<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 September 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: 7,378,484
outstanding as of November 10, 1998.
<PAGE> 2
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- -----------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 124,170 $ 123,885
Investment securities available for sale, at approximate fair value 5,331 35,281
Stock in Federal Home Loan Bank 12,450 11,919
Mortgage-backed securities held to maturity, at amortized cost
(fair value $18,936 and $25,063 in 1998 and 1997, respectively) 18,685 25,132
Loans held for investment, net (net of allowance for credit losses of
$16,055 and $12,178 in 1998 and 1997, respectively) 820,172 750,853
Loans held for sale, at lower of cost or fair market value 9,162 50,544
Interest receivable 5,583 4,916
Other real estate owned, net 2,807 3,946
Premises and equipment, net 2,806 3,169
Deferred income taxes 4,309 4,190
Other assets 1,567 2,074
----------- -----------
Total assets $ 1,007,042 $ 1,015,909
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 839,967 $ 843,813
Federal Home Loan Bank advances 48,500 61,500
Accounts payable and other liabilities 9,951 11,248
----------- -----------
Total liabilities 898,418 916,561
----------- -----------
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, 7,857,984 and 7,849,484 issued and
outstanding in 1998 and 1997, respectively 53,280 53,163
Retained earnings 59,421 48,450
Unrealized (loss) gain on investment securities available for sale, net (130) 19
----------- -----------
112,571 101,632
Less treasury stock, at cost - 247,500 shares and 152,500 shares
in 1998 and 1997, respectively (3,947) (2,284)
----------- -----------
Total shareholders' equity 108,624 99,348
----------- -----------
Total liabilities and shareholders' equity $ 1,007,042 $ 1,015,909
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
</TABLE>
2
<PAGE> 3
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 23,571 $ 19,897 $ 68,942 $ 55,874
Investment securities 2,065 1,868 6,357 4,478
Mortgage-backed securities 319 458 1,029 1,385
-------- -------- -------- --------
Total interest income 25,955 22,223 76,328 61,737
-------- -------- -------- --------
Interest expense:
Deposit accounts 12,112 10,567 36,364 29,302
Federal Home Loan Bank advances 835 876 2,632 2,150
-------- -------- -------- --------
Total interest expense 12,947 11,443 38,996 31,452
-------- -------- -------- --------
Net interest income before provisions for estimated credit
losses and valuation allowance on loans held for sale 13,008 10,780 37,332 30,285
Provision for estimated credit losses 800 1,050 3,800 1,900
Provision for valuation allowance on loans held for sale 1,400 -- 1,400 350
-------- -------- -------- --------
Net interest income after provisions for estimated credit
losses and valuation allowance on loans held for sale 10,808 9,730 32,132 28,035
-------- -------- -------- --------
Noninterest income:
Fee income from mortgage banking activities 497 154 1,487 556
Other 104 74 619 364
-------- -------- -------- --------
Total noninterest income 601 228 2,106 920
-------- -------- -------- --------
Noninterest expense:
Compensation and benefits 2,596 2,058 7,640 6,203
Occupancy and equipment 649 685 2,036 1,789
FDIC assessment 25 21 74 186
Other 1,636 1,740 5,520 5,235
-------- -------- -------- --------
Total general and administrative 4,906 4,504 15,270 13,413
-------- -------- -------- --------
Real estate operations, net 37 47 199 94
Provision for estimated losses on other real estate owned 100 25 348 25
(Gain) loss on sale of other real estate owned, net (7) (27) (183) 4
-------- -------- -------- --------
Total real estate operations, net 130 45 364 123
-------- -------- -------- --------
Total noninterest expense 5,036 4,549 15,634 13,536
-------- -------- -------- --------
Income before provision for income taxes 6,373 5,409 18,604 15,419
Provision for income taxes 2,619 2,221 7,633 6,311
-------- -------- -------- --------
NET INCOME $ 3,754 $ 3,188 $ 10,971 $ 9,108
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.49 $ 0.41 $ 1.43 $ 1.17
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.40 $ 1.38 $ 1.15
======== ======== ======== ========
See accompanying notes to the unaudited consolidated financial statements.
</TABLE>
3
<PAGE> 4
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,971 $ 9,108
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, accretion and amortization, net 64 (48)
Provisions for estimated credit losses, valuation allowance on loans
held for sale, and estimated losses on other real estate owned 5,548 2,598
(Gain) loss on sale of other real estate owned (183) 4
Increase in interest receivable (667) (858)
Benefit for deferred income taxes (170) (188)
Decrease in other assets 306 523
(Decrease) increase in accounts payable and other liabilities (1,297) 1,739
--------- ---------
Net cash provided by operating activities 14,572 12,878
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans receivable, net (46,884) (104,376)
Purchases of investment securities available for sale (20,198) (18,000)
Proceeds from the maturity of investment securities available for sale 50,050 25,314
Increase in stock in Federal Home Loan Bank (531) (3,381)
Repayment of principal on mortgage-backed securities 6,344 4,780
Proceeds from sale of other real estate owned 1,462 2,691
Proceeds from sale of real estate loans 14,150 2,047
Cash paid for capital expenditures (288) (1,072)
Other, net -- 9
--------- ---------
Net cash provided by (used in) investing activities 4,105 (91,988)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised 117 290
Purchase of treasury stock (1,663) (2,090)
Net (decrease) increase in deposit accounts (3,846) 66,062
(Decrease) increase in Federal Home Loan Bank advances (13,000) 18,000
--------- ---------
Net cash (used in) provided by financing activities (18,392) 82,262
--------- ---------
Net increase in cash and cash equivalents 285 3,152
Cash and cash equivalents at beginning of period 123,885 62,599
--------- ---------
Cash and cash equivalents at end of period $ 124,170 $ 65,751
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 38,738 $ 30,707
Cash paid during the period for income taxes $ 9,450 $ 5,500
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 488 $ 2,817
Loans to facilitate the sale of other real estate owned $ 751 $ 715
See accompanying notes to the unaudited consolidated financial statements.
</TABLE>
4
<PAGE> 5
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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. 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 nine months ended September 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 shareholders 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 NINE MONTHS ENDED SEPTEMBER 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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)
1998
- ----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $3,754 7,668,109 $0.49 $10,971 7,688,579 $1.43
Effect of Dilutive Stock Options -- 243,644 (.02) -- 263,097 (.05)
------ --------- ----- ------- --------- -----
Diluted EPS $3,754 7,911,753 $0.47 $10,971 7,951,676 $1.38
====== ========= ===== ======= ========= =====
1997
- ----
Basic EPS $3,188 7,705,210 $0.41 $ 9,108 7,760,970 $1.17
Effect of Dilutive Stock Options -- 212,404 (.01) -- 161,694 (.02)
------ --------- ----- ------- --------- -----
Diluted EPS $3,188 7,917,614 $0.40 $ 9,108 7,922,664 $1.15
====== ========= ===== ======= ========= =====
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 3,754 $ 3,188 $ 10,971 $ 9,108
Other comprehensive income -
unrealized (loss) gain on
investment securities available
for sale, net of tax (benefit)
expense of $(137) and $19 for the
three months ended September 30,
1998 and 1997, respectively, and
$(104) and $7 for the nine months
ended September 30, 1998 and
1997, respectively (197) 28 (149) 10
-------- -------- -------- --------
Comprehensive income $ 3,557 $ 3,216 $ 10,822 $ 9,118
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
NOTE 4 - IMPAIRED LOANS RECEIVABLE
As of September 30, 1998, the recorded investment in loans receivable
that were considered impaired under Statement of Financial Accounting Standards
No. 114 was $4.3 million. The average recorded investment in impaired loans was
$7.2 million for both the three and nine month periods ended September 30, 1998.
Interest income recognized on impaired loans was not material during the three
and nine month periods ended September 30, 1998 and 1997.
NOTE 5 - SUBSEQUENT EVENT - STOCK REPURCHASE PROGRAM
On October 23, 1998, the Company's Board of Directors approved an
extension of a stock repurchase program that originally commenced in April 1997.
Under this extension, the Company may acquire up to an additional 5 percent of
its outstanding shares, not to exceed $6 million over the next 12 months,
through purchases on the open market. Repurchased shares may become treasury
shares and will be utilized in the normal course of the Company's capital
management activities, including the potential funding of existing approved
employee benefit programs. The Company had acquired 247,500 shares of its stock
for a total cost of $3.9 million under the original program through September
30, 1998.
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 nine month periods ended September 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET INCOME
Net income totaled $3.8 million for the three months ended September 30,
1998 compared to $3.2 million for the corresponding period in 1997, an increase
of 17.8 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
$0.47 for the three months ended September 30, 1998 compared to $0.40 for the
corresponding period in 1997, an increase of 17.5 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
SEPTEMBER 30, 1998 VS. 1997
-------------------------------------
INCREASE (DECREASE) DUE TO:
---------------------------
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned on:
Loans receivable(1), net $ 3,633 $ 41 $ 3,674
Investment securities 260 (63) 197
Mortgage-backed securities (132) (7) (139)
------- ------- -------
Total increase (decrease) in
interest income 3,761 (29) 3,732
------- ------- -------
Interest paid on:
Deposit accounts 1,728 (183) 1,545
FHLB advances (79) 38 (41)
------- ------- -------
Total increase (decrease) in
interest expense 1,649 (145) 1,504
------- ------- -------
Increase in net interest income $ 2,112 $ 116 $ 2,228
======= ======= =======
</TABLE>
Total interest income increased by $3.7 million in the 1998 third
quarter 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 $130.4 million, or 18.2 percent,
due to growth in the Company's real estate loan portfolio. The average balance
of investment securities increased $19.1 million, or 14.3 percent. The
weighted-average yield on loans receivable increased slightly to 11.03 percent
for the 1998 third quarter compared to 11.01 percent for the corresponding
period in 1997. Included in interest and fee income earned on loans receivable
is income recognized from the early payoff of loans. Excluding this income from
prepayments, the yields on loans receivable would have been 10.63 percent and
10.75 percent for the three months ended September 30, 1998 and 1997,
respectively.
Total interest expense increased by $1.5 million in the 1998 third
quarter compared to the corresponding period in 1997 due primarily to an
increase in the average balance of deposit accounts, partially offset by a
decline in the cost of funds. The average balance of deposit accounts increased
$119.7 million during the third quarter of 1998 as compared to the 1997 third
quarter. The average rate paid on these accounts decreased to 5.70 percent in
the 1998 third quarter from 5.80 percent during the corresponding period in
1997.
PROVISIONS FOR ESTIMATED CREDIT LOSSES AND VALUATION ALLOWANCE ON LOANS HELD FOR
SALE
Management periodically assesses the adequacy of the allowance for
credit losses by reference to many factors which may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements, general portfolio trends relative to asset and portfolio size,
asset categories, potential credit and geographic concentrations, nonaccrual
loan levels, historical loss experience and risks associated with changes in
economic, social and business conditions. Accordingly, the calculation of the
adequacy of the allowance for credit losses is not based solely on the level of
nonperforming assets. Management believes that the Company's allowance for
credit losses as of September
- --------------------
(1) Loans receivable consist of loans held for investment and loans held for
sale.
9
<PAGE> 10
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 decreased to $0.8 million in
the 1998 third quarter from $1.1 million in the corresponding period in 1997,
due to improved asset quality resulting from the disposal of nonperforming loans
through a sale during the quarter. The provision for valuation allowance on
loans held for sale totaled $1.4 million during the three month period ended
September 30, 1998, as the Company marketed a portfolio of loans with a gross
principal balance of $12.0 million (including $7.7 million of nonperforming
loans) for sale. The Company recorded a provision for valuation allowance on
loans held for sale totaling $1.4 million in conjunction with the designation of
such loans. These loans were sold during the quarter with no additional gain or
loss. No such provision was recorded during the corresponding period in the
prior year.
Nonperforming assets to total assets declined to 0.70 percent as of
September 30, 1998, compared to 1.21 percent at December 31, 1997, due to sales
of nonperforming loans and other real estate owned ("OREO"). The aggregate
amount of nonperforming assets decreased to $7.1 million as of September 30,
1998 from $12.3 million at December 31, 1997. At September 30, 1998, the total
allowance for credit losses was $16.1 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
September 30, 1998 compared to $0.2 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
September 30, 1998, Funding originated $46.1 million of commercial real estate
loans for third-party investors and recognized $0.5 million of fee income,
compared to $12.8 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 $5.0 million for the three months ended
September 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 expense, due to an expansion of Funding's national
network of loan production offices, which resulted in an increase in the number
of full-time equivalent employees ("FTE's") to 170 during the third quarter of
1998 compared to 147 during the corresponding period of the prior year.
10
<PAGE> 11
For the three months ended September 30, 1998 and 1997, the Company's
ratio of consolidated general and administrative expense to average assets, on
an annualized basis, was 1.9 percent and 2.0 percent, respectively. The ratio,
excluding the costs of Funding, was 1.5 percent and 1.7 percent, respectively.
The Company's efficiency ratio (the ratio of noninterest expense to the sum of
net interest income and noninterest income) was 37.0 percent for the quarter
ended September 30, 1998 compared to 41.3 percent during the corresponding
period in the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET INCOME
Net income totaled $11.0 million for the nine months ended September 30,
1998 compared to $9.1 million for the corresponding period in 1997, an increase
of 20.4 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
$1.38 for the nine months ended September 30, 1998 compared to $1.15 for the
corresponding period in 1997, an increase of 20.0 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 NINE MONTHS ENDED
SEPTEMBER 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 $ 12,602 $ 466 $ 13,068
Investment securities 1,879 -- 1,879
Mortgage-backed securities (339) (17) (356)
-------- -------- --------
Total increase in interest income 14,142 449 14,591
-------- -------- --------
Interest paid on:
Deposit accounts 7,011 51 7,062
FHLB advances 359 123 482
-------- -------- --------
Total increase in interest expense 7,370 174 7,544
-------- -------- --------
Increase in net interest income $ 6,772 $ 275 $ 7,047
======== ======== ========
</TABLE>
Total interest income increased by $14.6 million for the nine month
period ended September 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
11
<PAGE> 12
receivable increased $153.4 million, or 22.4 percent, due to growth in the
Company's real estate loan portfolio. The average balance of investment
securities increased $46.0 million, or 42.1 percent. The weighted-average yield
on loans receivable increased to 10.98 percent for the nine months ended
September 30, 1998 compared to 10.89 percent for the corresponding period in
1997. Included in interest and fee income earned on loans receivable is income
recognized from the early payoff of loans. Excluding this income from
prepayments, the yields on loans receivable would have been 10.57 percent and
10.59 percent for the nine months ended September 30, 1998 and 1997,
respectively.
Total interest expense increased by $7.5 million for the nine month
period ended September 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 $161.4 million
during the nine month period ended September 30, 1998 compared to the
corresponding period in the prior year. The average rate paid on these accounts
increased to 5.77 percent for the nine month period ended September 30, 1998
from 5.76 percent during the corresponding period in the prior year.
PROVISIONS FOR ESTIMATED CREDIT LOSSES AND VALUATION ALLOWANCE ON LOANS HELD FOR
SALE
The provision for estimated credit losses increased to $3.8 million for
the nine month period ended September 30, 1998 compared to $1.9 million for the
corresponding period in 1997, as the Company provided reserves for growth in the
loan portfolio. See also "Financial Condition - Nonperforming Assets and
Allowance for Credit Losses." The provision for valuation allowance on loans
held for sale totaled $1.4 million during the nine month period ended September
30, 1998 compared to $0.4 million for the corresponding period in the prior
year. In the current year, the Company marketed a portfolio of loans with a
gross principal balance of $12.0 million (including $7.7 million of
nonperforming loans) for sale. The Company recorded a provision for valuation
allowance on loans held for sale totaling $1.4 million in conjunction with the
designation of such loans. These loans were sold during the year with no
additional gain or loss. In the prior year, a provision for valuation allowance
on loans held for sale totaling $0.4 million was recorded to adjust the carrying
value of the remaining portfolio of automobile finance contracts held for sale
to their fair market value.
NONINTEREST INCOME
Noninterest income totaled $2.1 million for the nine months ended
September 30, 1998 compared to $0.9 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 nine month period ended
September 30, 1998, Funding originated $135.7 million of commercial real estate
loans for third-party investors and recognized $1.5 million of fee income,
compared to $50.6 million of loans originated and $0.6 million of fee income
recognized during the corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $15.6 million for the nine months ended
September 30, 1998 compared to $13.5 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
12
<PAGE> 13
an increase in the number of FTE's, which averaged 168 during the nine month
period ended September 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 nine months ended September 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 1.8 percent, respectively.
The Company's efficiency ratio (the ratio of noninterest expense to the sum of
net interest income and noninterest income) was 39.6 percent for the nine months
ended September 30, 1998 compared to 43.0 percent during the corresponding
period in the prior year.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
computer programs used by the Company 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's State of Readiness - During the first quarter of 1998, the
Company formulated its plan to address the Year 2000 issue. Since that time, the
Company has taken the following steps:
o Established a Year 2000 Project Team;
o Inventoried Company applications and system software;
o Built an internal tracking database for application and vendor software;
o Developed a time line for completion of Year 2000 project milestones;
o Surveyed major customers to assess the Year 2000 impact and their ability
to honor loan obligations;
o Commenced awareness and education activities for employees;
o Processed responses to customer inquiries and educated customers on the
Year 2000 issue;
o Tested the year 2000 compliant version of the Company's
core banking system;
o Commenced processing all daily activity on the upgraded, year 2000
compliant release of the core banking system; and
o Submitted to an examination by the FDIC to assess the adequacy of the
Company's plan for addressing the Year 2000 issue. The results of this
examination are confidential as a matter of law.
Company Resources Invested in the Year 2000 Project - The Company's Year
2000 project team is responsible for ensuring that all Company systems are
identified, analyzed for Year 2000 compliance, and corrected, if necessary, by
September 30, 1999. The Year 2000 project team members represent all functional
areas of the Company. The Company's Board of Directors oversees the Year 2000
plan and provides guidance and resources to, and receives quarterly updates
from, the Year 2000 project team.
The Company is expensing the cost of all required system changes and
such costs are funded through operating cash flows. The total estimated cost of
the Year 2000 conversion
13
<PAGE> 14
project is not expected to materially impact the Company's results of
operations. The Company does not expect significant increases in future data
processing costs relating to Year 2000 compliance.
The Risks of the Company's Year 2000 Issues - Like most financial
service providers, the Company and its operations may be significantly affected
by the Year 2000 issue due to dependence on technology and date-sensitive data.
Computer software, hardware and other equipment, both within and outside the
Company's direct control, and third parties with whom the Company electronically
or operationally interfaces (including, without limitation, its customers and
third party vendors) are likely to be affected. If computer systems are not
modified to identify the year 2000, computer applications could fail or create
erroneous results. Many calculations reliant on date field information, such as
interest, payment or due dates and other operating functions, could generate
erroneous results, and the Company could experience an inability to process
transactions, prepare statements or engage in similar normal business
activities. A failure to adequately address the Year 2000 issue could adversely
affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Year
2000 issue could result in a significant adverse impact on the Company's
operations and, in turn, its financial condition and results of operations.
The Company's Contingency Plan - The Company has developed or is
developing contingency plans for each of its mission critical systems. These
contingency plans include selecting a new vendor or service provider or system
conversions. In the event a current vendor's system fails during Year 2000
compliance testing and it is determined that the system failure cannot be
corrected, the Company will convert to an alternative, Year 2000 compliant
system.
The Company's core banking system is used by a number of other financial
institutions and has been examined for Year 2000 readiness by the Federal
Financial Institutions Examination Counsel and has been found to be Year 2000
compliant.
14
<PAGE> 15
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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 4,262 $ 8,332
Other real estate owned, net 2,807 3,946
------- -------
Total nonperforming assets $ 7,069 $12,278
======= =======
Troubled debt restructurings $ 768 $ 1,574
Nonaccrual loans held for investment to total
gross loans held for investment 0.51% 1.09%
Nonperforming assets to total assets 0.70% 1.21%
</TABLE>
The following table provides certain information regarding the Company's
allowance for credit losses.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 12,178 $ 10,885
Provision for estimated credit losses 3,800 3,300
Net recoveries (charge-offs) on real estate loans 77 (2,007)
-------- --------
Balance at end of period $ 16,055 $ 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 September 30, 1998, the
Company held approximately $124.2 million of cash and cash equivalents
(consisting primarily of short-term investments with original maturities of 90
days or less) and $5.3 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
primarily of fixed income instruments which were rated "AAA" or equivalent by
nationally recognized rating agencies. As of September 30, 1998 and December 31,
1997, Imperial's liquidity ratios
15
<PAGE> 16
were 12.7 percent and 15.7 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 $52.1 million, and by federal funds lines of credit with two major
banks with an available borrowing capacity of $30.0 million.
Total deposit accounts decreased to $840.0 million at September 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
during the nine months ended September 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 September 30, 1998, Imperial's Leverage (Core), Tier I and Total
Risk-Based capital ratios were 8.5 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 September 30, 1998, Imperial's capital position
was designated as "well capitalized" for regulatory purposes. During the nine
months ended September 30, 1998, Imperial provided a $27.0 million dividend to
ITLA Capital.
The Company's shareholders' equity increased $9.3 million from December
31, 1997 to September 30, 1998 due primarily to the accumulation of $11.0
million in net income, partially offset by stock repurchases totaling $1.7
million. There were no dividends declared or paid by the Company during the
first nine 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.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is a 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
(a) On July 30, 1998, the Company held its Annual Meeting of
Shareholders.
(b) Shareholders voted on the following matters:
(i) The election of Sandor X. Mayuga as director for a
term to expire in 2001:
Votes For Against Withheld
----- --- ------- --------
6,693,790 0 6,475
(ii) The election of Robert R. Reed as director for a
term to expire in 2001:
Votes For Against Withheld
----- --- ------- --------
6,693,790 0 6,475
(iii) The election of Norval L. Bruce as director for a
term to expire in 2000:
Votes For Against Withheld
----- --- ------- --------
6,693,790 0 6,475
(iv) The ratification of Arthur Andersen LLP as
independent auditors of the Company for the fiscal
year ending December 31, 1998:
Votes For Against Abstain
----- --- ------- --------
6,691,085 6,600 0
17
<PAGE> 18
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
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: November 13, 1998 /s/ George W. Haligowski
----------------- ----------------------------
George W. Haligowski
Chairman of the Board, President and
Chief Executive Officer
Date: November 13, 1998 /s/ Michael A. Sicuro
----------------- -------------------------
Michael A. Sicuro
Managing Director and Chief
Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,378
<INT-BEARING-DEPOSITS> 119,792
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,331
<INVESTMENTS-CARRYING> 18,685
<INVESTMENTS-MARKET> 18,936
<LOANS> 845,389
<ALLOWANCE> 16,055
<TOTAL-ASSETS> 1,007,042
<DEPOSITS> 839,967
<SHORT-TERM> 48,500
<LIABILITIES-OTHER> 9,951
<LONG-TERM> 0
53,280
0
<COMMON> 0
<OTHER-SE> 55,344
<TOTAL-LIABILITIES-AND-EQUITY> 1,007,042
<INTEREST-LOAN> 68,942
<INTEREST-INVEST> 7,386
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 76,328
<INTEREST-DEPOSIT> 36,364
<INTEREST-EXPENSE> 38,996
<INTEREST-INCOME-NET> 37,332
<LOAN-LOSSES> 3,800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,034<F1>
<INCOME-PRETAX> 18,604
<INCOME-PRE-EXTRAORDINARY> 18,604
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,971
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 4.91
<LOANS-NON> 4,262
<LOANS-PAST> 0
<LOANS-TROUBLED> 768
<LOANS-PROBLEM> 13,307
<ALLOWANCE-OPEN> 12,178
<CHARGE-OFFS> 53
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 16,055
<ALLOWANCE-DOMESTIC> 16,055
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Included in EXPENSE-OTHER is provision for valuation allowance on loans held
for sale totaling $1.4 million.
</FN>
</TABLE>
