Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2002

OR

For the Transition Period from __________________ to __________________

Commission File Number 0-26960

ITLA CAPITAL CORPORATION

(858) 551-0511

     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: 5,786,258 outstanding as of August 7, 2002.

Table of Contents

ITLA CAPITAL CORPORATION
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
TABLE OF CONTENTS

Forward Looking Statements

     “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; the economic impact of the terrorist attacks on September 11, 2001 and the U.S. response to these attacks, changes in economic conditions in our market areas, changes in policies by regulatory agencies, the impact of competitive loan products, loan demand risks, the quality or composition of the loan or investment portfolios, including levels of nonperforming assets, fluctuations in interest rates, and changes in the relative differences between short and long term interest rates, and operating results and other risks detailed from time to time in our filings with the Securities and Exchange Commission. We caution readers not to place undue reliance on forward-looking statements. We do not undertake and specifically disclaim 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 our actual results for 2002 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us. As used throughout this report, the terms “we”, “our” or “Company” refer to ITLA Capital Corporation and its consolidated subsidiaries.

Part I — FINANCIAL INFORMATION

     This filing includes unaudited financial statements that have been reviewed in accordance with Rule 10-01(d) of Regulation S-X promulgated by the Securities and Exchange Commission. Because the Registrant elected to change auditors from Arthur Andersen LLP to Ernst and Young LLP during the second quarter ended June 30, 2002, the interim financial statements from the previous quarter and current quarter have been reviewed by Ernst and Young LLP in accordance with Statement of Auditing Standards Number 71 without exception, but no report of that independent public account need be presented.

2

Table of Contents

ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes to the unaudited consolidated financial statements.

3

Table of Contents

ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to the unaudited consolidated financial statements.

4

Table of Contents

ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to the unaudited consolidated financial statements.

5

Table of Contents

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 (“the Company”) included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the results of operations and financial position of the Company, as of and for the interim periods indicated. The unaudited consolidated financial statements include the accounts of ITLA Capital and its wholly owned subsidiaries, Imperial Capital Bank (the “Bank”) and Imperial Capital Real Estate Investment Trust (“Imperial Capital REIT”), ITLA Capital Statutory Trust I (“Trust I”) and ITLA Capital Statutory Trust II (“Trust II”). 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, 2002 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 our annual report on Form 10-K for the year ended December 31, 2001.

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 Company’s earnings.

     The following is a reconciliation of the calculation of Basic EPS and Diluted EPS.

6

Table of Contents

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:

NOTE 4 — IMPAIRED LOANS RECEIVABLE

     As of June 30, 2002 and December 31, 2001, the recorded investment in impaired real estate loans and impaired real estate loans held in trust was $10.1 million and $16.7 million, respectively. The average recorded investment in impaired loans was $9.1 million for the three months ended June 30, 2002 and $28.5 million for the same period last year. The average recorded investment in impaired loans was $11.8 million for the six months ended June 30, 2002 and $25.2 million for the same period last year. Interest income recognized on impaired loans totaled $35,000 and $79,000 for the three and six months ended June 30, 2002 as compared to $12,000 for the same periods last year.

NOTE 5 — GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

     The Company has two wholly-owned trust subsidiaries, Trust I and Trust II which issued $14.0 million of 10.60% cumulative trust preferred securities and $15.0 million of 10.20% cumulative trust preferred securities, respectively, (referred to collectively as the “Trust Preferred securities”). ITLA Capital has fully and unconditionally guaranteed the Trust Preferred securities along with all obligations of each trust under their respective trust agreements. Each trust was formed for the exclusive purpose of issuing their respective Trust Preferred securities and common securities and using the proceeds to acquire ITLA Capital’s junior subordinated deferrable interest debentures. Trust I acquired an aggregate principal amount of $14.4 million of ITLA Capital’s 10.60% junior subordinated deferrable interest debentures due September 7, 2030 and Trust II acquired an aggregate principal amount of $15.5 million of ITLA Capital’s 10.20% junior subordinated deferrable interest debentures due February 22, 2031. The sole assets of each trust are the debentures it holds. Each of the debentures is redeemable, in whole or in part, at ITLA Capital’s option on or after ten years after issuance, at declining premiums to maturity. The Company used the proceeds from the debentures for general corporate purposes, including an aggregate of $28.0 million in capital contributions to the Bank to support future growth.

     The costs associated with the Trust Preferred securities issuance have been capitalized and are being amortized using a method that approximates the interest method over a period of ten years. The distributions payable on the Trust Preferred securities are reflected as “Minority interest in income of subsidiary” in the Consolidated Statements of Income. The Trust preferred securities are reflected on the Consolidated Statement of Financial Condition as “Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Deferrable Interest Debentures.”

7

Table of Contents

NOTE 6 — RESIDUAL INTEREST IN SECURITIZATION

     During the quarter ended March 31, 2002, the Company formed a limited liability company to issue $86.3 million of asset-backed notes in a securitization of substantially all of its residential loan portfolio. The Company recognized a gain of $3.7 million on the securitization of these loans, although cash (representing the excess spread and servicing fees) is received by us over the lives of the loans. Concurrent with recognizing such gain on sale, the Company recorded the excess spread as a residual interest of $5.6 million which is recorded on the consolidated balance sheet in the “Investment securities available for sale, at fair value”. The value of the residual interest is subject to substantial credit, prepayment, and interest rate risk on the sold residential loans. In accordance with the provisions of Statement of Financial Accounting Standards, or SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, the residual interest is classified as “available-for-sale asset” and, as such, recorded at fair value with the resultant changes in fair value recorded as unrealized gain or loss in a separate component of shareholders equity entitled “accumulated other comprehensive income or loss”, until realized. Fair value is determined on a monthly basis based on a discounted cash flow analysis. These cash flows are projected over the lives of the receivables using prepayment, default, and interest rate assumptions that we believe market participants would use for similar financial instruments.

     At June 30, 2002, key assumptions used to estimate the fair value of the residual interest based on projected cash flows, and the sensitivity of the value to immediate adverse changes in those assumptions is as follows:

     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value of the residual is based on a variation in assumptions and generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the residual interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments but increased credit losses), which might magnify or counteract the sensitivities, and depending on the severity of such changes, the results of operations may be materially effected.

NOTE 7 — ACQUISITION OF ASAHI BANK OF CALIFORNIA

     During the first quarter ended March 31, 2002, the Bank completed its acquisition of Asahi Bank of California a wholly-owned subsidiary of Asahi Bank Ltd. - Japan, for approximately $14.9 million. The acquisition was structured as a statutory merger of Asahi Bank of California into the Bank. On the date of acquisition, Asahi Bank of California had total assets of approximately $50.0 million, including $35.0 million of commercial real estate and business loans and $15.0 million of cash and securities which were acquired by the Bank at the closing of the transaction.

8

Table of Contents

     The following discussion and analysis is intended to identify the major factors that influenced the financial condition and results of operations for the three months and six months ended June 30, 2002.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

General

     Consolidated net income totaled $4.8 million for the three months ended June 30, 2002 compared to $4.7 million for the same period last year, an increase of 2.1%. The increase in net income was primarily due to an increase in net interest income, partially offset by an increase in the provision for loan losses and an increase in non-interest expense. Diluted EPS was $0.75 for the three months ended June 30, 2002 compared to $0.69 for the same period last year, an increase of 8.7%.

     The return on average assets was 1.46% for the three months ended June 30, 2002 compared to 1.37% for the same period last year. The return on average shareholders’ equity was 13.31% for the three months ended June 30, 2002, compared to 13.69% for the same period last year.

     Total loan production was $127.2 million for the three months ended June 30, 2002, consisting of the origination and/or purchase of $121.2 million of commercial real estate loans and $6.0 million of franchise loans. Loan production during the same period last year totaled $118.1 million, consisting of the origination and/or purchase of $99.4 million of commercial real estate loans, the purchase of $2.5 million of residential real estate loans and $16.2 million of franchise loans.

9

Table of Contents

Net Interest Income and Margin

     The following table presents, for the three months ended June 30, 2002 and 2001, our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are computed using daily average balances. Nonaccrual loans are included in loans receivable.