<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, 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 Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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: 7,206,484
outstanding as of November 15, 1999.
<PAGE> 2
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------------- ----------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 23,701 $ 125,602
Investment securities available for sale, at approximate fair value 59,120 329
Stock in Federal Home Loan Bank 7,801 12,633
Loans held for investment, net (net of allowance for credit losses of
$19,035 and $16,811 in 1999 and 1998, respectively) 955,539 862,089
Loans held for sale, at lower of cost or fair market value - 12,188
Interest receivable 7,036 6,321
Other real estate owned, net 5,554 1,201
Premises and equipment, net 3,207 3,493
Deferred income taxes 5,925 6,270
Other assets 2,317 2,521
----------- -----------
Total assets $ 1,070,200 $ 1,032,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 909,172 $ 866,798
Federal Home Loan Bank advances 34,250 48,500
Accounts payable and other liabilities 8,065 11,467
----------- -----------
Total liabilities 951,487 926,765
----------- -----------
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, 8,190,916 and 8,151,916 issued in
1999 and 1998, respectively 56,303 55,917
Retained earnings 75,327 63,273
Accumulated other comprehensive income (loss) 352 (150)
----------- -----------
131,982 119,040
Less treasury stock, at cost - 992,432 and 985,432 shares
in 1999 and 1998, respectively (13,269) (13,158)
----------- -----------
Total shareholders' equity 118,713 105,882
----------- -----------
Total liabilities and shareholders' equity $ 1,070,200 $ 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 ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable, including fees $ 24,286 $ 23,571 $ 70,448 $ 68,942
Investment securities 1,558 2,065 4,390 6,357
Mortgage-backed securities - 319 - 1,029
-------- -------- -------- --------
Total interest income 25,844 25,955 74,838 76,328
-------- -------- -------- --------
Interest expense:
Deposit accounts 12,047 12,112 33,997 36,364
Federal Home Loan Bank advances 479 835 1,582 2,632
-------- -------- -------- --------
Total interest expense 12,526 12,947 35,579 38,996
-------- -------- -------- --------
Net interest income before provision for
estimated credit losses 13,318 13,008 39,259 37,332
Provision for estimated credit losses 1,400 800 3,800 3,800
Provision for valuation allowance on loans held for sale - 1,400 - 1,400
-------- -------- -------- --------
Net interest income after provision for
estimated credit losses 11,918 10,808 35,459 32,132
-------- -------- -------- --------
Noninterest income:
Fee income from mortgage banking activities 3 497 81 1,487
Other 198 104 708 619
-------- -------- -------- --------
Total noninterest income 201 601 789 2,106
-------- -------- -------- --------
Noninterest expense:
Compensation and benefits 2,536 2,596 7,580 7,640
Occupancy and equipment 661 649 2,089 2,036
FDIC assessment - 25 73 74
Other 1,920 1,636 5,902 5,520
-------- -------- -------- --------
Total general and administrative 5,117 4,906 15,644 15,270
-------- -------- -------- --------
Real estate operations, net 38 37 47 199
Provision for estimated losses on other real estate owned - 100 155 348
Gain on sale of other real estate owned, net (17) (7) (26) (183)
-------- -------- -------- --------
Total real estate operations, net 21 130 176 364
-------- -------- -------- --------
Total noninterest expense 5,138 5,036 15,820 15,634
-------- -------- -------- --------
Income before provision for income taxes 6,981 6,373 20,428 18,604
Provision for income taxes 2,862 2,619 8,374 7,633
-------- -------- -------- --------
NET INCOME $ 4,119 $ 3,754 $ 12,054 $ 10,971
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.57 $ 0.49 $ 1.68 $ 1.43
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.55 $ 0.47 $ 1.63 $ 1.38
======== ======== ======== ========
</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 NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,054 $ 10,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion and amortization of deferred loan fees, costs and premiums (2,248) (1,788)
Depreciation and amortization of fixed assets 759 852
Provisions for estimated credit losses and
estimated losses on other real estate owned 3,955 5,548
Gain on the sale of other real estate owned (26) (183)
Increase in interest receivable (715) (667)
Decrease in other assets 204 306
Increase in accounts payable and other liabilities (3,402) (1,297)
--------- ---------
Net cash provided by operating activities 10,581 13,742
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (57,946) (20,198)
Proceeds from the maturity of investment securities available for sale - 50,050
Decrease (increase) in stock in Federal Home Loan Bank 4,832 (531)
Repayment of principal on mortgage-backed securities - 6,344
Increase in loans held for investment, net (42,827) (45,884)
Purchases of loans held for investment (53,893) -
Proceeds from sale of loans 9,174 14,150
Proceeds from the sale of other real estate owned 252 1,462
Cash paid for capital expenditures (537) (288)
Other, net 64 (170)
--------- ---------
Net cash (used in) provided by investing activities (140,881) 4,935
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised 386 117
Purchases of stock held in treasury (111) (1,663)
Net increase (decrease) in deposit accounts 42,374 (3,846)
Amounts borrowed from the Federal Home Loan Bank 36,500 32,000
Repayment of amounts borrowed from the Federal Home Loan Bank (50,750) (45,000)
--------- ---------
Net cash provided by financing activities 28,399 (18,392)
--------- ---------
Net (decrease) increase in cash and cash equivalents (101,901) 285
Cash and cash equivalents at beginning of the period 125,602 123,885
--------- ---------
Cash and cash equivalents at end of period $ 23,701 $ 124,170
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 34,283 $ 38,738
Cash paid during the period for income taxes $ 12,345 $ 9,450
Noncash Investing Transactions:
Loans transferred to other real estate owned $ 4,743 $ 488
Loans to facilitate the sale of other real estate owned $ - $ 751
</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
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 nine months ended September 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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------------ ----------------------------
WEIGHTED- WEIGHTED-
AVERAGE PER AVERAGE PER
NET SHARES SHARE NET SHARES SHARE
INCOME OUTSTANDING AMOUNT INCOME OUTSTANDING AMOUNT
------- ----------- ------- ------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
1999
Basic EPS $ 4,119 7,194 $ 0.57 $12,054 7,176 $ 1.68
Effect of Dilutive Stock Options - 230 (0.02) - 211 (0.05)
------- ----- ------ ------- ----- -------
Diluted EPS $ 4,119 7,424 $ 0.55 $12,054 7,387 $ 1.63
======= ===== ====== ======= ===== =======
1998
Basic EPS $ 3,754 7,668 $ 0.49 $10,971 7,689 $ 1.43
Effect of Dilutive Stock Options - 244 (0.02) - 263 (0.05)
------- ----- ------ ------- ----- -------
Diluted EPS $ 3,754 7,912 $ 0.47 $10,971 7,952 $ 1.38
======= ===== ====== ======= ===== =======
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 4,119 $ 3,754 $12,054 $10,971
Other comprehensive income-
Unrealized gain (loss) on investment securities
available for sale, net of tax expense (benefit)
of $112 and $(137) for the three months ended
September 30, 1999 and 1998, and net of income
tax expense (benefit) of $349 and $(104) for
the nine months ended September 30 ,1999 and
1998 respectively 161 (197) 502 (149)
-------- ------- -------- -------
Comprehensive income $ 4,280 $ 3,557 $ 12,556 $10,822
======== ======= ======== =======
</TABLE>
6
<PAGE> 7
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - IMPAIRED LOANS RECEIVABLE
As of September 30, 1999 and December 31, 1998, the recorded investment
in loans receivable that were considered impaired as defined by Statement of
Financial Accounting Standards No. 114 was $5.7 million and $6.0 million,
respectively. The average recorded investment in impaired loans was $6.4 million
for the nine month period ended September 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 nine month periods ended September 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 nine month periods ended
September 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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
NET INCOME
Net income totaled $4.1 million for the three months ended September
30, 1999 compared to $3.8 million for the corresponding period in 1998, an
increase of 9.7 percent. The increase in net income was primarily due to an
increase in net interest income and a decrease in provisions for estimated
credit losses and valuation allowances on loans held for sale, partially offset
by a decrease in noninterest income and increases in noninterest expense and
provision for income taxes. Diluted EPS was $0.55 for the three months ended
September 30, 1999 compared to $0.47 for the corresponding period in 1998, an
increase of 17.0 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. 1998
------------------------------------------------------
INCREASE (DECREASE) DUE TO:
-----------------------------
VOLUME RATE TOTAL
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned from:
Loans receivable(1), net $2,787 $2,072) $ 715
Cash and Investment securities (502) (5) (507)
Mortgage-backed securities (319) - (319)
------- ------- ------
Total increase (decrease) in
interest income 1,966 (2,077) (111)
------- ------- ------
Interest paid for:
Deposit accounts 913 (978) (65)
FHLB advances (289) (67) (356)
------- ------- ------
Total increase (decrease) in
interest expense 624 (1,045) (421)
------- ------- ------
Increase (decrease) in net interest income $1,342 $(1,032) $ 310
======= ======= ======
</TABLE>
- -------------------
(1) Loans receivable, net, consist of loans held for investment and loans held
for sale.
Total interest income decreased by $0.1 million in the third quarter of
1999 compared to the corresponding period in 1998 due to a decrease in the yield
earned on loans receivable and decreases in the average 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 10.11 percent for the third quarter of 1999
compared to 11.03 percent for the corresponding period in 1998. The decline in
the yield on loans receivable was due to declines in market interest rates
(which reduced the yield of the adjustable rate loans in the portfolio upon
repricing), and due to the payoff of higher yielding commercial mortgages, as
borrowers have been able to refinance these loans at lower interest rates.
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 9.95 percent and 10.63 percent for
the three months ended September 30, 1999 and 1998, respectively. The average
balance of loans receivable increased $105.5 million, or 12.4 percent, due
primarily to loan originations and loan purchases, partially offset by
prepayments and scheduled loan amortization and payoffs. The increase in average
loans receivable was funded through an increase in deposits and by utilizing
existing excess liquidity.
Total interest expense decreased by $0.4 million in the third quarter
of 1999 compared to the corresponding period in 1998 due to a decline in the
cost of funds, partially offset by an increase in average interest bearing
liabilities. The cost of funds decreased to 5.27 percent for the 1999 third
quarter from 5.72 percent during the corresponding period in 1998. This decline
in funding costs was consistent with the general decline in market interest
rates. Average interest bearing liabilities increased by $45.1 million,
consisting of a $65.9 million increase in average deposit accounts, partially
offset by a $20.8 million decrease in average FHLB advances.
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,
9
<PAGE> 10
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 September 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 increased to $1.4 million in
the 1999 third quarter from $0.8 million in the corresponding period in 1998.
The provision for estimated credit losses was recorded due to growth in the loan
portfolio and to increased concentrations in construction lending and the
geographic expansion of the commercial real estate loan portfolio outside of the
state of California. In addition, the acceptable loan to value ratio on new loan
originations increased by five percent during 1998 in response to market
competition; loan to value ratios have not increased since 1998. Management
believes the recording of additional provisions was a prudent business measure
to continue to properly reflect the overall risk in the loan portfolio.
During the third quarter of 1998, ITLA Capital sold $12.0 million of
loans (including $7.7 million of nonperforming loans), and recorded a $1.4
million provision for valuation allowance on loans held for sale, to adjust the
carrying value of the loans sold to the lower of cost or fair market value. In
the 1999 third quarter, no loans had been designated as held for sale, and no
such mark-to-market provision was recorded.
Nonperforming assets as a percentage of total assets increased to 1.06
percent as of September 30, 1999, compared to 0.64 percent at December 31, 1998,
due to a nominal increase in nonperforming loans and a $4.4 million increase in
other real estate owned ("OREO"). The aggregate amount of nonperforming assets
increased to $11.4 million as of September 30, 1999 from $6.6 million at
December 31, 1998. The allowance for credit losses totaled $19.0 million, or
1.95 percent of total loans held for investment, as of September 30, 1999,
compared to $16.8 million, or 1.91 percent of total loans held for investment,
as of December 31, 1998. See also "Financial Condition - Nonperforming Assets
and Allowance for Credit Losses."
NONINTEREST INCOME
Noninterest income totaled $0.2 million for the three months ended
September 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. Since 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 September 30, 1999, $1.1 million of commercial real estate loans
for third-party investors were funded compared to $46.1 million of loans funded
during the corresponding period in the prior year.
10
<PAGE> 11
NONINTEREST EXPENSE
Noninterest expense totaled $5.1 million for the three months ended
September 30, 1999 compared to $5.0 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, partially offset
by declines in other real estate owned expense and compensation and benefits
expense. During the third quarter of 1999, ITLA Capital eliminated approximately
15 percent of its workforce, including management positions, as a result of a
decrease in loan production and general cost savings initiatives.
For the three months ended September 30, 1999, ITLA Capital's ratio of
consolidated general and administrative expense to average assets, on an
annualized basis, decreased to 1.91 percent compared from 1.93 percent in the
1998 quarter. ITLA Capital's efficiency ratio excluding real estate operations
was 37.9 percent for the quarter ended September 30, 1999 compared to 37.0
percent during the corresponding period in the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET INCOME
Net income totaled $12.1 million for the nine months ended September
30, 1999 compared to $11.0 million for the corresponding period in 1998, an
increase of 10.0 percent. The increase in net income was due primarily to an
increase in net interest income and a decrease in the provision for valuation
allowance on loans held for sale, partially offset by a decrease in noninterest
income and increases in noninterest expense and the provision for income taxes.
Diluted EPS was $1.63 for the nine months ended September 30, 1999 compared to
$1.38 for the corresponding period in 1998.
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. 1998
-----------------------------------------------------
INCREASE (DECREASE) DUE TO:
---------------------------
VOLUME RATE TOTAL
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and fees earned from:
Loans receivable(1), net $ 5,975 $(4,469) $ 1,506
Cash and investment securities (1,765) (202) (1,967)
Mortgage-backed securities (1,029) - (1,029)
------- ------- -------
Total increase (decrease) in
interest income 3,181 (4,671) (1,490)
------- ------- -------
Interest paid for:
Deposit accounts 861 (3,228) (2,367)
FHLB advances (832) (218) (1,050)
------- ------- -------
Total increase (decrease) in
interest expense 29 (3,446) (3,417)
------- ------- -------
Increase (decrease) in net interest income $ 3,152 $(1,225) $ 1,927
======= ======= =======
</TABLE>
- ---------------------
(1) Loans receivable, net, consist of loans held for investment and loans
held for sale.
Total interest income decreased by $1.5 million in the first nine
months 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 10.30 percent for the nine month period ended September 30, 1999
compared to 10.98 percent for the corresponding period in 1998, while the yield
on investment securities decreased to 5.30 percent in the current year from 5.48
percent in the prior year. The decline in yield on loans receivable was due to
declines in market interest rates (which reduced the yield of the adjustable
rate loans in the portfolio upon repricing), and due to the payoff of higher
yielding commercial mortgages, as borrowers have been able to refinance these
loans at lower interest rates. 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
10.09 percent and 10.57 percent for the nine months ended September 30, 1999 and
1998, respectively. The average balance of loans receivable increased $75.5
million, or 9.0 percent, due primarily to loan originations and loan
purchases. The increase in average loans receivable was funded by utilizing
existing excess liquidity.
Total interest expense decreased by $3.4 million in the first nine
months of 1999 compared to the corresponding period in 1998 due primarily to a
decline in the cost of funds and a decline in the average balance of FHLB
advances, partially offset by an increase in the average balance of deposits.
The average rate paid for interest bearing liabilities decreased to 5.28 percent
for the nine month period ending September 30, 1999 from 5.78 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
increased $20.5 million during the first nine months of 1999 as compared to the
same period last year while the average balance of FHLB advances declined by
$20.1 million.
12
<PAGE> 13
PROVISIONS FOR ESTIMATED CREDIT LOSSES AND VALUATION ALLOWANCE ON LOANS HELD FOR
SALE
The provision for estimated credit losses totaled $3.8 million for both
the nine month period ended September 30, 1999 and 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 ratio on new loan
originations increased by five percent during 1998 in response to competitive
pressures in the marketplace; loan to value ratios have not increased since
1998. Management believes the provisions recorded were a prudent business
measure to continue to properly reflect the overall risk in the loan portfolio.
In the prior year, ITLA Capital sold $12.0 million of loans (including
$7.7 million of nonperforming loans), and recorded a $1.4 million provision for
valuation allowance on loans held for sale, to adjust the carrying value of the
loans sold to the lower of cost or fair market value. In the current year, no
loans have been designated held for sale, and no such mark-to-market provision
was recorded.
NONINTEREST INCOME
Noninterest income totaled $0.8 million for the nine months ended
September 30, 1999 compared to $2.1 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 nine month period ended
September 30, 1999, $7.1 million of commercial real estate loans for third-party
investors were funded compared to $135.7 million of loans funded during the
corresponding period in the prior year.
NONINTEREST EXPENSE
Noninterest expense totaled $15.8 million for the nine months ended
September 30, 1999 compared to $15.6 million for the corresponding period in
1998, an increase of $0.2 million or 1.2 percent. The increase in noninterest
expense was due primarily to an increase in expenses incurred for corporate
development activities, partially offset by declines in other real estate owned
expense and compensation and benefits expense. During the third quarter of 1999,
ITLA Capital eliminated approximately 15 percent of its workforce, including
management positions, as a result of a decrease in loan production and general
cost savings initiatives.
For the nine months ended September 30, 1999 ITLA Capital's ratio of
consolidated general and administrative expense to average assets, on an
annualized basis, was 2.03 percent compared to 2.00 percent in the corresponding
period in the prior year. ITLA Capital's efficiency ratio excluding real estate
operations was 39.1 percent for the nine months ended September 30, 1999
compared to 39.6 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. The enhancements necessary to
prepare ITLA Capital's systems for the year 2000 have been completed in a timely
manner.
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:
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<PAGE> 14
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 Provided 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 ITLA Capital's core data
processing system;
o Commenced processing all daily activity on the upgraded, year 2000
compliant release of the core data processing system; and
o 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 ensured that all systems were identified,
analyzed for Year 2000 compliance, and corrected, if necessary, by September 30,
1999. The Year 2000 project team members represented all functional areas of
ITLA Capital. ITLA Capital's Board of Directors oversaw the Year 2000 plan and
provided guidance and resources to, and receives quarterly updates from, the
Year 2000 project team.
ITLA Capital expensed the cost of all required system changes and such
costs were funded through operating cash flows. The total cost of the Year 2000
conversion project was approximately $75,000, all of which had been incurred and
expensed by ITLA Capital as of September 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 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.
14
<PAGE> 15
ITLA Capital's core data processing 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-performing loans $ 5,808 $ 5,434
Other real estate owned, net 5,554 1,201
------- -------
Total nonperforming assets $11,362 $ 6,635
======= =======
Non-performing loans held for investment to total
gross loans held for investment 0.59% 0.62%
Non-performing assets to total assets 1.06% 0.64%
</TABLE>
At September 30, 1999 and December 31, 1998, Other Real Estate Owned
consisted of eight and seven properties, respectively
The following table provides certain information regarding ITLA
Capital's allowance for credit losses.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 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 3,800 4,550
Net (charge-offs) recoveries on real estate loans (1,576) 83
-------- --------
Balance at end of period $ 19,035 $ 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
15
<PAGE> 16
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, 1999, ITLA Capital held approximately
$23.7 million of cash and cash equivalents (consisting primarily of short-term
investments with original maturities of 90 days or less) and $59.1 million of
investment securities classified as available for sale. Short-term fixed income
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. Also included in investment securities available for sale are
1,426,000 shares of the common stock of Imperial Credit Commercial Mortgage
Investment Corporation ("ICMI"), a publicly traded real estate investment trust
acquired for investment purposes during the second quarter of 1999. ICMI
stock has earned a cash dividend yield of 12.8 percent.
As of September 30, 1999 and December 31, 1998, Imperial Thrift's
liquidity ratios were 6.0 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 $52.5 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 $909.2 million at September 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 nine months ended September 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 September 30, 1999, Imperial Thrift's Leverage (Core), Tier I and
Total Risk-Based capital ratios were 9.0 percent, 9.4 percent and 10.7 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 September 30, 1999, Imperial Thrift's capital
position was designated as "well capitalized" for regulatory purposes.
ITLA Capital's shareholders' equity increased $12.8 million from
December 31, 1998 to September 30, 1999 primarily due to the accumulation of
$12.1 million in net income, a net unrealized gain on investment securities of
$0.5 million and the exercise of employee stock options of $0.4 million
partially offset by purchases of treasury stock of $0.1 million. There were no
dividends declared or paid by ITLA Capital during the first nine 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
(a) On July 30, 1999, the Company held its Annual Meeting
of Shareholders.
(b) Shareholders voted on the following matters:
(i) The election of George W. Haligowski as
director for a term to expire in 2002:
Votes For Against Withheld
6,434,503 0 66,200
(ii) The election of Hirotaka Oribe as director
for a term to expire in 2002:
Votes For Against Withheld
6,434,503 0 66,200
(iii) The ratification of Arthur Andersen LLP as
independent auditors of the Company for the
fiscal year ending December 31, 1998:
Votes For Against Withheld
6,484,675 12,680 3,350
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: November 15, 1999 /s/ George W. Haligowski
-----------------------------------
George W. Haligowski
Chairman of the Board, President and
Chief Executive Officer
Date: November 15, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,468
<INT-BEARING-DEPOSITS> 14,233
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,120
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 974,574
<ALLOWANCE> 19,035
<TOTAL-ASSETS> 1,070,200
<DEPOSITS> 909,172
<SHORT-TERM> 22,500
<LIABILITIES-OTHER> 8,065
<LONG-TERM> 11,750
0
0
<COMMON> 56,303
<OTHER-SE> 62,410
<TOTAL-LIABILITIES-AND-EQUITY> 1,070,200
<INTEREST-LOAN> 70,448
<INTEREST-INVEST> 4,390
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 74,838
<INTEREST-DEPOSIT> 33,997
<INTEREST-EXPENSE> 35,579
<INTEREST-INCOME-NET> 39,259
<LOAN-LOSSES> 3,800
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,820
<INCOME-PRETAX> 20,428
<INCOME-PRE-EXTRAORDINARY> 20,428
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,054
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 5.12
<LOANS-NON> 5,808
<LOANS-PAST> 0
<LOANS-TROUBLED> 206
<LOANS-PROBLEM> 31,031
<ALLOWANCE-OPEN> 16,811
<CHARGE-OFFS> 1,780
<RECOVERIES> 204
<ALLOWANCE-CLOSE> 19,035
<ALLOWANCE-DOMESTIC> 19,035
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
