<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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 95-4596322
- --------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation (IRS Employer Identification No.)
or Organization)
888 Prospect St., Suite 110, La Jolla, California 92037
- ------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(619) 551-0511
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 12, 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
--- ---
Number of shares of common stock of the registrant: 7,700,484
outstanding as of July 30, 1998.
<PAGE> 2
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
Cash and cash equivalents $ 84,328 $ 123,885
Investment securities available for sale, at approximate fair value 30,795 35,281
Stock in Federal Home Loan Bank 12,270 11,919
Mortgage-backed securities held to maturity, at amortized cost
(fair value $20,788 and $25,063 in 1998 and 1997, respectively) 20,764 25,132
Loans held for investment, net (net of allowance for credit losses of
$15,251 and $12,178 in 1998 and 1997, respectively) 799,998 750,853
Loans held for sale, at lower of cost or fair market value 54,486 50,544
Interest receivable 6,035 4,916
Other real estate owned, net 3,236 3,946
Premises and equipment, net 2,864 3,169
Deferred income taxes 4,194 4,190
Other assets 2,373 2,074
------------ ------------
Total assets $ 1,021,343 $ 1,015,909
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 844,895 $ 843,813
Federal Home Loan Bank advances 60,500 61,500
Accounts payable and other liabilities 9,372 11,248
------------ ------------
Total liabilities 914,767 916,561
------------ ------------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Contributed capital - common stock, $.01 par value; 20,000,000
shares authorized, 7,854,484 and 7,849,484 issued and
outstanding in 1998 and 1997, respectively 53,225 53,163
Retained earnings 55,667 48,450
Unrealized gain on investment securities available for sale, net 67 19
------------ ------------
108,959 101,632
Less treasury stock, at cost - 157,500 shares and 152,500 shares
in 1998 and 1997, respectively (2,383) (2,284)
------------ ------------
Total shareholders' equity 106,576 99,348
------------ ------------
Total liabilities and shareholders' equity $ 1,021,343 $ 1,015,909
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE> 3
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Interest income:
Loans receivable, including fees $ 23,280 $ 18,182 $ 45,371 $ 35,977
Investment securities 1,965 1,106 4,292 2,610
Mortgage-backed securities 318 470 710 927
---------- ---------- ---------- ----------
Total interest income 25,563 19,758 50,373 39,514
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 12,109 9,255 24,252 18,735
Federal Home Loan Bank advances 896 685 1,797 1,274
---------- ---------- ---------- ----------
Total interest expense 13,005 9,940 26,049 20,009
---------- ---------- ---------- ----------
Net interest income before provisions for estimated credit
losses and valuation allowance on loans held for sale 12,558 9,818 24,324 19,505
Provision for estimated credit losses 1,600 250 3,000 850
Provision for valuation allowance on loans held for sale -- 350 -- 350
---------- ---------- ---------- ----------
Net interest income after provisions for estimated credit
losses and valuation allowance on loans held for sale 10,958 9,218 21,324 18,305
---------- ---------- ---------- ----------
Noninterest income:
Fee income from mortgage banking activities 408 233 990 402
Other 238 111 515 290
---------- ---------- ---------- ----------
Total noninterest income 646 344 1,505 692
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 2,553 2,065 5,044 4,145
Occupancy and equipment 693 541 1,387 1,104
FDIC assessment 26 21 49 165
Other 1,894 1,771 3,884 3,495
---------- ---------- ---------- ----------
Total general and administrative 5,166 4,398 10,364 8,909
---------- ---------- ---------- ----------
Real estate operations, net 82 39 162 47
Provision for estimated losses on other real estate owned 248 -- 248 --
(Gain) loss on sale of other real estate owned, net (176) 24 (176) 31
---------- ---------- ---------- ----------
Total real estate operations, net 154 63 234 78
---------- ---------- ---------- ----------
Total noninterest expense 5,320 4,461 10,598 8,987
---------- ---------- ---------- ----------
Income before provision for income taxes 6,284 5,101 12,231 10,010
Provision for income taxes 2,576 2,087 5,014 4,090
---------- ---------- ---------- ----------
NET INCOME $ 3,708 $ 3,014 $ 7,217 $ 5,920
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.48 $ 0.39 $ 0.94 $ 0.76
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.38 $ 0.90 $ 0.74
========== ========== ========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE> 4
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,217 $ 5,920
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, accretion and amortization, net (496) 478
Provisions for estimated credit losses, valuation allowance on loans
held for sale, and estimated losses on other real estate owned 3,248 1,200
(Gain) loss on sale of other real estate owned (176) 31
Increase in interest receivable (1,119) (475)
Provision for deferred income taxes -- (188)
(Increase) decrease in other assets (299) 496
Decrease in accounts payable and other liabilities (1,876) (2,348)
------------ ------------
Net cash provided by operating activities 6,499 5,114
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans receivable, net (58,854) (48,251)
Purchases of investment securities available for sale (20,520) (8,000)
Proceeds from the maturity of investment securities available for sale 25,050 6,297
Increase in stock in Federal Home Loan Bank (351) (3,233)
Repayment of principal on mortgage-backed securities 4,298 3,365
Proceeds from sale of other real estate owned 1,126 2,405
Proceeds from sale of real estate loans 3,411 1,812
Cash paid for capital expenditures (261) (686)
Other, net -- 9
------------ ------------
Net cash used in investing activities (46,101) (46,282)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised 62 151
Purchase of treasury stock (99) (1,935)
Net increase in deposit accounts 1,082 18,685
(Decrease) increase in Federal Home Loan Bank advances (1,000) 18,000
------------ ------------
Net cash provided by financing activities 45 34,901
------------ ------------
Net decrease in cash and cash equivalents (39,557) (6,267)
Cash and cash equivalents at beginning of period 123,885 62,599
------------ ------------
Cash and cash equivalents at end of period $ 84,328 $ 56,332
============ ============
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 25,914 $ 20,144
Cash paid during the period for income taxes $ 6,970 $ 4,400
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 488 $ 1,833
Loans to facilitate the sale of other real estate owned $ 549 $ 635
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE> 5
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of ITLA Capital
Corporation ("ITLA Capital" and together with its subsidiaries the "Company")
included herein reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the results for
the interim periods indicated. The unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Imperial
Thrift and Loan Association ("Imperial"), ITLA Funding Corporation ("Funding"),
and ITLA Commercial Investment Corporation ("CIC"), which was formed in May
1998. CIC will invest primarily in mortgages secured by income producing real
estate assets originated by Imperial and Funding. All material intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to the financial statements for 1997 to conform to the 1998
presentation. Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. The results of operations for the three and
six months ended June 30, 1998 are not necessarily indicative of the results of
operations for the remainder of the year.
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
NOTE 2 - EARNINGS PER SHARE
Basic Earnings Per Share ("Basic EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted Earnings Per Share ("Diluted EPS") reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock which shared in the earnings of the Company.
5
<PAGE> 6
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
NOTE 2 - EARNINGS PER SHARE (Continued)
The following is a reconciliation of the numerators and denominators
used in the calculation of Basic and Diluted EPS.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE PER AVERAGE PER
NET SHARES SHARE NET SHARES SHARE
INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNT
--------- ------------- --------- --------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
1998
Basic EPS $ 3,708 7,698,984 $ 0.48 $ 7,217 7,698,973 $ 0.94
Effect of Dilutive Stock Options -- 297,296 (.02) -- 296,935 (.04)
--------- --------- --------- --------- --------- ---------
Diluted EPS $ 3,708 7,996,280 $ 0.46 $ 7,217 7,995,908 $ 0.90
========= ========= ========= ========= ========= =========
1997
Basic EPS $ 3,014 7,751,239 $ 0.39 $ 5,920 7,789,312 $ 0.76
Effect of Dilutive Stock Options -- 122,334 (.01) -- 149,000 (.02)
--------- --------- --------- --------- --------- ---------
Diluted EPS $ 3,014 7,873,573 $ 0.38 $ 5,920 7,938,312 $ 0.74
========= ========= ========= ========= ========= =========
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income, which encompasses net income and unrealized gains
(losses) on investment securities available for sale, is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 3,708 $ 3,014 $ 7,217 $ 5,920
Other comprehensive income - unrealized gain
(loss) on investment securities available
for sale, net of tax expense (benefit) of
$35 and $57 for the three months ended
June 30, 1998 and 1997, respectively, and
$33 and $(13) for the six months ended
June 30, 1998 and 1997, respectively 50 82 48 (18)
---------- ---------- ---------- ----------
Comprehensive income $ 3,758 $ 3,096 $ 7,265 $ 5,902
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
NOTE 4 - IMPAIRED LOANS RECEIVABLE
As of June 30, 1998, the recorded investment in loans receivable that
were considered impaired under Statement of Financial Accounting Standards
("SFAS") No. 114 was $6.6 million. The average recorded investment in impaired
loans during the three and six month periods ended June 30, 1998 was $6.2
million and $7.2 million, respectively. Interest income recognized on impaired
loans was not material during the three and six month periods ended June 30,
1998 and 1997.
7
<PAGE> 8
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is intended to identify the major
factors that influenced the financial condition and results of operations of the
Company as of and for the three and six month periods ended June 30, 1998.
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in domestic or foreign business markets, financial or legal
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
NET INCOME
Net income totaled $3.7 million for the three months ended June 30,
1998 compared to $3.0 million for the corresponding period in 1997, an increase
of 23.0 percent. The increase in net income was primarily due to increases in
net interest income and noninterest income, partially offset by increases in
general and administrative expenses, the provision for estimated credit losses,
real estate operations, net, and the provision for income taxes. Diluted EPS was
$0.46 for the three months ended June 30, 1998 compared to $0.38 for the
corresponding period in 1997, an increase of 21.1 percent.
NET INTEREST INCOME
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 (volume) and changes in average
interest rates (rate). The change in interest due to both volume and rate have
been allocated to change due to volume and rate in proportion to the
relationship of absolute dollar amounts of each.
8
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
1998 VS. 1997
-----------------------------------------------
INCREASE (DECREASE) DUE TO:
----------------------------
VOLUME RATE TOTAL
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned on:
Loans receivable, net $ 4,839 $ 259 $ 5,098
Investment securities 863 (4) 859
Mortgage-backed securities (105) (47) (152)
---------- ---------- ----------
Total increase 5,597 208 5,805
---------- ---------- ----------
Interest paid on:
Deposit accounts 2,830 24 2,854
FHLB advances 182 29 211
---------- ---------- ----------
Total increase 3,012 53 3,065
---------- ---------- ----------
Increase in net interest income $ 2,585 $ 155 $ 2,740
========== ========== ==========
</TABLE>
Total interest income increased by $5.8 million in the 1998 second
quarter compared to the corresponding period in 1997 due primarily to increases
in the average balances of loans receivable(1) and investment securities. The
average balance of loans receivable increased $176.8 million, or 26.2 percent,
due to growth in the Company's real estate loan portfolio. The average balance
of investment securities increased $63.6 million, or 78.4 percent. The
weighted-average yield on loans receivable increased to 10.97 percent for the
1998 second quarter compared to 10.82 percent for the corresponding period in
1997 primarily as a result of income received from prepayments and the
collection of interest on past due loans, some of which were previously
classified as nonaccrual. Excluding this additional income, the yield on loans
receivable would have been 10.83 percent.
Total interest expense increased by $3.1 million in the 1998 second
quarter compared to the corresponding period in 1997 due primarily to an
increase in the average balance of deposit accounts and Federal Home Loan Bank
of San Francisco ("FHLB") advances. The average balance of deposit accounts
increased $196.4 million during the second quarter of 1998 as compared to the
1997 second quarter. The average rate paid on these accounts increased slightly
to 5.77 percent in the 1998 second quarter from 5.76 percent during the
corresponding period in 1997.
PROVISION FOR ESTIMATED CREDIT LOSSES
Management periodically assesses the adequacy of the allowance for
credit losses by reference to many factors which may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements, general portfolio trends relative to asset and portfolio size,
asset categories, potential credit and geographic concentrations, nonaccrual
loan levels, historical loss experience and risks associated with changes in
economic, social and business conditions. Accordingly, the calculation of the
adequacy of the allowance for credit losses is not based solely on the level of
nonperforming
- --------
(1) Loans receivable consist of loans held for investment and loans held for
sale.
9
<PAGE> 10
assets. Management believes that the Company's allowance for credit losses as of
June 30, 1998 was adequate to absorb the known and inherent risks of loss in the
loan portfolio at that date. While management believes the estimates and
assumptions used in its determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provisions that may be required will not adversely impact the Company's
financial condition and results of operations. In addition, the determination of
the amount of the allowance for credit losses is subject to review by Imperial's
regulators, as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.
The provision for estimated credit losses increased to $1.6 million in
the 1998 second quarter from $0.3 million in the corresponding period in 1997,
primarily due to the establishment of reserves relating to growth in loans held
for investment. Nonperforming assets to total assets declined to 0.92 percent as
of June 30, 1998, compared to 1.21 percent at December 31, 1997. The aggregate
amount of nonperforming assets decreased to $9.4 million as of June 30, 1998
from $12.3 million at December 31, 1997. At June 30, 1998, the total allowance
for credit losses was $15.3 million or 1.9 percent of total loans held for
investment. See also "Financial Condition - Nonperforming Assets and Allowance
for Credit Losses."
NONINTEREST INCOME
Noninterest income totaled $0.6 million for the three months ended June
30, 1998 compared to $0.3 million for the corresponding period in 1997. The
increase in noninterest income was due primarily to the increased fee income
from mortgage banking activities recognized by Funding, which commenced
operations during the first quarter of 1997. For the three month period ended
June 30, 1998, Funding originated $39.5 million of commercial real estate loans
for third-party investors and recognized $0.4 million of fee income, compared to
$25.3 million of loans originated and $0.2 million of fee income recognized
during the corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $5.3 million for the three months ended
June 30, 1998 compared to $4.5 million for the corresponding period in 1997. The
increase in noninterest expense was due primarily to increases in compensation
and benefits and occupancy and equipment expenses incurred by Funding.
Compensation and benefits expense increased due to an increase in the number of
full-time equivalent employees, which averaged 168 during the second quarter of
1998 compared to 150 during the corresponding period of the previous year. The
increase in occupancy and equipment expense was due primarily to increases from
the expansion of Funding's national network of loan production offices.
For the three months ended June 30, 1998 and 1997, the Company's ratio
of consolidated general and administrative expense to average assets, on an
annualized basis, was 2.0 percent and 2.2 percent, respectively. The ratio
excluding the costs of Funding was 1.5 percent and 2.0 percent, respectively.
The Company's efficiency ratio (the ratio of noninterest expense to the sum of
net interest income and noninterest income) was 40.3 percent for the quarter
ended June 30, 1998 compared to 43.9 percent during the corresponding period in
the prior year.
10
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
NET INCOME
Net income totaled $7.2 million for the six months ended June 30, 1998
compared to $5.9 million for the corresponding period in 1997, an increase of
21.9 percent. The increase in net income was primarily due to increases in net
interest income and noninterest income, partially offset by increases in general
and administrative expenses, the provision for estimated credit losses, real
estate operations, net, and the provision for income taxes. Diluted EPS was
$0.90 for the six months ended June 30, 1998 compared to $0.74 for the
corresponding period in 1997, an increase of 21.6 percent.
NET INTEREST INCOME
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 (volume) and changes in average
interest rates (rate). The change in interest due to both volume and rate have
been allocated to change due to volume and rate in proportion to the
relationship of absolute dollar amounts of each.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1998 VS. 1997
----------------------------------------------
INCREASE (DECREASE) DUE TO:
----------------------------
VOLUME RATE TOTAL
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned on:
Loans receivable, net $ 8,965 $ 429 $ 9,394
Investment securities 1,644 38 1,682
Mortgage-backed securities (210) (7) (217)
------------ ------------ ------------
Total increase 10,399 460 10,859
------------ ------------ ------------
Interest paid on:
Deposit accounts 5,255 262 5,517
FHLB advances 442 81 523
------------ ------------ ------------
Total increase 5,697 343 6,040
------------ ------------ ------------
Increase in net interest income $ 4,702 $ 117 $ 4,819
============ ============ ============
</TABLE>
Total interest income increased by $10.9 million for the six month
period ended June 30, 1998 compared to the corresponding period in 1997 due
primarily to increases in the average balances of loans receivable and
investment securities. The average balance of loans receivable increased $165.3
million, or 24.7 percent, due to growth in the Company's real estate loan
portfolio. The average balance of investment securities increased $60.2 million,
or 62.0 percent. The weighted-average yield on loans receivable increased to
10.96 percent for the six months ended June 30, 1998 compared to 10.83 percent
for the corresponding period in 1997 primarily as a result of income received
from prepayments and the collection of interest on past due loans, some of which
were previously classified as nonaccrual. Excluding this additional income, the
yield on loans receivable would have been 10.88 percent.
11
<PAGE> 12
Total interest expense increased by $6.0 million for the six month
period ended June 30, 1998 compared to the corresponding period in 1997 due
primarily to an increase in the average balance of deposit accounts and FHLB
advances. The average balance of deposit accounts increased $182.7 million
during the six month period ended June 30, 1998 compared to the corresponding
period in the prior year. The average rate paid on these accounts increased to
5.81 percent for the six month period ended June 30, 1998 from 5.73 percent
during the corresponding period in the prior year. The increase in deposit rates
was due to an increase in market demand for funds during the fourth quarter of
1997 and the first quarter of 1998, which resulted in deposit contracts entered
into during those periods to be priced above the rate of the then existing
deposit portfolio.
PROVISIONS FOR ESTIMATED CREDIT LOSSES AND VALUATION ALLOWANCE ON LOANS HELD FOR
SALE
The provision for estimated credit losses increased to $3.0 million for
the six month period ended June 30, 1998 compared to $0.9 million for the
corresponding period in 1997, primarily due to the establishment of reserves
relating to growth in loans held for investment. See also "Financial Condition -
Nonperforming Assets and Allowance for Credit Losses." The provision for
valuation allowance on loans held for sale declined to zero during the six month
period ended June 30, 1998 from $0.4 million for the corresponding period in the
prior year, as the portfolio of automobile finance contracts held for sale that
was subject to market valuation adjustments had a net carrying value of zero
during the current period.
NONINTEREST INCOME
Noninterest income totaled $1.5 million for the six months ended June
30, 1998 compared to $0.7 million for the corresponding period in 1997. The
increase in noninterest income was due primarily to the increased fee income
from mortgage banking activities recognized by Funding, which commenced
operations during the first quarter of 1997. For the six month period ended June
30, 1998, Funding originated $89.6 million of commercial real estate loans for
third-party investors and recognized $1.0 million of fee income, compared to
$37.8 million of loans originated and $0.4 million of fee income recognized
during the corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $10.6 million for the six months ended June
30, 1998 compared to $9.0 million for the corresponding period in 1997. The
increase in noninterest expense was due primarily to increases in compensation
and benefits and occupancy and equipment expenses incurred by Funding.
Compensation and benefits expense increased due to an increase in the number of
full-time equivalent employees, which averaged 168 during the six month period
ended June 30, 1998 compared to 148 during the corresponding period of the
previous year. The increase in occupancy and equipment expense was due primarily
to increases from the expansion of Funding's national network of loan production
offices.
For the six months ended June 30, 1998 and 1997, the Company's ratio of
consolidated general and administrative expense to average assets, on an
annualized basis, was 2.0 percent and 2.2 percent, respectively. The ratio
excluding the costs of Funding was 1.6 percent and 1.9 percent, respectively.
The Company's efficiency ratio (the ratio of noninterest expense to the
12
<PAGE> 13
sum of net interest income and noninterest income) was 41.0 percent for the six
months ended June 30, 1998 compared to 44.5 percent during the corresponding
period in the prior year.
YEAR 2000
The Company is currently in the process of conducting a comprehensive
review of its computer systems to identify the systems that could be affected by
the "Year 2000" potential issue. The Year 2000 potential issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations. Management anticipates that
the enhancements necessary to prepare its systems for the year 2000 will be
completed in a timely manner.
The Company is also aware of the risks to third parties, including
vendors (and to the extent appropriate, depositors and borrowers), and the
potential adverse impact on the Company resulting from failures by these parties
to adequately address these risks. The Company has been communicating with its
outside data processing service bureau, as well as other third-party service
providers (and to the extent appropriate, depositors and borrowers), to assess
their progress in evaluating their systems and implementing any corrective
measures required by them to be prepared for the year 2000. To date, the Company
has not been advised by any of its primary vendors that there are any
unmitigated risks regarding potential issues related to the year 2000. However,
no assurance can be given as to the adequacy of any plans or to the timeliness
of their implementation.
The Company anticipates that it may incur internal staff costs as well
as consulting and other expenses related to the enhancements necessary to
prepare the systems for the year 2000. Based on the Company's current knowledge
and investigations, any expense relating to the Year 2000 potential issue is not
expected to have a material impact on the Company's financial position or
results of operations.
13
<PAGE> 14
FINANCIAL CONDITION
NONPERFORMING ASSETS AND ALLOWANCE FOR CREDIT LOSSES
The following table sets forth the Company's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 6,126 $ 8,332
Other real estate owned, net 3,236 3,946
------------ ------------
Total nonperforming assets $ 9,362 $ 12,278
============ ============
Troubled debt restructurings $ 1,575 $ 1,574
Nonaccrual loans held for investment to total
gross loans held for investment 0.75% 1.09%
Nonperforming assets to total assets 0.92% 1.21%
</TABLE>
The following table provides certain information regarding the
Company's allowance for credit losses.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 12,178 $ 10,885
Provision for estimated credit losses 3,000 3,300
Net recoveries (charge-offs) on real estate loans 73 (2,007)
------------ ------------
Balance at end of period $ 15,251 $ 12,178
============ ============
</TABLE>
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to the Company's ability to maintain cash flow
adequate to fund operations and meet obligations and other commitments on a
timely basis, including the payment of maturing deposits and the origination or
purchase of new loans receivable. The Company maintains a cash and investment
securities portfolio designed to satisfy operating and regulatory liquidity
requirements while preserving capital and maximizing yield. As of June 30, 1998,
the Company held approximately $84.3 million of cash and cash equivalents
(consisting primarily of short-term investments with original maturities of 90
days or less) and $30.8 million of investment securities classified as available
for sale. Short-term investments classified as cash equivalents consisted of
government money market funds, repurchase agreements and short-term government
agency securities, while investment securities available for sale consisted of
fixed income instruments which were rated "AAA" or equivalent by nationally
recognized rating agencies. As of June 30, 1998 and December 31, 1997,
Imperial's liquidity ratios were 13.0
14
<PAGE> 15
percent and 14.0 percent, respectively, exceeding the regulatory requirement of
1.5 percent. In addition, the Company's liquidity position is supported by a
credit facility with the FHLB with an available borrowing capacity of $42.4
million, and by federal funds lines of credit with two major banks with an
available borrowing capacity of $30.0 million.
Total deposit accounts increased to $844.9 million at June 30, 1998
from $843.8 million at December 31, 1997. The Company retained a significant
amount of the funds which matured through rollover of maturing deposit accounts
in the three months ended June 30, 1998 and 1997. Although the Company competes
for deposits primarily on the basis of rates, based on its historical experience
regarding retention of deposits, management believes that a significant portion
of deposits will remain with the Company upon maturity on an ongoing basis.
CAPITAL RESOURCES
As of June 30, 1998, Imperial's Leverage (Core), Tier I and Total
Risk-Based capital ratios were 8.4 percent, 9.2 percent and 10.4 percent,
respectively. These ratios were 9.6 percent, 11.4 percent and 12.7 percent,
respectively, as of December 31, 1997. The minimum regulatory requirement for
Leverage (Core), Tier I and Risk-Based capital are 4.0 percent, 4.0 percent and
8.0 percent, respectively. As of June 30, 1998, Imperial's capital position was
designated as "well capitalized" for regulatory purposes. During the three
months ended June 30, 1998, Imperial provided a $23.0 million dividend to the
parent company.
The Company's shareholders' equity increased $7.2 million from December
31, 1997 to June 30, 1998 due primarily to the accumulation of $7.2 million in
net income. There were no dividends declared or paid by the Company during the
first six months of 1998.
MARKET RISK
The Company's estimated sensitivity to interest rate risk, as measured
by the estimated interest earnings sensitivity profile and the interest
sensitivity gap analysis, has not materially changed from the information
disclosed in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is party to certain legal proceedings incidental
to its business. Management believes that the outcome of such
proceedings, in the aggregate, will not have a material effect
on the Company's financial condition or results of operations.
ITEM 2 CHANGES IN SECURITIES
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
In order to be eligible for inclusion in the Company's proxy
materials for next year's Annual Meeting of Shareholders, any
shareholder proposal to take action at such meeting must be
received at the Company's executive office, 888 Prospect Street,
suite 110, La Jolla, California 92037, no later than March 2,
1999. Any such proposal shall be subject to the requirements of
the proxy rules adopted under the Securities Exchange Act of
1934, as amended. Otherwise, any shareholder proposal to take
action at such meeting must be received at the Company's
executive office, 888 Prospect Street, suite 110, La Jolla,
California 92037 by May 31, 1999; provided, however, that in the
event that the date of the annual meeting is held before July 11,
1999 or after September 28, 1999, the shareholder proposal must
be received no later than the close of business on the later of
the 60th day prior to such annual meeting or the tenth day
following the day on which notice of the date of the annual
meeting was mailed or public announcement of the date of such
meeting was first made. All shareholder proposals must also
comply with the Company's bylaws and Delaware law.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ITLA CAPITAL CORPORATION
Date: August 11, 1998 /s/ George W. Haligowski
--------------- ------------------------------------------
George W. Haligowski
Chairman of the Board, President and
Chief Executive Officer
Date: August 11, 1998 /s/ Michael A. Sicuro
--------------- ------------------------------------------
Michael A. Sicuro
Managing Director and Chief
Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,286
<INT-BEARING-DEPOSITS> 80,042
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,795
<INVESTMENTS-CARRYING> 20,764
<INVESTMENTS-MARKET> 20,788
<LOANS> 869,735
<ALLOWANCE> 15,251
<TOTAL-ASSETS> 1,021,343
<DEPOSITS> 844,895
<SHORT-TERM> 60,500
<LIABILITIES-OTHER> 9,372
<LONG-TERM> 0
0
0
<COMMON> 53,225
<OTHER-SE> 53,351
<TOTAL-LIABILITIES-AND-EQUITY> 1,021,343
<INTEREST-LOAN> 45,371
<INTEREST-INVEST> 5,002
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50,373
<INTEREST-DEPOSIT> 24,252
<INTEREST-EXPENSE> 26,049
<INTEREST-INCOME-NET> 24,324
<LOAN-LOSSES> 3,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,598
<INCOME-PRETAX> 12,231
<INCOME-PRE-EXTRAORDINARY> 12,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,217
<EPS-PRIMARY> .94
<EPS-DILUTED> .90
<YIELD-ACTUAL> 10.00
<LOANS-NON> 6,126
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,575
<LOANS-PROBLEM> 13,744
<ALLOWANCE-OPEN> 12,178
<CHARGE-OFFS> 53
<RECOVERIES> 126
<ALLOWANCE-CLOSE> 15,251
<ALLOWANCE-DOMESTIC> 15,251
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
