<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, 1999
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 (IRS Employer Identification No.)
Jurisdiction of Incorporation
or Organization)
888 Prospect St., Suite 110,
La Jolla, California 92037
----------------------------- ---------------------------------
(Address of Principal (Zip Code)
Executive Offices)
(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: 7,195,484
outstanding as of August 13, 1999.
<PAGE> 2
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 54,136 $ 125,602
Investment securities available for sale, at approximate fair value 45,583 329
Stock in Federal Home Loan Bank 5,682 12,633
Loans held for investment, net (net of allowance for credit losses of
$18,380 and $16,811 in 1999 and 1998, respectively) 937,340 862,089
Loans held for sale, at lower of cost or fair market value -- 12,188
Interest receivable 6,509 6,321
Other real estate owned, net 5,790 1,201
Premises and equipment, net 3,229 3,493
Deferred income taxes 6,020 6,270
Other assets 5,036 2,521
------------ ------------
Total assets $ 1,069,325 $ 1,032,647
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 900,516 $ 866,798
Federal Home Loan Bank advances 45,250 48,500
Accounts payable and other liabilities 9,310 11,467
------------ ------------
Total liabilities 955,076 926,765
------------ ------------
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, 8,163,516 issued in 1999 and 8,151,916
issued in 1998 56,037 55,917
Retained earnings 71,208 63,273
Accumulated other comprehensive income (loss) 191 (150)
------------ ------------
127,436 119,040
Less treasury stock, at cost - 987,432 shares
in 1999 and 985,432 in 1998 (13,187) (13,158)
------------ ------------
Total shareholders' equity 114,249 105,882
------------ ------------
Total liabilities and shareholders' equity $ 1,069,325 $ 1,032,647
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE> 3
ITLA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 23,364 $ 23,280 $ 46,162 $ 45,371
Investment securities 1,495 1,965 2,832 4,292
Mortgage-backed securities -- 318 -- 710
-------- -------- -------- --------
Total interest income 24,859 25,563 48,994 50,373
-------- -------- -------- --------
Interest expense:
Deposit accounts 10,998 12,109 21,950 24,252
Federal Home Loan Bank advances 590 896 1,103 1,797
-------- -------- -------- --------
Total interest expense 11,588 13,005 23,053 26,049
-------- -------- -------- --------
Net interest income before provision
for estimated credit losses 13,271 12,558 25,941 24,324
Provision for estimated credit losses 1,200 1,600 2,400 3,000
-------- -------- -------- --------
Net interest income after provision
for estimated credit losses 12,071 10,958 23,541 21,324
-------- -------- -------- --------
Noninterest income:
Fee income from mortgage banking activities 46 408 78 990
Other 264 238 510 515
-------- -------- -------- --------
Total noninterest income 310 646 588 1,505
-------- -------- -------- --------
Noninterest expense:
Compensation and benefits 2,552 2,553 5,044 5,044
Occupancy and equipment 703 693 1,428 1,387
FDIC assessment 29 26 73 49
Other 2,141 1,894 3,982 3,884
-------- -------- -------- --------
Total general and administrative 5,425 5,166 10,527 10,364
-------- -------- -------- --------
Real estate operations, net 7 82 9 162
Provision for estimated losses on other real estate owned 140 248 155 248
Gain on sale of other real estate owned, net -- (176) (9) (176)
-------- -------- -------- --------
Total real estate operations, net 147 154 155 234
-------- -------- -------- --------
Total noninterest expense 5,572 5,320 10,682 10,598
-------- -------- -------- --------
Income before provision for income taxes 6,809 6,284 13,447 12,231
Provision for income taxes 2,788 2,576 5,512 5,014
-------- -------- -------- --------
NET INCOME $ 4,021 $ 3,708 $ 7,935 $ 7,217
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.56 $ 0.48 $ 1.11 $ 0.94
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.54 $ 0.46 $ 1.08 $ 0.90
======== ======== ======== ========
</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,
---------- ----------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,935 $ 7,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization, net (1,166) (496)
Provisions for estimated credit losses and
estimated losses on other real estate owned 2,555 3,248
Gain on the sale of other real estate owned (9) (176)
Increase in interest receivable (188) (1,119)
Increase in other assets (2,342) (299)
Increase in accounts payable and other liabilities (2,157) (1,876)
---------- ----------
Net cash provided by operating activities 4,628 6,499
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (45,157) (20,520)
Proceeds from the maturity of investment securities available for sale 194 25,050
Decrease (increase) in stock in Federal Home Loan Bank 6,951 (351)
Repayment of principal on mortgage-backed securities -- 4,298
Increase in loans held for investment, net (29,722) (58,854)
Purchases of loans held for investment (39,026) --
Proceeds from sale of loans 283 3,411
Proceeds from the sale of other real estate owned -- 1,126
Cash paid for capital expenditures (214) (261)
Other, net 38 --
---------- ----------
Net cash used in investing activities (106,653) (46,101)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised 120 62
Purchase of Treasury Stock (29) (99)
Net increase in deposit accounts 33,718 1,082
Net decrease in Federal Home Loan Bank advances (3,250) (1,000)
---------- ----------
Net cash provided by financing activities 30,559 45
---------- ----------
Net decrease in cash and cash equivalents (71,466) (39,557)
Cash and cash equivalents at beginning of the period 125,602 123,885
---------- ----------
Cash and cash equivalents at end of period $ 54,136 $ 84,328
========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 21,728 $ 25,914
Cash paid during the period for income taxes $ 7,650 $ 6,970
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 4,732 $ 488
Loans to facilitate the sale of other real estate owned $ -- $ 549
</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, 1999 AND 1998
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of ITLA Capital
Corporation ("ITLA Capital") 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 ITLA Capital and its
wholly-owned subsidiaries, Imperial Thrift and Loan Association ("Imperial
Thrift"), ITLA Funding Corporation ("ITLA Funding") and ITLA Commercial
Investment Corporation. All material intercompany transactions and balances have
been eliminated. 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, 1999 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 ITLA Capital's annual report on Form 10-K for the year ended
December 31, 1998.
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 ITLA Capital.
5
<PAGE> 6
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - EARNINGS PER SHARE (Continued)
The following is a reconciliation of 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>
1999
Basic EPS $4,021 7,166,611 $0.56 $7,935 7,166,548 $1.11
Effect of Dilutive Stock Options -- 213,358 (0.02) -- 212,423 (0.03)
------ --------- ----- ------ --------- -----
Diluted EPS $4,021 7,379,969 $0.54 $7,935 7,378,971 $1.08
====== ========= ===== ====== ========= =====
1998
Basic EPS $3,708 7,698,984 $0.48 $7,217 7,698,973 $0.94
Effect of Dilutive Stock Options -- 297,296 (0.02) -- 296,935 (0.04)
------ --------- ----- ------ --------- -----
Diluted EPS $3,708 7,996,280 $0.46 $7,217 7,995,908 $0.90
====== ========= ===== ====== ========= =====
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income, which encompasses net income and unrealized gains
on investment securities available for sale, is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $4,021 $3,708 $7,935 $7,217
Other comprehensive income-
Unrealized gain on investment
securities available for sale,
net of tax expense of $277,000 and
$35,000 for the three months ended
June 30, 1999 and 1998, and net of
income tax expense of $237,000 and
$33,000 for the six months ended
June 30, 1999 and 1998 respectively 399 50 341 48
------ ------ ------ ------
Comprehensive income $4,420 $3,758 $8,276 $7,265
====== ====== ====== ======
</TABLE>
6
<PAGE> 7
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - IMPAIRED LOANS RECEIVABLE
As of June 30, 1999 and December 31, 1998, the recorded investment in
loans receivable that were considered impaired under Statement of Financial
Accounting Standards No. 114 was $6.8 million and $6.0 million, respectively.
The average recorded investment in impaired loans was $6.8 million for the six
month period ended June 30, 1999 and $5.5 million for the year ended December
31, 1998. Interest income recognized on impaired loans was not material during
the three and six month periods ended June 30, 1999 and 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
ITLA Capital as of and for the three month and six month periods ended June 30,
1999.
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: This Form 10-Q contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, changes in economic
conditions in ITLA Capital's market areas, changes in policies by regulatory
agencies, the impact of competitive loan products, loan demand risks,
fluctuations in interest rates and operating results and other risks detailed
from time to time in ITLA Capital's filings with the Securities and Exchange
Commission. ITLA Capital cautions readers not to place undue reliance on
forward-looking statements. ITLA Capital 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. These risks could cause ITLA Capital's actual results
for 1999 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, ITLA Capital.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET INCOME
Net income totaled $4.0 million for the three months ended June 30,
1999 compared to $3.7 million for the corresponding period in 1998, an increase
of 8.4 percent. The increase in net income was primarily due to an increase in
net interest income and a decrease in the provision for estimated credit losses,
partially offset by a decrease in noninterest income and increases in
noninterest expenses and the provision for income taxes. Diluted EPS was $0.54
for the three months ended June 30, 1999 compared to $0.46 for the corresponding
period in 1998, an increase of 17.4 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, 1999 VS. 1998
INCREASE (DECREASE) DUE TO:
-----------------------------------------------
VOLUME RATE TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned from:
Loans receivable, net(1) $ 1,736 $ (1,652) $ 84
Cash and Investment securities (640) 170 (470)
Mortgage-backed securities (318) -- (318)
-------- -------- --------
Total increase (decrease) in
interest income 778 (1,482) (704)
-------- -------- --------
Interest paid for:
Deposit accounts 33 (1,144) (1,111)
FHLB advances (225) (81) (306)
-------- -------- --------
Total decrease in
interest expense (192) (1,225) (1,417)
-------- -------- --------
Increase (decrease) in net interest income $ 970 $ (257) $ 713
======== ======== ========
</TABLE>
(1) Loans receivable, net, consist of loans held for investment and loans held
for sale.
Total interest income decreased by $0.7 million in the second quarter
of 1999 compared to the corresponding period in 1998 due primarily to declines
in the yields earned on loans and declines in the average outstanding balances
of investment securities and mortgage backed securities, partially offset by an
increase in the average balance of loans receivable and the yield on cash and
investment securities. The weighted-average yield on loans receivable decreased
to 10.28 percent for the second quarter of 1999 compared to 10.97 percent for
the corresponding period in 1998. The decline in the yields on loans relative to
the corresponding period in the prior year was consistent with the general
declines in market interest rates that occurred during the period. Interest and
fee income earned on loans receivable includes income recognized from the early
payoff of loans. Excluding this income from prepayments, the yields on loans
receivable would have been 10.01 percent and 10.83 percent for the three months
ended June 30, 1999 and 1998, respectively. The average balance of loans
receivable increased $60.4 million, or 7.1 percent, due primarily to loan
originations and purchases of single family residential mortgages, partially
offset by prepayments and scheduled loan amortization and payoffs. The increase
in average loans receivable was funded by utilizing existing excess liquidity.
The yield on cash and investment securities increased to 6.0 percent in
the current year from 5.45 percent in the prior year primarily due to a $0.4
million dividend earned on the Company's investment in common stock of Imperial
Credit Commercial Mortgage Investment Corporation ("ICMI"). There were no such
dividends earned in the corresponding period in the prior year.
Total interest expense decreased by $1.4 million in the second quarter
of 1999 compared to the corresponding period in 1998 due primarily to a decline
in the cost of funds, as well as to a decline in the average balance of FHLB
advances partially offset by an increase in the average balance of deposit
accounts. The average balance of deposit accounts increased $2.0 million during
the second quarter of 1999 as compared to the 1998 second quarter, while the
average balance of FHLB advances declined by $16.8 million. The average rate
paid for interest bearing liabilities decreased to 5.24 percent for the 1999
second quarter from 5.77 percent during the
9
<PAGE> 10
corresponding period in 1998. This decline in funding costs was consistent with
the general decline in market interest rates.
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, 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 allowance for credit losses as of June 30,
1999 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 ITLA Capital'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 Thrift'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 $1.2 million in
the 1999 second quarter from $1.6 million in the corresponding period in 1998.
The provision for estimated credit losses was recorded to provide for reserves
due to growth in the loan portfolio and due to increased concentrations in
construction lending and the geographic expansion of the commercial real estate
loan portfolio to loans outside of the state of California. In addition, the
acceptable loan to value ratios on new loan originations increased by five
percent during 1998 in response to market competition; loan to value ratios have
not increased since 1998. While the amount of the increase in the loan portfolio
was relatively consistent in the current year as compared to the same period in
the prior year, the provision for estimated credit losses declined slightly due
to a larger portion of the increase resulting from one-to four family
residential real estate loans purchased in the current period. One-to four
family residential real estate loans are for smaller loan amounts, are more
geographically disbursed, and generally may have a lower risk profile than
commercial real estate loans.
Nonperforming assets as a percentage of total assets increased to 1.18
percent as of June 30, 1999, compared to 0.64 percent at December 31, 1998, due
to a small increase in nonperforming loans and a $4.6 million increase in other
real estate owned ("OREO"). The aggregate amount of nonperforming assets
increased to $12.6 million as of June 30, 1999 from $6.6 million at December 31,
1998. At June 30, 1999, the total allowance for credit losses was $18.4 million
or 1.92 percent of total loans held for investment. See also "Financial
Condition - Nonperforming Assets and Allowance for Credit Losses."
10
<PAGE> 11
NONINTEREST INCOME
Noninterest income totaled $0.3 million for the three months ended June
30, 1999 compared to $0.6 million for the corresponding period in 1998. The
decrease in noninterest income was due to decreased fee income from mortgage
banking activities at ITLA Funding. During the third quarter of 1998, ITLA
Funding experienced a significant decline in the demand for fixed rate
commercial real estate loans originated for sale to third party investors due to
a decline in the commercial real estate securities market. For the three month
period ended June 30, 1999, $3.0 million of commercial real estate loans for
third-party investors were funded and $46,000 of fee income was recognized
compared to $39.5 million of loans funded and $0.4 million of fee income
recognized during the corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $5.6 million for the three months ended
June 30, 1999 compared to $5.3 million for the corresponding period in 1998. The
increase in noninterest expense was due primarily to an increase in expenses
incurred related to corporate development activities.
For the three months ended June 30, 1999 ITLA Capital's ratio of
consolidated general and administrative expense to average assets, on an
annualized basis, was 2.15 percent compared to 2.03 percent in the 1998 quarter.
ITLA Capital's efficiency ratio excluding real estate operations was 39.95
percent for the quarter ended June 30, 1999 compared to 40.32 percent during the
corresponding period in the prior year.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET INCOME
Net income totaled $7.9 million for the six months ended June 30, 1999
compared to $7.2 million for the corresponding period in 1998, an increase of
9.9 percent. The increase in net income was due primarily to an increase in net
interest income and a decrease in the provision for estimated credit losses,
partially offset by a decrease in noninterest income and increases in non
interest expenses and the provision for income taxes. Diluted EPS was $1.08 for
the six months ended June 30, 1999 compared to $0.90 for the corresponding
period in 1998, 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.
11
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 VS. 1998
INCREASE (DECREASE) DUE TO:
------------------------------------------------
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned from:
Loans receivable, net(1) $ 3,193 $(2,402) $ 791
Cash and investment securities (1,275) (185) (1,460)
Mortgage-backed securities (710) -- (710)
------- ------- -------
Total increase (decrease) in
interest income 1,208 (2,587) (1,379)
------- ------- -------
Interest paid for:
Deposit accounts (78) (2,224) (2,302)
FHLB advances (542) (152) (694)
------- ------- -------
Total decrease in
interest expense (620) (2,376) (2,996)
------- ------- -------
Increase (decrease) in net interest income $ 1,828 $ (211) $ 1,617
======= ======= =======
</TABLE>
(1) Loans receivable, net, consist of loans held for investment and loans held
for sale.
Total interest income decreased by $1.4 million in the first half of
1999 compared to the corresponding period in 1998 due primarily to declines in
the yields earned on loans and cash and investment securities and to declines in
the average outstanding balances of cash and investment securities and mortgage
backed securities, partially offset by an increase in the average balance of
loans receivable. The weighted-average yield on loans receivable decreased to
10.39 percent for the first half of 1999 compared to 10.96 percent for the
corresponding period in 1998, while the yield on investment securities decreased
to 5.26 percent in the current year from 5.50 percent in the prior year. The
decline in the yields on loans and investment securities relative to the
corresponding period in the prior year was consistent with the general declines
in market interest rates that occurred during the period. Interest and fee
income earned on loans receivable includes income recognized from the early
payoff of loans. Excluding this income from prepayments, the yields on loans
receivable would have been 10.10 percent and 10.88 percent for the six months
ended June 30, 1999 and 1998, respectively. The average balance of loans
receivable increased $60.6 million, or 7.3 percent, due primarily to growth in
originations and through purchases of single family residential mortgages. The
increase in average loans receivable was funded by utilizing existing excess
liquidity.
Total interest expense decreased by $3.0 million in the first half of
1999 compared to the corresponding period in 1998 due primarily to a decline in
the cost of funds, as well as to a decline in the average balance of FHLB
advances and deposit accounts. The average rate paid for interest bearing
liabilities decreased to 5.28 percent for the 1999 first half from 5.81 percent
during the corresponding period in 1998. This decline in funding costs was
consistent with the decline in market interest rates. The average balance of
deposit accounts decreased $2.7 million during the first half of 1999 as
compared to the same period last year and the average balance of FHLB advances
declined by $19.8 million.
12
<PAGE> 13
PROVISIONS FOR ESTIMATED CREDIT LOSSES AND VALUATION ALLOWANCE ON LOANS HELD FOR
SALE
The provision for estimated credit losses decreased to $2.4 million in
the first six months of 1999 from $3.0 million in the corresponding period in
1998. In both periods, the provision for estimated credit losses was recorded to
provide for reserves due to growth in the loan portfolio and due to increased
concentrations in construction lending and the geographic expansion of the
commercial real estate loan portfolio to loans outside of the state of
California. In addition, the acceptable loan to value ratios on new loan
originations increased by five percent during 1998 in response to competitive
pressures in the marketplace, but have not increased since that period. While
the amount of the increase in the loan portfolio was higher in the current year
as compared to the same period in the prior year, the provision for estimated
credit losses declined slightly due to a larger portion of the increase
resulting from one-to four family residential real estate loans purchased during
1999. One-to four family residential real estate loans are for smaller loan
amounts, are more geographically disbursed, and generally may have a lower risk
profile than commercial real estate loans.
NONINTEREST INCOME
Noninterest income totaled $0.6 million for the six months ended June
30, 1999 compared to $1.5 million for the corresponding period in 1998. The
decrease in noninterest income was due to decreased fee income from mortgage
banking activities at ITLA Funding. For the six month period ended June 30,
1999, $6.0 million of commercial real estate loans for third-party investors
were funded and $78,000 of fee income was recognized compared to $89.6 million
of loans funded and $1.0 million of fee income recognized during the
corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $10.7 million for the six months ended June
30, 1999 compared to $10.6 million for the corresponding period in 1998, an
increase of $0.1 million or 0.9 percent. For the six months ended June 30, 1999
ITLA Capital's ratio of consolidated general and administrative expense to
average assets, on an annualized basis, was 2.10 percent compared to 2.04
percent in the corresponding period in the prior year. ITLA Capital's efficiency
ratio excluding real estate operations was 39.68 percent for the six months
ended June 30, 1999 compared to 40.13 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 ITLA Capital 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.
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<PAGE> 14
ITLA Capital's State of Readiness - In 1998, ITLA Capital formulated
its plan to address the Year 2000 issue. Since that time, ITLA Capital has taken
the following steps:
- - Established a Year 2000 Project Team;
- - Inventoried Company applications and system software;
- - Built an internal tracking database for application and vendor
software;
- - Developed a time line for completion of Year 2000 project milestones;
- - Surveyed major customers to assess the Year 2000 impact and their
ability to honor loan obligations;
- - Provided awareness and education activities for employees;
- - Processed responses to customer inquiries and educated customers on the
Year 2000 issue;
- - Tested the year 2000 compliant version of ITLA Capital's core banking
system;
- - Commenced processing all daily activity on the upgraded, year 2000
compliant release of the core banking system; and
- - Submitted to an examination by the FDIC to assess the adequacy of ITLA
Capital's plan for addressing the Year 2000 issue. The results of this
examination are confidential as a matter of law.
ITLA Capital Resources Invested in the Year 2000 Project - ITLA
Capital's Year 2000 project team is responsible for ensuring that all 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 ITLA Capital. ITLA Capital'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.
ITLA Capital 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 project is approximately $75,000, all of which has been
incurred and expensed by ITLA Capital through June 30, 1999. ITLA Capital does
not expect significant increases in future data processing costs relating to
Year 2000 compliance.
The Risks of ITLA Capital's Year 2000 Issues - Like most financial
service providers, ITLA Capital 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 ITLA
Capital's direct control, and third parties with whom ITLA Capital
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 ITLA Capital 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 ITLA Capital'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 ITLA
Capital's operations and, in turn, its financial condition and results of
operations.
ITLA Capital's Contingency Plan - ITLA Capital has developed
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
14
<PAGE> 15
2000 compliance testing and it is determined that the system failure cannot be
corrected, ITLA Capital anticipates it will convert to an alternative, Year 2000
compliant system.
ITLA Capital'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.
FINANCIAL CONDITION
NONPERFORMING ASSETS AND ALLOWANCE FOR CREDIT LOSSES
The following table sets forth ITLA Capital's nonperforming assets by
category as of the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 6,817 $5,434
Other real estate owned, net 5,790 1,201
------- ------
Total nonperforming assets $12,607 $6,635
======= ======
Nonaccrual loans held for investment to total
gross loans held for investment 0.71% 0.62%
Nonperforming assets to total assets 1.18% 0.64%
</TABLE>
The following table provides certain information regarding ITLA
Capital's allowance for credit losses.
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 16,811 $ 12,178
Provision for estimated credit losses 2,400 4,550
Net (charge-offs) recoveries on real estate loans (831) 83
-------- --------
Balance at end of period $ 18,380 $ 16,811
======== ========
</TABLE>
LIQUIDITY AND DEPOSIT ACCOUNTS
Liquidity refers to ITLA Capital'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. ITLA Capital 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, 1999,
15
<PAGE> 16
ITLA Capital held approximately $54.1 million of cash and cash equivalents
(consisting primarily of short-term investments with original maturities of 90
days or less) and $45.6 million of investment securities classified as available
for sale. Short-term investments classified as cash equivalents consisted of
government money market funds, treasury bills 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 and an investment in the common stock of ICMI, a
publicly traded real estate investment trust. During the three months ended June
30, 1999, ITLA Capital acquired 1,426,000 shares of ICMI stock. The acquisition
of ICMI stock was made for investment purposes.
As of June 30, 1999 and December 31, 1998, Imperial Thrift's liquidity
ratios were 7.3 percent and 12.3 percent, respectively, exceeding the regulatory
requirement of 1.5 percent. In addition, Imperial Thrift's liquidity position is
supported by a credit facility with the FHLB with an available borrowing
capacity of $37.0 million based on collateral pledged, 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 $900.5 million at June 30, 1999
from $866.8 million at December 31, 1998. ITLA Capital retained a significant
amount of the funds which matured through rollover of maturing deposit accounts
during the six months ended June 30, 1999. Although ITLA Capital 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 ITLA Capital upon maturity on an ongoing basis.
CAPITAL RESOURCES
As of June 30, 1999, Imperial Thrift's Leverage (Core), Tier I and
Total Risk-Based capital ratios were 8.6 percent, 9.0 percent and 10.3 percent,
respectively. These ratios were 8.7 percent, 9.3 percent and 10.6 percent,
respectively, as of December 31, 1998. 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, 1999, Imperial Thrift's capital
position was designated as "well capitalized" for regulatory purposes.
ITLA Capital's shareholders' equity increased $8.4 million from
December 31, 1998 to June 30, 1999 primarily due to the accumulation of $7.9
million in net income, a net unrealized gain on investment securities of $0.3
million and the exercise of employee stock options of $0.1 million. There were
no dividends declared or paid by ITLA Capital during the first six months of
1999.
MARKET RISK
ITLA Capital'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 ITLA Capital's annual report on Form 10-K for the year ended
December 31, 1998.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
ITLA Capital 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 ITLA Capital'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
Not applicable.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
17
<PAGE> 18
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 13, 1999 /s/ George W. Haligowski
-----------------------------------
George W. Haligowski
Chairman of the Board, President and
Chief Executive Officer
Date: August 13, 1999 /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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,278
<INT-BEARING-DEPOSITS> 47,858
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,583
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 955,720
<ALLOWANCE> 18,380
<TOTAL-ASSETS> 1,069,325
<DEPOSITS> 900,516
<SHORT-TERM> 24,000
<LIABILITIES-OTHER> 9,310
<LONG-TERM> 21,250
0
0
<COMMON> 56,037
<OTHER-SE> 58,212
<TOTAL-LIABILITIES-AND-EQUITY> 1,069,325
<INTEREST-LOAN> 46,162
<INTEREST-INVEST> 2,832
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 48,994
<INTEREST-DEPOSIT> 21,950
<INTEREST-EXPENSE> 23,053
<INTEREST-INCOME-NET> 25,941
<LOAN-LOSSES> 2,400
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,682
<INCOME-PRETAX> 13,447
<INCOME-PRE-EXTRAORDINARY> 13,447
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,935
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 5.21
<LOANS-NON> 6,817
<LOANS-PAST> 384
<LOANS-TROUBLED> 207
<LOANS-PROBLEM> 12,560
<ALLOWANCE-OPEN> 16,811
<CHARGE-OFFS> 1,035
<RECOVERIES> 204
<ALLOWANCE-CLOSE> 18,380
<ALLOWANCE-DOMESTIC> 18,380
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
