ITLA Capital Corp.'s foray into the tax refund business was fun while it lasted.
Through a partnership with Household International Inc., the La Jolla, Calif., company entered the business in November 2002. Thanks in large part to the fees it earned on the loans in the 2003 and 2004 tax seasons, it has had record profits in recent quarters some of the best returns on equity in the industry.
ITLA announced June 25 that Household had terminated the relationship, but instead of lamenting the loss of a lucrative line, president and chief executive George W. Haligowski said he is looking ahead to new opportunities. And the $100 million his company had to hold for making the refund loans can now be used for expansion, including acquisitions.
"It was a strategic alliance that served a purpose," Mr. Haligowski said of the Household relationship. But Household's decision to end it "frees up our capital constraints. We'll continue to grow in our own businesses" and "we're expanding our loan production in multifamily rapidly."
The company originated refund-anticipation loans for Household and sold them back to Household for a fee. This arrangement was a fee-income bonanza for the $2.1 billion-asset ITLA and its lead subsidiary, Imperial Capital Bank.
In the first quarter of 2002, before it began making refund loans, ITLA earned just $125,000 in noninterest income, including gains on loan sales. In this year's first quarter it earned $9 million in net premiums on the sale of the loans and $4.2 million in fees.
Mr. Haligowski said that though Household had the option to renew the just-expired two-year agreement, he did not expect it to. The Prospect Heights, Ill., company was acquired by HSBC Holdings PLC in March 2003, and now Household's partner in the refund-anticipation business will be HSBC USA, which recently converted from a New York State charter to a national bank charter.
Last year ITLA had to keep $100 million in reserve for the loans during tax season; it then invested in Treasury bonds the rest of the year. Mr. Haligowksi, who has made clear he wants to buy another bank, said the available capital presents several possibilities. He was not very specific but said that in the near term ITLA will focus on expanding its multifamily and commercial lending businesses.
Over the past two years the company has opened more than a dozen loan production offices, focusing on multifamily and commercial lending in Atlanta; Austin; Boston; Boynton Beach, Fla.; Dallas; Stamford, Conn.; Virginia Beach and other cities nationwide.
Mr. Haligowski said the geographic expansion was starting to pay off and that the commercial real estate and multifamily division was on track to originate more than $1 billion of loans for the first time this year.
Investors and analysts realized that at some point the flow of fee income from refund-anticipation loans could stop, so ITLA's stock price has not suffered much since the June 25 announcement about Household's decision. It was trading at $40.15 late Tuesday.
Still, the stock price is down about 20% for the year, perhaps because of uncertainty about how ITLA will make up for the lost income.
Manuel Ramirez, an analyst in San Francisco with Keefe, Bruyette & Woods Inc., said that the fee income helped boost ITLA's return on equity in 2003. FDIC statistics show that it was 15.72% at yearend, versus an average of 14.82% for all banks with assets of $1 million to $10 billion. At the end of the first quarter, which included tax season, its ROE was 27.18%, well above the peer-group average of 12.94%.
Mr. Ramirez said the company would need to find ways to make up the lost income to keep its return on equity in line with its historical averages of 13%-15% a year. He said ITLA is overcapitalized and needs to deploy the $100 million it held for the refund anticipation loans. ITLA had a risk capital ratio of 14.51% at the end of the first quarter, compared with a 12.61% average for its peers. Mr. Ramirez noted this was well above regulatory requirements.
"The question really becomes, 'What are they going to do with their excess capital?' " he said.
James Abbott, an analyst with Friedman, Billings, Ramsey Group Inc. in Arlington, Va., said he did not include fee income from the refund-anticipation loans in his 2005 earnings estimates for ITLA and that he was not surprised the program ended.
"We didn't view it as a perpetual income stream," Mr. Abbott said.
He said ITLA could make a whole-bank or branch acquisition in the near future but that it would probably wait until it could get a good price on a deal.
