent associates averaged 133 in 2001 compared to 122 in 2000.

Real Estate Owned Expense

     Real estate owned expense, net, increased to $0.4 million in 2001 compared to $0.1 million in 2000. The increase in real estate owned expense in 2001 compared to 2000 was primarily due to the increase in the outstanding balance of OREO to $13.7 million at December 31, 2001 compared to $2.3 million at December 31, 2000. The increase in OREO during 2001 was primarily related to three commercial properties. Provision for losses on other real estate owned totaled $0.3 million in 2001 compared to $0.2 million in 2000. Other real estate owned expense was $0.1 million in 2001 compared to income of $31,000 in 2000. There was a net gain of $18,000 from sales of other real estate owned in 2001 compared to a net loss of $2,000 in 2000. See also “Credit Risk Elements – Allowance for Loan Losses and Nonperforming Assets”.

Income Taxes

     Provision for income taxes decreased to $11.4 million in 2001 compared to $11.9 million in 2000. The decrease in provision for income taxes was primarily due to a lower effective tax rate. The effective tax rate was 38.6% and 39.6% for 2001 and 2000, respectively. The effective tax rate differed from the applicable statutory federal tax rate due to state income taxes and the state income tax deduction for tax exempt income on loans located in designated redevelopment and enterprise zones and due to federal income tax credits received from a low income housing tax credit investment.

     At December 31, 2001, we had a net deferred tax asset of $11.9 million. The deferred tax asset related primarily to loss provisions recognized on our financial statements that have not yet been recognized on our income tax returns. During 2001, we had no deferred tax assets relating to net operating loss carry forward deductions. The deferred tax asset is considered fully realizable, as when the temporary differences associated with the deferred tax assets are recognized for income tax purposes, those deductions are expected to be fully offset, either by carryback against previously taxed income or by a reduction of future taxable income. Accordingly, we have not established a valuation allowance on the deferred tax asset.

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Minority Interest in Income of Subsidiary

     Minority interest in income of subsidiary, consisting of accrued distributions payable on our Trust Preferred securities, was $3.0 million in 2001 as compared to $0.5 million in 2000. The increase in the minority interest in income of subsidiary is due to an additional issuance of Trust Preferred securities in 2001 as well as the Trust Preferred securities issued in September 2000 being outstanding for all of 2001. See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements – Note 10”.

Financial Condition

At December 31, 2002 Compared with December 31, 2001

     Total assets increased by $213.7 million, or 14.2%, to $1.7 billion at December 31, 2002 compared to $1.5 billion at December 31, 2001. This increase was primarily due to a $26.6 million, or 19.8%, increase in cash and cash equivalents to $160.8 million at December 31, 2002 from $134.2 million at December 31, 2001, and a $193.9 million, or 17.3%, increase in loans receivable, net to $1.3 billion at December 31, 2002 from $1.1 billion at December 31, 2001. These increases were partially offset by the reductions in net real estate loans held in trust of $40.2 million. The growth in assets was funded primarily by an increase in FHLB advances of $69.4 million and deposits of $112.3 million. The increase in deposits was primarily concentrated in brokered deposits with a lower cost of funds than the current market rates offered through the Bank’s retail branch network. CMOs decreased from $109.6 million at December 31, 2001 to $69.1 million at December 31, 2002, reflecting the repayments on loans held in trust. Shareholders’ equity increased primarily due to the retention of $20.0 million of net income as retained earnings for the year, partially offset by the purchase of $2.3 million of ITLA Capital’s common stock currently held as treasury stock.

At December 31, 2001 Compared with December 31, 2000

     Total assets increased by $93.2 million, or 6.6%, to $1.5 billion at December 31, 2001 compared to $1.4 billion at December 31, 2000. This increase was primarily due to a $63.3 million, or 89.2%, increase in cash and cash equivalents to $134.2 million at December 31, 2001 from $71.0 million at December 31, 2000 and a $76.4 million, or 7.31%, increase in net real estate loans receivable to $1.1 billion at December 31, 2001 from $1.0 billion at December 31, 2000. Asset growth also included increases in FHLB Stock of $9.5 million and other real estate owned, net, of $11.5 million. These increases were partially offset by the reductions in net real estate loans held in trust of $49.5 million and investment securities available for sale of $16.9 million. The growth in assets was funded primarily by an increase in FHLB advances of $190.0 million partially offset by a decrease in deposits of $62.0 million. The decrease in deposits was primarily concentrated in time certificates, which decreased $117.3 million and was partially offset by an increase in money market and passbooks of $55.3 million, as depositors moved their investments to liquid and short term accounts during the declining market rate environment. CMOs decreased from $161.9 million at December 31, 2000 to $109.6 million at December 31, 2001. Shareholders’ equity increased primarily due to the retention of $18.2 million of net income as retained earnings for the year, partially offset by the purchase of $14.8 million of ITLA Capital’s common stock currently held as treasury stock.

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Loans Receivable, Net

     The following table shows the comparison of our loan portfolio by major categories as of the dates indicated.

                                               
          December 31,
         
          2002   2001   2000   1999   1998
         
 
 
 
 
          (in thousands)
 
Real estate loans
  $ 1,189,258     $ 1,191,688     $ 1,176,988     $ 864,048     $ 811,076  
 
Construction loans
    101,422       54,129       95,206       107,833       71,385  
 
   
     
     
     
     
 
     
Total real estate loans
    1,290,680       1,245,817       1,272,194       971,881       882,461  
 
Film finance
    119,283                          
 
Franchise loans
    54,672       57,617       3,912              
 
                   
                 
 
Commercial and other loans
    4,314                          
 
   
     
     
     
     
 
 
    1,468,949       1,303,434       1,276,106       971,881       882,461  
 
Unamortized premium
    7,898       9,773       11,300       2,590        
 
Deferred loan origination fees and costs
    (5,604 )     (2,029 )     (2,571 )     (3,096 )     (3,561 )
 
   
     
     
     
     
 
 
    1,471,243       1,311,178       1,284,835       971,375       878,900  
 
Allowance for loan losses
    (33,009 )     (26,650 )     (27,186 )     (19,895 )     (16,811 )
 
   
     
     
     
     
 
 
    1,438,234       1,284,528       1,257,649       951,480       862,089  
 
   
     
     
     
     
 
Real Estate Loans Held for Sale (at lower of cost or fair market value)
                                       
 
Real estate loans
                            12,188  
 
   
     
     
     
     
 
     
Gross loans held for sale
                            12,188  
 
Deferred loan origination fees and costs
                             
 
   
     
     
     
     
 
     
Net loans held for sale
                            12,188  
 
   
     
     
     
     
 
   
Consolidated net loans receivable
  $ 1,438,234     $ 1,284,528     $ 1,257,649     $ 951,480     $ 874,277  
 
   
     
     
     
     
 

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     The contractual maturities of our loan portfolio at December 31, 2002 are as follows:
                                   
      Loans Maturing in        
     
       
              Between   Greater        
      Less Than   One and   Than Five        
      One Year   Five Years   Years   Total
     
 
 
 
      (dollars in thousands)
Real estate loans
  $ 40,432     $ 167,487     $ 981,339     $ 1,189,258  
Construction loans
    48,948       27,466       25,008       101,422  
Film finance
    98,042       21,241             119,283  
Franchise loans
          5,695       48,977       54,672  
Commercial and other loans
    4,274       40             4,314  
 
   
     
     
     
 
 
  $ 191,696     $ 221,929     $ 1,055,324     $ 1,468,949  
 
   
     
     
     
 
 
Loans with fixed interest rates
  $ 3,689     $ 40,541     $ 71,860     $ 116,090  
Loans with variable interest rates
    188,007       181,388       983,464       1,352,859  
 
   
     
     
     
 
 
  $ 191,696     $ 221,929     $ 1,055,324     $ 1,468,949  
 
   
     
     
     
 
 
 
Percentage with variable interest rates
    98.1 %     81.7 %     93.2 %     92.1 %
 
   
     
     
     
 

     The table above should not be regarded as a forecast of future cash collections because a substantial portion of real estate loans may be renewed or repaid prior to contractual maturity and have adjustable interest rates.

     The following table sets forth certain information regarding the real property collateral securing our real estate loan portfolio as of December 31, 2002.
                                                               
          Number           Percent   Range of Principal Balance   Non-
          of   Gross   of  
  Accrual
          Loans   Amount   Total   Min   Max   Average   Loans
         
 
 
 
 
 
 
          (dollars in thousands)
Income Producing Property Loans:
                                                       
 
Multi-family (5 or more units)
    1,032     $ 569,170       44.1 %   $ 41     $ 11,264     $ 926     $ 100  
 
Retail
    319       205,465       15.9 %     9       9,427       1,371       133  
 
Office
    93       142,880       11.1 %     13       10,460       1,536       3,061  
 
Hotel
    42       104,912       8.1 %     30       11,976       2,498        
 
Industrial/warehouse
    47       27,674       2.1 %     6       3,150       589       179  
 
Mixed-use
    82       40,295       3.1 %     3       3,725       594        
 
Mobile home parks
    26       15,442       1.2 %     84       1,717       491        
 
Other
    110       77,340       6.0 %     1       5,765       742       1,986  
 
   
     
     
                             
 
     
Total income producing
    1,751       1,183,178       91.6 %                             5,459  
 
   
     
     
                             
 
Construction and Land:
                                                       
 
Construction
    35       101,422       7.9 %     56       8,590       2,898        
 
Land
    4       2,853       0.2 %     33       1,600       713        
 
   
     
     
                             
 
   
Total construction and land
    39       104,275       8.1 %                              
 
   
     
     
                             
 
Single-family mortgages:
                                                       
 
Single-family (1-4 units)
    24       3,227       0.3 %     5       476       291       482  
 
   
     
     
                             
 
 
    1,814     $ 1,290,680       100.0 %                           $ 5,941  
 
   
     
     
                             
 

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     The following table sets forth the location of the collateral for our loan portfolios as of December 31, 2002.
                             
        Number           Percent
        of   Gross   of
        Loans   Amount   Total
       
 
 
        (dollars in thousands)
Southern California:
                       
 
Los Angeles County
    920     $ 464,893       36.0 %
 
San Diego County
    64       84,900       6.6 %
 
Riverside County
    39       34,501       2.7 %
 
San Bernardino County
    48       55,579       4.3 %
 
Orange County
    48       42,353       3.3 %
 
All Other Southern California Counties
    16       45,240       3.5 %
 
   
     
     
 
   
Total Southern California
    1,135       727,466       56.4 %
 
   
     
     
 
Northern California:
                       
 
San Francisco County
    32       66,806       5.2 %
 
Sacramento County
    13       5,172       0.4 %
 
Santa Clara County
    14       9,899       0.8 %
 
Alameda County
    45       34,460       2.7 %
 
Fresno County
    38       16,117       1.2 %
 
San Mateo
    4       8,976       0.7 %
 
All Other Northern California Counties
    151       83,487       6.5 %
 
   
     
     
 
   
Total Northern California
    297       224,917       16.7 %
 
   
     
     
 
Outside California:
                       
 
Arizona
    89       85,779       6.6 %
 
Texas
    43       20,709       1.6 %
 
Washington
    32       45,782       3.5 %
 
Nevada
    51       59,688       4.6 %
 
Colorado
    35       24,073       1.9 %
 
Florida
    14       8,420       0.7 %
 
Missouri
    3       11,131       0.9 %
 
Utah
    9       4,095       0.3 %
 
New York
    7       3,000       0.2 %
 
Other U.S. States
    99       75,620       5.9 %
 
   
     
     
 
   
Total Outside California
    382       338,297       26.2 %
 
   
     
     
 
 
    1,814     $ 1,290,680       100.0 %
 
   
     
     
 

     Although we generally seek to limit risks associated with our portfolio of real estate and construction loans by limiting the geographic concentration and by varying the types of underlying collateral, significant concentration risks still remain. Concentrations of loans in certain geographic regions, for example, cause our risk associated with these loans to be closely associated with the general economic and social environment of the region. Localized economic and competitive conditions, natural disasters, possible terrorist activities or social conditions all may affect the values of collateral located within a particular geographic area. In addition, certain types of properties may be more or less subject to changes in prevailing economic, competitive or social conditions.

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     The following table sets forth certain information with respect to our real estate loan originations and purchases and real estate loans held in trust. Premiums paid and discounts taken on loans purchased in the secondary market are not included below.
                         
    As of and for the Years Ended December 31,
   
    2002   2001   2000
   
 
 
    (dollars in thousands)
Gross real estate loans originated and retained in the portfolio
  $ 412,332     $ 285,650     $ 198,163  
Gross real estate loans originated on behalf of third-party investors
          9,018       15,300  
Gross commercial revolving credit loans
    4,195              
Gross film financing originated
    34,340              
 
                     
Gross film financing purchased
    (2)    92,584              
Gross franchise loans purchased
    7,335       53,319       5,922  
Gross real estate loans purchased
    (2)  120,363       154,081       (1)  434,495  
 
   
     
     
 
Total loan production
  $ 671,149     $ 502,068     $ 653,880  
 
   
     
     
 
Gross loans at end of period
  $ 1,468,949     $ 1,303,434     $ 1,276,106  
Gross loans weighted-average portfolio yield
    8.20 %     9.26 %     10.62 %
Average size of loans originated and retained in the Company’s portfolio
  $ 1,062     $ 1,120     $ 2,359  


(1)   Includes $250.5 million of real estate loans acquired through the ICCMAC Trust acquisition in 2000.
(2)   Includes $36.8 million of gross real estate loans acquired in 2002 in connection with the acquisition of Asahi Bank of California and $92.6 million of film finance loans acquired in 2002 in connection with the acquisition of LHO.

Investment Securities

     The following table shows the amortized cost and approximate fair value of investment securities available for sale at the dates indicated.
                                                 
    December 31,
   
    2002   2001   2000
   
 
 
    Amortized   Fair   Amortized   Fair   Amortized   Fair
    Cost   Value   Cost   Value   Cost   Value
   
 
 
 
 
 
    (in thousands)
U.S. Government Agency
  $ 48,698     $ 48,986     $ 29,409     $ 29,404     $ 46,196     $ 46,319  
Residual interest in securitized loans
    5,305       5,619                          
Equity securities
    25       72       14       7       22       6  
 
   
     
     
     
     
     
 
Total investment securities available for sale
  $ 54,028     $ 54,677     $ 29,423     $ 29,411     $ 46,218     $ 46,325  
 
   
     
     
     
     
     
 

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     During the first quarter of 2002, the Company formed a limited liability company to issue $86.3 million of asset-backed notes in a securitization of substantially all of its residential loan portfolio. The Company recognized a gain of $3.7 million on the securitization of these loans and is included in other non-interest income within the consolidated statement of income. Concurrent with recognizing such gain on sale, the Company recorded a residual interest of $5.6 million, which represents the present value of future cash flows (spread and fees) that are anticipated to be received over the life of the loans. The residual interest is recorded on the consolidated balance sheet in the “Investment securities available for sale, at fair value”. The value of the residual interest is subject to substantial credit, prepayment, and interest rate risk on the sold residential loans. In accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the residual interest is classified as “available-for-sale” and, as such, recorded at fair value with the resultant changes in fair value recorded as unrealized gain or loss in a separate component of shareholders’ equity in “accumulated other comprehensive income or loss”, until realized. Fair value is determined on a monthly basis based on a discounted cash flow analysis. These cash flows are projected over the lives of the receivables using prepayment, default, and interest rate assumptions that we believe market participants would use for similar financial instruments.

     At December 31, 2002, key assumptions used to estimate the fair value of the residual interest based on projected cash flows, and the sensitivity of the value to immediate adverse changes in those assumptions is as follows:

         
    December 31, 2002
   
Dollars in thousands
       
Fair value of retained interest
  $ 5,619  
Weighted average life (in years)
    1.49  
Weighted average annual prepayment speed
    35.0 %
Impact of 10% adverse change
  $ (23 )
Impact of 25% adverse change
  $ (59 )
Weighted average annual discount rate
    15.0 %
Impact of 10% adverse change
  $ (167 )
Impact of 25% adverse change
  $ (404 )
Weighted average lifetime credit losses
    3.3 %
Impact of 10% adverse change
  $ (285 )
Impact of 25% adverse change
  $ (678 )

     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value of the residual is based on a variation in assumptions and generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the residual interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments but increased credit losses), which might magnify or counteract the sensitivities, and depending on the severity of such changes, the results of operations may be materially affected.

     The following table indicates the composition of the investment security portfolio assuming these securities are held to maturity based on the final maturity of each investment.

                                                                     
                        Due after One           Due after Five                        
        Due in One           Year through           Years through           Due after        
        Year or Less           Five Years           Ten Years           Ten Years        
       
                Weighted           Weighted           Weighted           Weighted
                Average           Average           Average           Average
        Balance   Yield   Balance   Yield   Balance   Yield   Balance   Yield
       
 
 
 
 
 
 
 
December 31, 2002
                                                               
 
Investment securities available for sale
                                                               
   
U.S. Government Agency
  $           $ 48,121       4.44 %   $           $ 865       8.25 %
   
Equity Securities
    72                                            
   
Residual interest in securitized loans
                5,619                                
 
   
             
             
             
         
   
Total investment securities available for sale
  $ 72             $ 53,740             $             $ 865          
 
   
             
             
             
         

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Liquidity and Deposit Accounts

     Liquidity refers to our ability to maintain cash flow adequate to fund operations and meet obligations and other commitments on a timely basis, including the payment of maturing deposits and the origination or purchase of new loans. We maintain a cash and investment securities portfolio designed to satisfy operating and regulatory liquidity requirements while preserving capital and maximizing yield. As of December 31, 2002 and 2001, the Bank’s liquidity ratios were 19.0% and 17.0%, respectively, exceeding the DFI regulatory requirement of 1.5%. In addition, our liquidity position is supported by a credit facility with the FHLB of San Francisco. As of December 31, 2002, we had remaining available borrowing capacity under this credit facility of $65.2 million, net of the $3.4 million of additional FHLB Stock that we would be required to purchase to support those additional borrowings, and $30.0 million of unused federal funds credit facilities under established lines of credit with two banks. In addition, ITLA Capital established a revolving credit facility with a bank in the amount of $35.0 million commencing on January 24, 2003, which declined to $10.0 on February 28, 2003 and matured on March 31, 2003.

     Total deposit accounts increased approximately $112.3 million to $1.1 billion at December 31, 2002 from $953.7 million at December 31, 2001. The increase in deposits in 2002 was primarily related to the origination of brokered deposits. Brokered deposits totaled $103.6 million at December 31, 2002, as compared to none at December 31, 2001. Total deposit accounts decreased approximately $62.0 million to $953.7 million at December 31, 2001 from $1.0 billion at December 31, 2000. In both 2002 and 2001, the funds provided from deposits were used to fund the growth in our loan portfolio. Although we compete for deposits primarily on the basis of rates, based on our historical experience regarding retention of deposits, management believes that a significant portion of deposits will remain with us upon maturity on an ongoing basis.

     The following table sets forth information regarding deposits outstanding at the dates indicated.

                         
    December 31,
   
    2002   2001   2000
   
 
 
    (in thousands)
Money market and passbook accounts
  $ 168,525     $ 158,188     $ 102,868  
Time certificates under $100,000
    521,404       526,911       572,851  
Time certificates $100,000 and over
    375,982       268,555       339,980  
 
   
     
     
 
 
  $ 1,065,911     $ 953,654     $ 1,015,699  
 
   
     
     
 

     The following table sets forth the maturities of certificates of deposit $100,000 and over at December 31, 2002 (in thousands):

           
Certificates of deposit $100,000 and over:
       
 
Maturing within three months
  $ 95,604  
 
After three but within six months
    80,300  
 
After six but within twelve months
    115,708  
 
After twelve months
    84,370  
 
   
 
Total certificates of deposit $100,00 and over:
  $ 375,982  
 
   
 

Capital Resources

     As of December 31, 2002, the Bank’s leverage, tier 1 risk-based and total risk-based capital ratios were 13.0%, 13.2% and 14.4%, respectively. These ratios were 10.1%, 10.7% and 12.0% as of December 31, 2001, respectively. The minimum regulatory requirements for leverage, tier 1 risk-based and total risk-based capital ratios are 4.0%, 4.0% and 8.0%, respectively. The “well capitalized” regulatory requirements for leverage, tier 1 risk-based and total risk-based capital ratios are 5.0%, 6.0% and 10.0%, respectively. As of December 31, 2002 and 2001, the Bank’s capital position was designated as “well capitalized” for regulatory purposes.

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     Our shareholders’ equity increased $18.8 million to $156.7 million at December 31, 2002 compared to $137.9 million at December 31, 2001, due primarily to the accumulation of $20.0 million in net income as retained earnings, and a $442,000 increase due to the change in accumulated other comprehensive income. This increase was partially offset by a $2.3 million reduction due to the repurchase of shares of our common stock currently held as treasury stock. There were no dividends declared or paid by us during 2002.

Credit Risk Elements

Allowance for Loan Losses and Nonperforming Assets

     The following table provides certain information with respect to our total allowance for loan losses, including charge-offs, recoveries and selected ratios, for the periods indicated.

                                                 
            As of and for the Years Ended December 31,
           
            2002   2001   2000   1999   1998
           
 
 
 
 
            (dollars in thousands)
Balance at beginning of year
  $ 26,650     $ 27,186     $ 19,895     $ 16,811     $ 12,178  
 
Provision for loan losses
    9,030       4,575       4,775       4,950       4,550  
 
Addition due to purchase of the ICCMAC Trust
                4,614              
 
Additions due to purchase of LHO and Asahi
    2,048                                  
Charge offs:
                                       
 
Real estate loans
    (4,730 )     (2,845 )     (1,489 )     (2,088 )     (64 )
       
Construction loans
          (2,419 )     (1,000 )            
 
   
     
     
     
     
 
       
    Total charge-offs
    (4,730 )     (5,264 )     (2,489 )     (2,088 )     (64 )
 
   
     
     
     
     
 
 
Recoveries:
                                       
       
Real estate loans
    11       153       391       222       147  
 
   
     
     
     
     
 
       
    Total recoveries
    11       153       391       222       147  
 
   
     
     
     
     
 
       
        Net (charge-offs) recoveries
    (4,719 )     (5,111 )     (2,098 )     (1,866 )     83  
 
   
     
     
     
     
 
Balance at end of the year
  $ 33,009     $ 26,650     $ 27,186     $ 19,895     $ 16,811  
 
   
     
     
     
     
 
     
Average real estate loans outstanding during the year
  $ 1,305,902     $ 1,295,097     $ 1,147,602     $ 925,059     $ 811,847  
     
Loans, net, at end of the year (1)
  $ 1,471,243     $ 1,311,178     $ 1,284,835     $ 971,375     $ 878,900  
Selected Ratios:
                                       
     
Net (charge-offs) recoveries to average loans outstanding
    (0.36 %)     (0.39 %)     (0.18 %)     (0.20 %)     0.01 %
     
Net (charge-offs) recoveries to loans, net (1)
    (0.32 %)     (0.39 %)     (0.16 %)     (0.19 %)     0.01 %
     
Allowance for loan losses to loans, net (1)
    2.31 %     2.16 %     2.12 %     2.05 %     1.91 %
     
Allowance for loan losses to nonaccrual loans
    555.61 %     174.30 %     149.85 %     249.40 %     309.37 %


(1)   Loans, before allowance for loan losses and net of premium, deferred loan origination costs and deferred loan fees.

     The allowance for loan losses increased to $33.0 million or 2.31% of our total loan portfolio at December 31, 2002 from $26.7 million or 2.03% of our total loan portfolio at December 31, 2001. The increase in the allowance was due primarily to the growth in our loan portfolio and the increase in our other loans of concern, which increased from $21.5 million in 2001 to $35.5 million in 2002. During 2002, we increased our provision to $9.0 million compared to $4.6 million in 2001 as a result of the above factors.

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     The allowance for loan losses decreased to $26.7 million or 2.03% of our total real estate loan portfolio, at December 31, 2001 from $27.2 million or 2.12% of our total real estate loan portfolio, at December 31, 2000. The decrease in allowance was due primarily to higher net charge offs of $5.1 million for the year ended December 31, 2001 as compared to $2.1 million from the prior year and lower provision for loan losses of $4.6 million for the year ended December 31, 2001 as compared to $4.8 million for the year ended December 31, 2000. The factors affecting the lower provision for loan losses in 2001 were as follows: (1) lower nonperforming loans of $15.3 million at December 31, 2001 as compared to $18.1 million at December 31, 2000 (2) the decrease in loan delinquencies to $32.9 million at December 31, 2001 as compared to $44.1 million at December 31, 2000 and (3) the reallocation of $2.7 million of allowance for loan losses from the Imperial Capital REIT to the Bank, as actual loan losses related to real estate loans held in trust have been negligible.

     The following table sets forth management’s historical allocation of the allowance for loan losses by loan or contract category and the percentage of gross loans in each category to total gross loans at the dates indicated.

                                                   
      December 31,
     
      2002   2001   2000
     
 
 
      Allowance           Allowance           Allowance        
      for loan   % of loans   for loan   % of loans   for loan   % of loans
Loan Category:   losses   (1)   losses   (1)   losses   (1)

 
 
 
 
 
 
Secured by real estate
  $ 28,348       88 %   $ 26,650       100 %   $ 27,186       100 %
Film finance
    2,961       8                          
Franchise
    1,490       4                          
Commercial
    210                                
 
   
     
     
     
     
     
 
 
Total
  $ 33,009       100 %   $ 26,650       100 %   $ 27,186       100 %
 
   
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                   
      December 31,
     
      1999   1998
     
 
      Allowance           Allowance        
      for loan   % of loans   for loan   % of loans
Loan Category:   losses   (1)   losses   (1)

 
 
 
 
Secured by real estate
  $ 19,895       100 %   $ 16,811       100 %
Film finance
                       
Franchise
                       
Commercial
                       
 
   
     
     
     
 
 
Total
  $ 19,895       100 %   $ 16,811       100 %
 
   
     
     
     
 


(1)   Percentage represents the percent of gross loans in category to total gross loans.

     Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

     Management periodically assesses the adequacy of the allowance for loan losses by reference to many factors that may be weighted differently at various times depending on prevailing conditions. These factors include, among other elements:

          general portfolio trends relative to asset and portfolio size;
 
          asset categories;
 
          potential credit and geographic concentrations;
 
          delinquency trends and nonaccrual loan levels;
 
          historical loss experience and risks associated with changes in economic, social and business conditions; and
 
          the underwriting standards in effect when the loan was made.

     Accordingly, the calculation of the adequacy of the allowance for loan losses is not based solely on the level of nonperforming assets. Management believes that our allowance for loan losses as of December 31, 2002 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Bank’s allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

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     The following table sets forth the delinquency status of our loan portfolios at each of the dates indicated.

                                                   
      December 31,
     
      2002   2001   2000
     
 
 
              Percent of           Percent of           Percent of
              Gross           Gross           Gross
      Amount   Portfolio   Amount   Portfolio   Amount   Portfolio
     
 
 
 
 
 
      (dollars in thousands)
Period of Delinquency
                                               
 
30 – 59 days
  $ 17,500       1.19 %   $ 11,481       0.88 %   $ 12,245       0.96 %
 
60 – 89 days
    148       0.01 %     7,954       0.61 %     15,640       1.23 %
 
90 days or more
    5,941       0.40 %     13,450       1.03 %     16,226       1.27 %
 
   
     
     
     
     
     
 
 
Total loans delinquent
  $ 23,589       1.61 %   $ 32,885       2.52 %   $ 44,111       3.46 %
 
   
     
     
     
     
     
 

     The decrease in total delinquent loans in 2002 was due primarily to a $19.1 million decrease in past due one-four family real estate loans and a $1.7 million decrease of past due loans held in trust, partially offset by a $9.5 million increase in past due commercial real estate loans and a $1.9 million increase in past due franchise loans.

     The Company has established a policy that all loans greater than $1.5 million are reviewed annually. This review usually involves obtaining updated information about the collateral and source of repayment. In addition, independent outside consultants periodically review the Bank’s loan portfolio and report findings to management and the audit committee of the board of directors. Loans considered to warrant special attention are presented to the review and reserve committee, which meets at least monthly to review the status of classified loans, consider new classifications or declassifications, determine the need for and amount of any charge offs, and recommend to our executive committee of the board of directors the level of allowance for loan losses to be maintained. If management believes that the collection of the full amount of principal is unlikely and the value of the collateral securing the obligation is insufficient, steps are generally taken to protect and liquidate the collateral. Losses resulting from the difference between the loan balance and the fair market value of the collateral are recognized by a partial charge-off of the loan balance to the collateral’s fair market value. While real property collateral is held for sale, it is subject to periodic evaluation and/or appraisal. If an evaluation or appraisal indicates that the property will ultimately sell for less than our recorded value plus costs of disposition, the loss is recognized by a charge to allowance for loan losses on other real estate owned.

     Loans are placed on nonaccrual status when they become 90 days or more contractually delinquent, or earlier if the collection of interest is considered by management to be doubtful, unless the loan is considered well secured and in the process of collection. Subsequent cash collections on nonaccrual loans are either recognized as interest income on a cash basis, if the loan is well secured and in management’s judgment the net book value is fully collectible, or recorded entirely as a reduction of principal.

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     The following table sets forth our nonperforming assets by category and troubled debt restructurings as of the dates indicated:

                                               
          December 31
         
          2002   2001   2000   1999   1998
         
 
 
 
 
          (dollars in thousands)
Nonaccrual loans:(1)
                                       
 
Real Estate (2)
  $ 3,913     $ 13,690     $ 9,430     $ 7,977     $ 5,434  
 
Construction
          1,600       8,712              
 
Franchise
    1,986                          
Other real estate owned, net
    12,593       13,741       2,250       1,041       1,201  
 
   
     
     
     
     
 
     
Total nonperforming assets
    18,492       29,031       20,392       9,018       6,635  
     
Accruing loans past-due 90 days or more with respect to principal or interest
                9,765              
     
Performing troubled debt restructurings
    7,858       3,752       3,002       13,996       805  
 
   
     
     
     
     
 
 
  $ 26,350     $ 32,783     $ 33,159     $ 23,014     $ 7,440  
 
   
     
     
     
     
 
Non accrual loans to total gross loans and real estate loans in trust
    0.36 %     1.17 %     1.42 %     0.82 %     0.62 %
Allowance for loan losses to nonaccrual loans
    555.61 %     174.30 %     149.85 %     249.40 %     309.37 %
Nonperforming assets to total assets
    1.08 %     1.92 %     1.44 %     0.81 %     0.64 %


(1)   Gross interest income that would have been recorded on nonaccrual loans had they been current in accordance with original terms was $941,000 and $2.1 million for the years ended December 31, 2002 and 2001 respectively. The amount of interest income on such nonaccrual loans included in net income for the year ended December 31, 2002 and 2001 was $796,000 and $340,000, respectively.
(2)   Includes one loan with a net book balance of $1.4 million that was a nonperforming troubled debt restructuring in 2000.

     Our nonaccrual loans totaled $5.9 million at December 31, 2002. Two of these loans had an outstanding balance greater than $1.0 million.

     In 2002, $4.4 million of new other real estate owned was acquired, $4.9 million of other real estate owned was sold, and $836,000 of write-downs were taken, resulting in net other real estate owned at December 31, 2002 of $12.6 million. Other real estate owned at December 31, 2002 consisted of four properties with an average balance of approximately $3.1 million. The other real estate owned property with the largest net book balance totaled $5.3 million.

     In addition to the above, management has concerns as to the borrowers’ ability to comply with present repayment terms on $35.5 million of other loans of concern as of December 31, 2002. See “Item 1. Business–Nonperforming Assets and Other Loans of Concern.”

Item 7.A. Quantitative and Qualitative Disclosures About Market Risk

     We realize income principally from the differential or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of our loan agreements and deposit accounts, a change in interest rates could also affect the duration of the loan portfolio and/or the deposit base, which could alter our sensitivity to future changes in interest rates.

     Interest rate risk management focuses on maintaining consistent growth in net interest income within board-approved policy limits while taking into consideration, among other factors, our overall credit, operating income, operating cost and capital profile. The asset/liability management committee, which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change in net interest income as a result of changes in interest rates. See “Item 1. Business – Nonperforming Assets and Other Loans of Concern”.

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     In evaluating our exposure to changes in interest rates, certain risks inherent in the method of analysis presented in the following table must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees and at different times to changes in market rates. Additionally, loan prepayments and early withdrawals of time certificates could cause interest sensitivities to vary from those that appear in the following table. Further, certain assets, such as variable rate real estate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. The majority of our variable rate real estate loans may not adjust downward below their initial rate, with increases generally limited to maximum adjustments of 2% per year and up to 4% over the life of the loan. These loans may also be subject to prepayment penalties. At December 31, 2002, 85.9% of our variable rate loan portfolio would not adjust downward below the initial interest rate with the weighted-average minimum interest rate on this portfolio being 7.84% and 79.5% of the total loans outstanding had a lifetime interest rate cap, with the weighted-average lifetime interest rate cap on this portfolio being 10.03%. The anticipated effects of these various factors are considered by management in implementing interest rate risk management activities.

     We use an internal earnings simulation model as a tool to identify and manage our interest rate risk profile. The model is based on projected cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments, considering applicable interest rate floors and caps and prepayment penalties associated with each financial instrument. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

     The following table shows our estimated earnings sensitivity profile as of December 31, 2002:

         
Changes in   Percentage Change in
Interest rates   Net Interest Income
(Basis Points)   (12 Months)

 
+ 200 Over One Year
    -5.00 %
+ 100 Over One Year
    -3.73 %
- 100 Over One Year
    4.05 %
- 200 Over One Year
    N/A  

     Because of the low level of current market interest rates, the above analysis was not performed for an interest rate decrease greater than 100 basis points.

     Another tool used to identify and manage our interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. Although our cumulative GAP position indicates an asset-sensitive position, our loan portfolio has reached floor interest rates in excess of current market rates to such an extent that a 200 basis point increase in rates does not cause our assets to reprice. Our liabilities within the cumulative GAP period reprice upward to market rates under this scenario causing compression of net interest income. In a declining rate environment, our liabilities will continue to reprice downward, while our loan portfolio remains at its floor rates, creating an increase in net interest income.

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     The following table presents an estimate of our static GAP analysis as of December 31, 2002.
                                                   
      Maturing or Repricing in
     
              After 3   After 1 Year                        
      3 months   Months But   But Within   After   Non-Interest        
      or less   Within 1 year   5 Years   5 Years   Sensitive   Total
     
 
 
 
 
 
      (dollars in thousands)
Assets
                                               
Loans (1)
  $ 754,340     $ 566,588     $ 24,677     $ 1,774     $     $ 1,347,379  
Real estate loans held in trust (2)
    55,128       14,197             54,539               123,864  
Cash and cash equivalents
    146,463                         14,385       160,848  
Investment securities available for sale
                53,740       865       72       54,677  
Noninterest-earning assets less allowance for loan losses and unearned fees
                            35,197       35,197  
 
   
     
     
     
     
     
 
 
Total assets
  $ 955,931     $ 580,785     $ 78,417     $ 57,178     $ 49,654     $ 1,721,965  
 
   
     
     
     
     
     
 
Liabilities and Shareholders’ Equity
                                               
Time certificates under $100,000
  $ 134,420     $ 305,489     $ 81,495     $     $     $ 521,404  
Time certificates $100,000 and more
    95,604       196,008       84,370                   375,982  
Money market and passbook accounts
    168,525                               168,982  
FHLB advances
    188,700       54,850       80,605       14,530             338,685  
Collateralized mortgage obligations
    14,441       36,505       18,131                   69,077  
Other liabilities
                            10,006       10,006  
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures
    53,394                   28,201             81,595  
Shareholders’ equity
                            156,691       156,691  
 
   
     
     
     
     
     
 
 
Total liabilities and shareholders’ equity
  $ 655,084     $ 590,799     $ 266,654     $ 42,731     $ 166,697     $ 1,721,965  
 
   
     
     
     
     
     
 
Net repricing assets over (under) repricing liabilities equals interest rate sensitivity GAP
  $ 300,847     $ (10,014 )   $ (188,237 )   $ 14,447     $ (117,043 )        
 
   
     
     
     
     
         
Cumulative interest rate sensitivity GAP
  $ 300,847     $ 290,833     $ 102,596     $ 117,043     $          
 
   
     
     
     
     
         
Cumulative GAP as a percentage of total assets
    17.5 %     16.9 %     6.0 %     6.8 %     0.0 %        
 
   
     
     
     
     
         


(1)   Variable rate loans consist principally of real estate secured loans with a maximum term of 30 years. Approximately 65% of these loans are generally adjustable quarterly based on changes in various indexes, subject generally to a maximum increase of 2% annually and up to 4% over the life of the loan. Approximately 17% of these loans are fixed for an initial period of two to five years from origination, and then are adjustable quarterly based on changes in various indexes. Nonaccrual loans of approximately $5.7 million are assumed to reprice after five years.
(2)   Nonaccrual loans of approximately $233,000 are assumed to reprice after five years.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

         
    Page
   
Report of Independent Auditors
    38  
Report of Predecessor Independent Public Accountants
    39  
Consolidated Balance Sheets as of December 31, 2002 and 2001
    40  
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000
    41  
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000
    42  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
    43  
Notes to Consolidated Financial Statements
    44  

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders and the Board of Directors of
ITLA Capital Corporation:

We have audited the accompanying consolidated balance sheet of ITLA Capital Corporation and subsidiaries (“the Company”), a Delaware corporation, as of December 31, 2002, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ITLA Capital Corporation and subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.

/s/ Ernst &Young LLP

Los Angeles, California
January 30, 2003

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and the Board of Directors of
ITLA Capital Corporation:

We have audited the accompanying consolidated balance sheets of ITLA Capital Corporation and subsidiaries (“the Company”), a Delaware corporation, as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ITLA Capital Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Los Angeles, California
January 25, 2002

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with ITLA Capital Corporation’s filing Form 10-K for the year ended December 31, 2001. Arthur Andersen LLP has not reissued this report in connection with this filing on Form 10-K.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                       
          December 31,
         
          2002   2001
         
 
          (in thousands except share amounts)
Assets
               
Cash and cash equivalents
  $ 160,848     $ 134,241  
Investment securities available for sale, at fair value
    54,677       29,411  
Stock in Federal Home Loan Bank
    16,934       13,464  
Loans, net (net of allowance for loan losses of $31,081 and $24,722 in 2002 and 2001, respectively)
    1,316,298       1,122,370  
Real estate loans held in trust, net (net of allowance for loan losses of $1,928 in 2002 and 2001)
    121,936       162,158  
Interest receivable
    9,158       11,144  
Other real estate owned, net
    12,593       13,741  
Premises and equipment, net
    4,197       2,177  
Deferred income taxes
    13,822       11,869  
Goodwill
    3,118        
Other assets
    8,384       7,733  
 
   
     
 
     
Total assets
  $ 1,721,965     $ 1,508,308  
 
   
     
 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
 
Deposit accounts
  $ 1,065,911     $ 953,654  
 
Federal Home Loan Bank advances
    338,685       269,285  
 
Collateralized mortgage obligations
    69,077       109,648  
 
Accounts payable and other liabilities
    10,006       9,674  
 
   
     
 
   
Total liabilities
    1,483,679       1,342,261  
 
   
     
 
Commitments and contingencies (note 17)
               
 
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures
    81,595       28,118  
 
Shareholders’ equity:
               
 
Preferred stock, 5,000,000 shares authorized, none issued
           
 
Contributed capital – common stock, $.01 par value; 20,000,000 shares authorized, 8,226,414 and 8,212,749 issued and outstanding in 2002 and 2001, respectively
    58,841       58,183  
 
Retained earnings
    135,773       115,768  
 
Accumulated other comprehensive income (loss)
    435       (7 )
 
   
     
 
 
    195,049       173,944  
 
Less treasury stock, at cost 2,447,656 and 2,354,056 shares in 2002 and 2001, respectively
    (38,358 )     (36,015 )
 
   
     
 
   
Total shareholders’ equity
    156,691       137,929  
 
   
     
 
     
Total liabilities and shareholders’ equity
  $ 1,721,965     $ 1,508,308  
 
   
     
 

     See accompanying notes to the consolidated financial statements.

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Table of Contents

ITLA CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
                                 
            Years Ended December 31,
           
            2002   2001   2000
           
 
 
            (in thousands except per share amounts)
Interest income:
                       
 
Loans receivable, including fees
  $ 96,894     $ 104,949     $ 102,419  
 
Real estate loans held in trust
    10,239       14,954       16,192  
 
Cash and investment securities
    3,475       3,192       5,164  
 
   
     
     
 
   
Total interest income
    110,608       123,095       123,775  
 
   
     
     
 
Interest expense:
                       
 
Deposit accounts
    29,349       52,864       55,968  
 
Collateralized mortgage obligations
    2,301       6,209       10,901  
 
Federal Home Loan Bank advances
    5,672       4,790       1,773  
 
   
     
     
 
   
Total interest expense
    37,322       63,863       68,642  
 
   
     
     
 
     
Net interest income before provisions for loan losses
    73,286       59,232       55,133  
Provision for loan losses
    9,030       4,575       4,775  
 
   
     
     
 
     
Net interest income after provisions for loan losses
    64,256       54,657       50,358  
 
   
     
     
 
Non-interest income:
                       
 
Fee income from mortgage banking activities
          83       47  
 
Gain on sale of investment securities
                1,412  
 
Other
    373       976       872  
 
   
     
     
 
   
Total non-interest income
    373       1,059       2,331  
 
   
     
     
 
Non-interest expense:
                       
 
Compensation and benefits
    13,954       11,778       9,958  
 
Occupancy and equipment
    3,165       2,968       2,567  
 
FDIC assessment
    159       182       188  
 
Other
    9,754       7,890       7,941  
 
   
     
     
 
   
Total recurring general and administrative
    27,032       22,818       20,654  
 
Non-recurring expense
                1,400  
 
   
     
     
 
   
Total general and administrative
    27,032       22,818       22,054  
 
   
     
     
 
 
Real estate owned expense (income), net
    632       136       (31 )
 
Provision for losses on other real estate owned
    796       269       167  
 
(Gain) loss on sale of other real estate owned, net
    (105 )     (18 )     2  
 
   
     
     
 
   
Total real estate owned expense, net
    1,323       387       138  
 
   
     
     
 
       
Total non-interest expense
    28,355       23,205       22,192  
 
   
     
     
 
Income before provision for income taxes and minority interest in income of subsidiary
    36,274       32,511       30,497  
Minority interest in income of subsidiary
    3,481       2,967       478  
 
   
     
     
 
Income before provision for income taxes
    32,793       29,544       30,019  
Provision for income taxes
    12,788       11,393       11,880  
 
   
     
     
 
 
NET INCOME
  $ 20,005     $ 18,151     $ 18,139  
 
   
     
     
 
 
BASIC EARNINGS PER SHARE
  $ 3.35     $ 2.82     $ 2.57  
 
   
     
     
 
 
DILUTED EARNINGS PER SHARE
  $ 3.16     $ 2.72     $ 2.51  
 
   
     
     
 

See accompanying notes to the consolidated financial statements.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

                                                 
    Common Stock                        
    Number of shares   Shareholders' Equity
   
 
                            Contributed Capital
    Gross           Net  
    Shares           Shares                   Total
    Issued and   Treasury   Issued and   Share   Earned   Contributed
    Outstanding   Shares   Outstanding   Capital   Compensation   Capital
   
 
 
 
 
 
    (in thousands except share amounts)
Balance at January 1, 2000
    8,202,916       (1,021,432 )     7,181,484     $ 56,459     $ 725     $ 57,184  
 
                                               
Issuance of common stock - employee stock options
    3,833             3,833       36             36  
Earned compensation from Supplemental Executive Retirement Plan /Recognition and Retention Plan, net
          11,115       11,115             (100 )     (100 )
Common stock repurchased
          (536,019 )     (536,019 )                  
Net income
                                   
Total comprehensive income
                                   
 
   
     
     
     
     
     
 
Balance at December 31, 2000
    8,206,749       (1,546,336 )     6,660,413       56,495       625       57,120  
 
   
     
     
     
     
     
 
Issuance of common stock-employee stock options
    6,000             6,000       74             74  
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
          1,980       1,980             989       989  
Common stock repurchased
          (809,700 )     (809,700 )                  
Net income
                                   
Total comprehensive income
                                   
 
   
     
     
     
     
     
 
Balance at December 31, 2001
    8,212,749       (2,354,056 )     5,858,693       56,569       1,614       58,183  
 
   
     
     
     
     
     
 
Issuance of common stock- employee stock options
    13,665             13,665       184             184  
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
                            474       474  
Common stock repurchased
          (93,600 )     (93,600 )                  
Net income
                                   
Total comprehensive income
                                   
 
   
     
     
     
     
     
 
Balance at December 31, 2002
    8,226,414       (2,447,656 )     5,778,758     $ 56,753     $ 2,088     $ 58,841  
 
   
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
    Shareholders' Equity
   
    Contributed Capital                        
   
  Accumulated                
            Other   Treasury        
    Retained   Comprehensive   Stock,        
    Earnings   Income (loss)   At Cost   Total
   
 
 
 
    (in thousands except share amounts)
Balance at January 1, 2000
  $ 79,478     $ 706     $ (13,673 )   $ 123,695  
 
                           
 
Issuance of common stock - employee stock options
                      36  
Earned compensation from Supplemental Executive Retirement Plan /Recognition and Retention Plan, net
                100        
Common stock repurchased
                (7,701 )     (7,701 )
Net income
    18,139                   18,139  
Total comprehensive income
          (615 )           (615 )
 
   
     
     
     
 
Balance at December 31, 2000
    97,617       91       (21,274 )     133,554  
 
   
     
     
     
 
Issuance of common stock-employee stock options
                      74  
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
                18       1,007  
Common stock repurchased
                (14,759 )     (14,759 )
Net income
    18,151                   18,151  
Total comprehensive income
          (98 )           (98 )
 
   
     
     
     
 
Balance at December 31, 2001
    115,768       (7 )     (36,015 )     137,929  
 
   
     
     
     
 
Issuance of common stock- employee stock options
                      184  
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
                      474  
Common stock repurchased
                (2,343 )     (2,343 )
Net income
    20,005                   20,005  
Total comprehensive income
          442             442  
 
   
     
     
     
 
Balance at December 31, 2002
  $ 135,773     $ 435     $ (38,358 )   $ 156,691  
 
   
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
    Comprehensive Income
   
                    Reclassification of        
                    realized gains        
            Unrealized   previously        
            Gain (loss)   recognized in   Total
    Net   on securities,   comprehensive   Comprehensive
    Income   net of tax   income, net of tax   Income
   
 
 
 
    (in thousands except share amounts)
Balance at January 1, 2000
                               
 
                               
Issuance of common stock - employee stock options
                               
Earned compensation from Supplemental Executive Retirement Plan /Recognition and Retention Plan, net
                               
Common stock repurchased
                               
Net income
                               
Total comprehensive income
  $ 18,139     $ 232     $ (847 )   $ 17,524  
 
   
     
     
     
 
Balance at December 31, 2000
                               
 
                               
Issuance of common stock-employee stock options
                               
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
                               
Common stock repurchased
                               
Net income
                               
Total comprehensive income
    18,151       (98 )           18,053  
 
   
     
     
     
 
Balance at December 31, 2001
                               
 
                               
Issuance of common stock- employee stock options
                               
Earned compensation from Supplemental Executive Retirement Plan / Recognition and Retention Plan, net
                               
Common stock repurchased
                               
Net income
                               
Total comprehensive income
  $ 20,005     $ 442     $     $ 20,447  
 
   
     
     
     
 
Balance at December 31, 2002
                               
 
                               

See accompanying notes to the consolidated financial statements.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 
            Years Ended December 31
           
            2002   2001   2000
           
 
 
            (in thousands)
Cash Flows From Operating Activities:
                       
 
Net Income
  $ 20,005     $ 18,151     $ 18,139  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization of premises and equipment
    946       836       796  
   
Amortization of premium on purchased loans
    1,859       3,143       2,755  
   
Amortization of original issue discount and deferred debt issuance cost on CMOs
    168       294       874  
   
Amortization of deferred loan origination fees, net of costs
    (1,688 )     (1,333 )     (1,745 )
   
Provision for loan losses
    9,030       4,575       4,775  
   
Provision for losses on other real estate owned
    796       269       167  
   
Gain on sale of investment securities available for sale
                (1,412 )
   
(Gain) loss on sales of other real estate owned
    (105 )     (18 )     2  
   
Decrease (increase) in interest receivable
    1,986       677       (2,466 )
   
Deferred income tax benefit
    (2,255 )     (546 )     (1,321 )
   
Decrease (increase) in other assets
    363       462       (115 )
   
Increase (decrease) in accounts payable and other liabilities
    (368 )     (654 )     (346 )
 
   
     
     
 
     
Net cash provided by operating activities
    30,737       25,856       20,103  
 
   
     
     
 
Cash Flows From Investing Activities:
                       
   
Proceeds from securitization and sale of real estate loans
    98,155              
   
Purchases of investment securities available for sale
    (102,462 )     (45,400 )     (17,998 )
   
Proceeds from the maturity of investment securities available for sale
    78,705       62,260       15,000  
   
Proceeds from the sale of investment securities for sale
                16,176  
   
Purchase of CRA investment
                (4,766 )
   
(Increase) decrease in stock in Federal Home Loan Bank
    (3,470 )     (9,160 )     4,931  
   
Cash paid to acquire ICCMAC Multifamily and Commercial Trust 1999-1
                (51,069 )
   
Purchase of loans
    (90,909 )     (207,400 )     (189,889 )
   
(Increase) decrease in loans, net
    (84,889 )     108,493       75,264  
   
Repayment of real estate loans held in trust
    38,896       47,927       41,264  
   
Proceeds from sale of real estate loans
          755       12,720  
   
Proceeds from sale of other real estate owned
    3,972       5,687       1,685  
   
Cash paid for capital expenditures
    (2,859 )     (752 )     (798 )
   
Cash paid to acquire LHO, net
    (93,042 )            
   
Cash paid to acquire Asahi Bank of California, net
    (14,872 )            
   
Other, net
          (331 )     33  
 
   
     
     
 
     
Net cash used in investing activities
    (172,775 )     (37,921 )     (97,447 )
 
   
     
     
 
Cash Flows From Financing Activities:
                       
   
Proceeds from exercise of employee stock options
    184       74       36  
   
Cash paid to acquire treasury stock
    (2,343 )     (14,759 )     (7,701 )
   
Repayment of Asahi repurchase agreement, net
    (14,693 )            
   
Proceeds from issuance of trust preferred securities
    53,348       14,549       13,580  
   
Principal payments on collateralized mortgage obligations
    (40,739 )     (52,498 )     (43,949 )
   
Net increase (decrease) in deposit accounts
    103,488       (62,045 )     102,086  
   
Net proceeds from borrowings from the Federal Home Loan Bank
    69,400       190,035       12,000  
 
   
     
     
 
     
Net cash provided by financing activities
    168,645       75,356       76,052  
 
   
     
     
 
       
Net increase (decrease) in cash and cash equivalents
    26,607       63,291       (1,292 )
       
Cash and cash equivalents, beginning of period
    134,241       70,950       72,242  
 
   
     
     
 
       
Cash and cash equivalents, end of period
  $ 160,848     $ 134,241     $ 70,950  
 
   
     
     
 
Supplemental Cash Flow Information:
                       
   
Cash paid during the period for interest
  $ 36,753     $ 65,073     $ 68,625  
   
Cash paid during the period for income taxes
  $ 15,247     $ 9,750     $ 13,550  
Non-cash Investing Transactions:
                       
   
Loans transferred to other real estate owned
  $ 3,515     $ 16,961     $ 3,063  
   
Loans to facilitate the sale of other real estate owned
  $ 2,860     $ 2,050     $  

See accompanying notes to the consolidated financial statements.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization - ITLA Capital Corporation and Subsidiaries (“ITLA Capital”, or “the Company”) is primarily engaged in the origination of real estate loans secured by income producing real estate, and to a lesser extent the origination of franchise, tax refund anticipation, private label commercial revolving credit loans and film finance loans. Through our principal operating subsidiary, Imperial Capital Bank (“Imperial” or “the Bank”), the Company accepts deposits insured by the Federal Deposit Insurance Corporation (“FDIC”) which are used primarily to fund the investment in variable rate loans. During 2000, the Company acquired 100 percent of the equity and certain collateralized mortgage obligations (“CMOs”) of the ICCMAC Multifamily and Commercial Trust 1999-1 (the “ICCMAC Trust”), through our Imperial Capital Real Estate Investment Trust (“Imperial Capital REIT”) subsidiary. Additionally, in 2002 we formed ITLA Capital Statutory Trust III (the “Trust Preferred III”), ITLA Capital Statutory Trust IV (the “Trust Preferred IV”), and ITLA Capital Statutory Trust V (the “Trust Preferred V”), and in 2001 and 2000, we formed ITLA Capital Statutory Trust II (the “Trust Preferred II”) and ITLA Capital Statutory Trust I (the “Trust Preferred I”), respectively. The Trusts were established as subsidiaries whose sole purpose was to issue Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred securities”).

     During 2002, the Company formed ITLA Mortgage Loan Securitization 2002-1, LLC, a limited liability company to issue certain asset-backed notes in connection with the securitization of the Company’s performing residential loan portfolio.

     In November 2002, the Company entered into a strategic business relationship with various subsidiaries of Household International, Inc. (“Household”) relating to certain tax refund products. In connection with this relationship, the Bank originates tax refund anticipation loans and sells Household a non-recourse participation interest representing substantially all of the outstanding loan balance. Under the agreement, Household supports the Bank’s credit administration, compliance, treasury, and accounting functions with a range of services relating to the origination process, and services the loans on behalf of the Bank. Substantially all of the tax refund lending volume is generated during the first quarter of the year. The tax refund agreement is for a four-year term, with substantial break-up fees to apply in the event that Household terminates the agreement during the first two years of the agreement.

     The Company also entered into an agreement in December, 2002 with Household pursuant to which the Bank originates relatively small private label commercial revolving credit loans to small businesses. This agreement is for a two year term. These loans are used primarily to fund purchases from major retailers. Pursuant to this agreement, the Bank sells Household a non-recourse participation interest representing substantially all of the outstanding loan balance.

     As of December 31, 2002, the Bank had no tax refund anticipation loans outstanding and $4.2 million of private label commercial revolving loans outstanding.

     Imperial began operating as a California industrial bank since 1974, and became a publicly traded company in October 1995, when its shares were sold in an initial public offering. Imperial operates six deposit branches in California. From its formation in 1974 until December 31, 1999, Imperial operated under the name Imperial Thrift and Loan Association. Effective January 1, 2000, Imperial changed its name to Imperial Capital Bank.

     In December 2002, the Bank received regulatory approval to convert to a California state chartered commercial bank from a California industrial bank. In addition, ITLA Capital was approved by the Federal Reserve Bank to become a bank holding company. The Bank began operating as a commercial bank in January 2003.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Financial Statement Presentation — The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States (“GAAP”) and to prevailing practices within the financial services industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. Certain amounts in prior periods have been reclassified to conform to the presentation in the current period. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Cash and Cash Equivalents — We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

     Investment Securities — Investment securities available for sale are carried at fair value with unrealized gains or losses reported net of taxes as a component of other comprehensive income (loss) until realized. Realized gains and losses are determined using the specific identification method.

     Loans – Loans, which include real estate loans, franchise loans, film finance loans, commercial revolving credit loans and real estate loans held in trust, are generally carried at principal amounts outstanding plus purchase premiums, less charge-offs, net deferred loan origination fees and other unearned income. Deferred loan origination fees and other unearned income include deferred unamortized fees net of direct incremental loan origination costs. Interest income is accrued as earned. Net purchase premiums or discounts and deferred loan origination fees are amortized or accreted into interest income using the interest method.

     Loans are placed on nonaccrual status when they become 90 days or more contractually delinquent, or earlier if the collection of interest is considered by management to be unlikely. When a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against current period operating results. Subsequent cash collections on nonaccrual loans are either recognized as interest income on a cash basis if the loan is well secured and in management’s judgment the net book value is fully collectible, or recorded as a reduction of principal.

     Loans are considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all principal and interest amounts due according to the original contractual terms of the loan agreement on a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or by using the loan’s most recent market price or the fair value of the collateral if the loan is collateral dependent.

     When the measurement of an impaired loan is less than the recorded amount of the loan, a valuation allowance is established by recording a charge to the provision for loan losses. Subsequent increases or decreases in the valuation allowance for impaired loans are recorded by adjusting the existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.

     Our policy for recognizing interest income on impaired loans is the same as that for nonaccrual loans.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Allowance for Loan Losses - We maintain an allowance for loan losses at a level considered adequate to cover probable losses on loans. In evaluating the adequacy of the allowance for loan losses, management estimates the amount of the loss for each loan that has been identified as having more than standard credit risk. Those estimates give consideration to, among other factors, economic conditions, estimated real estate collateral value and cash flow, and the financial strength and commitment of the borrower or guarantors, where appropriate. Additionally, an estimate for loan loss is calculated for the remaining portion of the portfolio giving consideration to the Company’s historical loss experience in the portfolio, adjusted, as appropriate, for the estimated effects of current economic conditions and changes in the composition of the loan portfolio over time. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance, or portion thereof, has been confirmed.

     Other Real Estate Owned -Other real estate owned (“OREO”) represents real estate acquired through or in lieu of foreclosure. OREO is held for sale and is initially recorded at fair value less estimated costs of disposition at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or estimated fair value less costs of disposition. The net operating results from OREO are recognized as non-interest expense.

     Premises and Equipment — Premises and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets ranging from three to twelve years. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the estimated useful lives of the assets or the corresponding lease term.

     Goodwill – The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. The adoption of SFAS No. 142 ceases the current amortization of goodwill and will instead be subject to at least an annual assessment for impairment by applying a fair-value-based test. As of December 31, 2001, the Company did not have any goodwill or material identifiable intangible assets. In connection with acquisitions discussed in Note 2, the Company recognized approximately $3.1 million of goodwill. In accordance with SFAS No. 142, the Company will assess the goodwill for impairment on an annual basis, or on an interim basis if events or circumstances indicate the fair value of the goodwill has decreased below its carrying value. During 2002, the Company evaluated its goodwill, in accordance with SFAS No. 142, and determined that no impairment was required.

     Income Taxes — Provision for income taxes is the amount of estimated tax due reported on our tax returns and the change in the amount of deferred tax assets and liabilities. Deferred income taxes represent the estimated net income tax expense payable (or benefits receivable) for temporary differences between the carrying amounts for financial reporting purposes and the amounts used for tax purposes.

     Earnings Per Share - Earnings per share (“EPS”) for all periods presented in the consolidated statements of income are computed in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128 - “Earnings Per Share”, and are based on the weighted-average number of shares outstanding during each year. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the effect of common stock equivalents of the Company, which include only shares issuable on the exercise of outstanding options. A reconciliation of the computation of Basic EPS and Diluted EPS is presented in Note 19 — Earnings Per Share.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Stock-Based Compensation — Stock-based compensation plan is accounted for in accordance with Accounting Principles Board (“APB”) Opinion No. 25 - “Accounting for Stock Issued to Employees”. Under APB Opinion No. 25, no compensation expense is recognized for a stock option grant if the exercise price of the stock option at measurement date is equal to or greater than the fair market value of the common stock on the date of grant. Accordingly, Note 14 — Benefit Plans discloses the pro forma effect on net income and earnings per share as if the Company had elected to recognize compensation expense for the stock options granted.

     Comprehensive Income - Comprehensive income is displayed in the Consolidated Statements of Changes in Shareholders’ Equity and consists entirely of the change in net unrealized holding gain or loss on securities classified as available for sale, net of the related income tax effect.

     New Accounting Pronouncements – In June 2001, the FASB issued SFAS No. 141, “Business Combinations”. The Company was required to adopt SFAS No. 141 upon issuance. As such, all business combinations after that date must be accounted for as purchase transactions. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes or amends previous pronouncements including SFAS No. 121, Accounting Principles Board Opinion No. 30, and Accounting Research Board No. 51. The Company adopted this statement on January 1, 2002. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of this statement will not have a material impact on the Company’s financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, and APB Opinion No. 28, “Interim Financial Reporting”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This Statement does not require any change from the method currently used by the Company to account for stock-based compensation, but does require more prominent disclosure in the annual and interim financial statements about the method of accounting for such compensation and the effect of the method used on reported results. This Statement was effective for years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 in the accompanying consolidated financial statements.

     The FASB has issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others”, an interpretation of SFAS No.’s 5, 57 and 107 and rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company’s consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements for December 31, 2002, with no additional disclosure required.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 2 – ACQUISITIONS

     In February 2002, the Bank acquired Asahi Bank of California, a wholly owned subsidiary of Asahi Bank Ltd — Japan, for approximately $14.9 million. The acquisition was structured as a statutory merger of Asahi Bank of California into the Bank. On the date of acquisition, Asahi Bank of California had total assets of approximately $50.0 million, including $35.0 million of commercial real estate and business loans and $15.0 million of cash and securities which were acquired by the Bank at the closing of the transaction. The Bank recorded $2.3 million of goodwill in connection with this acquisition. The purpose of this acquisition was to expand the Bank’s customer base and to obtain certain commercial banking systems and technology.

     On October 25, 2002, the Company acquired the operating assets and the film finance loan portfolio of The Lewis Horwitz Organization (“LHO”) in an all cash transaction valued at approximately $93.0 million. The Bank recorded $0.8 million of goodwill in connection with this acquisition. LHO is a lender to the independent film and television production industry. LHO operates as a division of the Bank. The purpose of this acquisition was to diversify the Bank’s lending products and expand its customer base.

     These acquisitions were accounted for in accordance with SFAS No. 141. The results of operations related to these entities are included in the consolidated statements of income from the date of each respective acquisition.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 3—INVESTMENT SECURITIES

     The amortized cost and fair value of investment securities as of December 31, 2002 and 2001 are as follows:

                                       
                          Gross Unrealized
          Amortized   Fair  
          Cost   Value   Gains   Losses
         
 
 
 
          (in thousands)
December 31, 2002:
                               
 
Investment securities available for sale:
                               
   
U.S. Government Agency
  $ 48,698     $ 48,986     $ 353     $ 65  
   
Residual interest in securitized loans
    5,305       5,619       314        
   
Equity securities
    25       72       62       15  
 
   
     
     
     
 
     
Total investment securities available for sale
  $ 54,028     $ 54,677     $ 729     $ 80  
 
   
     
     
     
 
December 31, 2001:
                               
 
Investment securities available for sale:
                               
   
U.S. Government Agency
  $ 29,409     $ 29,403     $     $ 6  
   
Equity securities
    14       8             6  
 
   
     
     
     
 
     
Total investment securities available for sale
  $ 29,423     $ 29,411     $     $ 12  
 
   
     
     
     
 

     At December 31, 2002, the carrying value of U.S. government agency securities available for sale consisted of $14.1 million of securities that mature within three years with an average yield of 4.20%, and $34.6 million of securities that mature after three but within five years with an average yield of 4.62%. The $14.1 million of securities that mature within three years are callable as follows: $3.0 million in February 2003, $2.0 million in March 2003, $2.0 million in May 2003, and $7.1 million in June 2003. The $34.6 million of securities that mature after three but within five years are callable as follows: $3.9 million are callable in February 2003, $6.1 million are callable in April 2003, $3.0 million are callable in May 2003, $2.1 million are callable in June 2003, $9.1 million are callable in August 2003, $3.0 million are callable in October 2003, and $7.4 million are callable in November 2003.

     At December 31, 2001, the carrying value of U.S. government agency securities available for sale consisted of $9.5 million of securities that mature within three years with an average yield of 3.83%, and $19.9 million of securities that mature after three but within five years with an average yield of 4.39%. The $9.5 million of securities that mature within three years are callable as follows: $3.5 million in February 2002 and $6.0 million in March 2002. The $19.9 million of securities that mature after three but within five years are callable as follows: $9.9 million are callable in January 2002, $4.0 million are callable in February 2002, and the $6.0 million are callable in March 2002. During the first quarter of 2002, we have had $7.0 million of U. S. government securities called at par by the issuer of the respective securities.

     During 2002 and 2001, no securities were sold prior to their maturity or call date.

     There were no gross realized gains or losses on investment securities for the years ended December 31, 2002 and 2001. There were $1.4 million gross realized gains and no gross realized losses for the year ended December 31, 2000.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 4—LOANS

     Loans are held in the Bank’s portfolio and consist of the following:

                 
    December 31,
   
    2002   2001
   
 
    (in thousands)
Real estate loans
  $ 1,069,434     $ 1,032,968  
Construction loans
    101,422       54,129  
Film finance loans
    119,283        
Franchise loans
    54,672       57,618  
Commercial and other loans
    4,314        
 
   
     
 
 
    1,349,125       1,144,715  
 
   
     
 
Unamortized premium
    3,858       4,406  
Deferred loan origination fees, net of costs
    (5,604 )     (2,029 )
 
   
     
 
 
    1,347,379       1,147,092  
Allowance for loan losses
    (31,081 )     (24,722 )
 
   
     
 
 
  $ 1,316,298     $ 1,122,370  
 
   
     
 

     At December 31, 2002, approximately 92.1%, 7.7% and 0.2% of the Bank’s loans collateralized by real estate are secured by income producing properties, properties under development and residential one-to-four family properties, respectively. At December 31, 2002, approximately 73.1% of our loans secured by real estate were collateralized by properties located in California.

     At December 31, 2001, approximately 84.5%, 5.4% and 10.1% of the Bank’s loans collateralized by real estate are secured by income producing properties, properties under development and residential one-to-four family properties, respectively. At December 31, 2001, approximately 75.0% of our loans secured by real estate were collateralized by properties located in California.

     At December 31, 2002 and 2001, approximately $606.9 million and $549.9 million, respectively, of loans were pledged to secure a line of credit at the Federal Home Loan Bank (“FHLB”) of San Francisco.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 4—LOANS (Continued)

     The following is the activity in the allowance for loan losses on loans for the periods indicated.

                                 
            As of and for the Years Ended December 31,
           
            2002   2001   2000
           
 
 
            (In thousands)
Balance at beginning of year
  $ 24,722     $ 22,608     $ 19,895  
 
Provision for loan losses
    9,030       7,225       4,775  
 
Additions related to acquisitions
    2,048              
 
Charge-offs:
                       
   
Real estate loans
    (4,730 )     (2,845 )     (1,453 )
   
Construction loans
          (2,419 )     (1,000 )
 
   
     
     
 
     
Total charge-offs
    (4,730 )     (5,264 )     (2,453 )
 
   
     
     
 
 
Recoveries-
                       
   
Real estate loans
    11       153       391  
 
   
     
     
 
     
Total recoveries
    11       153       391  
 
   
     
     
 
       
Net charge-offs
    (4,719 )     (5,111 )     (2,062 )
 
   
     
     
 
Balance at end of year
  $ 31,081     $ 24,722     $ 22,608  
 
   
     
     
 

     As of December 31, 2002 and 2001, the accrual of income had been suspended on approximately $5.9 million and $15.3 million, respectively, of loans secured by real estate. Interest income that was contractually due on loans that were on nonaccrual status that was not recognized during the years ended December 31, 2002, 2001 and 2000 was approximately $941,000, $2.1 million and $679,000, respectively.

     As of December 31, 2002 and 2001, restructured loans totaled $7.9 million and $3.8 million, respectively. There were no related commitments to lend additional funds on restructured loans. For the years ended December 31, 2002, 2001 and 2000, $905,000, $376,000 and $826,000, respectively, of gross interest income would have been recorded had the loans been current in accordance with their original terms compared to $796,000, $340,000 and $780,000, respectively, of interest income which was included in net income for the same periods. The average yield on restructured loans was 8.05% at December 31, 2002.

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 4LOANS (Continued)

     The Bank’s recorded investment in impaired loans, and the related valuation allowance, were as follows:

                                   
      December 31, 2002   December 31, 2001
     
 
      Recorded   Valuation   Recorded   Valuation
      Investment   Allowance   Investment   Allowance
     
 
 
 
      (in thousands)   (in thousands)
     
 
Valuation allowance required
  $ 7,251     $ 1,622     $ 1,600     $ 506  
No valuation allowance required
    8,702             15,111        
 
   
     
     
     
 
 
Total impaired loans
  $ 15,953     $ 1,622     $ 16,711     $ 506  
 
   
     
     
     
 

     $5.9 million of the impaired loans with a valuation allowance were on nonaccrual status at December 31, 2002. The average recorded investment in impaired loans for the years ended December 31, 2002, 2001 and 2000 was $11.6 million, $26.0 million and $13.4 million, respectively. Interest income recognized on impaired loans for the years ended December 31, 2002, 2001 and 2000 was $375,000, $89,000 and $368,000, respectively.

     Loans having carrying values of $3.5 million and $17.0 million were transferred to OREO in 2002 and 2001, respectively.

NOTE 5—ICCMAC MULTIFAMILY AND COMMERCIAL TRUST 1999-1

     Real estate loans held in trust consisted of the following:

                 
    December 31,
   
    2002   2001
   
 
    (in thousands)
Real estate loans
  $ 119,824     $ 158,720  
Unamortized premium
    4,040       5,366  
 
   
     
 
 
    123,864       164,086  
Allowance for loan losses
    (1,928 )     (1,928 )
 
   
     
 
 
  $ 121,936     $ 162,158  
 
   
     
 

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ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

NOTE 5—ICCMAC MULTIFAMILY AND COMMERCIAL TRUST 1999-1 (Continued)

     The following is the activity in the allowance for loan losses relating to real estate loans held in the ICCMAC Trust as follows:

                 
    December 31,
   
    2002   2001
   
 
    (in thousands)
Balance at beginning of year
  $ 1,928     $ 4,578  
Reversal of provision for loan losses
          (2,650 )
Charge-offs
           
 
   
     
 
Balance at end of year
  $ 1,928     $ 1,928  
 
   
     
 

     At December 31, 2002 and 2001, the recorded investment in impaired loans of the ICCMAC Trust was $233,000 and $329,000, respectively. There was no valuation allowance required on these loans. The average recorded investment in impaired real estate loans of the ICCMAC Trust was $345,000 and $510,000 at December 31, 2002 and 2001. There was no interest income recognized on these impaired loans for the years ended December 31, 2002 and 2001.

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Table of Contents

ITLA CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002, 2001, AND 2000

     The following is a summary of the outstanding CMOs of the ICCMAC Trust: