10-Q 1 e10-q.txt FORM 10-Q 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, 2000 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 Identification No.) Incorporation or Organization) 888 Prospect St., Suite 110, La Jolla, California 92037 (Address of Principal Executive Offices) (Zip Code) (858) 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: 6,903,580 outstanding as of August 7, 2000. 1 2 ITLA CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 DECEMBER 31, (UNAUDITED) 1999 ----------- ------------ (IN THOUSANDS EXCEPT SHARE AMOUNTS) ASSETS Cash and cash equivalents $ 43,814 $ 72,242 Investment securities available for sale, at approximate fair value 48,062 59,247 Stock in Federal Home Loan Bank 3,233 8,894 Real estate loans, net (net of allowance for credit losses of $20,901 and $19,895 in 2000 and 1999, respectively) 929,293 951,480 Real estate loans held in trust for collateralized mortgage obligations (net of allowance for credit losses of $4,614 in 2000) 244,489 -- Interest receivable 9,462 7,383 Other real estate owned, net 1,160 1,041 Premises and equipment, net 2,788 3,253 Deferred income taxes 9,105 9,401 Other assets 10,924 2,882 ----------- ----------- Total assets $ 1,302,330 $ 1,115,823 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposit accounts $ 924,586 $ 913,613 Collateralized mortgage obligations 195,051 -- Federal Home Loan Bank advances 39,250 67,250 Accounts payable and other liabilities 14,496 11,265 ----------- ----------- Total liabilities 1,173,383 992,128 ----------- ----------- 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, 8,205,916 and 8,202,916 issued and outstanding in 2000 and 1999, respectively 57,114 57,184 Retained earnings 88,315 79,478 Accumulated other comprehensive (loss) income (129) 706 ----------- ----------- 145,300 137,368 Less treasury stock, at cost - 1,215,836 and 1,021,432 shares in 2000 and 1999, respectively (16,353) (13,673) ----------- ----------- Total shareholders' equity 128,947 123,695 ----------- ----------- Total liabilities and shareholders' equity $ 1,302,330 $ 1,115,823 =========== ===========
See accompanying notes to the unaudited consolidated financial statements. 2 3 ITLA CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Interest income: Real estate loans, including fees $ 24,778 $ 23,364 $ 49,379 $ 46,162 Real estate loans held in trust for collateralized mortgage obligations 5,672 -- 5,918 -- Cash and investment securities 1,093 1,495 2,765 2,832 -------- -------- -------- -------- Total interest income 31,543 24,859 58,062 48,994 -------- -------- -------- -------- Interest expense: Deposit accounts 13,389 10,998 26,390 21,950 Collateralized mortgage obligations 3,830 -- 3,981 -- Federal Home Loan Bank advances 444 590 894 1,103 -------- -------- -------- -------- Total interest expense 17,663 11,588 31,265 23,053 -------- -------- -------- -------- Net interest income before provision for estimated credit losses 13,880 13,271 26,797 25,941 Provision for estimated credit losses 1,200 1,200 1,800 2,400 -------- -------- -------- -------- Net interest income after provision for estimated credit losses 12,680 12,071 24,997 23,541 -------- -------- -------- -------- Noninterest income: Gain on sale of investment securities available for sale -- -- 1,412 -- Fee income from mortgage banking activities 33 46 33 78 Other 111 264 273 510 -------- -------- -------- -------- Total noninterest income 144 310 1,718 588 -------- -------- -------- -------- Noninterest expense: Compensation and benefits 2,439 2,663 4,879 5,369 Occupancy and equipment 696 703 1,395 1,428 FDIC assessment 47 29 95 73 Other 1,919 2,030 3,997 3,657 -------- -------- -------- -------- Total recurring general and administrative 5,101 5,425 10,366 10,527 Nonrecurring expense -- -- 1,400 -- -------- -------- -------- -------- Total general and administrative 5,101 5,425 11,766 10,527 -------- -------- -------- -------- Real estate operations, net 6 7 (48) 9 Provision for estimated losses on other real estate owned -- 140 144 155 (Gain) loss on sale of other real estate owned, net (60) -- 9 (9) -------- -------- -------- -------- Total real estate operations, net (54) 147 105 155 -------- -------- -------- -------- Total noninterest expense 5,047 5,572 11,871 10,682 -------- -------- -------- -------- Income before provision for income taxes 7,777 6,809 14,844 13,447 Provision for income taxes 3,184 2,788 6,007 5,512 -------- -------- -------- -------- NET INCOME $ 4,593 $ 4,021 $ 8,837 $ 7,935 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ 0.64 $ 0.56 $ 1.23 $ 1.11 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ 0.63 $ 0.54 $ 1.21 $ 1.08 ======== ======== ======== ========
See accompanying notes to the unaudited consolidated financial statements 3 4 ITLA CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------- 2000 1999 --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,837 $ 7,935 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 415 564 Amortization of premium on purchased loans 949 -- Accretion of net deferred loan origination fees (780) (1,730) Amortization of original issue discount and deferred debt issuance costs on CMO's 392 -- Provision for estimated credit losses 1,800 2,400 Provision for estimated losses on other real estate owned 144 155 Gain on the sale of investment securities available for sale (1,412) -- Loss (gain) on the sale of other real estate owned 9 (9) Increase in interest receivable (107) (188) Increase in other assets (7,522) (2,342) Increase (decrease) in accounts payable and other liabilities 4,049 (2,157) --------- --------- Net cash provided by operating activities 6,774 4,628 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available for sale (15,000) (45,157) Proceeds from the maturity of investment securities available for sale 10,000 194 Proceeds from the sale of investment securities available for sale 16,176 -- Decrease in stock in Federal Home Loan Bank 5,661 6,951 Cash paid to acquire ICCMAC Multifamily and Commercial Trust 1999-1 (51,069) -- Purchases of real estate loans (53,539) (39,026) Decrease (increase) in real estate loans, net 60,075 (29,722) Decrease in loans held in trust for Collateralized Mortgage Obligations 9,559 -- Proceeds from sale of real estate loans held for sale 12,720 283 Proceeds from the sale of other real estate owned 1,018 -- Other, net (498) (176) --------- --------- Net cash used in investing activities (4,897) (106,653) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issued through exercise of employee stock options 30 120 Cash paid to acquire treasury stock (2,780) (29) Net increase in deposit accounts 10,973 33,718 Principal repayments on Collateralized Mortgage Obligations (10,528) -- Amounts borrowed from the Federal Home Loan Bank 63,000 20,500 Repayment of amounts borrowed from the Federal Home Loan Bank (91,000) (23,750) --------- --------- Net cash used in financing activities (30,305) 30,559 --------- --------- Net decrease in cash and cash equivalents (28,428) (71,466) Cash and cash equivalents at beginning of the period 72,242 125,602 --------- --------- Cash and cash equivalents at end of period $ 43,814 $ 54,136 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest $ 31,746 $ 21,728 Cash paid during the period for income taxes $ 7,850 $ 7,650 NONCASH INVESTING TRANSACTIONS: Loans transferred to other real estate owned $ 1,290 $ 4,732
See accompanying notes to the unaudited consolidated financial statements. 4 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 period indicated. The unaudited consolidated financial statements include the accounts of ITLA Capital and its wholly-owned subsidiaries, Imperial Capital Bank (the "Bank"), ITLA Commercial Securitization Corporation ("ITLA CSC"), ICCMAC Multifamily and Commercial Trust 1999-1 (the "Trust"), ITLA Commercial Investment Corporation, and ITLA Funding Corporation. All intercompany transactions and balances have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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, 2000 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, 1999. 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. The following is a reconciliation of the calculation of Basic and Diluted EPS.
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 --------- ----------- --------- --------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 Basic EPS $ 4,593 7,190 $ 0.64 $ 8,837 7,206 $ 1.23 Effect of Dilutive Stock Options -- 114 (0.01) -- 112 (0.02) --------- --------- --------- --------- --------- --------- Diluted EPS $ 4,593 7,304 $ 0.63 $ 8,837 7,318 $ 1.21 ========= ========= ========= ========= ========= ========= 1999 Basic EPS $ 4,021 7,167 $ 0.56 $ 7,935 7,167 $ 1.11 Effect of Dilutive Stock Options -- 213 (0.02) -- 212 (0.03) --------- --------- --------- --------- --------- --------- Diluted EPS $ 4,021 7,380 $ 0.54 $ 7,935 7,379 $ 1.08 ========= ========= ========= ========= ========= =========
5 6 ITLA CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - COMPREHENSIVE INCOME Comprehensive income, which encompasses net income and the net change in unrealized gains (losses) on investment securities available for sale, is presented below:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ----------------------- 2000 1999 2000 1999 ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net income $ 4,593 $ 4,021 $ 8,837 $ 7,935 Other comprehensive income- Unrealized gain (loss) on investment securities available for sale, net of tax expense of $28,000 and $277,000 for the three months ended June 30, 2000 and 1999, and net of tax (benefit) expense of ($1,000) and $237,000 for the six months ended June 30, 2000, respectively 70 399 (1) 341 Less reclassification adjustment for gains included in net income, net of tax benefit of $578 in 2000 -- -- (834) -- ------- ------- ------- ------- Comprehensive income $ 4,663 $ 4,420 $ 8,002 $ 8,276 ======= ======= ======= =======
NOTE 4 - IMPAIRED LOANS RECEIVABLE As of June 30, 2000 and December 31, 1999, the recorded investment in loans receivable that were considered impaired as defined by Statement of Financial Accounting Standards No. 114 was $10.5 million and $20.3 million, respectively. The average recorded investment in impaired loans was $13.3 million and $16.0 million, respectively, for the three and six month periods ended June 30, 2000 and $8.7 million for the year ended December 31, 1999. Interest income recognized on impaired loans totaled $0.3 million for the six month period ended June 30, 2000. There was no interest income recognized on impaired loans during the three months ended June 30, 2000 or the corresponding periods in the prior year. During the quarter ended June 30, 2000, ITLA Capital sold one impaired loan, with an outstanding principal balance of $13.2 million and a net book value of $12.7 million at no gain or loss. 6 7 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 and six month periods ended June 30, 2000. "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 2000 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, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 NET INCOME Net income totaled $4.6 million for the three months ended June 30, 2000 compared to $4.0 million for the corresponding period in 1999, an increase of 14.2 percent. The increase in net income was primarily due to an increase in net interest income and a decrease in noninterest expense. Diluted EPS was $0.63 for the three months ended June 30, 2000 compared to $0.54 for the corresponding period in 1999, an increase of 16.7 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. 7 8
FOR THE THREE MONTHS ENDED JUNE 30, 2000 VS. 1999 ----------------------------------------- INCREASE (DECREASE) DUE TO: --------------------------- ------- VOLUME RATE TOTAL ----------- ---------- ------- (IN THOUSANDS) Interest and fees earned from: Real estate loans $ 896 $ 518 $ 1,414 Real estate loans held in trust for collateralized mortgage obligations 5,672 -- 5,672 Cash and investment securities (547) 145 (402) ------- ------- ------- Total increase in interest income 6,021 663 6,684 ------- ------- ------- Interest paid for: Deposit accounts 792 1,599 2,391 Collateralized mortgage obligations 3,830 -- 3,830 FHLB advances (165) 19 (146) ------- ------- ------- Total increase in interest expense 4,457 1,618 6,075 ------- ------- ------- Increase (decrease) in net interest income $ 1,564 $ (955) $ 609 ======= ======= =======
Total interest income increased by $6.7 million in the second quarter of 2000 compared to the corresponding period in 1999 due primarily to the addition of real estate loans as a result of the Trust acquisition in the first quarter of 2000, and to a lesser extent, due to increases in the yields earned on real estate loans and cash and investment securities. These increases were partially offset by a decline in the average balance of cash and investment securities. The average balance of loans held in the Trust was $255.3 million during the three months ended June 30, 2000. The average balance of real estate loans increased to $947.2 million in the second quarter of 2000 from $911.2 million in the corresponding period of the prior year, an increase of $36.0 million, or 3.9 percent. This increase was due to purchases of single family residential mortgages, partially offset by a decrease in loans secured by income producing properties. Purchased single family residential loans had an average balance of $107.8 million during the quarter ended June 30, 2000, compared to $13.4 million in the same period in the prior year, while loans secured by income producing real estate properties had an average balance of $839.4 million during the current year compared to $897.9 million in the same period in the prior year. The average yield earned on real estate loans increased to 10.52 percent in the current quarterly period from 10.28 percent in the same period in the prior year, due to repricing of variable rate loans at higher interest rates due to the general market increases in the LIBOR and Prime rates that the loans are indexed to. The increase in loan yields due to repricing was partially offset by the increased balance of single family residential mortgages, which generally have lower effective yields than the Company's commercial real estate loans. The yield on cash and investment securities increased to 6.59 percent for the quarter ended June 30, 2000 compared to 6.00 percent in the corresponding period of the prior year. The increase in yield on cash and investment securities was due to the general increase in market interest rates. The average balance of cash and investment securities decreased to $66.7 million in the 2000 second quarter from $99.9 million in the corresponding period in the prior year, as the Company reduced its excess liquidity due to lower loan production. Total interest expense increased by $6.1 million in the first quarter of 2000 compared to the corresponding period in 1999 due primarily to the collateralized mortgage obligations 8 9 ("CMO"s) issued by the Trust and an increase in the average balance of deposit accounts, and to a lesser extent, an increase in the cost of funds, partially offset by a decline in the average balance of FHLB advances. The CMOs had an average balance of $201.8 million during the second quarter of 2000. The average balance of deposit accounts increased $53.6 million to $897.1 million for the three months ended June 30, 2000 compared to $843.5 million in the corresponding period of the prior year. The increase in deposits was used to fund the growth in the loan portfolio and the acquisition of certain CMO's of the Trust. The cost of funds increased to 6.28 percent for the 2000 second quarter from 5.24 percent during the corresponding period in 1999. This increase in funding costs was due primarily to the general increase in market interest rates, and to a lesser extent, due to the addition of the CMOs, which have a weighted average interest rate higher than the weighted average interest rate on the Bank's deposits. FHLB advances averaged $31.9 million in the current period, compared to $43.7 million in the prior year, a decline of $11.8 million, or 27.0 percent. FHLB advances are used primarily for short-term borrowings, and the decline in FHLB advances was consistent with the decline in liquidity. PROVISION FOR ESTIMATED CREDIT LOSSES Management periodically assesses the adequacy of the allowance for credit losses by reference to many factors which may be weighted differently at various times depending on prevailing conditions. These factors include, among other elements, general portfolio trends relative to asset and portfolio size, asset categories, 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, 2000 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 the Bank'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 totaled $1.2 million in the second quarter of 2000, the same as in the prior year. The provision for estimated credit losses was recorded to provide for reserves due to increases in purchased residential loans and commercial real estate loan originations. The allowance for estimated credit losses was 2.20 percent of total real estate loans at June 30, 2000 as compared to 2.05 percent at December 31, 1999. Nonperforming assets as a percentage of total assets increased slightly to 0.84 percent as of June 30, 2000, compared to 0.81 percent at December 31, 1999. The aggregate amount of nonperforming assets totaled $10.9 million as of June 30, 2000 ($9.3 million of loans held by the Bank and $1.6 million of loans held by the Trust) as compared to $9.0 million at December 31, 1999. See also "Financial Condition - Nonperforming Assets and Allowance for Credit Losses." 9 10 NONINTEREST INCOME Noninterest income totaled $0.1 million for the three months ended June 30, 2000 compared to $0.3 million for the corresponding period in the prior year. The decline in noninterest income was due primarily to a decline in loan processing fees. NONINTEREST EXPENSE Noninterest expense totaled $5.0 million for the three months ended June 30, 2000, compared to $5.6 million for the corresponding period in the prior year. The decline in noninterest expense was due primarily to decreases in compensation and benefits, which totaled $2.4 million in the quarter ending June 30, 2000 compared to $2.7 million in the corresponding period of the prior year and in real estate operations, net, which resulted in $54,000 of income in the current quarter, compared to $147,000 of expense in the second quarter of the prior year. Compensation and benefits expense decreased due to a reduction in staffing, as average full time equivalent associates decreased to 112 during the quarter ended June 30, 2000 compared to 132 during the corresponding period in the prior year. The decrease in headcount was due to the reduction of approximately 15 percent of the workforce during the third quarter of 1999 as a result of a decrease in loan production and general cost savings initiatives. Real estate operations, net decreased primarily due to the gain realized on sale of a foreclosed property during the second quarter of this year. For the three months ended June 30, 2000, ITLA Capital's ratio of consolidated general and administrative expense to average assets, on an annualized basis, decreased to 1.60 percent compared from 2.15 percent in the 1999 second quarter. ITLA Capital's efficiency ratio (excluding real estate operations) was 36.4 percent for the quarter ended June 30, 2000 compared to 40.0 percent during the corresponding period in the prior year. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 NET INCOME Net income totaled $8.8 million for the six months ended June 30, 2000 compared to $7.9 million for the corresponding period in 1999, an increase of 11.4 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 the provision for income taxes. Diluted EPS was $1.21 for the six months ended June 30, 2000 compared to $1.08 for the corresponding period in 1999, an increase of 12.0 percent. 10 11 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.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 VS. 1999 ----------------------------------------- INCREASE (DECREASE) DUE TO: --------------------------- ------- VOLUME RATE TOTAL ----------- ---------- ------- (IN THOUSANDS) Interest and fees earned from: Real estate loans $ 2,892 $ 325 $ 3,217 Real estate loans held in trust for collateralized mortgage obligations 5,918 -- 5,918 Cash and investment securities (425) 358 (67) ------- ------- ------- Total increase in interest income 8,385 683 9,068 ------- ------- ------- Interest paid for: Deposit accounts 2,008 2,432 4,440 Collateralized mortgage obligations 3,981 -- 3,981 FHLB advances (205) (4) (209) ------- ------- ------- Total increase in interest expense 5,784 2,428 8,212 ------- ------- ------- Increase (decrease) in net interest income $ 2,601 $(1,745) $ 856 ======= ======= =======
Total interest income increased by $9.1 million in the first half of 2000 compared to the corresponding period in 1999. This increase was due primarily to the addition of real estate loans as a result of the Trust acquisition in the first quarter of 2000, the increase in the average balance of real estate loans, and to a lesser extent, to the increases in the average yields on cash and investment securities and real estate loans. These increases were partially offset by a decrease in the average balance of cash and investment securities. The average balance of real estate loans held in the Trust was $133.4 million for the six month period ending June 30, 2000. The average balance of real estate loans increased to $949.0 million in the current year-to-date period compared to $895.7 million in the corresponding period in the prior year, due primarily to purchases of single family residential mortgages. The weighted-average yield of real estate loans increased to 10.46 percent in the current year-to-date period, compared to 10.39 percent in the prior year. The increase in yield of real estate loans was due to the repricing of variable rate loans at higher interest rates due to the general market increase in the LIBOR and Prime rates that the loans are indexed to, partially offset by the increased balance of single family residential mortgages, which generally have lower effective yields. The weighted-average yield on cash and investment securities increased to 5.92 percent in the current year-to-date period, compared to 5.26 percent in the corresponding period in the prior year, reflecting the general increase in market interest rates Total interest expense increased by $8.2 million in the first half of 2000 compared to the corresponding period in 1999 due primarily to the interest expense from the CMOs, and to a 11 12 lesser extent, to increases in the average balance of deposit accounts and in the average rates paid on deposits. The average balance of CMOs was $108.6 million for the six months ended June 30, 2000. The average balance of deposit accounts was $901.9 million in the six month period ended June 30, 2000, compared to $839.3 million in the prior year-to-date period. The increase in deposits was used to fund the increase in real estate loans and to finance the acquisition of the Trust. The average rate paid on deposit accounts increased to 5.88 percent in the current year-to-date period compared to 5.28 percent in the corresponding period in the prior year. The increase in the average interest rate on deposit accounts was consistent with the general increase in market interest rates. PROVISIONS FOR ESTIMATED CREDIT LOSSES The provision for estimated credit losses decreased to $1.8 million in the first six months of 2000 from $2.4 million in the corresponding period in 1999. The provision for estimated credit losses was recorded to provide for reserves primarily due to the increase in the purchased residential loan portfolio. NONINTEREST INCOME Noninterest income totaled $1.7 million for the six months ended June 30, 2000 compared to $0.6 million for the corresponding period in 1999. The increase in noninterest income was due primarily to the $1.4 million gain realized on the sale of investment securities available for sale. NONINTEREST EXPENSE Noninterest expense totaled $11.9 million and $10.7 million for the six-months ended June 30, 2000 and 1999, respectively. The increase in noninterest expense in the current six month period was due primarily to $1.4 million of nonrecurring general and administrative expenses recorded in the first quarter of 2000 related to the consolidation of the Bank and ITLA Capital's headquarters in La Jolla, California. For the six months ended June 30, 2000, ITLA Capital's ratio of consolidated recurring general and administrative expense to average assets, on an annualized basis, was 1.76 percent compared to 2.10 percent in the corresponding period in the prior year. ITLA Capital's efficiency ratio excluding nonrecurring expenses and real estate operations was 38.2 percent for the six months ended June 30, 2000 compared to 39.7 percent during the corresponding period in the prior year. 12 13 FINANCIAL CONDITION NONPERFORMING ASSETS AND ALLOWANCE FOR CREDIT LOSSES The following table sets forth ITLA Capital's nonperforming assets by category and troubled debt restructurings as of the dates indicated.
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ (DOLLARS IN THOUSANDS) Non-performing real estate loans $ 8,147 $ 7,977 Non-performing real estate loans held in trust for collateralized mortgage obligations 1,620 -- Other real estate owned, net 1,160 1,041 ------- ------- Total nonperforming assets 10,927 9,018 Troubled debt restructurings 918 13,996 ------- ------- $11,845 $23,014 ======= ======= Non-performing real estate loans to total gross real estate loans 0.80% 0.82% Nonperforming assets to total assets 0.84% 0.81%
At June 30, 2000 and December 31, 1999, other real estate owned consisted of five and six properties, respectively. 13 14 The following table provides certain information regarding ITLA Capital's allowance for credit losses on its portfolios of real estate loans and real estate loans held in the Trust.
FOR THE SIX MONTHS FOR THE ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: Balance at beginning of period $ 19,895 $ 16,811 Provision for estimated credit losses 1,800 4,950 Net charge-offs on real estate loans (794) (1,866) -------- -------- Balance at end of period $ 20,901 $ 19,895 ======== ======== Allowance for credit losses as a percentage of real estate loans, net 2.20% 2.05% REAL ESTATE LOANS HELD IN TRUST FOR COLLATERALIZED MORTGAGE OBLIGATIONS: Balance at beginning of period $ -- $ -- Additions due to purchase 4,614 -- -------- -------- Balance at end of period $ 4,614 $ -- ======== ======== Allowance for credit losses as a percentage of real estate loans held in trust for the collateralized mortgage obligations, net 1.85% --
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, 2000, ITLA Capital held approximately $43.8 million of cash and cash equivalents (consisting primarily of short-term investments with original maturities of 90 days or less) and $48.1 million of investment securities classified as available for sale. Short-term fixed income investments classified as cash equivalents consisted of interest-bearing deposits at financial institutions, government money market funds 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 June 30, 2000 and December 31, 1999, the Bank's liquidity ratios were 9.5 percent and 11.8 percent, respectively, exceeding the regulatory requirement of 1.5 percent. In addition, the Bank's liquidity position is supported by a credit facility with the FHLB with an available 14 15 borrowing capacity of $136.8 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 $924.6 million at June 30, 2000 from $913.6 million at December 31, 1999. ITLA Capital retained a significant amount of the funds which matured through rollover of maturing deposit accounts during the three and six month periods ended June 30, 2000. Although ITLA Capital competes for deposits primarily on the basis of rates, management believes that a significant portion of deposits will remain with ITLA Capital upon maturity on an ongoing basis based on its historical experience regarding retention of deposits. CAPITAL RESOURCES As of June 30, 2000, the Bank's Leverage (Core), Tier I and Total Risk-Based capital ratios were 8.6 percent, 9.8 percent and 11.0 percent, respectively. These ratios were 9.0 percent, 10.1 percent and 11.4 percent, respectively, as of December 31, 1999. The decline in capital ratios from December 31, 1999 to June 30, 2000 was due to the payment of a $14.3 million cash dividend from the Bank to its parent, ITLA Capital. These funds were utilized by ITLA Capital to complete the acquisition of 100 percent of the equity and certain CMO's of the Trust. The minimum regulatory requirement for Leverage (Core), Tier I and Total Risk-Based capital are 4.0 percent, 4.0 percent and 8.0 percent, respectively. As of June 30, 2000, the Bank's capital position was designated as "well capitalized" for regulatory purposes. ITLA Capital's shareholders' equity increased $5.3 million from December 31, 1999 to June 30, 2000 primarily due to the accumulation of $8.8 million in net income, partially offset by purchases of treasury stock of $2.7 million and the net change in unrealized gain (loss) on investment securities available for sale of $0.9 million. There were no dividends declared or paid by ITLA Capital during the first six months of 2000. 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, 1999. 15 16 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 (a) Exhibit (3)(ii) - Amended and Restated Bylaws. Exhibit (10.1) - Employment Agreement of George Haligowski Exhibit (10.2) - Salary Continuation Plan (b) A report was filed on May 5, 2000 announcing the appointment of new executives to the positions of Chief Financial Officer and Treasurer. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ITLA CAPITAL CORPORATION Date: August 14, 2000 /s/ George W. Haligowski ------------------------------------- George W. Haligowski Chairman of the Board, President and Chief Executive Officer Date: August 14, 2000 /s/ Timothy M. Doyle ------------------------------------- Timothy M. Doyle Managing Director and Chief Financial Officer 17