-----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, CfOHZcCJJ7VKvZqRSNAmqwwoon5cvvaOcyRm5gAJMPf91UJ71xIei6Obq+VRvAd1 doYfBQxVs3oUpjID925D3w== 0000898430-97-004969.txt : 19971120 0000898430-97-004969.hdr.sgml : 19971120 ACCESSION NUMBER: 0000898430-97-004969 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971119 SROS: AMEX 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: SEC FILE NUMBER: 000-19861 FILM NUMBER: 97724582 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 SEPTEMBER 30, 1997 COMMISSION FILE NUMBER: 0-19861 IMPERIAL CREDIT INDUSTRIES, INC. CALIFORNIA 95-4054791 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) 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:
SHARES OUTSTANDING CLASS AT NOVEMBER 3, 1997 ----- ------------------- Common Stock, no par value 38,798,910
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IMPERIAL CREDIT INDUSTRIES, INC. FORM 10-Q TABLE OF CONTENTS PART I--FINANCIAL INFORMATION
PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets--September 30, 1997 and December 31, 1996. 2 Consolidated Statements of Income--Three and nine months ended September 30, 1997 and 1996.......................................... 3 Consolidated Statements of Cash Flows--Nine months ended September 30, 1997 and 1996........................................................ 4 Consolidated Statement of Changes in Shareholders' Equity--Nine months ended September 30, 1997................................................... 5 Notes to Consolidated Financial Statements............................ 6 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..... 29 Signatures.............................................................. 30
FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 1 ITEM 1. FINANCIAL STATEMENTS IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS ------ Cash................................................ $ 55,104 $ 74,247 Interest bearing deposits........................... 191,406 3,369 Investment in Federal Home Loan Bank stock.......... 4,473 17,152 Trading securities, at market....................... 66,028 25,180 Securities available for sale, at market............ 32,355 59,116 Securities held to maturity......................... 2,748 -- Loans held for sale................................. 678,572 940,096 Loans held for investment, net...................... 1,190,199 1,068,599 Purchased and originated servicing rights........... 6,091 14,887 Capitalized excess servicing fees receivable........ -- 23,142 Retained interest in loan and lease securitizations. 36,190 49,548 Interest-only and residual certificates............. -- 87,017 Accrued interest receivable......................... 19,918 13,847 Premises and equipment, net......................... 9,928 12,442 Other real estate owned, net........................ 14,834 12,214 Goodwill............................................ 49,392 38,491 Investment in Southern Pacific Funding Corporation.. 58,797 -- Other assets........................................ 16,569 31,292 ---------- ---------- Total assets.................................... $2,432,604 $2,470,639 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits............................................ $1,244,409 $1,069,184 Borrowings from Federal Home Loan Bank.............. 20,000 140,500 Other borrowings.................................... 483,756 694,352 Remarketed Par Securities........................... 70,000 -- Senior Notes........................................ 219,803 88,209 Convertible subordinated debentures................. -- 75,000 Accrued interest payable............................ 20,948 14,034 Accrued income taxes payable........................ 36,591 55,327 Minority interest in consolidated subsidiaries...... 11,149 54,936 Other liabilities................................... 53,623 39,589 ---------- ---------- Total liabilities............................... 2,160,279 2,231,131 ---------- ---------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding.............................. -- -- Common stock, no par value. Authorized 80,000,000 shares; 38,759,021 and 38,291,112 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively.................... 147,381 145,521 Retained earnings................................... 124,676 88,977 Unrealized gain on securities available for sale, net................................................ 268 5,010 ---------- ---------- Total shareholders' equity...................... 272,325 239,508 ---------- ---------- Total liabilities and shareholders' equity...... $2,432,604 $2,470,639 ========== ==========
See accompanying notes to consolidated financial statements 2 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------ 1997 1996 1997 1996 --------- --------- -------- -------- REVENUE: Gain on sale of loans and leases..... $ 20,512 $ 28,640 $ 57,736 $ 69,517 Interest on loans.................... 54,027 51,002 150,469 139,284 Interest on investments.............. 9,493 442 16,247 2,831 Interest on other finance activities. 750 3,748 2,141 6,957 --------- --------- -------- -------- Total interest income.............. 64,270 55,192 168,857 149,072 Interest expense..................... 35,089 33,029 95,145 100,767 --------- --------- -------- -------- Net interest income................ 29,181 22,163 73,712 48,305 Provision for loan and lease losses.. 9,559 2,617 18,165 6,142 --------- --------- -------- -------- Net interest income after provision for loan and lease losses........... 19,622 19,546 55,547 42,163 --------- --------- -------- -------- Loan servicing income................ 2,331 702 5,781 2,264 Gain on sale of servicing rights..... -- -- -- 7,808 Gains on sale of Southern Pacific Funding Corporation stock........... 5,182 -- 9,488 62,007 Gain on sale of Imperial Credit Mortgage Holdings stock............. 11,496 -- 11,496 -- Loss on sale of securities........... -- -- (403) -- Equity in net income of Southern Pacific Funding Corporation......... 6,432 -- 19,363 -- Management fees...................... 858 986 3,674 2,157 Other (loss) income.................. (894) 1,299 657 5,613 --------- --------- -------- -------- Total other income................. 25,405 2,987 50,056 79,849 --------- --------- -------- -------- Total revenue.................... 65,539 51,173 163,339 191,529 --------- --------- -------- -------- EXPENSES: Personnel expense.................... 17,844 13,075 40,948 36,477 Amortization of PMSR's and OMSR's.... 206 196 431 1,028 Occupancy expense.................... 1,051 1,038 2,941 3,308 Data processing expense.............. 515 394 1,320 1,324 Net expenses of other real estate owned............................... 1,146 867 5,383 4,853 Professional services................ 1,964 1,919 8,167 5,600 FDIC insurance premiums.............. -- 154 -- 199 Telephone and other communications... 875 563 2,058 2,108 Restructuring provision -- Exit from mortgage banking operations........................ -- -- -- 3,800 General and administrative expense... 11,489 6,718 24,040 14,047 --------- --------- -------- -------- Total expenses................... 35,090 24,924 85,288 72,744 --------- --------- -------- -------- Income before income taxes, minority interest and extraordinary item..... 30,449 26,249 78,051 118,785 Income taxes......................... 10,959 13,553 28,802 51,322 Minority interest in income of consolidated subsidiaries........... 4,901 3,263 9,555 6,373 --------- --------- -------- -------- Income before extraordinary item..... 14,589 9,433 39,694 61,090 --------- --------- -------- -------- Extraordinary item--Loss on early extinguishment of debt, net of income taxes........................ -- -- (3,995) -- --------- --------- -------- -------- Net income........................... $ 14,589 $ 9,433 $ 35,699 $ 61,090 ========= ========= ======== ======== PRIMARY AND FULLY DILUTED INCOME PER SHARE: Income before extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60 Extraordinary item--Loss on early extinguishment of debt, net of income taxes........................ -- -- (0.10) -- --------- --------- -------- -------- Net income per common share.......... $ 0.36 $ 0.23 $ 0.87 $ 1.60 ========= ========= ======== ========
See accompanying notes to consolidated financial statements 3 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ (IN THOUSANDS) Cash flows from operating activities: Net income............................. $ 35,699 $ 61,090 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses.... 18,165 6,142 Restructuring provision exit from mortgage banking operations........... -- 3,800 Depreciation........................... 3,178 4,373 Amortization........................... 2,933 1,971 Accretion of discount.................. (2,142) (6,957) Gain on sale of Southern Pacific Funding Corporation stock............. (9,488) (62,007) Gain on sale of Imperial Credit Mortgage Holdings stock............... (11,496) -- Gain on sale of servicing rights....... -- (7,808) Gain on sale of loans and leases....... (57,736) (69,517) Equity in net earnings of Southern Pacific Funding Corp.................. (19,363) -- Loss on sale of OREO................... 4,345 2,557 Writedowns of OREO..................... 166 2,459 Originations of loans held for sale.... (1,024,500) (1,367,100) Sales and collections on loans held for sale.................................. 1,343,760 1,838,331 Net change in retained interest in loan and lease securitizations............. 13,358 -- Net change in capitalized excess servicing............................. 23,142 -- Net change in other assets............. 49,707 65,081 Net change in other liabilities........ 23,641 58,455 ---------- ---------- Net cash provided by operating activities............................. 393,369 530,870 ---------- ---------- Cash flows from investing activities: Net change in interest bearing deposits.............................. (188,037) (89,936) Purchase of servicing rights........... -- (10,389) Proceeds from sale of servicing rights. -- 31,032 Proceeds from sale of other real estate owned................................. 2,651 5,534 Purchase of securities available for sale.................................. -- (219,702) Sale of securities available for sale.. 27,955 267,098 Purchase of securities held to maturity.............................. (2,748) -- Net change in loans held for investment............................ (148,356) (140,320) Purchases of premises and equipment.... (5,834) (3,853) Net change in investment in Southern Pacific Funding Corporation........... (39,434) -- Proceeds from sale of SPFC stock....... 13,707 36,362 Proceeds from sale of Imperial Credit Mortgage Holdings stock............... 11,950 -- Redemption of stock in Federal Home Loan Bank............................. 12,679 -- Cash utilized for acquisitions......... (14,699) -- ---------- ---------- Net cash used in investing activities... (330,166) (124,174) ---------- ---------- Cash flows from financing activities: Net change in deposits................. 175,225 (40,637) Advances from Federal Home Loan Bank... 50,000 738,000 Repayments of advances from Federal Home Loan Bank........................ (170,500) (590,000) Net change in convertible subordinated debentures............................ (75,000) -- Net change in other borrowings......... (210,596) (480,771) Proceeds from offering of Senior Notes due 2007.............................. 194,500 -- Proceeds from offering of Remarketed Par Securities........................ 70,000 -- Repayment of Senior Notes due 2004..... (73,241) -- Repayment of bonds..................... -- (111,995) Net change in minority interest........ (43,787) 24,820 Issuance of common stock............... -- 59,229 Proceeds from resale of Senior Notes... -- 7,615 Proceeds from exercise of stock options............................... 1,053 5,815 ---------- ---------- Net cash used in financing activities... (82,346) (387,924) ---------- ---------- Net change in cash...................... (19,143) 18,772 Cash at beginning of year............... 74,247 39,166 ---------- ---------- Cash at end of period................... $ 55,104 $ 57,938 ========== ========== Supplemental disclosure of cash flow information: Income taxes paid during the period.... $ 15,736 $ 16,253 Interest paid during the period........ 88,231 104,427
See accompanying notes to consolidated financial statements 4 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
UNREALIZED GAIN ON SECURITIES NUMBER OF AVAILABLE TOTAL SHARES COMMON RETAINED FOR SALE, SHAREHOLDERS' OUTSTANDING STOCK EARNINGS NET EQUITY ----------- -------- -------- ---------- ------------- Balance, December 31, 1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508 Exercise of stock options................ 470 1,090 -- -- 1,090 Tax benefit from exercise of stock options................ -- 807 -- -- 807 Net change in unrealized gain on securities available for sale..... -- -- -- (4,742) (4,742) Retirement of stock..... (2) (37) -- -- (37) Net income for period... -- -- 35,699 -- 35,699 ------ -------- -------- ------ -------- Balance, September 30, 1997................... 38,759 $147,381 $124,676 $ 268 $272,325 ====== ======== ======== ====== ========
See accompanying notes to consolidated financial statements 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Imperial Credit Industries, Inc. (the "Company" or "ICII"), incorporated in 1986 in the State of California, is 23.5% owned by Imperial Bank. Since its initial capitalization in 1991 by Imperial Bank, the Company has transformed itself from a full service mortgage banking operation to a diversified commercial and consumer finance holding company. The consolidated financial statements include ICII, its wholly owned subsidiaries and a majority owned consolidated subsidiary (collectively the "Company"). The wholly owned operating subsidiaries include Southern Pacific Bank ("SPB") formally Southern Pacific Thrift & Loan, Imperial Business Credit, Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network, Inc. ("AMN"), Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), Imperial Credit Worldwide Ltd. ("ICW"), a majority owner of Credito Imperial Argentina ("CIA"), a mortgage banking company conducting business in Argentina and Imperial Credit Capital Trust I ("ICCTI"), a subsidiary of the Company organized for the sole purpose of issuing trust securities. The majority-owned consolidated subsidiary is Franchise Mortgage Acceptance Company, LLC ("FMAC"). FMAC is owned two-thirds by the Company and one-third by the President of FMAC. The Company owns 8.6% of the common stock of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (NASDAQ: ICMI), a commercial Real Estate Investment Trust managed by ICCAMC. The Company accounts for its investment in ICCMIC using the cost method of accounting. The Company also has a 47% ownership interest in Southern Pacific Funding Corporation ("SPFC") (NYSE: SFC). The Company accounts for this investment using the equity method of accounting. All material intercompany balances and transactions have been eliminated. 2. DECONSOLIDATION OF SOUTHERN PACIFIC FUNDING CORPORATION AND ICI FUNDING CORPORATION During the first quarter of 1997, the Company sold 370,000 shares of the common stock of SPFC at $16.63 per share, generating net proceeds of $6.2 million, and resulting in a gain of $4.3 million, reducing its ownership of SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now accounted for in the Company's financial statements under the equity method of accounting. During the third quarter ending September 30, 1997, the Company sold an additional 500,000 shares of SPFC common stock, generating net proceeds of $7.6 million and resulting in a gain of $5.2 million, further reducing its ownership percentage to 47%. The equity investment in SPFC is carried at cost adjusted for equity in SPFC's undistributed earnings. Deferred income taxes were provided for by the Company at the time of the sale of SPFC stock. During the first quarter of 1997, ICII disposed of its common stock interest in ICI Funding Corporation ("ICIFC"), a subsidiary engaged in mortgage conduit operations for Imperial Credit Mortgage Holdings ("ICMH") (AMEX: IMH). At December 31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1% economic interest since ICMH a former subsidiary and now a separate publicly held mortgage real estate investment trust, owned all of the nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concluded its exit from the original mortgage banking business. The Company did not receive any proceeds on the disposition of the ICIFC common stock. The Company recorded a loss of approximately $90,000 on the disposition. 3. 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. 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 nine months ended September 30, 1997 are not 6 necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. 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 year's consolidated financial statements have been reclassified to conform to the 1997 presentation. 4. NET INCOME 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 gives 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 September 30, 1997 and 1996 was 41,094,428 and 40,570,264 for purposes of computing fully diluted income per share, respectively. The weighted average number of shares including common stock equivalents for the nine months ended September 30, 1997 and 1996 was 41,033,029 and 38,293,874 for purposes of computing fully diluted income per share, respectively. The weighted average number of shares including common stock equivalents for the three months ended September 30, 1997 and 1996 was 40,884,142 and 40,382,302 for purposes of computing primary income per share, respectively. The weighted average number of shares including common stock equivalents for the nine months ended September 30, 1997 and 1996 was 40,803,044 and 38,074,558 for purposes of computing primary income per share, respectively. 5. LOANS HELD FOR SALE Loans held for sale consisted of the following at September 30, 1997 and December 31, 1996: (In thousands)
AT AT SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ Loans secured by real estate: Single family 1-4............................ $ 10,581 $452,533 Multi-family................................. 141,071 186,391 Commercial................................... 116,616 109,469 -------- -------- 268,268 748,393 Leases......................................... 49,461 8,547 Auto........................................... 149,981 -- Commercial loans............................... 210,862 183,156 -------- -------- $678,572 $940,096 ======== ========
6. REMARKETED PAR SECURITIES During the second quarter of 1997, ICCTI issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002. These securities can be redeemed at par upon their maturity or remarketed as 30-year capital instruments at the Company's option. Under current tax law, the interest payments on these 7 securities are tax-deductible. The proceeds from the offering will be used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. 7. SUBSIDIARY NAME CHANGE The Company's largest subsidiary, Southern Pacific Thrift and Loan, has changed its name to Southern Pacific Bank. Southern Pacific Bank is a national lending institution specializing in non-confoming loans. Through its divisions, SPB provides consumer loans, commercial real estate loans, asset based lending, major loan participations and FDIC-insured certificates of deposits. 8. SUBSEQUENT EVENTS On October 2, 1997, SPB acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc and PrinCap Mortgage Backed, L.P. ("PMW"), located in Vorhees, New Jersey. PMW's primary business is the warehouse lending to small and medium sized residential mortgage brokers and mortgage bankers on a national basis. PMW provides short term lines of credit to be utilized by its clients for the purpose of aggregating pools of loans for ultimate sale to investors. At September 30, 1997, PMW had commitments and outstanding loans of approximately $225 million and $115 million, respectively. The assets acquired from PMW were contributed to a wholly owned subsidiary of SPB. On October 20, 1997, the Company completed the initial public offering of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (NASDAQ: ICMI), a Maryland corporation that has elected to be taxed as a Real Estate Investment Trust. The initial public offering of 34,500,000 shares of common stock was priced at $15.00 per share, representing total net proceeds from the offering of approximately $481 million. All of the shares were offered by ICCMIC. The Company purchased 2,970,000 shares or 8.6% of ICCMIC common stock for $41.4 million. ICCMIC will be managed by ICCAMC, a wholly owned subsidiary of the Company. ICCMIC intends to invest primarily in performing multifamily and commercial loans and in mortgage backed securities. On October 31, 1997, ICCMIC announced the purchase of multifamily/commercial mortgage loans and interests in certain multifamily and commercial mortgage backed securities from Southern Pacific Bank and from the Company, for an aggregate purchase price of approximately $163 million plus accrued interest. On October 30, 1997, SPB announced that the Memorandum Of Understanding ("MOU") entered into in September 1996 with the Federal Deposit Insurance Corporation ("FDIC") and the California Department of Financial Institutions ("CDFI") has been terminated as a result of the recent concurrent examinations by the FDIC and CDFI and their joint conclusion that the terms of the agreement have been satisfactorily met and that the improvement in SPB's operations no longer warranted the MOU. During November 1997, the Company intends to complete the initial public offering of its subsidiary, FMAC, (NASDAQ: FMAX). A registration statement relating to the public offering has been filed with the United States Securities and Exchange Commission. FMAC plans to issue 8,750,000 shares of common stock, of which 5,312,500 are being sold by FMAC and 3,437,500 are being sold by the Company and President of FMAC. The assumed initial offering price range is $16.00 to $18.00 per share. Based on the assumed initial offering price range, the Company may record a pretax gain of approximately $60 million to $80 million. After the sale, the Company's ownership interest in FMAC would be approximately 44%, which would be treated as an equity investment and accounted for using the equity method of accounting. 8 9. CONSOLIDATING FINANCIAL STATEMENTS The following represents summarized consolidating financial information as of September 30, 1997 and December 31, 1996, and for the nine months ended September 30, 1997 and for 1996, with respect to the financial position and operations of the Company and its wholly-owned and majority-owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9 7/8% senior notes due 2007. The senior notes are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, ICW and AMN (the "Other Guarantor Subsidiaries"), and the Company's 66 2/3% owned subsidiary, FMAC. The non-guarantor subsidiaries are SPB and ICCTI. Each of the guarantees is full and unconditional and joint and several. The summarized consolidated financial information is presented in lieu of separate financial statements and other related disclosures of the wholly-owned subsidiary guarantors as management has determined that such information is not material to investors. FMAC has filed a Form 10-Q with the SEC as of and for the quarter ended September 30, 1997. None of the subsidiary guarantors is restricted from making distributions to the Company. CONSOLIDATING CONDENSED BALANCE SHEET SEPTEMBER 30, 1997
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash.................... $ 17,105 $ -- $ 8,252 $ 30,885 $ (1,138) $ 55,104 Interest bearing deposits............... 61,630 2,705 -- 129,090 (2,019) 191,406 Investment in Federal Home Loan Bank stock... -- -- -- 4,473 -- 4,473 Securities held to maturity, available for sale and trading....... 74,250 2,496 537 23,848 -- 101,131 Loans held for sale..... 10,581 210,862 199,442 257,687 -- 678,572 Loans held for investment, net........ 111,728 -- 28,195 1,104,365 (54,089) 1,190,199 Purchased and originated servicing rights....... -- -- 206 5,885 -- 6,091 Retained interest in loan and lease securitizations........ -- 7,041 29,149 -- -- 36,190 Investment in subsidiaries........... 273,470 -- -- -- (214,673) 58,797 Goodwill................ -- 4,430 30,496 14,466 -- 49,392 Other assets............ 63,765 20,195 (36,820) 16,119 (2,010) 61,249 -------- -------- -------- ---------- --------- ---------- Total assets........... $612,529 $247,729 $259,457 $1,586,818 $(273,929) $2,432,604 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ -- $1,246,428 $ (2,019) $1,244,409 Other borrowings........ -- 202,956 201,937 135,887 (37,024) 503,756 Remarketed Par Securities............. 72,165 -- -- (2,165) -- 70,000 Senior notes............ 219,803 -- -- -- -- 219,803 Minority interest in consolidated subsidiaries........... 749 -- -- -- 10,400 11,149 Other liabilities....... 47,487 7,973 26,563 49,240 (20,101) 111,162 -------- -------- -------- ---------- --------- ---------- Total liabilities...... 340,204 210,929 228,500 1,429,390 (48,744) 2,160,279 -------- -------- -------- ---------- --------- ---------- Shareholders' equity: Common stock............ 147,381 5,792 30,224 82,617 (118,633) 147,381 Retained earnings....... 124,676 31,008 733 74,811 (106,552) 124,676 Unrealized gain on securities available for sale............... 268 -- -- -- -- 268 -------- -------- -------- ---------- --------- ---------- Total shareholders' equity................ 272,325 36,800 30,957 157,428 (225,185) 272,325 -------- -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity.. $612,529 $247,729 $259,457 $1,586,818 $(273,929) $2,432,604 ======== ======== ======== ========== ========= ==========
9 CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1996
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247 Interest bearing deposits............... -- 2,594 163 -- 612 3,369 Investment in Federal Home Loan Bank stock... -- -- -- 17,152 -- 17,152 Investment and trading securities............. 8,802 39,349 887 35,824 (566) 84,296 Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096 Loans held for investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599 Purchased and originated servicing rights....... -- -- 637 14,250 -- 14,887 Capitalized excess servicing fees receivable............. -- -- -- 23,142 -- 23,142 Retained interest in loan and lease securitizations........ -- 6,908 19,646 22,994 -- 49,548 Interest-only and residual certificates.. -- -- -- 87,017 -- 87,017 Investment in subsidiaries........... 269,651 -- -- -- (269,651) -- Goodwill................ -- 4,332 14,115 20,044 -- 38,491 Other assets............ 106,601 8,078 (14,981) (10,333) (19,570) 69,795 -------- -------- -------- ---------- --------- ---------- Total assets.......... $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639 ======== ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184 Borrowings from Federal Home Loan Bank......... -- -- -- 140,500 -- 140,500 Other borrowings........ 15,363 143,139 88,768 480,103 (33,021) 694,352 Senior notes............ 88,209 -- -- -- -- 88,209 Convertible subordinated debentures............. -- -- -- 75,000 -- 75,000 Minority interest in consolidated subsidiaries........... 45,149 -- -- -- 9,787 54,936 Other liabilities....... 41,382 2,580 9,222 68,854 (13,088) 108,950 -------- -------- -------- ---------- --------- ---------- Total liabilities..... 190,103 145,719 97,990 1,836,723 (39,404) 2,231,131 -------- -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- -- -- 9,143 (9,143) -- Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521 Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977 Unrealized gain on securities available for sale............... 5,010 -- 185 -- (185) 5,010 -------- -------- -------- ---------- --------- ---------- Total shareholders' equity............... 239,508 14,457 25,211 239,883 (279,551) 239,508 -------- -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity. $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639 ======== ======== ======== ========== ========= ==========
10 CONSOLIDATING CONDENSED INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 30, 1997
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: (Loss) gain on sale of loans and leases....... $(2,638) $40,497 $ 6,737 $ 12,736 $ 404 $ 57,736 ------- ------- ------- -------- ------- -------- Interest income......... 20,712 18,947 23,129 112,326 (6,257) 168,857 Interest expense........ 18,365 15,788 7,953 59,198 (6,159) 95,145 ------- ------- ------- -------- ------- -------- Net interest income..... 2,347 3,159 15,176 53,128 (98) 73,712 Provision for loan and lease losses........... -- -- 9,140 9,025 -- 18,165 ------- ------- ------- -------- ------- -------- Net interest income after Provision for loan and lease losses............... 2,347 3,159 6,036 44,103 (98) 55,547 ------- ------- ------- -------- ------- -------- Loan servicing income (expense).............. (1,960) 2,230 3,558 1,953 -- 5,781 Gain on sale of SPFC stock.................. 9,488 -- -- -- -- 9,488 Gain on sale of ICMH stock.................. 11,496 -- -- -- -- 11,496 Equity in net income SPFC................... 19,363 -- -- -- -- 19,363 Other income (expense).. (4,213) (588) 5,637 3,230 (138) 3,928 ------- ------- ------- -------- ------- -------- Total other income.... 34,174 1,642 9,195 5,183 (138) 50,056 ------- ------- ------- -------- ------- -------- Total revenues...... 33,883 45,298 21,968 62,022 168 163,339 ------- ------- ------- -------- ------- -------- EXPENSES: Personnel expense....... 2,100 9,285 12,572 16,991 -- 40,948 Amortization of PMSR's and OMSR's............. -- -- 431 -- -- 431 Occupancy expense....... 823 444 419 1,255 -- 2,941 Data processing expense. 427 66 270 557 -- 1,320 Net expenses of other real estate owned...... 3,548 -- -- 1,835 -- 5,383 Professional services... 2,659 1,792 1,110 2,606 -- 8,167 General, administrative and other expense...... 3,696 5,046 11,960 5,794 (398) 26,098 ------- ------- ------- -------- ------- -------- Total expenses........ 13,253 16,633 26,762 29,038 (398) 85,288 ------- ------- ------- -------- ------- -------- Income (loss) before income taxes (benefit), minority interest, and extraordinary item..... 20,630 28,665 (4,794) 32,984 566 78,051 Income taxes (benefit).. 16,587 -- (2,003) 13,979 239 28,802 Minority interest in income of consolidated subsidiaries........... -- -- -- -- 9,555 9,555 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................. (3,995) -- -- -- -- (3,995) ------- ------- ------- -------- ------- -------- Net income (loss)....... $ 48 $28,665 $(2,791) $ 19,005 $(9,228) $ 35,699 ======= ======= ======= ======== ======= ========
11 CONSOLIDATING CONDENSED INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 30, 1996
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: Gain on sale of loans and leases............. $ 1,297 $14,209 $2,830 $ 50,939 $ 242 $ 69,517 ------- ------- ------ -------- ------- -------- Interest income......... 10,625 2,442 835 137,041 (1,871) 149,072 Interest expense........ 13,261 2,215 889 85,026 (624) 100,767 ------- ------- ------ -------- ------- -------- Net interest (expense) income................. (2,636) 227 (54) 52,015 (1,247) 48,305 Provision for loan and lease losses........... -- -- -- 6,142 -- 6,142 ------- ------- ------ -------- ------- -------- Net interest (expense) income after Provision for loan and lease losses..... (2,636) 227 (54) 45,873 (1,247) 42,163 ------- ------- ------ -------- ------- -------- Loan servicing (expense) income................. (2,002) 1,127 2,281 858 -- 2,264 Gain on sale of servicing rights....... 6,466 -- -- -- 1,342 7,808 Gain on sale of SPFC stock.................. 62,007 -- -- -- -- 62,007 Other income (expense).. 1,189 (1) 2,282 4,929 (629) 7,770 ------- ------- ------ -------- ------- -------- Total other income.... 67,660 1,126 4,563 5,787 713 79,849 ------- ------- ------ -------- ------- -------- Total revenues...... 66,321 15,562 7,339 102,599 (292) 191,529 ------- ------- ------ -------- ------- -------- EXPENSES: Personnel expense....... 7,313 5,705 1,831 22,255 (627) 36,477 Amortization of PMSR's and OMSR's............. 401 -- 89 538 -- 1,028 Occupancy expense....... 1,652 194 135 1,330 (3) 3,308 Data processing expense. 744 -- 1 578 1 1,324 Net expenses of other real estate owned...... 3,492 -- -- 1,361 -- 4,853 Professional services... 3,028 829 439 1,321 (17) 5,600 General, administrative and other expense...... 7,946 1,838 1,990 8,572 (192) 20,154 ------- ------- ------ -------- ------- -------- Total expenses........ 24,576 8,566 4,485 35,955 (838) 72,744 ------- ------- ------ -------- ------- -------- Income before income taxes and minority interest............... 41,745 6,996 2,854 66,644 546 118,785 Income taxes............ 21,452 -- 1,180 28,210 480 51,322 Minority interest in income of consolidated subsidiaries........... -- -- -- -- 6,373 6,373 ------- ------- ------ -------- ------- -------- Net income(loss)........ $20,293 $ 6,996 $1,674 $ 38,434 $(6,307) $ 61,090 ======= ======= ====== ======== ======= ========
12 CONSOLIDATING CONDENSED CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash (used in) provided by operating activities............. $(56,955) $(78,066) $(148,787) $ 667,193 $ 16,136 $ 399,521 -------- -------- --------- --------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits....... (59,512) (111) 163 (128,577) -- (188,037) Net change securities available for sale..... 8,069 36,853 535 (13,205) (4,297) 27,955 Net change in loans held for investment......... (83,910) -- 50,901 (167,855) 52,508 (148,356) Net change in Investment in SPFC................ (39,434) -- -- -- -- (39,434) Net change in Investment in Subsidiaries........ 90,298 -- -- -- (90,298) -- Other, net.............. 19,724 (1,740) (17,452) 10,346 676 11,554 -------- -------- --------- --------- -------- --------- Net cash (used in) provided by investing activities........... (64,765) 35,002 34,147 (299,291) (41,411) (336,318) -------- -------- --------- --------- -------- --------- Cash flows from financing activities: Net change in deposits.. 1,063 -- -- 174,162 -- 175,225 Advances from Federal Home Loan Bank......... -- -- -- 50,000 -- 50,000 Repayments of advances from Federal Home Loan Bank Advances.......... -- -- -- (170,500) -- (170,500) Net change in convertible subordinated debentures............. -- -- -- (75,000) -- (75,000) Net change in other borrowings............. (15,363) 48,419 113,169 (374,173) 17,352 (210,596) Proceeds from offering of senior notes due 2007................... 194,500 -- -- -- -- 194,500 Proceeds from offering of Remarketed Securities............. 70,000 -- -- -- -- 70,000 Repayment of senior notes due 2004......... (73,241) -- -- -- -- (73,241) Net change in minority interest............... (44,400) -- -- -- 613 (43,787) Other net............... 1,053 (6,322) 1,750 (6,432) 11,004 1,053 -------- -------- --------- --------- -------- --------- Net cash provided by (used in) financing activities........... 133,612 42,097 114,919 (401,943) 28,969 (82,346) -------- -------- --------- --------- -------- --------- Net change in cash...... 11,892 (967) 279 (34,041) 3,694 (19,143) Cash at beginning of period................. 5,213 (171) 7,973 64,926 (3,694) 74,247 -------- -------- --------- --------- -------- --------- Cash at end of period... $ 17,105 $ (1,138) $ 8,252 $ 30,885 $ -- $ 55,104 ======== ======== ========= ========= ======== =========
13 CONSOLIDATING CONDENSED CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1996
OTHER NON- GUARANTOR GUARANTOR ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating activities............. $ 57,616 $ 158,298 $ 3,747 $ 468,058 $(156,849) $ 530,870 --------- --------- ------- --------- --------- --------- Cash flows from investing activities: Net change in interest bearing deposits....... -- (2,034) -- (88,709) 807 (89,936) Proceeds of sales of servicing rights....... 31,032 -- -- -- -- 31,032 Net change in securities available for sale..... 4,682 (47,837) (778) 100,961 (9,632) 47,396 Net change in loans held for investment......... (2,828) -- -- (251,609) 114,117 (140,320) Proceeds from sale of SPFC stock............. 36,362 -- -- -- -- 36,362 Net change in Investment in Subsidiaries........ (15,952) -- -- -- 15,952 -- Other, net.............. -- (628) (444) (3,071) (4,565) (8,708) --------- --------- ------- --------- --------- --------- Net cash provided by (used in) investing activities........... 53,296 (50,499) (1,222) (242,428) 116,679 (124,174) --------- --------- ------- --------- --------- --------- Cash flows from financing activities: Net change in deposits.. (29,556) -- 214 (11,295) -- (40,637) Advances from Federal Home Loan Bank......... -- -- -- 738,000 -- 738,000 Repayments of advances from Federal Home Loan Bank Advances.......... -- -- -- (590,000) -- (590,000) Net change in other borrowings............. (180,222) 4,362 -- (333,839) 28,928 (480,771) Repayment of Bonds...... -- (111,995) -- -- -- (111,995) Proceeds from offering of common stock........ 59,229 -- -- -- -- 59,229 Net change in minority interest............... 24,820 -- -- -- -- 24,820 Other, net.............. 13,411 -- -- (6,200) 6,219 13,430 --------- --------- ------- --------- --------- --------- Net cash (used in) provided by financing activities........... (112,318) (107,633) 214 (203,334) 35,147 (387,924) --------- --------- ------- --------- --------- --------- Net change in cash...... (1,406) 166 2,739 22,296 (5,023) 18,772 Cash at beginning of period................. 8,593 (445) (1,937) 32,981 (26) 39,166 --------- --------- ------- --------- --------- --------- Cash at end of period... $ 7,187 $ (279) $ 802 $ 55,277 $ (5,049) $ 57,938 ========= ========= ======= ========= ========= =========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Imperial Credit Industries, Inc. (the "Company" or "ICII"), with consolidated assets of $2.4 billion, is a diversified commercial and consumer finance holding company, organized in 1986 with its headquarters located in Torrance, California. Its principal business activities consist of the operation of six wholly owned subsidiaries; Southern Pacific Bank ("SPB") formerly Southern Pacific Thrift and Loan, an industrial loan company specializing in lending to small businesses and consumers, Imperial Business Credit Inc. ("IBC"), a commercial leasing company specialized in equipment leasing to small businesses, Imperial Credit Advisors, Inc. ("ICAI"), a management advisory services company overseeing the investment activities of a real estate investment trust, Auto Marketing Network, Inc. ("AMN"), a subprime auto lender engaged in financing the purchase of new and used motor vehicles, Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), the external manager of Imperial Credit Commercial Mortgage Investment Corp., ("ICCMIC") (NASDAQ: ICMI) a commercial REIT, Imperial Credit Worldwide Ltd. ("ICW"), a majority owner of Credito Imperial Argentina ("CIA"), a mortgage banking company conducting business in Argentina Imperial Credit Capital Trust I and ("ICCTI"), a subsidiary of the Company organized for the sole purpose of issuing trust securities. The Company owns 8.6% of the common stock of ICCMIC. The Company is the majority owner of a subsidiary, Franchise Mortgage Acceptance Company, LLC ("FMAC"), a franchise lending company specializing in lending to business franchisees. In addition, the Company owns 47.0% of the outstanding common stock of Southern Pacific Funding Corporation ("SPFC"), a company engaged in sub-prime residential mortgage lending (NYSE: SFC). DECONSOLIDATION OF SUBSIDIARIES During the first quarter ended March 31, 1997, the Company reduced its common stock ownership in Southern Pacific Funding Corporation ("SPFC") from 51.2% at December 31, 1996 to 49.4% at March 31, 1997, generating net proceeds of $6.2 million and resulting in a gain of $4.3 million. As a result, commencing with the three months ended March 31, 1997, SPFC's financial statements are no longer consolidated with those of ICII. Under Generally Accepted Accounting Principles ("GAAP"), when a subsidiary's ownership percentage is reduced to below 50%, consolidation is no longer required. Accordingly, the Company's investment in SPFC is reflected in the Company's statement of condition as a separate line item entitled "Investment in Southern Pacific Funding Corporation" and in the statement of income as "Equity in net income of Southern Pacific Funding Corporation." During the third quarter ending September 30, 1997, the Company sold an additional 500,000 shares of SPFC common stock, generating net proceeds of $7.6 million and resulting in a gain of $5.2 million, further reducing its ownership percentage to 47%. The income from SPFC represents the Company's percentage ownership in SPFC's net income. For the three months and nine months ended September 30, 1997, the equity in net income of SPFC was $6.4 million and $19.4 million, respectively. During the first quarter of 1997, ICII disposed of its common stock interest in ICI Funding Corporation "ICIFC," a subsidiary engaged in mortgage conduit operations for Imperial Credit Mortgage Holdings, Inc. ("ICMH"). At December 31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1% economic interest since ICMH (AMEX: IMH), a former affiliate and now a separate publicly held mortgage real estate investment trust, owned all of the nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in ICIFC. The Company did not receive any proceeds on the disposition of ICIFC common stock. The Company recorded a loss of approximately $90,000 on the disposition. Franchise Lending For the three and nine months ended September 30, 1997, FMAC originated or acquired $211.2 million and $484.3 million of franchise loans as compared to $96.5 million and $305.6 million for the same period last year. For the three and nine months ended September 30, 1997 loan securitizations totaled $185.2 million and $343.8 million as compared to none and $167.4 million for the same period last year. At September 30, 1997, 15 FMAC had total assets of $247.6 million as compared to $160.2 million at December 31, 1996. FMAC's total revenues for the three and nine months ended September 30, 1997 were $22.7 million and $45.3 million as compared to $2.0 million and $15.6 million for the same periods last year, respectively. FMAC's net income (loss) for the three and nine months ended September 30, 1997 were $14.7 million and $28.7 million as compared to ($767,000) and $7.0 million for the same periods last year, respectively. Business Finance Lending Imperial Business Credit. IBC leases business equipment including copying, data processing, communication, printing and manufacturing equipment exclusively to business users. IBC's lease originations totaled $46.0 million and $110.5 million for the three and nine months ended September 30, 1997 as compared to $20.8 million and $54.4 million for the same period last year. IBC securitized $22.2 million and $137.7 million of leases during the three and nine months ended September 30, 1997 as compared to $20.7 million and $67.7 million for the same period last year. At September 30, 1997, IBC had total assets of $69.2 million. IBC's total revenues for the three months and nine months ended September 30, 1997 were $3.4 million and $14.4 million as compared to $2.3 million and $5.0 million for the same period last year, respectively. IBC's net income for the three and nine months ended September 30, 1997 was $351,000 and $3.5 million as compared to $630,000 and $1.3 million for the same period last year, respectively. Coast Business Credit ("CBC"). CBC, a division of SPB, is a national asset- based lender specializing in lending to middle market manufacturers, distributors, retailers, and high-technology businesses. At September 30, 1997, CBC's loan portfolio represented lending relationships with approximately 132 customers, with an average total loan per customer of $3.3 million. During 1996 and through September 30,1997, CBC has executed an expansion plan, which increased its customer base outside of California. CBC currently operates four loan production centers in California and additional loan production centers in Atlanta, Baltimore, Boston, Cleveland, Detroit, Minneapolis, Portland, Chicago, and Seattle. At September 30, 1997 and December 31, 1996, CBC had outstanding loans totaling $443.2 million and $288.5 million, of which $179.5 million and $115.6 million were outstanding to technology companies, respectively. CBC had open unused commitments of $289.2 million at September 30, 1997. Loan Participation and Investment Group ("LPIG"). LPIG was formed by SPB in September 1995 to invest in and purchase syndicated commercial loan participations in the secondary market originated by commercial banks. At September 30, 1997, loan participations held in the LPIG portfolio ranged in size from approximately $450,000 to approximately $19.0 million, as compared to approximately $900,000 to $10.0 million at September 30, 1996, respectively. As of September 30, 1997, LPIG committed to fund approximately $417.8 million of senior secured loan participation commitments. Loans outstanding under LPIG's participation commitments at September 30, 1997 totaled $198.2 million. Auto Lend Group. Auto Lend was formed by SPB in September 1996 to finance automobile dealership inventories. SPB believes that Auto Lend's products offer synergistic opportunities, when offered in connection with the Company's sub-prime auto lending operations, to provide car dealers a complete financing package. As of September 30, 1997, Auto Lend had total loan commitments of $45.6 million of which $21.1 million of loans were outstanding. COMMERCIAL MORTGAGE LENDING Income Property Lending Division For the three and nine months ended September 30, 1997, the Income Property Lending Division ("IPLD") of SPB, funded approximately $58.6 million and $206.8 million in loans as compared to $60.5 million and $182.2 million for the same period last year. 16 CONSUMER LENDING Auto Lending Division The Auto Lending Division ("ALD"), a division of SPB, originated $23.4 million and $63.0 million in sub-prime auto loans during the three and nine months ended September 30, 1997, as compared to $11.4 million and $24.8 million, for the same period last year, respectively. ALD currently originates sub-prime auto loans through three Northern California retail offices and is expanding its activities to Central California and areas outside California. Auto Marketing Network On March 14, 1997, ICII acquired for $750,000 all of the outstanding shares of Auto Marketing Network, Inc. ("AMN") of Boca Raton, Florida, a sub-prime auto lender. AMN is a nationally recognized specialty finance company engaged in financing the purchase of new and used motor vehicles. ICII also advanced AMN $11.5 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. The acquisition was recorded using the purchase method of accounting. Goodwill of approximately $14.7 million was recorded. The acquisition of AMN is consistent with the Company's general financing strategy: the loans AMN originates will be pooled and securitized for sale in the secondary market. For the quarter ending September 30, 1997 and since the date of acquisition through September 30, 1997, AMN originated $57.6 million and $151.5 million in sub prime auto loans. The Company has delayed its securitization of AMN originated loans. The delay has resulted from AMN's bond insurer's due diligence lawsuit filed against AMN regarding a securitization that occurred in 1993. Home Improvement Loans and Other Consumer Credit During the three months and nine months ended September 30, 1997, the Consumer Credit Division ("CCD") of SPB originated $4.4 million and $14.5 million in loans as compared to $7.0 million and $16.4 million for the same period last year. SECURITIZATION TRANSACTIONS During the three and nine months ended September 30, 1997, the Company completed loan and lease securitizations totaling $207.4 million and $684.6 million. The Company has retained interests in loan and lease securitizations representing the excess of the total amount of loans sold in the securitization over the amounts represented by interests in the securities sold to investors. The retained interests in the loan and lease securitizations totaled $36.2 million and $49.5 million at September 30, 1997 and December 31, 1996, respectively. At September 30, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected Capitalized Excess Servicing Fees Receivable of none and $23.1 million, respectively. At September 30, 1997 and December 31, 1996, the Company's consolidated balance sheet reflected Interest Only and Residual Certificates of none and $87.0 million, respectively. The decline in Capitalized Excess Servicing Fees Receivable and Interest Only and Residual Certificates resulted from the deconsolidation of SPFC and ICIFC. 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", ("PMSR's" and "OMSR's"). At September 30, 1997, PMSR's and OMSR's outstanding were $6.1 million, consisting of $5.9 million at SPB and $200,000 at ICAI. At December 31, 1996, PMSR's and OMSR's were $14.9 million, consisting of $5.5 million at SPB, $600,000 at ICAI and $8.8 million at ICIFC. 17 FUNDING Lines of Credit Until 1995, apart from equity and debt offerings in the capital markets, the Company's primary sources of financing were warehouse lines of credit and deposits at SPB. Typically, ICII consolidated entities other than SPB would borrow funds under their warehouse lines in connection with their wholesale loan originations and purchases, while SPB used its deposits and borrowings from the Federal Home Loan Bank of San Francisco ("FHLB") to finance its lending activities. During the three months ended September 30, 1997, SPB obtained a $200.0 million line of credit from Morgan Stanley in order to fund loan originations and to provide SPB with additional liquidity in order to explore potential acquisition and investment opportunities . 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. The Company continues to rely on FDIC insured deposits generated by SPB and third party warehouse lines of credit and securitizations. At September 30, 1997, SPB had total deposits of approximately $1.2 billion (excluding deposits of $2.0 million ICII maintained with SPB). ICII's subsidiaries had various revolving warehouse lines of credit available at September 30, 1997, as follows: (In thousands)
WEIGHTED AVERAGE INTEREST RATE COMMITMENT OUTSTANDING INDEX ---------------- ---------- ----------- ------------------- Greenwich Capital Financial (AMN)........ 6.91% $210,000 $171,937 Libor+125bp's Banco Santander (FMAC).. 7.29% 50,000 19,575 Libor+160bp's Sanwa Bank (FMAC)....... 7.50% 15,000 12,508 Eurodollars+200bp's CS First Boston (FMAC).. 7.29% 300,000 169,736 Libor+160bp's CoreStates Bank, N.A. (IBC).................. 8.36% 30,000 30,000 Libor+230bp's Morgan Stanley (SPB).... 6.16% 200,000 80,000 Libor+50bp's -------- -------- $805,000 $483,756 ======== ========
18 RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 Income before extraordinary item for the three months and nine months ended September 30, 1997 was $14.6 million and $39.7 million or $0.36 and $0.97 per share, as compared to $9.4 million and $61.1 million or $0.23 and $1.60 per share for the same periods last year, respectively. Net income for the three months ending September 30, 1997 was $14.6 million or $0.36 per share. Net income including an extraordinary item representing a loss on the early retirement of debt for the nine months ending September 30, 1997 was $35.7 million or $0.87 per share. There were no extraordinary items for the same periods last year. EXTRAORDINARY ITEM During the first quarter 1997, the Company successfully issued $200.0 million of 9.875% Senior Notes due 2007. A portion of the proceeds from the offering was used to repurchase $69.8 million of the existing outstanding 9.75% Senior Notes, due 2004. As a result, the Company recorded an extraordinary item relating to the early retirement of debt of $4.0 million or $0.10 per share for the first quarter. The Company expects to utilize the remaining proceeds for capital contributions to subsidiaries, strategic acquisitions, investments, and for general corporate purposes. REMARKETED PAR SECURITIES During the second quarter 1997, Imperial Credit Capital Trust I, a subsidiary of the Company organized for the sole purpose of issuing trust securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002. These securities can be redeemed at par upon their maturity or remarketed as 30-year capital instruments at the Company's option. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering will be used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. RETURN ON EQUITY Return on equity ("ROE") based on the Company's core net income (defined as net income excluding gain on sale of SPFC and ICMH stock, the ICAI profit sharing arrangement buyout, gain on sale of servicing rights, the restructuring provision for the Company's exit from the mortgage banking business, and the extraordinary item, net of income taxes, relating to the early retirement of debt) was 12.1 % and 16.0 % for the three months and nine months ending September 30, 1997, as compared to ROE of 17.7 % and 19.6 % for the same periods last year. The Company's strong capital position provides it with excellent opportunities to reduce risk and improve corporate performance and profitability in the future through investments, acquisitions, or other capital redeployment opportunities. DECONSOLIDATION OF SUBSIDIARIES During the first quarter of 1997, the Company sold 370,000 shares of the common stock of Southern Pacific Funding Corporation ("SPFC") at $16.63 per share, generating net proceeds of $6.2 million, and resulting in a gain of $4.3 million, reducing its ownership of SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now accounted for in the Company's financial statements under the equity method of accounting. During the third quarter ending September 30, 1997, the Company sold an additional 500,000 shares of SPFC common stock, generating net proceeds of $7.6 million and resulting in a gain of $5.2 million, further reducing its ownership percentage to 47%. The equity investment in SPFC is accounted for by the equity method of accounting in accordance with Generally Accepted Accounting Principles. The equity investment in SPFC is carried at cost adjusted for equity in SPFC's undistributed earnings. Deferred income taxes were provided for by the Company at the time of the sale of SPFC stock. For the three months and nine months ended September 30, 1997, the equity in net income of SPFC was $6.4 million and 19.4 million, respectively. 19 During the first quarter of 1997, ICII disposed of its common stock interest in ICI Funding Corporation (ICIFC), a subsidiary engaged in mortgage conduit operations for Imperial Credit Mortgage Holdings ("ICMH"). At December 31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1% economic interest since ICMH (AMEX: IMH) a former subsidiary and now a separate publicly held mortgage real estate investment trust, owned all of the nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in ICIFC. The Company's disposal of its remaining economic interest in ICIFC concluded its exit from the original mortgage banking business. The Company did not receive any proceeds on the disposition of the ICIFC common stock. The Company recorded a loss of approximately $90,000 on the disposition. As a result of the deconsolidation of SPFC and ICIFC; gain on sale of loans, net interest income, other income and, general and administrative expenses are not comparable to the prior period. Therefore, the following income statements present the gain on sale of loans, net-interest income, other income and general and administrative expenses for the Company as if SPFC had been accounted for as an equity investment and ICII's common stock interest in ICIFC had been disposed of for all periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 1997 1996 1997 1996 ------- -------- -------- -------- (IN THOUSANDS) Gain on sale of loans and leases......... $20,512 $ 10,160 $ 57,736 $ 25,638 Interest income.......................... 64,270 43,110 168,857 114,211 Interest expense......................... 35,089 23,559 95,145 70,454 ------- -------- -------- -------- Net interest income.................... 29,181 19,551 73,712 43,757 Provision for loan and lease losses.... 9,559 2,617 18,165 6,142 ------- -------- -------- -------- Net interest income after provision for loan and lease losses................... 19,622 16,934 55,547 37,615 Other income: Loan servicing income.................. 2,331 262 5,781 1,495 Gain on sale of servicing rights....... -- -- -- 8,065 Gain on sale of SPFC stock............. 5,182 -- 9,488 62,007 Gain on sale of ICMH stock............. 11,496 -- 11,496 -- Loss on sale of securities............. -- -- (403) -- Equity in net/pretax income of SPFC.... 6,432 4,800 19,363 21,297 Other (loss) income.................... (36) 1,643 4,331 6,868 ------- -------- -------- -------- Total other income....................... 25,405 6,705 50,056 99,732 ------- -------- -------- -------- Total revenue............................ 65,539 33,799 163,339 162,985 ------- -------- -------- -------- Expenses: Personnel expense...................... 17,844 8,296 40,948 24,774 Amortization of PMSR's and OMSR's...... 206 272 431 742 Occupancy expense...................... 1,051 812 2,941 2,807 Data processing expense................ 515 342 1,320 1,012 Net expenses of other real estate owned................................. 1,146 867 5,383 4,853 General and Administrative expense..... 14,328 6,640 34,265 20,772 ------- -------- -------- -------- Total expenses........................... 35,090 17,229 85,288 54,960 ------- -------- -------- -------- Income before income taxes, minority interest and extraordinary item......... 30,449 16,570 78,051 108,025 Income taxes............................. 10,959 7,393 28,802 44,800 Minority interest in income of consolidated subsidiaries............... 4,901 (256) 9,555 2,135 ------- -------- -------- -------- Income before extraordinary item....... 14,589 9,433 39,694 61,090 Extraordinary item-Loss on early extinguishment of debt, net............. -- -- (3,995) -- ------- -------- -------- -------- Net income............................. $14,589 $ 9,433 $ 35,699 $ 61,090 ======= ======== ======== ========
20 REVENUES Total revenues for the Company during the third quarter ended September 30, 1997 were $65.5 million as compared to $51.2 million reported for the same period in 1996. Excluding the gains on the sale of SPFC and ICMH stock from the third quarter ending September 30, 1997, and adjusting for the deconsolidation of SPFC and ICI Funding Corporation from the third quarter 1996 total revenues increased by 45% to $48.9 million as compared to $33.8 million for the same period last year. Total revenues for the nine months ended September 30, 1997 were $163.3 million, as compared to $191.5 million for the same period last year. Excluding the gains on the sale of SPFC and ICMH stock for the nine month periods ended September 30, 1997 and 1996, total revenues increased by 41% to $142.4 million from $101.0 million, respectively. Gain on Sale of Loan & Leases Gain on sale of loans and leases decreased $8.1 million to $20.5 million during the third quarter of 1997 from $28.6 million for the same period last year primarily resulting from the deconsolidation of SPFC and ICIFC and the scheduling of additional loan and lease securitizations for the fourth quarter of 1997. Gain on sale of loans decreased $11.8 million to $57.7 million for the nine months ended September 30, 1997 from $69.5 million for the same period last year, primarily as a result of the deconsolidation of SPFC and ICIFC. Loan and Lease Originations During the third quarter ending September 30, 1997, the Company originated $401.2 million in loans and leases as compared to $426.5 million for the same period last year. The decrease in originations for the quarter ending September 30, 1997 as compared to the same period last year resulted from the deconsolidation of SPFC partially offset by the increased originations at FMAC, IBC and the inclusion of AMN originations. Excluding SPFC's loan originations from the same period last year, originations would have increased $205.0 million when comparing the third quarter 1997 to the same period last year. Total loan originations for the nine months ended September 30, 1997 and 1996 were $1.0 billion and $1.4 billion, respectively. Excluding SPFC's and ICII's loan originations from the same period last year, originations would have increased $442.3 million when comparing the nine months ending September 30, 1997 to the same period last year. During the third quarter ending September 30, 1997, the Company originated loans/leases at SPB, IBC, FMAC, AMN and ICII of $86.4 million, $46.0 million, $211.2 million, $57.6 million and none, as compared to $78.9 million, $20.8 million, $96.5 million, none and none, respectively, for the same period last year. For the nine months ending September 30, 1997, the Company originated loans/leases at SPB, IBC, FMAC, AMN and ICII of $284.2 million, $110.5 million, $478.3 million, $151.5 million and none, as compared to $223.4 million, $54.4 million, $304.4 million, none and 310.1 million, respectively, for the same period last year. Interest Income and Expense Interest income increased $9.1 million to $64.3 million for the third quarter of 1997 from $55.2 million for the same period last year. For the nine months ended September 30, 1997, interest income increased $19.8 million to $168.9 million from $149.1 million for the same period last year. The increase in interest income was primarily attributable to the increase in yield and average outstanding balances on interest earning assets and the addition of AMN, partially offset by the deconsolidation of SPFC and ICIFC in 1997. Excluding interest income for SPFC and ICIFC from the third quarter and nine months ended September 30, 1996, interest income would have increased by $21.2 million and $54.6 million for the third quarter and nine months ended September 30, 1997, respectively, when compared to the same periods last year. Interest expense increased $2.1 million to $35.1 million for the third quarter of 1997 from $33.0 million for the same period last year. For the nine months ended September 30, 1997, interest expense decreased 21 $5.7 million to $95.1 million from $100.8 million for the same period last year. Excluding interest expense for SPFC and ICIFC from the third quarter and nine months ended September 30, 1996, interest expense would have increased by $11.5 million and $24.7 million for the third quarter and nine months ended September 30, 1997, respectively, as compared to the same periods last year. This increase in interest expense primarily resulted from higher borrowing costs as a result of the Company's newly issued Remarketed Par Securities, as well as from increased outstanding average balances of senior notes, deposits and warehouse lines. NET INTEREST INCOME AND MARGIN Net interest income continued to improve for the third quarter of 1997. Net interest income increased by $7.0 million to $29.2 million for the third quarter of 1997 from $22.2 million for the same period last year. For the nine months ended September 30, 1997, net interest income increased $25.4 million to $73.7 million from $48.3 million for the same period last year. Excluding net interest income for SPFC and ICIFC from the third quarter and nine months ended September 30, 1996, net interest income would have increased by $9.6 million and $30.0 million, respectively, for the quarter and nine months ended September 30, 1997 as compared to the same periods last year. Net interest margin at SPB was 4.86% for the third quarter of 1997, an increase of 71 basis points as compared to 4.15% for the same period last year. For the nine months ended September 30, 1997 net interest margin was 4.45%, an increase of 42 basis points as compared to 4.03% for the same period last year. The improvement in net interest margin is primarily the result of the Company's efforts to originate higher yielding loan and lease products. SALE OF SPFC AND ICMH STOCK During the third quarter ended September 30, 1997, the Company sold 500,000 and 462,269 shares of common stock in SPFC and ICMH respectively, generating cash proceeds of $7.6 million and $12.0 million. As a result of the sales, the Company recorded pre-tax gains of $5.2 million and $11.5 million, respectively. As a result of the sale of SPFC stock, the Company's ownership percentage has been reduced to 47% at September 30, 1997 from 51.2% from December 31, 1996. OTHER INCOME ITEMS Loan servicing income totaled $2.3 million for the third quarter of 1997 as compared to $702,000 for the same period last year. The increase in loan servicing income was primarily due to two factors: 1) a decrease in the levels of foreclosure and liquidation costs associated with the Company's former conforming residential mortgage loan servicing portfolio and 2) an increase in the outstanding performing balance of loans and leases serviced for others at Franchise Mortgage Acceptance Company, LLC, Imperial Business Credit, Inc., and Southern Pacific Bank. Other (loss) income totaled ($894,000) during the third quarter of 1997 as compared to $1.3 million for the same period in 1996. Other income decreased during the third quarter of 1997 as a result of one time charge of $1.5 million at SPB, partially offset by the deconsolidation of SPFC and ICIFC in 1997. REIT management fees for the three months ended September 30, 1997 were $858,000 as compared to $986,000 for the same period last year. For the nine months ended September 30, 1997 REIT management fees totaled $3.7 million as compared to $2.2 million for the same period last year. The REIT management fee results from the Company's advisory contract with ICMH. EXPENSES Total expenses for the Company during the quarter ended September 30, 1997 were $35.1 million, an increase of $10.2 million from the $24.9 million reported for the same period in 1996. For the nine months ended September 30, 1997 total expenses were $85.3 million, an increase of $12.6 million from the $72.7 million reported for the same period last year. Excluding total expenses for SPFC and ICIFC from the third quarter and nine months ending September 30, 1996, total expenses increased by $17.9 million and $30.3 million when compared to the third quarter and nine months ending September 30, 1997, respectively. 22 Total expenses increased primarily due to a one-time charge of $5.5 million relating to the buyout of a profit sharing arrangement on ICAI's REIT management fee contract. Of the $5.5 million one time charge, $1.0 million was charged to personnel expense and $4.5 million was charged to other general and administrative expense. Expenses also increased due to the continued expansion of operations at the Company's new business lines and subsidiaries, including AMN, acquired in the first quarter of 1997. Personnel expenses increased to $17.8 million for the three months ended September 30, 1997 as compared to $13.1 million for the same period of the previous year. Excluding personnel expenses for SPFC and ICIFC from the three months ended September 30, 1996, personnel expense increased to $17.8 million from $8.3 million for the quarter ending September 30, 1997. The increase in personnel expense excluding SPFC and ICIFC resulted from the Company's acquisition and expansion activities throughout 1996 and during the first nine months of 1997 in addition to the personnel expense related to the buyout of a profit sharing arrangement on ICAI's REIT management fee contract. For the nine months ended September 30, 1997, personnel expenses increased to $40.9 million from $36.5 million primarily due to the Company's expansion activities offset by the deconsolidation of SPFC and ICIFC. Amortization of PMSR's and OMSR's increased to $206,000 for the three months ended September 30, 1997 as compared to $196,000 for the same period last year. The increase primarily resulted from an increase in prepayment rates on the underlying mortgage loan portfolio partially offset by the deconsolidation of SPFC and ICIFC. For the nine months ended September 30, 1997 amortization of PMSR's and OMSR's decreased to $431,000 as compared to $1.0 million for the same period last year. The decrease was primarily the result of the deconsolidation of SPFC and ICIFC. Occupancy expense remained relatively constant at $1.0 million for the three months ended September 30, 1997 as compared to the same period last year. Excluding occupancy expenses for SPFC and ICIFC from the three months ended September 30, 1996, occupancy expense increased to $1.0 million from $812,000 for the quarter ending September 30, 1997. The increase in occupancy expense was primarily attributable to the Company's acquisition and expansion activities throughout 1996 and during the first nine months of 1997. For the nine months ended September 30, 1997 occupancy expense decreased to $2.9 million as compared to $3.3 million for the same period last year primarily due to the deconsolidation of SPFC and ICIFC. Net expenses of OREO increased to $1.1 million for the three months ended September 30, 1997 as compared to $867,000 for the same period last year. Net expenses of OREO increased primarily due to an increase in OREO expenses from properties foreclosed on related to the conforming mortgage banking operations exited in 1996 and to a loan portfolio at SPB. For the nine months ended September 30, 1997 and 1996, net expenses of OREO were $5.4 million and $4.9 million, respectively. In the prior year's nine months ending September 30, 1996, the Company recorded a $3.8 million restructuring charge representing the costs anticipated to be incurred in connection with the Company's exit from the conforming mortgage business. For the three and nine month periods ended September 30, 1997, there were no additional restructuring charges required. All other general and administrative expenses, including Federal Deposit Insurance Corporation ("FDIC") insurance premiums, data processing, professional services, and telephone and other communications expense, increased to $14.8 million for the three months ended September 30, 1997 as compared to $9.7 million for the same period last year. For the nine months ended September 30, 1997 and 1996 these expenses were $35.6 million and $23.3 million, respectively. Excluding SPFC and ICIFC for the third quarter and nine months ending September 30, 1996, such expenses were $7.0 million and $21.8 million in the prior year. The overall increase in general and administrative expenses was primarily attributable to the Company's acquisition and expansion activities throughout 1996 and during the first nine months of 1997 including the one-time charge relating to the buyout of a profit sharing arrangement on ICAI's REIT management fee contract. 23 ASSET QUALITY Loan and Lease Loss Provision and Nonaccrual Loans and Leases As a result of the growth in the loan portfolio and the change in its product mix, the Company continued to add to the allowance for loan and lease losses. The provision for loan and lease losses increased $7.0 million to $9.6 million for the third quarter of 1997 from $2.6 million for the same period last year. The increase in the provision for loan and lease losses for the third quarter of 1997 was primarily the increase in nonaccrual auto loans resulting from the delay in the securitization of AMN originated loans from the second and third quarters of 1997. The delay results from AMN's bond insurer's due diligence investigation of a lawsuit filed against AMN regarding a securitization completed in 1993. By delaying the securitization of AMN's loans, the Company has carried a larger more seasoned auto loan portfolio, of which $17.7 million of AMN's loans were not accruing interest at September 30, 1997. Nonaccrual loans and leases as of September 30, 1997 and December 31, 1996 were $65.0 million and $50.1 million or 5.3% and 4.6% of gross loans held for investment, respectively. The balance of nonaccrual loans relating to the former mortgage banking operations included $12.1 million and $19.9 million of loans at September 30, 1997 and December 31, 1996, respectively. The increase in loans and lease charge-offs were primarily due to the consumer loan and lease portfolios. Non-performing assets as a percentage of loans held for investment and OREO at September 30, 1997 increased to 6.40% from 5.71% at December 31, 1996. The increase in the percentage of non-performing assets results primarily from an increase in non-accrual loans at AMN. The percentage of the allowance for loan and lease losses to nonperforming assets increased to 40.1% at September 30, 1997 as compared to 31.5% at December 31, 1996. The Company periodically reviews the allowance for loan and lease losses in connection with the investment loan and lease portfolios. Based on level and composition of non-accrual loans and leases and the Company's charge-off experience, the Company believes that the allowance for loan and lease losses is adequate. Increasing levels of non-accrual loans and non-performing assets may occur and would be consistent with the Company's shift to higher yielding loan and lease products. The Company believes it has more than adequately priced these new loan and lease products for potential future increases in the overall levels of non-accrual loans as evidenced by the significant increase in net interest income after the provision for loan and lease losses. 24 The Company's activity in the allowance for loan and lease losses was as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------- 1997 1996 -------- ------- (IN THOUSANDS) BEGINNING BALANCE AS OF DECEMBER 31, 1996 AND 1995........... $ 19,999 $13,729 Provision for loan and lease losses.......................... 18,165 6,142 Business acquisitions........................................ 7,484 -- Lease sales.................................................. (900) -- Deconsolidation of ICIFC..................................... (687) -- -------- ------- 44,061 19,871 -------- ------- LOANS CHARGED OFF: Mortgage..................................................... (2,160) (1,980) Multifamily.................................................. (420) (1,023) Commercial................................................... (955) (432) Leases....................................................... (3,737) (1,490) Consumer..................................................... (5,399) (598) -------- ------- Total........................................................ (12,671) (5,523) -------- ------- RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF: Mortgage..................................................... 46 26 Leases....................................................... 425 -- Consumer..................................................... 183 87 -------- ------- Total........................................................ 654 113 -------- ------- Net charge-offs.............................................. (12,017) (5,410) -------- ------- Ending balance as of September 30, 1997 and 1996............. $ 32,044 $14,461 ======== =======
Loans held for investment consisted of the following at September 30, 1997 and December 31, 1996:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (IN THOUSANDS) Loans secured by real estate: Single Family 1-4.................................... $ 266,611 $ 375,476 Multi-Family......................................... 26,112 2,527 Commercial........................................... 6,628 11,011 ---------- ---------- 299,351 389,014 Leases............................................... 7,499 99,717 Installment loans.................................... 139,402 34,248 Franchise loans...................................... 86,077 115,910 Asset based loans.................................... 443,154 288,528 Commercial........................................... 258,563 173,932 ---------- ---------- Total.............................................. 1,234,046 1,101,349 Unearned income...................................... (3,134) (6,336) Deferred loan fees................................... (8,669) (6,415) ---------- ---------- Total.............................................. 1,222,243 1,088,598 Allowance for loan losses............................ (32,044) (19,999) ---------- ---------- Total.............................................. $1,190,199 $1,068,599 ========== ==========
25 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 franchise 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 debtors' ability to honor their contracts is dependent upon the economy of California. The following table sets forth the amount of non-performing assets attributable to the Company's former mortgage banking operations and to all of its other lending activities.
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996 ---------------------- ---------------------- FORMER FORMER ALL OTHER MORTGAGE ALL OTHER MORTGAGE LENDING BANKING LENDING BANKING ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ---------- ---------- ---------- ---------- (IN THOUSANDS) Nonaccrual loans: One to four family............ $ 21,267 $12,098 $ 24,711 $19,928 Commercial property........... 2,527 -- 3,052 -- Multi-family property......... 7,952 -- 1,421 -- Leases and installment........ 21,162 -- 997 -- --------- ------- --------- ------- Total nonaccrual loans.......... 52,908 12,098 30,181 19,928 --------- ------- --------- ------- Other real estate owned: One to four family............ 8,725 3,047 6,639 3,508 Commercial property........... 2,753 -- 1,200 -- Multi-family property......... 309 -- 867 -- --------- ------- --------- ------- Total other real estate owned... 11,787 3,047 8,706 3,508 Loans with modified terms: One to four family............ -- -- 800 -- Commercial property........... -- -- 456 -- Multi-family property......... -- -- -- -- --------- ------- --------- ------- Total loans with modified terms. -- -- 1,256 -- Total non performing assets..... $ 64,695 $15,145 $ 40,143 $23,436 ========= ======= ========= ======= Total loans and OREO............ 1,898,585 28,867 2,012,704 40,955 Total NPA's as a percentage of Loans and OREO................. 3.41% 52.46% 1.99% 57.22%
There are no loans over 90 days past due accruing interest at September 30, 1997 or December 31, 1996. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease 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 and lease losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan and lease 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. Future additions to the allowance for loan and lease losses may be necessary. 26 INFLATION The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles, 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 loans and a borrower's ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates, borrowers are more likely to refinance their existing loans which may negatively impact the Company's investments. REGULATORY MATTERS SPB's Capital Ratios The following table presents SPB's actual capital ratios and the corresponding minimum and well capitalized capital ratio requirements under the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier 1 Capital and (iii) the FDIC Leverage Ratio as of September 30, 1997.
WELL MINIMUM CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT -------------- -------------- ------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- ------- ----- (IN THOUSANDS EXCEPT FOR RATIO DATA) California Leverage Limitation................. $133,937 10.75% $ 62,321 5.00% $ -- -- % Risk-based Capital.......... 192,063 11.99% 128,135 8.00% 160,169 10.00% Risk-based Tier 1 Capital... 137,908 8.61% 64,068 4.00% 96,101 6.00% FDIC Leverage Ratio......... 137,908 9.36% 58,935 4.00% 73,668 5.00%
On September 30, 1996 SPB entered into a Memorandum of Understanding ("MOU") with the FDIC and the California Department of Financial Institutions ("CDFI"). This agreement requires that SPB shall (i) have and retain qualified management, (ii) adopt and implement comprehensive risk management policies, programs and systems, (iii) take all reasonable and good faith steps to ensure future compliance with all applicable laws and regulations, (iv) develop a credit review program, (v) update the lending, investments and audit policies, and (vi) provide quarterly progress reports to the FDIC and the Department of Corporations. On October 30, 1997, SPB announced that the MOU entered into in September 1996 has been terminated as a result of the recent concurrent examinations by the FDIC and CDFI and their joint conclusion that the terms of the agreement have been satisfactorily met and the improvement in SPB's operations no longer warranted the MOU. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirements result from the need for the Company to fund mortgage loans originated 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. 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 27 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 $70 million principal amount of Remarketed Par Securities and $220 million principal amount of Senior Notes due 2004 and 2007 (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 SPB, public offerings of capital stock of ICII and SPFC, the issuance of the Notes and Remarketed Par Securities, the issuance of convertible securities, 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 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. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $805 million in financing at September 30, 1997. 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. SPB obtains the necessary liquidity to fund its own lending activities through deposits, warehouse lines of credit and, if necessary through borrowings from the FHLB. At September 30, 1997 and December 31, 1996, SPB had available lines of credit from the FHLB equal to $55.8 million and $212.7 million, respectively. The FHLB advances are secured by the investment in stock of FHLB and certain real estate loans with a carrying value of $127.8 million and $228.5 million at September 30, 1997 and December 31, 1996, respectively. The highest FHLB advance outstanding during the quarter ending September 30, 1997 was $20.0 million, with an average outstanding balance of $5.8 million. There were $20.0 million in outstanding balances of FHLB advances on September 30, 1997. Since December 31, 1991, SPB 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. During the three months ended September 30, 1997, SPB obtained a $200.0 million line of credit from Morgan Stanley in order to fund loan originations and to provide SPB with additional liquidity in order to explore potential acquisition and investment opportunities. At September 30, 1997, SPB's outstanding balance of the Morgan Stanley warehouse line of credit was $80.0 million. As of September 30, 1997, SPB's deposit portfolio which consists primarily of certificate accounts increased approximately $100 million to $1.2 billion from $1.1 billion at December 31, 1996. SPB has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Additionally, SPB maintains liquidity in the form of cash and interest bearing deposits with financial institutions. SPB tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPB allow SPB to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of the Company's lending activities. During the second quarter, Imperial Credit Capital Trust I, a subsidiary of the Company organized for the sole purpose of issuing trust securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002. These securities can be redeemed at par upon their maturity or remarketed as 30-year capital instruments at the Company's option. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering will be used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. 28 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 SPB 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 addition, in order to gain access to the secondary market for loans and leases, the Company has relied to some extent 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 believes that the liquidity available at ICII and its subsidiaries will provide the capacity to adequately fund the Company's lending activities. Under applicable regulations, dividends and loans from SPB to ICII and its other subsidiaries are subject to various limitations. Since December 31, 1992, ICII's liquidity needs have included $51 million to make capital contributions to SPB. The combination of cash from operations, including servicing sales, and the net proceeds received by the Company from its Remarketed Par Securities and Senior Note offerings have allowed the Company to meet its required liquidity needs for 1996 and 1997. These available sources, in addition to the proceeds received from the Company's secondary stock offering in April, 1996 and the completion of the Company's offering of SPFC stock in June 1996, have allowed the Company to meet its capital resource needs for at least the next 12 months. 29 PART II OTHER INFORMATION ITEM 6 EXHIBIT -11 IMPERIAL CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS NINE MONTHS QUARTER ENDED QUARTER ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Income before extraordinary items.... $14,589 $ 9,433 $39,694 $61,090 ------- ------- ------- ------- Extraordinary item Early extinguishment of debt, net of income taxes.... -- -- (3,995) -- ------- ------- ------- ------- Net income.............. $14,589 $ 9,433 $35,699 $61,090 ------- ------- ------- ------- Average number of shares outstanding............ 38,721 37,895 38,550 35,385 Net effect of dilutive stock options-based on treasury stock method using average market price.................. 2,163 2,487 2,253 2,690 ------- ------- ------- ------- Total average shares.... 40,884 40,382 40,803 38,075 ======= ======= ======= ======= PRIMARY EARNINGS PER SHARE: Income before extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................. -- -- (0.10) -- ------- ------- ------- ------- Net income per share.... $ 0.36 $ 0.23 $ 0.87 $ 1.60 ======= ======= ======= ======= FULLY DILUTED EARNINGS PER SHARE: Income before extraordi- nary item.............. $14,589 $ 9,433 $39,694 $61,090 ------- ------- ------- ------- Extraordinary item-Loss on early extinguishment of debt, net of income taxes.................. -- -- (3,995) -- ------- ------- ------- ------- Net Income.............. $14,589 $ 9,433 $35,699 $61,090 ------- ------- ------- ------- Average number of shares outstanding............ 38,721 37,895 38,550 35,385 Net effect of dilutive stock options-based on treasury stock method using ending market price.................. 2,373 2,675 2,483 2,908 ------- ------- ------- ------- Total average shares.... 41,094 40,570 41,033 38,293 ======= ======= ======= ======= FULLY DILUTED EARNINGS PER SHARE: Income before extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60 Extraordinary item Loss on early extinguishment of debt, net of income taxes.................. -- -- (0.10) -- ------- ------- ------- ------- Net Income.............. $ 0.36 $ 0.23 $ 0.87 $ 1.60 ======= ======= ======= =======
30 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: November 14, 1997 By: /s/ Kevin Villani ------------------------- Kevin Villani Executive Vice President and CFO 31 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 55,104 191,406 0 4,473 32,355 0 0 1,868,771 32,044 2,432,604 1,244,409 483,756 122,311 289,803 0 0 147,381 124,676 2,432,604 150,469 16,247 2,141 168,857 54,155 95,145 73,712 18,165 (403) 94,843 78,051 39,694 (3,995) 0 35,699 .87 .87 4.45 65,006 0 0 0 19,999 (12,671) 654 32,044 32,044 0 0
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