-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SnAJuZ/iPOZ6V5LgpqbgjSbyirLtL3pJMesVo9/DlSJ+2qlNdcdjOdU1oc/W5dpA RZd81v6cjpeP7WVwulOH4A== 0000883811-96-000006.txt : 19960820 0000883811-96-000006.hdr.sgml : 19960820 ACCESSION NUMBER: 0000883811-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960819 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000883811 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954054791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19861 FILM NUMBER: 96617354 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 Commission File number: 0-19861 IMPERIAL CREDIT INDUSTRIES, INC. CALIFORNIA 95-4054791 - ---------------------- ----------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505 (310) 791-8020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest possible date: Class Shares Outstanding at August 14, 1996 - ----------------------- ------------------------------------ Common Stock, no par value 18,950,195 IMPERIAL CREDIT INDUSTRIES, INC. FORM 10-Q TABLE OF CONTENTS Part 1 - Financial Information Page Item 1. Financial Statements: Consolidated Balance Sheets - June 30, 1996 (Unaudited) and December 31, 1995 1 Consolidated Statements of Income (Unaudited) Six months Ended June 30, 1996 and 1995 2 Consolidated Statement of Changes in Shareholders' Equity (Unaudited) 3 Consolidated Statements of Cash Flows (Unaudited) Six months Ended June 30, 1996 and 1995 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Part II - Other Information Items 1-5. Not Applicable Item 6. Exhibit - Statement Regarding Computation of Earnings Per Share 32 Signatures 33
ITEM 1. FINANCIAL STATEMENTS IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 1996 1995 ------------ -------------- ASSETS Cash.......................................... $ 116,778 $ 39,166 Interest bearing deposits..................... 45,881 267,776 Investment in Federal Home Loan Bank stock.............................. 19,250 22,750 Securities available for sale, at market.................................... 6,596 5,963 Loans held for sale (Fair value of $982,789 and $1,345,509 at June 30, 1996 and December 31 1995, respectively)................................ 982,789 1,341,810 Loans held for investment, net................ 750,470 668,771 Capitalized excess servicing fees receivable.. 79,354 44,031 Purchased and originated servicing rights..... 8,707 18,428 Retained interest in loan and lease securitizations........................ 22,552 14,241 Accrued interest on loans..................... 10,742 10,164 Premises and equipment, net................... 12,386 11,369 Other real estate owned, net.................. 9,133 7,179 Goodwill...................................... 20,802 20,346 Other assets.................................. 35,599 38,641 ------------ ------------ Total assets............................. $ 2,121,039 $ 2,510,635 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits...................................... $ 989,224 $ 1,092,989 Borrowings from Imperial Bank................. -- 5,000 Borrowings from Federal Home Loan Bank........ 295,000 190,000 Other borrowings.............................. 414,967 875,815 Bonds......................................... -- 111,995 Senior Notes.................................. 88,189 80,472 Minority interest in consolidated subsidiaries................................. 40,414 2,905 Other liabilities............................. 86,888 57,357 ------------- -------------- Total liabilities............................ $ 1,914,682 $ 2,416,533 ------------- -------------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding............. -- -- Common stock, no par value. Authorized 40,000 shares; 18,943 and 14,579 shares issued and outstanding at June 30, 1996 and December 31, 1995, respectively....................... $ 138,485 $ 51,981 Retained earnings............................. 64,650 38,910 Unrealized gain on securities available for sale, net................................ 3,222 3,211 ------------- -------------- Total shareholders' equity.................... 206,357 94,102 ------------- -------------- Total liabilities and shareholders' equity.... $ 2,121,039 $ 2,510,635 ============== ============= Escrow, agency premium funds, and mortgage held in trust for various investors (segregated in special bank accounts - included in deposits)........................ $ 8,261 $ 35,963 ============== =============
See accompanying notes to consolidated financial statements. IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands)
Three months ended June 30, Six months ended June 30, 1996 1995 1996 1995 ------------ ----------- ------------ ----------- Revenue: Gain on sale of loans........................ $ 19,166 $ 8,794 $ 40,877 $ 15,024 ----------- ----------- ------------ ----------- Interest on loans............................ 43,089 25,850 88,282 48,825 Interest on investments...................... 204 500 2,389 984 Interest on other finance activities......... 1,067 -- 3,209 -- ----------- ---------- ------------ ----------- Total interest income.................. 44,360 26,350 93,880 49,809 Interest expense............................. 30,955 20,350 67,738 38,975 ----------- ---------- ------------ ----------- Net interest income.................... 13,405 6,000 26,142 10,834 Provision for loan losses.............. 2,025 1,700 3,525 2,600 ----------- ---------- ------------ ----------- Net interest income after provision for loan losses........................ 11,380 4,300 22,617 8,234 Loan servicing (expense) income.............. (448) 3,006 1,562 6,541 (Loss) gain on sale of servicing rights...... (257) 496 7,808 2,921 Gain on sale of SPFC stock................... 62,007 -- 62,007 -- Other income................................. 4,284 80 5,485 270 ---------- ---------- ------------ ---------- Total other income..................... 65,586 3,582 76,862 9,732 ----------- ---------- ------------ ---------- Total revenue.......................... 96,132 16,676 140,356 32,990 Expenses: Personnel expense............................ 10,967 6,824 23,402 13,719 Amortization of PMSR's and OMSR's............ 114 736 832 1,380 Occupancy expense............................ 950 934 2,270 1,922 Data processing expense...................... 575 450 930 788 Net expenses of other real estate owned...... 1,218 473 3,986 715 Professional services........................ 2,535 405 3,681 857 FDIC insurance premiums...................... -- 559 45 1,123 Telephone and other communications........... 619 709 1,525 1,314 Restructuring provision - exit from mortgage banking operations....... -- -- 3,800 -- General and administrative expense........... 3,674 2,453 7,349 4,653 ---------- --------- ----------- --------- Total expenses........................... 20,652 13,543 47,820 26,471 Income before income taxes................. 75,480 3,133 92,536 6,519 Income taxes............................... 30,868 1,301 37,769 2,729 Minority interests in net income of consolidated subsidiaries................. 1,571 -- 3,110 -- ---------- --------- ----------- --------- Net income........................... $ 43,041 $ 1,832 51,657 3,790 =========== ========= =========== ========= Net income per share: Primary:..................................... $ 2.22 $ 0.11 $ 2.79 $ 0.22 =========== ========== ========= ========= Fully Diluted:............................... $ 2.21 $ 0.11 $ 2.78 $ 0.22 =========== ========== ========= =========
See accompanying notes to consolidated financial statements IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (In thousands)
Unrealized Number of gain on Total shares Common Retained securities Shareholders outstanding stock earnings for sale, net Equity ----------- -------- --------- ------------ ----------- Balance, December 31, 1995. 14,579 $ 51,981 $ 38,910 $ 3,211 $ 94,102 Exercise of stock options.. 466 1,358 -- -- 1,358 Stock dividend............. 1,458 25,917 (25,917) -- -- Issuance of common stock... 2,440 59,229 -- -- 59,229 Net change in unrealized gain on securities available for sale...... -- -- -- 11 11 Net income for period (unaudited)................ -- -- 51,657 -- 51,657 ----------- --------- ---------- ------------ ----------- Balance June 30, 1996 (unaudited)................ 18,943 $138,485 $ 64,650 $ 3,222 $ 206,357 ========== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Six months Six months ended June 30, ended June 30, 1996 1995 ------------- -------------- Cash flows from operating activities: Net income............................... $ 51,657 $ 3,790 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................ 3,525 2,600 Restructuring provision - exit from mortgage banking operations............ 3,800 -- Depreciation and amortization............ 1,958 2,144 Accretion of discount.................... (3,209) -- Gain on sale of servicing rights......... (7,808) (2,921) Gain on sale of SPFC stock............... (62,007) -- Gain on sale of loans.................... (40,877) (15,024) Stock option compensation expense........ -- 218 Writedowns on other real estate owned.... 2,088 540 Net change in loans held for sale........ 399,897 12,465 Net change in accrued interest on loans.. (578) (1,861) Net change in other assets............... (16,869) (12,965) Net change in other liabilities.......... 63,252 12,456 ---------- ----------- Net cash provided by operating activities: 394,829 1,442 Cash flows from investing activities: Net change in interest bearing deposits.. 137,300 (14,300) Purchase of servicing rights............. (4,500) (4,219) Proceeds from sale of servicing rights... 19,097 11,798 Proceeds from sale of other real estate owned............... 3,249 1,572 Purchase of securities available for sale.............................. (154,777) (1,801) Sale of securities available for sale.... 242,238 -- Net change in loans held for investment.. (85,021) (128,243) Purchases of premises and equipment...... (2,759) (448) Net cash provided by (used in) investing activities: ----------- ----------- 154,827 (135,641) Cash flows from financing activities: Net change in deposits.................. (103,765) (37,677) Advances from Federal Home Loan Bank.... 470,000 237,000 Repayments of advances from Federal Home Loan Bank................ (365,000) (302,000) Net change in other borrowings.......... (465,848) 269,488 Repayment of bonds...................... (111,995) -- Proceeds from resale of Senior Notes.... 7,615 -- Proceeds from sale of SPFC stock........ 36,362 -- Issuance of common stock................ 59,229 -- Proceeds from exercise of stock options. 1,358 146 ----------- ----------- Net cash (used in) provided by financing activities:........................... (472,044) 166,957 Net change in cash...................... 77,612 32,758 Cash at beginning of year............... 39,166 24,903 ----------- ----------- Cash at end of period................... $ 116,778 $ 57,661 =========== ============ Supplemental disclosure of cash flow information: Income taxes paid during the period...... $ 8,468 $ 6,077 Interest paid during the period.......... $ 67,413 $ 36,474
See accompanying notes to consolidated financial statements Notes to Consolidated Financial Statements (Unaudited) 1. Organization Imperial Credit Industries, Inc. (the "Company"),incorporated in 1986 in the State of California, is 24.9% owned by Imperial Bank. The consolidated financial statements include Imperial Credit Industries, Inc.("ICII"), and its wholly-owned and majority-owned subsidiaries (collectively the "Company"). The wholly-owned subsidiaries include Southern Pacific Thrift & Loan Association ("SPTL"),Imperial Business Credit, Inc. ("IBCI") and Imperial Credit Advisors, Inc. ("ICAI"). The majority owned consolidated subsidiaries include Southern Pacific Funding Corporation ("SPFC"), Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding Corporation ("ICIFC"). The minority interests in the majority owned consolidated subsidiaries are included in minority interest in consolidated subsidiaries on the consolidated balance sheets. The Company owns 58.4% of SPFC, with 41.6% owned by other public investors. The Company owns 66 2/3% of FMAC, with 33 1/3% of FMAC owned by the President of FMAC. The Company owns 100% of the voting common stock of ICIFC which entitles it to a 1% economic interest in ICIFC. The Company also owns 7.6% of Imperial Credit Mortgage Holdings, Inc. ("ICMH"), an unconsolidated affiliated company, that owns all of the ICIFC non voting preferred stock which entitles ICMH to a 99% economic interest in ICIFC. The Company will retain only 1% of the net earnings or loss derived from the operations of ICIFC. All material intercompany balances and transactions have been eliminated. 2. Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with the instructions to form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. Prior years' consolidated financial statements have been reclassified to conform to the 1996 presentation. 3. Preferred and Common Stock The Company has authorized 8,000,000 shares of Preferred Stock. The Board has the authority to issue the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. On February 26, 1996, the Company paid a stock dividend to shareholders of record as of February 12, 1996. One new share of Common Stock was issued for each 10 shares currently held by shareholders. On October 24, 1995, the Company paid a 3-for-2 stock split to shareholders of record as of October 10, 1995. Per Share Information Net income per common share is computed based on the weighted average number of shares outstanding during the periods presented plus common stock equivalents deemed to be dilutive. Common stock equivalents deemed to be dilutive were calculated based on the average price per share during the periods presented for primary net income per share and based on the ending stock price per share, if greater than the average stock price per share, for fully diluted net income per share for the periods presented. The number of shares used in the computations give retroactive effect to stock dividends and stock splits for all periods presented. The weighted average number of shares including common stock equivalents for the three months ended June 30, 1996 and 1995 was 19,452,044 and 16,982,547 for fully diluted net income per share, respectively. The weighted average number of shares including common stock equivalents for the three months ended June 30, 1996 and 1995 was 19,423,270 and 16,902,641 for primary net income per share, respectively. The weighted average number of shares including common stock equivalents for the six months ended June 30, 1996 and 1995 was 18,588,101 and 16,980,747 for fully diluted net income per share, respectively. The weighted average number of shares including common stock equivalents for the six months ended June 30, 1996 and 1995 was 18,527,646 and 16,803,511 for primary net income per share, respectively. Primary income per share was not materially different than fully diluted income per share. 4. Commitments and Contingencies Sales of Loans and Servicing Rights In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company is required to repurchase mortgage loans if there has been a breach of representations or warranties. As of June 30, 1996, the Company was servicing loans totaling approximately $1.2 billion. During the three months ended June 30, 1996, the Company sold $478.5 million of bulk servicing rights as compared to the sale of $350.6 million of bulk servicing rights in the same period of the previous year. Legal Proceedings The Company is involved in litigation arising in the normal course of business of which management believes based in part upon the advice of legal counsel, will not have a material effect on the consolidated financial statements. 5. Investment Securities Available for Sale At June 30, 1996, the carrying value of investment securities available for sale, including interest bearing deposits and investment in Federal Home Loan Bank stock, equaled market value. 6. Loans Held for Sale Loans held for sale consisted of the following at June 30, 1996 and December 31, 1995: (Dollars in thousands)
At June 30, 1996 At December 31, 1995 ---------------- ------------------- Loans secured by real estate: Single family 1-4.................. $ 635,273 $ 1,083,038 Multi-family....................... 207,000 171,199 ------------- ------------- 842,273 1,254,237 Leases............................. 12,893 17,787 Commercial loans................... 127,623 69,786 ------------- ------------ $ 982,789 $ 1,341,810 ============= =============
7. Loans Held for Investment, net Loans held for investment consisted of the following at June 30, 1996 and December 31, 1995. (Dollars in thousands)
At June 30, 1996 At December 31, 1995 ----------------- ----------------- Loans secured by real estate: Single Family 1-4............. $ 221,481 $ 228,721 Multi Family.................. 70,866 7,028 Commercial.................... 57,329 133,189 ------------- ----------- 349,676 368,938 Leases....................... 1,485 7,297 Installment loans............ 16,060 1,900 Commercial................... 411,468 311,122 ------------- ---------- 778,689 689,257 Unearned income.............. (6,666) (5,217) Deferred loan fees........... (7,602) (1,540) -------------- ----------- 764,421 682,500 Allowance for loan losses.... (13,951) (13,729) -------------- ---------- $ 750,470 $668,771 ============= ============
The Company's loans held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, asset based loans to middle market companies mainly in California, and loans to experienced franchisees of nationally recognized restaurant concepts. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtor's ability to honor their contracts is dependent upon the economy of California. Activity in the allowance for loan losses was as follows: (Dollars in thousands)
At June 30, At December 31, 1996 1995 ----------- -------------- Balance, beginning of year.. $ 13,729 $7,054 Provision for losses charged to expense ........ 3,525 5,450 Business acquisitions and bulk loan purchases........ -- 4,320 Loans charged off.......... (3,361) (3,106) Recoveries on loans previously charged off..... 58 11 ----------- ------------ Net charge-offs............. (3,303) (3,095) Balance, end of period...... $ 13,951 $ 13,729 =========== ==========
As of June 30, 1996 and December 31, 1995 non-accrual loans totaled $43.3 and $31.0 million, respectively. The following table sets forth the amount of NPA's attributable to the Company's former mortgage banking operations (Including ICIFC) and to all of its other lending activities.
At June 30, At December 31, 1996 1995 ------------------- ---------------- Former Former All Other Mortgage All other Mortgage Lending Banking Lending Banking Activities Operat. Activities Operat. ---------- -------- ---------- ------- (Dollar amounts in thousands) Nonaccrual loans: One to four family..... 12,832 24,576 2,652 20,990 Commercial............. 4,359 -- 1,824 -- Multifamily property... 1,499 -- 5,522 -- ------ ------- ------- ------ Total nonaccrual loans... 18,690 24,576 9,998 20,990 Other real estate owned: One to four family..... 3,883 3,016 1,937 4,173 Commercial ............ 869 -- 211 -- Multifamily property... 1,365 -- 858 -- Total other real ------ ------- ------ ----- estate owned........... 6,117 3,016 3,006 4,173 Loans with modified terms: One to four family..... 858 -- 870 -- Commercial property.... 456 -- -- -- Multifamily property... -- -- -- -- ------ ------- ------- ----- Total loans with modified terms......... 1,314 -- 870 -- Total non performing assets................. $ 26,121 $ 27,592 $ 13,874 $ 25,163 Total loans and OREO..... $1,661,587 $109,024 $ 1,168,783 $ 869,463 Total NPA's as a percentage of loans and OREO....... 1.57% 25.31% 1.19% 2.89%
The provision for loan losses was $3.5 million for the six months ended June 30, 1996, an increase of 36% from $2.6 million for the same period of the previous year. The increase in the provision was primarily the result of the significant increase in nonaccrual loans and the increase in the amount of net charge-offs in the current period. The Company's Multifamily loans amounted to $1.2 million of charge-offs and loans originated as a part of the former mortgage banking operations amounted to $1.1 million of charge offs in the six months ended June 30, 1996. The Company expects the trend in charge offs to continue relating to loans originated by the former mortgage banking operations for the next few quarters, until the existing portfolio of problem loans has been sold, paid off, or disposed of by other means. The ratio of the allowance for loan losses to total loans held for investment at June 30, 1996 decreased to 1.79%, from 1.99% at December 31, 1995. The ratio of the allowance for loan losses to nonaccrual loans decreased to 32.2% at June 30, 1996 from 44.3% at December 31, 1995. Although nonaccrual loans have increased since December 31, 1995, with a corresponding decrease in allowance coverage, the Company evaluates expected losses on these nonaccrual loans in both periods on a loan-by-loan basis and has determined that the allowance is adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of the Company's loans held for investment portfolio. The Company believes that the current loan loss allowance is adequate. The percentage of the allowance for loan loss to nonaccrual loans will not remain constant due to the changing nature of the Company's portfolio of loans. The collateral for each nonperforming loan is analyzed by the Company to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan losses. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan losses. In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, underlying collateral values, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans deemed by management to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan losses are charged to expense and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. While management believes that the current allowance for loan losses is sufficient, future additions to the allowance may be necessary. 8. Purchased/Originated Servicing Rights and Capitalized Servicing Fees Receivable Changes in purchased/originated servicing rights were as follows: (Dollars in thousands)
For the six Months Ended For theYear Ended June 30, 1996 December 31, 1995 ------------- ---------------- Beginning balance.................. $ 18,428 $ 16,746 Addition........................... 4,501 7,340 Bulk purchase of servicing......... -- 757 Increase as a result of the FMAC acquisition.................. -- 3,805 Sales of servicing ............... (13,390) (6,233) Amortization - prepayments......... -- (1,176) Amortization - scheduled........... (832) (2,811) ------------ ---------- Ending balance..................... $ 8,707 $18,428 ============ ===========
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights", an amendment to SFAS No. 65. The Company has adopted this standard for its financial statement reporting beginning with the first quarter of 1995. SFAS No. 122 requires that a portion of the cost of originating a mortgage loan be allocated to the mortgage loan servicing right based on its fair value relative to the fair value of the loan as a whole. To determine the fair value of the servicing rights created, the Company used the market prices under comparable servicing sale contracts, when available, or alternatively used a valuation model that calculates the present value of future net servicing revenues to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income which includes estimates of the cost of servicing, a discount rate, an inflation rate, ancillary income per loan, a loan prepayment speed, and a loan default rate. Of the $8.7 million of servicing rights outstanding at June 30, 1996, $3.8 million are held at SPTL as acquired servicing rights of franchise mortgage loans from FMAC, with the remaining $4.9 million held at ICIFC in connection with their mortgage banking operations.(See "Notes to Consolidated Financial Statements -Note 1. -Organization.") In determining servicing value impairment, the post implementation originated servicing portfolio was disaggregated into its predominant risk characteristics. The Company has determined those risk characteristics to be loan program type and interest rate. Interest rates are stratified using 100 basis point increments. These segments of the portfolio were evaluated, using market prices under comparable servicing sale contracts, when available, or alternatively using the same model as used to originally determine the fair value at sale, using current assumptions. The calculated value was compared to the capitalized book value of each loan type and interest rate pool to determine if a valuation allowance is required. The Company will continue to calculate the fair value of its pre-implementation purchased servicing rights on a loan by loan basis. Additionally, the Company will continue to amortize its pre-implementation purchased servicing rights in proportion to, and over the period of, expected future net servicing income disaggregated by each individual loan with related capitalized serving rights. Capitalized Servicing Fees Receivable At June 30, 1996 and December 31, 1995 capitalized excess servicing fees receivable of 79.4 million and 44.0 million are recorded net of an allowance for recourse losses of $11.7 million and $8.7 million, respectively. As a fundamental part of its business and financing strategy, the Company sells the majority of its loans through loan securitization transactions. A significant portion of the Company's revenue is recognized as gain on sale of loans, which may represent the present value of the difference between the interest rate charged by the Company to a borrower and the interest rate received by the investors who purchased securities collateralized by the loans sold into the securitization vehicle. The Company has created capitalized excess servicing fees receivable as a result of the sale of loans and to a lesser extent leases into various trust securitization vehicles. These various trust vehicles, primarily consisting of real estate mortgage investment conduits, are majority owned by an independent third party who has made a substantial capital investment and has substantial risks and rewards of ownership of the assets of the trust; therefore, these trust vehicles are not consolidated with the Company. Capitalized excess servicing fees receivable on the sale of loans and leases are determined by computing the present value of the excess of the weighted average coupon on the loans and leases sold (ranging from 9.0% to 13.3%) over the sum of: (1) the coupon in the pass through certificates (ranging from 5.6% to 7.4%), (2) a base servicing fee paid to the loan or lease servicer (ranging from 0.40% to 0.50%), (3) expected losses to be incurred on the portfolio of loans or leases sold (ranging from 0.25% to 0.50% over the life of the loan), and considering (4) prepayment assumptions. Prepayment assumptions are based on recent evaluations of the actual prepayments of the Company's servicing portfolio or on market prepayment rates on new portfolios and consideration of the current interest rate environment and its potential impact on prepayment rates. The cash flows expected to be received by the Company, not considering the expected losses, are discounted at an interest rate that the Company believes an unaffiliated third party purchaser would require as a rate of return on such a financial instrument. Expected losses are discounted using a rate equivalent to the risk free rate for securities with a duration similar to that estimated for the underlying loans and leases sold. The combined result is an effective overall discount rate of approximately 15%. The excess servicing cash flows are available to the Company to the extent that there is no impairment of the credit enhancements established at the time the loans and leases are sold. Such credit enhancements are classified as retained interest in loan and lease securitizations on the consolidated balance sheets and represent the amount of overcollateralization of the certificates. To the extent that actual future performance results are different from the excess cash flows the Company estimated, the Company's capitalized excess servicing fees receivable will be adjusted quarterly with corresponding adjustments made to income in that period. A portion of the Company's reported income and all of the related capitalized servicing fees receivable included in the Company's consolidated financial statements represent the recognition of the present value of the excess servicing spread, which is based on certain estimates made by management at the time loans are sold. The rate of prepayment of loans may be affected by a variety of economic and other factors, including prevailing interest rates and the availability of alternative financing. The effect of those factors on loan prepayment rates may vary depending on the particular type of loan. Estimates of prepayment rates are made based on management's expectations of future prepayment rate, which are based, in part, on the historical rate of prepayment of the Company's loans, and other considerations. There can be no assurance of the accuracy of management's initial prepayment estimates. If actual prepayment with respect to sold loans occur more quickly than was projected at the time such loans were sold, the carrying value of the capitalized servicing fees receivable may have to be written down through a charge to earnings in the period of adjustment. If actual prepayments with respect to sold loans occur more slowly than estimated, the carrying value of capitalized servicing fees receivable on the Company's consolidated statement of financial condition would not increase, although total income would exceed previously estimated amounts. 9. Borrowings from Imperial Bank In November 1995, the Company renewed a $10 million line of credit with Imperial Bank. The line was subsequently increased to $15 million. In April 1996, the line was repaid in full with the proceeds raised in the Company's secondary stock offering. 10. Other Borrowings Other borrowings primarily consist of revolving warehouse lines of credit to fund the Company's and its subsidiaries lending activities. At June 30, 1996, approximately $465.0 million of loans were pledged as collateral for other borrowings. These lines of credit are short term and management believes these lines will be renewed in the normal course of business. ICII and its subsidiaries has various revolving warehouse lines of credit available at June 30, 1996, as follows:
Interest Rate Commitment Outstanding Index ---------- ---------- --------- -------- (Dollars in thousands) DLJ (ICII)................. 6.48% $400,000 34,131 FedFunds+80bp-150bp PaineWebber (ICII)......... 6.13% 200,000 14,369 Libor+65bp-100bp Banco Santander (FMAC)..... 8.25% 50,000 23,235 Libor+225bp Lehman Brothers (SPFC)..... 6.30% 200,000 80,137 Libor+30bp Imperial Warehouse Lending Group (ICIFC)..... 8.25% 600,000 246,706 Bank of America Prime Warehouse Lending Corporation of America (ICII)........ 8.50% 20,000 16,389 Libor+250bp ---------- ------- $1,470,000 $414,967 ========== ========
11. Senior Notes
(Dollars in thousands) Balance at June 30, December 31, 1996 1995 ---------- ----------- Senior notes........................ $ 90,000 $ 81,500 Unamortized discount................ (1,811) (1,028) ---------- ---------- Net balance, Senior Notes........... $ 88,189 $ 80,472 ========= ==========
In January 1994, the Company issued $90,000,000 of Senior Notes with a stated interest rate of 9.75% which mature on January 15, 2004. In October 1994, the Company repurchased $8,500,000 of the Senior Notes. During the first quarter of 1996, the Company sold the repurchased Senior Notes for prices ranging from 90 to 95. At June 30, 1996, $90,000,000 of the Senior Notes were outstanding and the interest rate on the Senior Notes was 9.75%. The Senior Notes may be redeemed after January 15, 1999 at the option of the Company until maturity at a declining premium, plus accrued interest. The Senior Notes are unsecured and rank pari passu with all other senior unsecured indebtedness of the Company, but are effectively subordinated to the liabilities of Southern Pacific Thrift and Loan Association, the Company's wholly owned subsidiary. The Trust Indenture (the Indenture) for the Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. Total interest expense on the Senior Notes for the six months ended June 30, 1996 and 1995 was $5.2 million and $4.9 million, respectively. 12. Current accounting issues In June, 1996 the Financial Accounting Standards Board issued Statement of Accounting Standards No 125, Accounting for Transfers and servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125") SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at a fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based in their relative fair values at the date of the transfer. SFAS 125 included specific provisions to deal with servicing assets or liabilities. These provisions retain the impairment and amortization approaches that are contained in Statement No. 122 but eliminates the distinction between normal and excess servicing. SFAS 125 will be effective for transactions occurring after December 31, 1996. It is not anticipated that the financial impact of this statement will have a material effect on Imperial Credit Industries, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is a diversified specialty finance company offering financial products, principally through its subsidiaries, in the following four sectors: non-conforming residential mortgage banking, commercial mortgage banking, business lending and consumer lending. The Company's strategy is to concentrate its lending activities in select high margin commercial and consumer markets in which loan and lease products originated or purchased by the Company can be readily sold through securitization or whole loan sales in the secondary market. The Company emphasizes (i) opportunistic expansion into niche segments of the financial services industry, (ii) conservative underwriting and credit guidelines, (iii) loan and lease originations on a wholesale basis to maintain low overhead, (iv) securitization or sale in the secondary market of substantially all of the Company's loans and leases other than those held by its subsidiary, Southern Pacific Thrift & Loan Association ("SPTL"), for investment and (v) business and financial flexibility to allow withdrawal from or entry into business segments as warranted by market conditions. Since 1995, the Company has attempted to diversify its loan and lease products by focusing on the creation and acquisition of additional finance businesses in order to reduce dependency on residential mortgage lending. When acquiring new businesses or targeting expansion opportunities, the Company seeks to retain existing management or recruit experienced management to help make continued growth possible and to reduce the risks associated with market entry. The financial products offered by the Company consist of loans and leases in the following four sectors: non-conforming residential mortgage lending - non conforming single family mortgage loans commercial mortgage lending - franchise loans, income property loans and manufactured housing community loans business finance lending - equipment leasing, asset-based financing and loan participations consumer loans - sub-prime auto loans, home improvement loans and other consumer credit The majority of the Company's loans and leases, other than those held by SPTL for investment, are sold in the secondary market through securitizations. Securitizations provide the Company with greater flexibility and operating leverage by allowing the Company to generate fee and interest income through originations and investments in loans with a significantly smaller capital commitment than that required by traditional portfolio lenders. In addition, the Company believes that the use of securitizations results in a lower overall cost of funds. SPTL also accepts Federal Deposit Insurance Corporation ("FDIC") insured deposits which are used to finance SPTL's lending activities through several active divisions. Non-Conforming Residential Mortgage Lending The Company engages in non-conforming residential mortgage lending through its majority owned subsidiary, SPFC, and through the Bulk Acquisitions Division of SPTL. SPFC Through SPFC, a 58.4% owned subsidiary, the Company is an originator, purchaser and seller of high yielding, single family non conforming mortgage loans. Substantially all of SPFC's loans are secured by first or second mortgages on owner occupied single family residences. The majority of the originated and purchased loans are made to borrowers who do not qualify for or are unwilling to obtain financing from conventional mortgage sources. SPFC typically packages a portfolio of originated and purchased loans and sells such through securitization. SPFC's mortgage loan production increased to $259.8 million for the six months ended June 30, 1996 from $128.0 million for the six months ended June 30, 1995. Commercial Mortgage Lending The Company engages in commercial lending, which consists of franchise mortgage lending, asset-based lending, equipment leasing income property lending, manufactured housing community lending and loan participations. Franchise Mortgage Lending General Franchise Mortgage Acceptance Company, LLC (''FMAC''), a 66 2/3% owned subsidiary, makes long-term, fixed and variable rate loans to established franchisees of major restaurant franchise concepts, which are then securitized into investment grade structures and sold to institutional investors. The Company believes that recent changes in the banking environment have adversely affected the ability of small business operators to find credit, regardless of their track record and ratings. Franchise operations comprise a major portion of overall small business activity in the United States. The standardization imposed by franchisors make this market sector amenable to securitization. FMAC targets ''top tier'' franchises whose franchisors exercise significant operating and marketing control. It lends only to established, successful operators of franchise restaurants with proven track records. FMAC makes loans directly to franchisees based on the enterprise value as well as the cash flow of individual restaurants and, where applicable, the value of any associated real estate. FMAC generally lends against existing cash flow. It generally does not rely on projected sales growth to add incremental cash flow to help service debt. Borrowers must demonstrate positive cash flow on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis. During the six months ended June 30, 1996, loans to individual credits ranged from approximately $300,000 to $27.4 million. For the six months ended June 30, 1996, FMAC originated or acquired $208.0 million of franchise mortgage loans. FMAC securitized $167.4 million of franchise mortgage loans during the six months ended June 30, 1996. Income Property Lending SPTL's Income Property Loan Division ("IPLD") was formed in February 1994 to expand the Company's apartment and commercial property lending business. IPLD seeks to make 70% of its loans secured by apartment buildings and 30% of its loans secured by other commercial properties. Most of IPLD's business is generated through in house loan representatives who market the loans directly to mortgage brokers and borrowers. Virtually all of IPLD's loans are secured by properties in California. The focus of IPLD's lending activity is the small loan market for apartments and commercial loans. IPLD's maximum loan amount is approximately $2.5 million. The Company believes that IPLD employs conservative underwriting criteria, which include a maximum loan to value ratio of 70% and minimum debt coverage ratio of 1.2 to 1 on all loans. Loans secured by income properties entail additional risk as compared to single family residential lending. The payment experience on such loans is generally dependent on the successful operation of the related commercial or multifamily property and thus is subject to a greater extent to adverse conditions in local real estate markets or in the economy generally. For the six months ended June 30 1996 and 1995, IPLD funded approximately $121.7 million and $57.2 million in loans, respectively. Manufactured Housing Community Lending Manufactured Housing Community Bankers (''MHCB'') was formed as a division of ICII in early 1995 as a specialty lending group to finance fully-developed manufactured housing communities throughout the United States. During the quarter ended June 30, 1996, the MHCB division of ICII was merged into SPTL, and will conduct its future operations as a SPTL division. MHCB's loan programs are designed to originate, underwrite, close, service, warehouse and securitize mobile home community first mortgage loans. Many of these properties are master planned communities with recreational and social amenities. The loans are secured by the manufactured housing community real estate; the principal source of repayment is the rental payments for the pads on which the manufactured housing is situated. MHCB originated $9.7 million and no loans in the six months ended June 30, 1996 and 1995, respectively. Business Finance Lending The Company, through CBCC, IBC and the Loan Participation and Investment Group of SPTL, also engages in business finance lending, which consists of asset-based lending, commercial equipment leasing and loan participations. Asset Based Lending General The Company, through its SPTL division, Coast Business Credit Corporation ("CBC"), conducts an asset based lending business. CBC is a senior secured asset-based lender which lends primarily to qualified companies throughout the nation. CBC's principal business is asset-based lending to small to medium-sized businesses with annual revenues ranging from approximately $10 to $100 million. Generally, such businesses are constrained from obtaining financing from more traditional credit sources such as commercial banks due to inadequate equity capitalization, limited operating history, lack of profitability or financing needs below commercial bank minimum size requirements. CBC has focused its lending activities on high technology businesses engaged in the computer industry. At June 30, 1996, CBC's loan portfolio represented lending relationships with approximately 94 customers, with an average total loan per customer of $2.2 million. During the six months ended June 30, 1996, CBC began an expansion plan which the Company believes will substantially increase the customer base of CBC outside the state of California. At June 30, 1996 and December 31, 1995, CBC had outstanding loans totaling $210.2 million and $154.2 million, respectively. CBC and open commitments to fund additional loans of $210.4 million at June 30, 1996. Equipment Leasing General Imperial Business Credit, Inc. ("IBC") was formed by ICII in May, 1995 to carry on the Company's equipment leasing business. IBC carries out its business equipment leasing operations from both its headquarters in Rancho Bernardo, California, and its operations center in Denver, Colorado. IBC is in the business of leasing equipment, including copying, data processing, communication, printing and manufacturing equipment, exclusively to business users. Initial lease terms typically range from 24 months to 60 months. IBC will commit to purchase this equipment only when it has a signed lease with a lessee who satisfies its credit and funding requirements. Substantially all the leases written by IBC are full payout ("direct financing") leases that allow IBC to sell or release the equipment upon termination of the lease. IBC occasionally purchases small portfolios of existing equipment leases from brokers with whom it has established relationships. These portfolios are evaluated on an individual basis according to IBC's established credit policy. The Company believes that these acquisitions allow IBC to grow with greater efficiency than usual at a level of decreased risk due to the portfolio aging that has occurred in the books of the originating broker. Upon expiration of the initial lease terms if its direct-financing leases, IBC expects, on average, to realize slightly more than the "residual value" at which the leased equipment is carried on IBC's books. IBC's ability to recover the recorded estimated residual value depends on the accuracy of initial estimates of the equipment's useful life, the market conditions for used equipment when leases expire, and the effectiveness of IBC's program for releasing or otherwise disposing of leased equipment. Residual recovery, however, is not required for IBC to achieve a profitable return on its investment. The residual is usually worth 1% to 2% of the gross yield depending upon original lease term, further mitigating against the residual risk inherent in the portfolio. IBC's lease originations totaled $33.7 million in the six months ended June 30, 1996. Loan Participation and Investment Group The Company's Loan Participation and Investment Group ("LPIG") is a division of SPTL that purchases for investment nationally syndicated commercial loan participations originated by commercial banks and insurance companies, primarily in the secondary market. The principal types of loans acquired by LPIG are senior secured bank loans consisting of: (i) revolving lines of credit which allow the borrower to borrow and repay proceeds as needed for working capital purposes; (ii) long-term loans with a specific amortization schedule which requires the borrower to repay the borrowed loans over time, usually on a quarterly basis; or (iii) letters of credit which are normally funded as a sublimit under the revolving line of credit commitment. The loans are generally secured by a first priority lien on all of the borrower's personal property including accounts receivable, inventory and furniture, fixtures and equipment, as well as liens on owned real estate. At June 30, 1996, loan participations held by LPIG ranged in size from approximately $3 million to approximately $10 million. During the six months ended June 30, 1996, LPIG has purchased and funded approximately $135.0 million of senior secured loan participation commitments. Loans outstanding under LPIG's participation commitments at June 30, 1996 totaled $116.3 million. Consumer Lending Through SPTL, the Company also makes consumer finance loans consisting of sub-prime auto finance loans, home improvement loans and other consumer credit. Sub-Prime Auto Lending SPTL's Sub-Prime Auto Lending Division ("ALD") was formed in October 1994 to fund new and used automobile purchase contracts. ALD's borrowers are generally credit impaired and therefore are unable to access alternative sources of financing from banks and captive auto finance companies. ALD seeks to offset the increased risk of default in its portfolio with higher yields and aggressive servicing and collection activities. During 1995, ALD generated and sold approximately $19 million in sub-prime auto loans. ALD generated $13.4 million in sub-prime auto loans during the six months ended June 30, 1996. The Company currently generates sub-prime auto loans through three Northern California retail offices and is expanding its activities to Central California and areas outside California in 1996. Home Improvement Loans and Other Consumer Credit SPTL's Consumer Credit Division ("CCD") was formed in early 1994 to offer loans primarily to finance home improvements, manufactured housing and other consumer goods. CCD's business is developed through a network of retailers and contractors throughout California. All loans are centrally processed, approved and funded at CCD's headquarters in Irvine, California. Home improvement loans offered by CCD range from $5,000 to $350,000 and include major remodeling projects that are sometimes coupled with refinancing. CCD's typical loan is secured by a junior lien. In addition, CCD purchases unsecured installment sales contracts to finance certain home improvements such as air conditioning, roofing and kitchen and bathroom remodeling. During the six months ended June 30, 1996 and 1995, CCD originated $9.5 million and $5.6 million in loans, respectively. Strategic Divestitures During the fourth quarter of 1995, the Company contributed its mortgage conduit operations and SPTL's warehouse lending operations to Imperial Credit Mortgage Holdings, Inc., a newly-formed Maryland corporation ("ICMH"),that subsequently engaged in an initial public offering of its common stock. ICMH operates three businesses, two of which were owned by ICII. ICMH elected to be taxed as a real estate investment trust. At the effective date of ICMH's public offering ("Offering"), ICII contributed to ICI Funding Corporation ("ICIFC") certain of the operating assets and certain customer lists of ICII's mortgage conduit operations including all of ICII's mortgage conduit operations' commitments to purchase mortgage loans subject to rate locks from correspondents, in exchange for 100% of the voting common stock and 100% of the outstanding non-voting preferred stock of ICIFC. Simultaneously, on the effective date of the Offering, in exchange for 500,000 shares of the common stock of ICMH, ICII (1) contributed to ICMH all of the outstanding non-voting preferred stock of ICIFC, which represents 99% of the economic interest in ICIFC, and caused SPTL to contribute to ICMH certain of the operating assets and certain customer lists of SPTL's warehouse lending division, and (3) executed an agreement not to compete and a right of first refusal agreement in each case for a period of two years from the effective date of the Offering. All of the outstanding shares of common stock of ICIFC were retained by ICII. Lastly, ICMH contributed all of the aforementioned operating assets contributed by SPTL's warehouse lending operation to Imperial Warehouse Lending Group ("IWLG") in exchange for shares representing 100% of the common stock of IWLG. At and for the six month ended June 30, 1996, ICIFC had total assets of $258.5 million, total revenues of $5.1 million, and net income of $624,000. The assets and operations of ICIFC are consolidated with ICII. ICMH's 99% economic interest in the earnings of ICIFC are eliminated from the Company's consolidated income statement through "Minority Interest in Income of Consolidated Subsidiaries." As a result, the assets and liabilities of the Company reflected on its consolidated balance sheet at June 30, 1996 included approximately $258.5 million in assets, and $248.8 million in liabilities related to ICIFC. The Company will retain only 1% of the net earnings or loss derived from such assets and liabilities along with the other operations of ICIFC. In exchange for the contributed assets, the Company received 11.8% of the capital stock of ICMH. During the quarter ended June 30, 1996, ICMH completed a secondary offering of its common stock, issuing 2.5 million primary shares, and generating net proceeds of $37.5 million. ICMH's secondary stock offering reduced the Company's ownership in ICMH to 7.6% at June 30, 1996. The Company's wholly-owned subsidiary, Imperial Credit Advisors, Inc. (''ICAI''), provides management advisory services to ICMH in return for a management fee. In the first six months of 1996, the Company sold all of its mortgage origination offices related to its former conforming residential mortgage lending business. The Company's wholesale offices in Colorado, Florida, Oregon and Washington were converted to SPFC offices. The Company recognized that maintaining a mortgage loan servicing infrastructure was not economically viable in the absence of a conforming residential mortgage loan origination business. Thus, during the first six months of 1996, the Company sold substantially all of its conforming residential mortgage loan servicing rights. Additionally, the Company has subcontracted all remaining servicing generated by its non conforming residential mortgage banking business since September 1995 to Advanta Mortgage Corp. USA (''Advanta''). The Company expects to sell or subcontract all servicing related to such mortgage banking business prior to September 1995 to Advanta or other third party servicers. The Company intends to continue servicing all loans and leases originated by its equipment leasing and franchise mortgage lending businesses, as well as all loans held by SPTL. Finally, during the quarter ended June 30, 1996, the Company completed its initial public offering of SPFC common stock. After the offering ICII owned 58.4% of the issued and outstanding shares of SPFC's common stock, excluding shares issuable upon exercise of options granted or to be granted pursuant to SPFC's stock option plans. Since April 1995 SPFC has operated as a stand alone entity and has produced approximately $490.9 million of sub prime credit loans through June 30, 1996. The loans originated by SPFC (and before April 1995, the Residential Lending Division of SPTL) have accounted for a significant portion of the loans included in the Company's loan securitizations. During the six months ended 1996 and 1995, SPFC securitized $229.7 million and $46.1 million of loans, respectively. SPFC intends to continue to accumulate the loans originated or acquired and securitize them in the secondary mortgage markets. As of and for the six months ended June 30, 1996, SPFC had total assets of $163.4 million and net income of $9.4 million. Strategic Focuses and Acquisitions Additionally, in 1995, the Company formed a new subsidiary, Imperial Credit Advisors, Inc. ("ICAI"), entering the Company in another new business-investment trust management. ICAI, incorporated in January 1995 in the State of California, is a 100% owned subsidiary of ICII. ICII formed ICAI to provide monitoring, reporting, and other general and administrative services to the Imperial Government Income Trusts, Series I through IV. ICAI also acts as the manager of ICMH, the Company's newly formed REIT. ICAI will oversee the day-to-day operations of ICMH, subject to the supervision of ICMH's Board of Directors, pursuant to a management agreement. As of and for the six month ended June 30, 1996, ICAI had total assets of $2.9 million and net income of $883,400. During 1995, the Company completed the acquisition of substantially all of the assets and assumption of substantially all of the liabilities of First Concord Acceptance Corporation of Colorado ("FCAC"). At the date of acquisition the existing employees and operations of FCAC became a part of Imperial Business Credit, Inc. ("IBC"), a newly formed wholly owned subsidiary of ICII. The Company paid approximately $21 million in the acquisition of FCAC. Total assets of approximately $41 million were acquired and sold to SPTL as a result of the acquisition. FCAC's operations primarily consist of originating and securitizing equipment leases throughout the United States. The acquisition of FCAC has resulted in the significant expansion of the Company's equipment leasing activities. As of and for the six month ended June 30, 1996, IBC had total assets of $12.2 million and net income of $660,000. During 1995, the Company completed the acquisition of two thirds of the outstanding common stock of Franchise Mortgage Acceptance Corporation ("FMAC") of Greenwich, Connecticut, and placed all of the employees, and operations of FMAC into a new subsidiary, Franchise Mortgage Acceptance Company LLC, ("FMAC"). The Company paid approximately $4 million in the acquisition of FMAC and was obligated to pay an additional $3.8 million based on FMAC's future loan originations. Total assets of approximately $3.8 million (primarily servicing rights) were acquired and sold to SPTL as a result of the acquisition, and the Company recorded goodwill of approximately $4.0 million. FMAC provides commercial financing programs to major franchising companies and their franchisees. The $3.8 million of assets transferred to SPTL consists primarily of franchise mortgage servicing rights aggregating approximately $267 million. As of and for the six month ended June 30, 1996, FMAC had total assets of $37.3 million and income before income taxes of $7.2 million. In September 1995, the Company completed the acquisition of 100% of the outstanding common stock of CoastFed Business Credit Corporation ("CBCC"), and placed all of the employees, and operations of CBCC into its existing subsidiary, SPTL. The Company paid approximately $150.0 million in its acquisition of CBCC. At the acquisition date, CBCC had total assets of approximately $137.2 million, total commitments to fund loans of $460.6 million, and total outstanding loans of $138.8 million. As a result of the acquisition, and the Company recorded goodwill of approximately $16.0 million. Coast Business Credit Corporation ("CBC") provides commercial receivables financing programs to retailers in a variety of businesses. During 1995, CBC originated approximately $42.9 million in commercial receivables. Substantially all of the assets transferred to SPTL consist of outstanding loans to CBC customers. At June 30, 1996, SPTL had total outstanding loans related to CBC of $210.2 million. Securitization Transactions During the six months ended June 30, 1996, the Company had completed three sales, through securitization, of sub prime residential mortgage loans aggregating $229.7 million and franchise mortgage loans aggregating $167.4 million. Of the principal amount securitized during 1995, $150.8 million was securitized in the first six months. The Company retained an interest in each loan securitization, representing the excess of the total amount of loans sold in the securitization over the amounts represented by interests in the security sold to investors. The retained interests in the mortgage loan securitizations were $22.6 million and $14.2 million at June 30, 1996 and December 31, 1995, respectively. Although the Company continues to act as master servicer for the underlying mortgage loans included in each security and maintains the customer relationships, these securitizations are treated as sales for financial reporting purposes. Accordingly, the associated securitized mortgage loans are not reflected on the balance sheet, except for the retained interests and capitalized excess servicing fees described below. The Company is subject to certain recourse provisions in connection with these securitizations. At June 30, 1996 and December 31, 1995, the Company had discounted recourse allowances of $11,664,421 and $8,749,988, respectively, related to these recourse provisions which are netted against capitalized servicing fees receivable. A portion of the Company's reported income and all of the related capitalized servicing fees receivable included in the Company's consolidated financial statements represent the recognition of the present value of the excess servicing spread, which is based on certain estimates made by management at the time loans are sold. The rate of prepayment of loans may be affected by a variety of economic and other factors, including prevailing interest rate and the availability of alternative financing. The effect of those factors on loan prepayment rates may vary depending on the particular type of loan. Estimates of prepayment rate are made based on management's expectations of future prepayment rate, which are based, in part, on the historical rate of prepayment of the Company's loans, and other considerations. There can be no assurance of the accuracy of management's initial prepayments estimates. If actual prepayments with respect to sold loans occur more quickly than was projected at the time such loans were sold, the carrying value of the capitalized servicing fees receivable may have to be written down through a charge to earnings in the period of adjustment. If actual prepayments with respect to sold loans occur more slowly than estimated, the carrying value of capitalized servicing fees receivable on the Company's consolidated statement of financial condition would not increase, although total income would exceed previously estimated amounts. Servicing Rights When the Company purchases servicing rights from others, or loans which include the associated servicing rights, the price paid for the servicing rights, net of amortization based on assumed prepayment rates, is included on the consolidated balance sheet as "Purchased and Originated Servicing Rights." During the six months ended June 30, 1996, the Company sold all of its residential mortgage servicing with related capitalized Purchased and Originated Servicing Rights. As a result of this sale, of the $8.7 million of servicing rights outstanding at June 30, 1996, $3.8 million are held at SPTL as acquired servicing rights of franchise mortgage loans from FMAC, with the remaining $4.9 million held at ICIFC in connection with their mortgage banking operations. (See "Notes to Consolidated Financial Statements -Note 1. -Organization.") Funding Until 1995, apart from equity and debt offerings in the capital markets, the Company's primary sources of financing were warehouse lines of credit at ICII and deposits with SPTL. Typically, ICII would borrow funds under its warehouse lines in connection with its wholesale loan originations and purchases, while SPTL used its deposits and borrowings from the Federal Home Loan Bank of San Francisco ("FHLB") to finance its lending activities. In connection with its diversification strategy, the Company believes that lower cost financing is available through credit lines, repurchase facilities, whole loan sales and securitization programs established by SPFC, IBC and FMAC. Therefore, ICII expects that it will no longer maintain its warehouse lines of credit beyond December 31, 1996. With respect to all of its other lending activities, the Company continues to rely on FDIC insured deposits generated by SPTL, but it also utilizes third party warehouse lines of credit and securitizations. At June 30, 1996, SPTL had total deposits of approximately $1.0 billion (excluding deposits of ICII maintained with SPTL). Results of Operations Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995 Revenues for the quarter ended June 30, 1996 increased 476% to $96.1 million as compared to $16.7 million for the same period of the previous year. Expenses for the quarter ended June 30, 1996 increased 52% to $20.7 million as compared to $13.5 million for the same period of the previous year. Net income for the quarter ended June 30, 1996 increased to $43.0 million as compared to $1.8 million for the same period of the previous year. The 476% increase in revenue, partially offset by the 52% increase in expenses accounted for the increase in the Company's net income. Fully diluted net income per share for the quarter ended June 30, 1996 was $2.21, as compared to $0.11 for the same period of the previous year. Net income per share increased at a lower rate than net income due an increase in outstanding shares used for net income per share calculations as a result of the Company's common stock offering. (See Liquidity and Capital Resources, below). The Company had 19.5 million shares of common stock and common stock equivalents outstanding during the quarter ended June 30, 1996 as compared to 17.0 million shares outstanding during the same period of the previous year. Net income and net income per share from core operations (defined as net income less the net gain from the sale of SPFC stock, and less the gains on sales of servicing rights) for the quarter ended June 30, 1996 increased 419% and 356% to $8.0 million and $0.41 per share from $1.5 million and $0.09 per share in the same period of the previous year, respectively. Gain on sale of loans increased 118% to $19.2 million for the quarter ended June 30, 1996 as compared to $8.8 million for the same period of the previous year. Gain on sale of loans consists primarily of gains recorded upon the sale of loans, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. The increase was primarily the result of substantially increased volume and profitability on the sale of various servicing retained variable and fixed rate loan products through securitizations, and due to an increase in the volume of loans sold on a servicing released basis at the Company's former mortgage banking operations. Gain on sale of loans includes; $13.2 million in gains recorded as a result of the securitization of $130.0 million of the Company's sub prime residential mortgage loans at SPFC, $4.6 million in gains (including $2.7 million in hedge gains) resulting from the sale of $167.4 million of franchise mortgage loans at Franchise Mortgage Acceptance Company, LLC, and a $257,000 loss recorded as a result of the sale of loans held by the Company's former mortgage banking operations in connection with the planned exit from this business. Also included in gain on sale of loans was $1.6 million in gains from the sale of loans at the Company's consolidated subsidiary, ICIFC. (See "Notes to Consolidated Financial Statements -Note 1. - Organization.") Net interest income, which consists of interest and fees net of interest charges, and net interest margin at Southern Pacific Thrift & Loan Association for the quarter ended June 30,1996 increased 123% and 91% to $13.4 million and 4.15% compared to $6.0 million and 2.17% for the same period of the previous year. The increase in net interest income and net interest margin was due primarily to two factors. The Company began 1995 with a loan portfolio consisting primarily of adjustable rate residential mortgage loans. The increase in net interest income can be directly attributed to the acquisitions completed throughout the last half of 1995, and the resultant change in the composition of loans held for sale and investment from primarily conforming single family residential mortgage loans to a more diversified mix of higher yielding loan products from the Company's four primary businesses The product mix of the Company's interest earning assets now includes a much larger percentage of higher-yielding loan and lease products as compared to the previous year. Interest income also increased as a result of the Company's loan and lease securitizations, which contributed interest income of $1.1 million from the accretion of discounts on the Company's capitalized excess servicing fees receivable. The increase in interest income due to the factors described above was partially offset by an increase in the average costs of borrowing from all sources, including warehouse lines of credit, borrowings from the FHLB, and customer deposits. Loan servicing income for the quarter ended June 30, 1996 decreased 115% to an expense of $448,000 as compared to income of $3.0 million for the same period in the previous year. The decrease in loan servicing income was primarily due to a decreased average balance of residential mortgage loans serviced for others, primarily as a result of the Company's sale of $3.0 billion of servicing rights in connection with the Company's exit from the conforming mortgage banking business. Additionally, loan servicing income was negatively effected by increased direct servicing costs related to the loan foreclosure and property liquidation process of the remaining conforming residential mortgage loan portfolio. The conforming residential mortgage loan servicing portfolio decreased 75% to $1.2 billion at June 30, 1996 from $4.5 billion at December 31, 1995. As a result of the Company's strategic divestitures, the Company does not expect loan servicing income to be a strong contributor to total revenues in the near future. This reduced contribution to revenues is anticipated to be offset by increases in other finance activity revenues in the near future, as well from a reduction in servicing related expenses. In addition to the above referenced servicing portfolio, the Company also services a variety of other loan products at its other business operations that make positive contributions to total revenue. At June 30, 1996, FMAC serviced franchise mortgage loans for others totaling $454.7 million, IBCI serviced leases for others of $122.1 million, and SPTL serviced multifamily or commercial loans for others of $53.8 million. SPFC acts as master servicer for $376.9 million of sub prime residential loans serviced for others. However, as a result of the sub servicing fee arrangement with SPFC's sub servicer, significant revenues are not realized from this operation. ICIFC also acts as master servicer for $664.1 million of non conforming residential mortgage loans. (See "Notes to Consolidated Financial Statements - -Note 1. Organization."). During the quarter ended June 30, 1996 and 1995, the Company sold mortgage loan servicing rights relating to $478.5 million and $18.5 million principal amount of loans, resulting in a pre-tax loss of $300,000 and a pre tax gain of $500,000, respectively. Gain on the sale of servicing rights consists of the cash proceeds received on the ''bulk'' sale of servicing rights, net of the related capitalized originated or purchased servicing rights. The decline in profitability on the sale of the conforming residential mortgage servicing rights was due to the increased amounts of capitalized servicing rights on the portfolio sold in the quarter as compared to the same period of the previous year as a result of the Company's adoption of SFAS 122 in the first quarter of 1995. The decision to sell servicing rights was based upon the Company's exit plan from its former mortgage banking operations. During the quarter ended June 30, 1996, the Company sold approximately 42% of its common stock in SPFC through an initial public offering of 5.8 million shares of SPFC common stock. The Company sold 2.3 million shares, with SPFC selling 3.5 million primary shares. As a result of the sale, the Company recorded a pretax gain of $62.0 million. Since the Company continues to have a majority ownership interest in SPFC, the Company will continue to consolidate SPFC's operations with its other majority owned or wholly owned subsidiaries. However, the Company will only retain 58.4% of SPFC's net income or loss in the future. Other income for the quarter ended June 30, 1996 increased to $4.3 million as compared to $80,000 for the same period of the previous year. This increase was primarily due to fee income generated from the Company's advisory contract with ICMH and dividend payments received by the Company on its investment in ICMH. Expenses for the quarter ended June 30, 1996 increased 52% to $20.7 million as compared to $13.5 million for the same period of the previous year. Personnel expenses increased 61% to $11.0 million for the quarter ended June 30, 1996 as compared to $6.8 million for the same period of the previous year. This increase was primarily the result of personnel expenses related to the Company's acquisition and expansion activities throughout the second half of 1995, partially offset by reductions in personnel expense at the Company's former mortgage banking operations. Amortization of PMSR's and OMSR's decreased 85% $114,000 for the quarter ended June 30, 1996 as compared to $736,000 for the same period of the previous year. The decrease was the result of a decreased outstanding balance of PMSR's and OMSR's as a result of the Company's sale of conforming residential mortgage loan servicing rights generated by its former mortgage banking operations. As a result of this sale, of the $8.7 million of servicing rights outstanding at June 30, 1996, $3.8 million are held at SPTL as acquired servicing rights of franchise mortgage loans from FMAC, with the remaining $4.9 million held at ICIFC in connection with their mortgage banking operations. (See "Notes to Consolidated Financial Statements-Note 1. -Organization.") Occupancy expense remained relatively unchanged at $950,000 for the quarter ended June 30, 1996 as compared to $934,000 for the same period of the previous year. Occupancy expense remained relatively unchanged despite the Company's shift in business focus and related expansion activities due to the reduction of occupancy costs from the Company's former mortgage banking operations. The Company expanded its lease obligations in the current year as a result of the Company's acquisition of Coast Business Credit, First Concord Leasing, and Franchise Mortgage Acceptance Company LLC in the second half of 1995. Net expenses of OREO increased 158% to $1.2 million for the quarter ended June 30, 1996 as compared to $473,000 for the same period of the previous year. The increase in net expense of OREO was primarily the result of the sale of properties foreclosed on by the Company's former mortgage banking operations. FDIC insurance premiums decreased 100% to $0 for the quarter ended June 30, 1996 as compared to $559,000 for the same period of the previous year. FDIC insurance premiums decreased primarily as a result of a decrease in the rate and fee structure of the insurance premium charged to SPTL for FDIC deposit insurance. All other general and administrative expenses, including data processing, professional services, and telephone and other communications expense increased 84% to $7.4 million for the quarter ended June 30, 1996 as compared to $4.0 million for the same period of the previous year. The increase in general and administrative expenses was due primarily to the Company's acquisition of CBCC, FCAC, and FMAC, as well as to the start up of ICAI late in 1995. As a result of the change in the composition of the Company's investment loan portfolio, earnings were reduced by an increase in the provision for loan losses. The provision for loan losses increased 19% to $2.0 million for the quarter ended June 30, 1996, as compared to $1.7 million for the same period of the previous year. The increase in the provision was primarily the result of an increase in nonaccrual loans, an increase in the amount of net charge-offs, and the change in the composition of the investment loan portfolio. Total nonaccrual loans increased 40% to $43.3 million at June 30, 1996, as compared to $31.0 million at December 31, 1995. Total nonaccrual loans as a percentage of loans held for investment were 5.56% and 4.50% at June 30, 1996 and December 31, 1995, respectively. Net charge-offs were $1.4 million for the quarter ended June 30, 1996, as compared to $1.1 million for the same period of the previous year. Net charge-offs for the quarter ended June 30, 1996 by product type were as follows: Multifamily Loans $377,000, Auto Loans $199,000, Conforming Residential Mortgage Loans $687,000, and Leases $176,000. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Revenues for the six months ended June 30, 1996 increased 325% to $140.4 million as compared to $33.0 million for the same period of the previous year. Expenses for the six months ended June 30, 1996 increased 81% to $47.8 million as compared to $26.5 million for the same period of the previous year. Net income for the six months ended June 30, 1996 increased 1,263% to $51.7 million as compared to $3.8 million for the same period of the previous year. The 325% increase in revenue, partially offset by the 81% increase in expenses accounted for the increase in the Company's net income. Fully diluted net income per share for the six months ended June 30, 1996 increased 1,164% to $2.78, as compared to $0.22 for the same period of the previous year. Net income per share increased at a lower rate than net income due an increase in outstanding shares used for net income per share calculations as a result of the Company's common stock offering as discussed below. (See "Liquidity and Capital Resources") The Company had 18.6 million shares of common stock and common stock equivalents outstanding during the six months ended June 30, 1996 as compared to 17.0 million shares outstanding during the same period of the previous year. Net income and net income per share from "core" operations (defined as net income less the net gain from the sale of SPFC stock, net gains on sales of servicing rights, and in addition to the net expense of the restructuring provision) for the six months ended June 30, 1996 increased 632% and 569% to $15.3 million and $0.82 per share from $2.1 million and $0.12 per share in the same period of the previous year, respectively. Gain on sale of loans increased 172% to $40.9 million for the six months ended June 30, 1996 as compared to $15.0 million for the same period of the previous year. Gain on sale of loans consists primarily of gains recorded upon the sale of loans, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. The increase was primarily the result of substantially increased volume and profitability on the sale of various servicing retained variable and fixed rate loan products, and due to an increase in the volume of loans sold on a servicing released basis. Gain on sale of loans includes; $20.9 million in gains recorded as a result of the securitization of $229.7 million of the Company's sub prime residential mortgage loans at SPFC, $3.6 million in gains resulting from the sale of the Company's retained interest in the securitization of $105.2 million of franchise mortgage loans at FMAC LLC which was accounted for as a financing at December 31, 1995, $4.6 in gains recorded as a result of the securitization of $167.4 million of franchise mortgage loans in the second quarter of 1996, and $2.2 million in gains recorded as a result of the sale of loans held by the Company's former mortgage banking operations. Also included in gain on sale of loans were $4.5 million in gains from the sale of loans at the Company's consolidated subsidiary, ICIFC. (See "Notes to Consolidated Financial Statements - Note 1. - Organization.") Net interest income, which consists of interest and fees net of interest charges, and net interest margin at SPTL for the six months ended June 30,1996 increased 109% and 81% to $26.1 million and 3.88% compared to $10.8 million and 2.14% for the same period in the previous year. The increase in net interest income and net interest margin was due primarily to two factors. The Company began 1995 with a loan portfolio consisting primarily of adjustable rate residential mortgage loans. The increase in net interest income can be directly attributed to the acquisitions completed throughout the last half of 1995, and the resultant change in the composition of loans held for sale and investment from primarily conforming single family residential mortgage loans to a more diversified mix of loan products from the Company's four primary businesses. The product mix of the Company's interest earning assets now includes a much larger percentage of higher-yielding loan and lease products as compared to the previous year. Interest income also increased as a result of the Company's loan and lease securitizations, which contributed interest income of $3.2 million from the accretion of discounts on the Company's capitalized excess servicing fees receivable. The increase in interest income due to the factors described above was partially offset by an increase in the average costs of borrowing from all sources, including warehouse lines of credit, borrowings from the FHLB, and customer deposits. Loan servicing income for the six months ended June 30,1996 decreased 76% to $1.6 million as compared to $6.5 million for the same period in the previous year. The decrease in loan servicing income was primarily due to a decreased average balance of residential mortgage loans serviced for others, primarily as a result of the Company's sale of $3.0 billion of conforming residential mortgage servicing rights in connection with the Company's exit from the mortgage banking business. Additionally, loan servicing income continues to be negatively effected by increased direct servicing costs related to the loan foreclosure and property liquidation process. The conforming residential mortgage loan servicing portfolio decreased 75% to $1.2 million at June 30, 1996 from $4.5 billion at December 31, 1995. During the six months ended June 30, 1996 and 1995, the Company sold mortgage loan servicing rights relating to $3.0 billion and $350.6 million principal amount of loans, resulting in pre-tax gains of $7.8 million and $2.9 million, respectively. Gain on the sale of servicing rights consists of the cash proceeds received on the ''bulk'' sale of servicing rights, net of the related capitalized originated or purchased servicing rights. The decline in profitability on the sale of the conforming residential mortgage servicing rights was due to the increased amounts of capitalized servicing rights on the portfolio sold in the quarter as compared to the same period of the previous year as a result of the Company's adoption of SFAS 122 in the first quarter of 1995. The decision to sell servicing rights was based upon the Company's exit plan from its former mortgage banking operations. During the six months ended June 30, 1996, the Company sold approximately 42% of its common sock in SPFC through an initial public offering of 5.0 million shares of SPFC common stock. The Company sold 2.3 million shares, with SPFC selling 3.5 million primary shares. As a result of the sale, the Company recorded a pre tax gain of $62.0 million. Since the Company continues to own a majority ownership interest in SPFC, the Company will continue to consolidate SPFC's operations with its other majority owned or wholly owned subsidiaries. However, the Company will only retain 58.4% of SPFC's net income or loss in the future. Other income for the six months ended June 30, 1996 increased to $5.5 million as compared to $270,000 for the same period of the previous year. This increase was primarily due to fee income generated from the Company's advisory contract with ICMH and dividend payments received by the Company on its investment in ICMH. Expenses for the six months ended June 30, 1996 increased 81% to $47.8 million as compared to $26.5 million for the same period of the previous year. Personnel expenses increased 71% to $23.4 million for the six months ended June 30, 1996 as compared to $13.7 million for the same period of the previous year. This increase was primarily the result of personnel expenses related to the Company's acquisition and expansion activities throughout the second half of 1995, partially offset by reductions in personnel expense at the Company's former mortgage banking operations. Amortization of PMSR's and OMSR's decreased 40% to $832,000 for the six months ended June 30, 1996 as compared to $1.4 million for the same period of the previous year. The decrease was the result a decreased outstanding balance of PMSR's and OMSR's as a result of the Company's sale of servicing rights on conforming residential mortgage loans generated by the former mortgage banking operations. Occupancy expense increased 18% to $2.3 million for the six months ended March 31, 1996 as compared to $1.9 million for the same period of the previous year. The increase primarily reflects an increase in lease expenses as a result of the Company's acquisition of Coast Business Credit, First Concord Leasing, and Franchise Mortgage Acceptance Company in the second half of 1995. Net expenses of OREO increased 457% to $4.0 million for the six months ended June 30, 1996 as compared to $715,000 for the same period of the previous year. The increase in net expense of OREO was primarily the result of the sale of properties foreclosed on by the Company's former mortgage banking operations. FDIC insurance premiums decreased 96% to $45,000 for the six months ended June 30, 1996 as compared to $1.1 million for the same period of the previous year. FDIC insurance premiums decreased primarily as a result of a decrease in the rate of the insurance premium charged to SPTL for FDIC deposit insurance. Restructuring charges were $3.8 million for the six months ended June 30, 1996 as compared to no charge for the same period of the previous year. The charge represents those costs incurred in connection with the Company's exit from the conforming mortgage banking business in accordance with the provisions of EITF 94-3, "Accounting for Restructuring Charges." During the six months ended June 30, 1996, the Company committed itself to, and began the execution of, an exit plan that specifically identified the necessary actions to be taken to complete the exit from the origination, sale and servicing of conforming residential mortgage loans. During the six months ended June 30, 1996, the Company incurred charges against the allowance of approximately $2.0 million. The Company believes that significant changes to the exit plan are not likely, and that the exit plan should be completed by December, 1996.The Company has included in the restructuring charge those costs resulting from the exit plan that are not associated with, nor would have benefit for the continuing operations of the Company. All other general and administrative expenses, including data processing, professional services, and telephone and other communications expense increased 77% to $13.5 million for the six months ended June 30, 1996 as compared to $7.6 million for the same period of the previous year. The increase in general and administrative expenses was due primarily to the Company's acquisition of CBCC, FCAC, and FMAC, as well as to the start up of ICAI in 1995. As a result of the change in the composition of the Company's investment loan portfolio, earnings were reduced by an increase in the provision for loan losses. The provision for loan losses increased 36% to $3.5 million for the six months ended June 30, 1996, as compared to $2.6 million for the same period of the previous year. The increase in the provision was primarily the result of the increase in nonaccrual loans, the increase in the amount of net charge-offs, and the change in the composition of the investment loan portfolio. Net charge-offs were $3.3 million for the six months ended June 30, 1996, as compared to $1.3 million for the same period of the previous year. Net charge-offs for the six months ended June 30, 1996 by product type were as follows: Multifamily Loans $1.2 million, Auto Loans $434,000, Conforming Residential Mortgage Loans $1.1 million, and Leases $548,000. Inflation The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Inflation affects the Company primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgage loans and a borrowers ability to qualify for mortgage financing in a purchase transaction may be adversely effected. Liquidity and Capital Resources The Company's principal liquidity requirements result from the need for the Company to fund mortgage loans originated or acquired for purposes of sale or investment. In addition, the Company, as a loan servicer, requires funding to make advances of delinquent principal and interest payments and escrow balances, and as basic working capital. SPTL has historically provided the funding for its lending activities through its deposits and FHLB borrowings. During the quarter ended June 30, 1996, the Company had sufficient liquidity to meet its operating needs. In April 1996, the Company completed a secondary stock offering of 2,439,904 shares of its Common Stock. The shares issued were sold for $26.00 per share. The Company received net proceeds from the offering of $59.2 million. Also, during the quarter ended June 30, 1996, the Company completed its initial public offering of SPFC common stock. After the offering ICII owned 58.4% of the issued and outstanding shares of SPFC's common stock, excluding shares issuable upon exercise of options granted or to be granted pursuant to SPFC's stock option plans. The Company received net proceeds from the offering of SPFC stock of $36.4 million. SPTL obtained the liquidity necessary to fund the Company's former mortgage banking operations and its own lending activities through deposits and, if necessary through borrowings from the FHLB. At June 30, 1996 and December 31, 1995, SPTL had available lines of credit from the FHLB equal to 35% of its assets, or $517.7 million and $501.4 million, respectively. The highest FHLB advance outstanding during the quarter ending June 30, 1996 was $295.0 million, with an average outstanding balance of $245.0 million. The outstanding balance of FHLB advances was $295.0 million at June 30, 1996. Since December 31, 1991, SPTL has increased its deposits as necessary so that deposits, together with cash, liquid assets and FHLB borrowings have been sufficient to provide the funding for its loans held for sale and investment. SPTL has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Additionally, SPTL maintains liquidity in the form of cash and interest bearing deposits with financial institutions. The Company tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPTL allow SPTL to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of the Company's lending activities. The Company has an ongoing need for capital to finance its lending activities. This need is expected to increase as the volume of the Company's loan and lease originations and acquisitions increases. The Company's primary cash requirements include the funding of (i) loan and lease originations and acquisitions pending their pooling and sale, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) fees and expenses incurred in connection with its securitization programs, (iv) overcollateralization or reserve account requirements in connection with loans and leases pooled and sold, (v) ongoing administrative and other operating expenses, (vi) interest and principal payments under ICII's $90 million principal amount of Senior Notes due 2004 (the "Notes") and (vii) the costs of the Company's warehouse credit and repurchase facilities with certain financial institutions. The Company has financed its activities through repurchase facilities, warehouse lines of credit from financial institutions, including SPTL, public offerings of capital stock of ICII and SPFC, the issuance of the Notes and securitizations. The Company believes that such sources will be sufficient to fund the Company's liquidity requirements for the foreseeable future. Any future financing may involve the issuance of additional Common Stock or other securities, including securities convertible into or exercisable for Common Stock. The Company currently pools and sells through securitization a substantial portion of the loans or leases which it originates or purchases, other than loans held by SPTL for investment. Accordingly, adverse changes in the securitization market could impair the Company's ability to originate, purchase and sell loans or leases on a favorable or timely basis. Any such impairment could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for many types of assets is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. Finally, any delay in the sale of a loan or lease pool could cause the Company's earnings to fluctuate from quarter to quarter. In a securitization, the Company recognizes a gain on sale of the loans or leases securitized upon the closing of the securitization, but does not receive the cash representing such gain until it receives the excess servicing fees, which are payable over the actual life of the loans or leases securitized. As a result, such transactions may not generate cash flows to the Company for an extended period. In addition, in order to gain access to the secondary market for loans and leases, the Company has relied on monoline insurance companies to provide guarantees on outstanding senior interests in the trusts to which such loans and leases are sold to enable it to obtain an ''AAA/Aaa'' rating for such interests. Any unwillingness of the monoline insurance companies to guarantee the senior interests in the Company's loan or lease pools could have a material adverse effect on the Company's financial position and results of operations. The Company is dependent upon its ability to access warehouse credit and repurchase facilities, in addition to its ability to continue to pool and sell loans and leases in the secondary market, in order to fund new originations and purchases. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $702 million in financing at June 30, 1996 (excluding financing available to the Company's wholly owned subsidiary, ICI Funding Corporation ("ICIFC")). (See "Notes to Consolidated Financial Statements Note 1. Organization") Certain of these credit and repurchase facilities will expire in 1996. The Company expects to be able to maintain existing warehouse lines of credit and repurchase facilities (or to obtain replacement or additional financing) as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms. To the extent that the Company is unable to arrange new warehouse lines of credit and repurchase facilities, the Company may have to curtail its loan origination and purchasing activities, which could have a material adverse effect on the Company's operations and financial position. In December 1995, the Company, through a Special Purpose Entity ("SPE") issued pass through certificates (the Bonds) secured by $101 million of franchise mortgage loans to various investors. The debentures consist of three separate classes, Class A, Class B and Class C, with principal balances at December 31, 1995 of approximately $92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds are subordinate to Class B and both Class B and C are subordinate to Class A. The bonds have a weighted average loan rate of 9.63%, a pass through rate of 8.59%, and an anticipated life of 13 years. The premium associated with the Bonds of $11 million was being amortized as an adjustment to interest expense over the anticipated life of the Bonds. Due to the Company's retained interest in the SPE and the disproportionate payments on the pass through certificates, the Company accounted for this transaction as a financing at December 31, 1995. In the six months ended June 30, 1996, the Company sold its retained interest in the SPE, resulting in the deconsolidation of the SPE and a gain of $3.6 million. In October 1995, Imperial Bank extended ICII a $10 million revolving line of credit bearing interest at the prime rate (8.50% at December 31, 1995. During the quarter ended June 30, 1996, the line of credit was increased to $15 million. In April of 1996, the Company repaid its advances under this line with a portion of the proceeds from its secondary stock offering. In January 1994, the Company issued $90 million principal amount of Senior Notes (''Senior Notes'') to yield 10.00%, due 2004. In October 1994, the Company repurchased $8,500,000 of the Senior Notes. During the quarter ended June 30, 1996, the Company sold the $8.5 million of Senior Notes. At June 30, 1996, $90.0 million of the Senior Notes were outstanding. The Company believes that SPTL, together with liquidity available at ICII and its subsidiaries, will adequately fund the Company's lending activities. Under applicable regulations, dividends and loans from SPTL to ICII and its other subsidiaries are subject to various limitations. The liquidity needs of ICII arise in operating its former mortgage banking operations, not only to meet ICII operating expenses but also for its contractual obligation as a mortgage servicer. As a mortgage servicer, ICII is required to make advances to investors when a borrower is delinquent in meeting its payment obligation. Although these advances are recaptured through a foreclosure proceeding, the uncertainty as to when an advance will be necessary requires ICII to maintain liquidity. Since December 31, 1992, ICII's liquidity needs have included $51 million to make capital contributions to SPTL. The combination of cash from operations, including servicing sales, the Company's $20 million line of credit and the net proceeds received by the Company from its Senior Note offering allowed the Company to meet its required liquidity needs for 1994 and 1995. These available sources, in addition to the proceeds received from the Company's stock offering in April, 1996 and the Company's offering of SPFC stock in June, 1996, are expected to meet the Company's needs for capital for at least the next 12 months. PART II OTHER INFORMATION ITEM 6 EXHIBIT IMPERIAL CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE UNAUDITED (Dollars in thousands except per share information)
Quarter ended Six months ended June 30, 1996 June 30, 1996 --------------- -------------- Primary earnings per share: Net income $ 43,041 $ 51,657 =========== ============== Avg. number of shares outstanding 18,053 17,059 Net effect of dilutive stock options Based on treasury stock method using average market price 1,370 1,469 ----------- ------------ Total average shares 19,423 18,528 Primary earnings per share $ 2.22 $ 2.79 =========== ============= Fully diluted earnings per share: Net income $ 43,041 $ 51,657 =========== ============== Avg. number of shares outstanding 18,053 17,059 Net effect of dilutive stock options Based on treasury stock method using average market price 1,399 1,529 ------------ ---------- Total average shares 19,452 18,588 Fully diluted earnings per share: $ 2.21 $ 2.78 =========== ============
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. IMPERIAL CREDIT INDUSTRIES, INC. Date: August 16, 1996 By: /s/ Kevin Villani --------------------- Kevin Villani Executive Vice-President and CFO EX-27 2
9 1,000 6-MOS 12-MOS DEC-31-1995 DEC-31-1995 JUN-30-1996 DEC-31-1995 116,778 39,166 0 267,776 0 0 0 0 0 0 71,727 28,713 0 0 1,733,259 2,024,310 13,951 13,729 2,121,039 2,510,635 989,224 1,092,989 709,967 1,070,815 127,302 60,261 88,189 192,468 0 0 0 0 138,485 51,981 67,872 42,121 2,121,039 2,510,635 88,282 120,244 2,389 6,630 3,209 2,608 93,880 129,482 0 0 67,738 95,728 26,142 33,754 3,525 5,450 0 0 47,820 61,180 92,536 24,130 92,536 14,193 0 0 0 0 51,657 14,193 2.79 .75 2.78 .74 0 0 43,266 30,988 0 0 1,314 870 0 0 13,729 7,054 (3,361) (3,106) 58 11 13,951 13,729 13,951 13,729 0 0 0 0 -----END PRIVACY-ENHANCED MESSAGE-----