-----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, IAekbGDoSx4Gysh/RxTwrQNX4sPjFX2EU++w+c4QYdOhqIk6pwK2jBpXZZvVoAxG qdI4Z3WNep2I6T7/Bm5IMQ== 0000944209-97-000390.txt : 19970328 0000944209-97-000390.hdr.sgml : 19970328 ACCESSION NUMBER: 0000944209-97-000390 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950930 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000883811 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954054791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19861 FILM NUMBER: 97565595 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): September 30, 1995 IMPERIAL CREDIT INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) California (State or Other Jurisdiction of Incorporation) 0-19861 95-4054791 (Commission File Number) (I.R.S. Employer Identification No.) 23550 Hawthorne Boulevard, Building One, Suite 110 Torrance, California 90505 (Address of Principal Executive Offices, Including Zip Code) (310) 373-1704 (Registrant's Telephone Number, Including Area Code) Item 2. Acquisition or Disposition of Assets. - ------ ------------------------------------ On September 30, 1995, the Company acquired from Coast Federal Savings Bank, Federal Savings Bank, all of the outstanding capital stock of CoastFed Business Credit Corporation ("CBCC"), a financial services company engaged primarily in the origination and servicing of business loans. The purchase price which included its loan receivables was $150,000,000. The acquisition was recorded using the purchase method of accounting. Under this method of accounting, the purchase price was allocated to the respective assets acquired with a fair value of $139,000,000 and liabilities assumed with a fair value of $5,000,000 at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $16,000,000. Concurrently with the closing of the transaction described above, CBCC was merged with and into Southern Pacific Thrift & Loan Association, the Company's wholly-owned thrift subsidiary ("Southern Pacific"). Upon consummation of the merger, CBCC was renamed Coast Business Credit ("CBC") and became an operating division of Southern Pacific. CBC's headquarters and operations center are located in Los Angeles, California. Item 7. Financial Statements and Exhibits. - ------ --------------------------------- (a) Financial statements of business acquired: The financial statements for CoastFed Business Credit Corporation are provided herewith. (b) Pro forma financial information: The pro forma consolidated income statement for the year ended December 31, 1995 is provided herewith. -1- 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, hereunto duly authorized. IMPERIAL CREDIT INDUSTRIES, INC. Date: March 27, 1997 By: /s/ H. Wayne Snavely ---------------------------- Name: H. Wayne Snavely Title: President, Chief Executive Officer and Chairman -2- KPMG COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Financial Statements December 1994 and 1993 (With Independent Auditors' Report Thereon) -3- [LETTERHEAD OF KPMG Peat Marwick LLP] Independent Auditors' Report ---------------------------- The Board of Directors CoastFed Business Credit Corporation: We have audited the accompanying statement of financial condition of CoastFed Business Credit Corporation (a wholly owned subsidiary of Coast Federal Bank, Federal Savings Bank) as of December 31, 1994 and 1993, and the related statements of operations, stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CoastFed Business Credit Corporation as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 27, 1995 -4- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statement of Financial Condition
December 31, ------------------------------ 1994 1993 ------------ ------------ Assets - ------ Cash $ 5,180 $ 1,779,534 Loans receivable, net 139,383,786 104,287,129 Accrued interest receivable and other assets 14,916 12,030 Depreciable assets 190,027 132,449 Goodwill, net - 166,427 Deferred income taxes receivable from parent 1,589,433 1,332,633 ------------ ------------ Total assets $141,183,342 $107,710,202 ============ ============ Liabilities and Stockholder's Equity - ------------------------------------ Due to parent $124,719,848 $ 91,723,449 Accrued expenses 458,589 425,660 Other liabilities 4,004,905 3,561,093 ------------ ------------ Total liabilities 129,183,342 95,710,202 ------------ ------------ Commitments and contingent liabilities Stockholder's equity Common stock, without par value. Authorized 1,000,000 shares; issued and outstanding 25,000 shares 12,000,000 12,000,000 Retained earnings - - ------------ ------------ Total stockholder's equity 12,000,000 12,000,000 ------------ ------------ Total liabilities and stockholder's equity $141,183,342 $107,710,202 ============ ============
See accompanying notes to financial statements. -5- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statement of Operations
Year Ended December 31, ----------------------------- 1994 1993 ----------- ----------- Interest income $15,219,690 $13,439,561 Interest expense paid to parent 5,106,253 3,760,899 ----------- ----------- Net interest income 10,113,437 9,678,662 Provision for loan losses 600,000 600,000 ----------- ----------- Net interest income after position for loan losses 9,513,437 9,078,662 ----------- ----------- Noninterest income 576,620 108,459 ----------- ----------- Noninterest expense: Compensation and benefits 1,807,743 1,777,410 Other general and administrative 523,040 473,117 Amortization of goodwill 166,427 166,427 ----------- ----------- 2,497,210 2,416,954 ----------- ----------- Earnings before income tax expense 7,592,847 6,770,167 Income tax expense 3,252,924 2,881,759 ----------- ----------- Net earnings $ 4,339,923 $ 3,888,408 =========== ===========
See accompanying notes to financial statements. -6- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statement of Stockholder's Equity
Total Capital Retained stockholder's stock earnings equity ----------- ----------- ------------- Balance, December 31, 1992 $ 9,200,000 $ - $ 9,200,000 Net earnings for the year ended December 31, 1993 - 3,888,408 3,888,408 Cash dividends - (3,888,408) (3,888,408) Additional paid-in capital 2,800,000 - 2,800,000 ----------- ----------- ----------- Balance, December 31, 1993 12,000,000 - 12,000,000 Net earnings for the year ended December 31, 1994 - 4,339,923 4,339,923 Cash dividends - (4,339,923) (4,339,923) ----------- ----------- ----------- Balance, December 31, 1994 $12,000,000 $ - $12,000,000 =========== =========== ===========
See accompanying notes to financial statements. -7- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statement of Cash Flows
Year Ended December 31, ------------------------------ 1994 1993 ------------ ------------ Cash flows from operating activities: Net earnings $ 4,339,923 $ 3,888,408 ------------ ------------ Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 600,000 600,000 Net increase (decrease) in other liabilities 443,812 (249,441) Amortization of goodwill 166,427 166,427 Depreciation 44,247 37,209 Net increase in accrued expenses 32,929 84,144 Net (increase) decrease in accrued interest receivable and other assets (2,886) 29,066 Net increase in deferred income taxes receivable from parent (256,800) (1,332,633) ------------ ------------ Total adjustments 1,027,729 (665,228) ------------ ------------ Net cash provided by operating activities 5,367,652 3,223,180 ------------ ------------ Cash flows from investing activities: Net (increase) decrease in loans receivable (35,696,657) 18,574,949 Additions to depreciable assets (101,825) (12,509) ------------ ------------ Net cash provided (used) by investing activities (35,798,482) 18,562,440 ------------ ------------ Cash flows from financing activities: Increase (decrease) in due to parent 32,996,399 (23,702,760) Cash dividends paid (4,339,923) (3,888,408) Additional paid-in capital - 2,800,000 ------------ ------------ Net cash provided (used) by financing activities 28,656,476 (24,791,168) ------------ ------------ Net decrease in cash (1,774,354) (3,005,548) Cash at beginning of year 1,779,534 4,785,082 ------------ ------------ Cash at end of year $ 5,180 $ 1,779,534 ============ ============
See accompanying notes to financial statements. -8- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements (1) Summary of Significant Accounting Policies ------------------------------------------ General ------- The financial statements of CoastFed Business Credit Corporation ("CBCC"), a wholly owned subsidiary of Coast Federal Bank, Federal Savings Bank ("Coast"), have been prepared in conformity with generally accepted accounting principles. 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 date of the statement of financial condition, and revenues and expenses for the period reported in the accompanying statement of operations. Actual results could differ from those estimates. Certain reclassifications have been made to the financial statements for 1993 to conform to the 1994 presentation. Allowance for Loan Losses ------------------------- Valuation allowances for estimated losses on loans are provided to absorb known and inherent risks in the loan portfolio. The allowance is based on management's evaluation of many factors, including asset classifications, economic trends, industry experience, industry and geographic concentrations, historical loss experience, the borrower's ability to repay, probability of foreclosure and collateral values assuming orderly liquidations. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Management believes that the allowance for losses on loans is adequate. Management uses available information to recognize losses on loans; future additions to the allowance may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination of Coast, periodically review CBCC's allowance for loan losses. Such agencies may require CBCC to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Interest Income on Loans ------------------------ Interest income on loans is accrued as it is earned. Interest receivable on loans deemed uncollectible is excluded from interest income. Goodwill -------- In 1990, CBCC reevaluated the estimated useful life of its goodwill and, as a result, revised the amortization period to five years from the 30-year period previously utilized. The effect of this change in estimate was to increase the amortization of goodwill to approximately $166,000 annually. At December 31, 1994, CBCC had no remaining goodwill. -9- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued Loan Origination Fees - --------------------- Virtually all costs to originate loans are reimbursed by the borrowers. Loan origination fees, net of costs, are deferred and amortized into interest income utilizing the interest method over the lives of the related loans. Dividends - --------- CBCC declares a dividend equivalent to its net earnings each quarter. Depreciation and Amortization - ----------------------------- Depreciation is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the assets or the term of the lease. Change in Accounting Principles - ------------------------------- Loan Impairment - Effective January 1, 1994, CBCC adopted Statement of Financial Accounting Standards No. 114 entitled Accounting by Creditors for Impairment of a Loan ("SFAS 114") which was subsequently amended by SFAS No. 118 entitled Accounting for Creditors for Impairment of a Loan-Income Recognition and Disclosure ("SFAS 118"). Impairment is present when it is probable that a creditor will be unable to collect all amounts contractually due under a loan agreement. Loans are evaluated for impairment as part of CBCC's normal internal asset review process. When a loan is determined to be impaired, a writedown is taken or an allowance is established which is based upon the difference between CBCC's investment in the loan and one of the following methodologies as prescribed by SFAS 114: (i) the present value of expected cash flows from the loan discounted at the loan's effective interest rate, (ii) an observable market price, or (iii) the fair value of the loan's underlying collateral. At December 31, 1994, CBCC had impaired loans of $1.8 million valued utilizing method (iii) above. At December 31, 1994, the aggregate impairment on loans for which an impairment allowance had been established or charge-off taken was $1.3 million. During the year ended December 31, 1994, CBCC's average investment on impaired loans was $2.1 million and no income was recorded on loans identified as being impaired. Disclosures about Fair Value of Financial Instruments - ----------------------------------------------------- In December 1991, the FASB issued Statement of Financial Standards No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS 107") which for certain disclosures was subsequently amended by Statement of Financial Standards No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments ("SFAS 119"). This statement became effective for financial statements issued for fiscal years ended after December 15, 1992, except for entities (such as CBCC) with less than $150 million in total asset in the then current financial statements. For those entities, the effective date is for fiscal years ending after December 15, 1995. SFAS 107 -10- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued will require the Company to disclose, in the accompanying notes, the fair value of financial instruments for which it is practicable to estimate that value. SFAS 107 will also require the Company to disclose the methods and significant assumptions used to estimate the fair value of financial instruments. (2) Loans Receivable, Net --------------------- The following is a summary of loans receivable at the dates indicated.
December 31, ------------------------------ 1994 1993 ------------ ------------ Loans secured by: Accounts receivable $ 90,197,824 $ 64,210,768 Inventory 16,073,323 14,714,361 Machinery, equipment and real estate 36,942,480 28,591,841 ------------ ------------ 143,213,627 107,516,970 Valuation allowance (3,829,841) (3,229,841) ------------ ------------ $139,383,786 $104,287,129 ============ ============
The weighted average yield on loans receivable was 11.83% and 11.23% at December 31, 1994 and 1993, respectively. Pursuant to provisions contained within the loan agreements, CBCC adds interest earned to the respective loan balance of loans secured by accounts receivable, inventory and machinery and equipment. CBCC provides an allowance for interest receivable deemed uncollectible. The provision is accounted for as a reduction of interest income, and the allowance is recorded as an offset to the respective loans receivable. The table shown below reflects the changes in the valuation allowance on loans receivable for the years indicated.
Year Ended December 31, ---------------------------- 1994 1993 ---------- ---------- Balance at beginning of period $3,229,841 $2,629,841 Additions charged to operations 600,000 600,000 ---------- ---------- Balance at end of period $3,829,841 $3,229,841 ========== ==========
CBCC had commitments to make additional fundings on loans receivable to existing borrowers totaling approximately $116 million and $140 million at December 31, 1994 and 1993, respectively, however, each additional funding is contingent upon the borrower maintaining sufficient collateral. -11- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued The loan portfolio is concentrated in California. There is no concentration of loans to borrowers in a specific industry. (3) Depreciable Assets ------------------ The following is a summary of depreciable assets at the dates indicated.
December 31, ----------------------- 1994 1993 -------- -------- Furniture, fixtures and equipment $491,640 $389,816 Leasehold improvements 44,038 44,038 -------- -------- 535,678 433,854 Accumulated depreciation (345,651) (301,405) -------- -------- $190,027 $132,449 ======== ========
CBCC leases certain premises and equipment under operating leases that expire in the year 2000. Lease expense for office facilities amounted to $258,751 and $261,107 for the years ended December 31, 1994 and 1993, respectively. The total annual minimum lease commitment under noncancelable operating leases at December 31, 1994, was as follows for the years indicated. Year ending December 31: 1995 $145,860 1996 145,860 1997 145,860 -------- $437,580 ========
(4) Due to Parent Coast provides funds to CBCC to meet requests for loans to borrowers and any other liquidity needs. Coast charges interest on the advances on a monthly basis at the rate of the Bank of America prime lending rate less 2%. The advances from Coast are made on a continuing basis consistent with an agreement between Coast and CBCC. -12- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued (5) Income Taxes ------------ CBCC is included in the consolidated Federal income tax return and combined California franchise tax return of Coast Savings Financial, Inc., the parent company of Coast. During 1994, CBCC accounted for its net deferred tax assets and liabilities on a separate-company basis. The balance of CBCC's net deferred tax asset at December 31, 1994, is approximately $1.6 million and is comprised entirely of temporary differences related to the excess of the allowance for loan losses for financial reporting purposes over such allowance for tax purposes. There was no valuation allowance with respect to the deferred tax asset at December 31, 1994, and management believes that it is more likely than not that the entirety of the deferred tax asset will be realized. Current and deferred income taxes have been computed by applying the provisions of SFAS 109 as if CBCC were a separate taxpayer. Income tax expense consists of the following components for the years ended December 31, 1994 and 1993.
Federal State Total ---------- ---------- ---------- 1994: Current $2,877,974 $ 631,750 $3,509,724 Deferred (210,576) (46,224) (256,800) ---------- ---------- ---------- $2,667,398 $ 585,526 $3,252,924 ========== ========== ========== 1993: Current $2,295,037 $ 834,282 $3,129,319 Deferred (181,560) (66,000) (247,560) ---------- ---------- ---------- $2,113,477 $ 768,282 $2,881,759 ========== ========== ==========
The deferred tax expense is primarily due to the provision for loan losses. For financial reporting purposes, CBCC is on the allowance method for loan losses. For income tax purposes, loan losses are deducted when charged off. A reconciliation from the expected Federal income tax rate to the effective income tax rate for the periods indicated.
Year Ended December 31, ------------------------- 1994 1993 ---------- ---------- Expected Federal income tax rate 34.0% 34.0% Increase in taxes resulting from: California franchise taxes, net of Federal tax effect 7.9 7.5 Amortization of goodwill 0.9 1.1 ---- ---- Effective income tax rate 42.8% 42.6% ==== ====
-13- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued (6) Pension Plan ------------ CBCC's employees' pension plan benefits are provided by the Coast's pension plan, which covers substantially all employees of Coast and its wholly owned subsidiaries. Benefits are based on an employee's years of service and average earnings in the five highest consecutive years during the last ten years of employment and are reduced by a specified percentage of the employee's primary Social Security benefits. No expense has been allocated to CBCC by Coast for the years ended December 31, 1994 and 1993. (7) Contingent Liabilities ---------------------- CBCC is involved in litigation arising in the normal course of business. Management does not believe such litigation will have a material adverse effect on CBCC. -14- KPMG COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Financial Statements December 31, 1993 and 1992 (With Independent Auditors' Report Thereon) -15- [LETTERHEAD OF KPMG Peat Marwick LLP] INDEPENDENT AUDITORS' REPORT The Board of Directors CoastFed Business Credit Corporation: We have audited the accompanying statements of financial condition of CoastFed Business Credit Corporation (a wholly owned subsidiary of Coast Federal Bank, Federal Savings Bank) as of December 31, 1993 and 1992 and the related statements of earnings, stockholder's equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CoastFed Business Credit Corporation as of December 31, 1993 and 1992 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in note 9 to the financial statements, the 1993 and 1992 financial statements have been restated to reflect the recognition of certain deferred income. /s/ KPMG Peat Marwick LLP February 18, 1994, except for note 9 to the financial statements, as to which the date is January 27, 1995. -16- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statements of Financial Condition December 31, 1993 and 1992
1993 1992 ------------ ----------- (Restated) Assets Cash $ 1,779,534 4,785,082 Loans receivable, net 104,287,129 123,462,078 Accrued interest receivable and other assets 12,030 41,096 Depreciable assets 132,449 157,149 Goodwill, net 166,427 332,854 Deferred income taxes receivable from parent 1,332,633 -- ------------ ----------- Total assets $107,710,202 128,778,259 ============ =========== Liabilities and Stockholder's Equity Due to parent $ 91,723,449 115,426,209 Accrued expenses 425,660 341,516 Other liabilities 3,561,093 3,810,534 ------------ ----------- Total liabilities 95,710,202 119,578,259 ------------ ----------- Commitments and contingent liabilities Stockholder's equity Common stock, without par value, Authorized 1,000,000 shares; issued and outstanding 25,000 shares 12,000,000 9,200,000 Retained earnings -- -- ------------ ----------- Total stockholder's equity 12,000,000 9,200,000 ------------ ----------- Total liabilities and stockholder's equity $107,710,202 128,778,259 ============ ===========
See accompanying notes to financial statements. -17- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statements of Earnings Years ended December 31, 1993 and 1992
1993 1992 ----------- ---------- (Restated) Interest income $13,439,561 13,835,268 Interest expense paid to parent 3,760,899 4,640,749 ----------- ---------- Net interest income 9,678,662 9,194,519 Provision for loan loses 600,000 600,000 ----------- ---------- Net interest income after provision for loan losses 9,078,662 8,594,519 ----------- ---------- Noninterest income 108,459 210,859 ----------- ---------- Other expenses: Compensation and benefits 1,594,457 1,381,326 General and administrative expenses 496,500 497,673 Other 325,997 322,295 ----------- ---------- 2,416,954 2,201,294 ----------- ---------- Earnings before income tax expense 6,770,167 6,604,084 Income tax expense 2,881,759 2,812,307 ----------- ---------- Net earnings $ 3,888,408 3,791,777 =========== ==========
See accompanying notes to financial statements. -18- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statements of Stockholder's Equity Years ended December 31, 1993 and 1992
Total Capital Retained stockholder's stock earnings equity ----------- ---------- ------------- Balance, December 31, 1991, as previously reported $12,000,000 -- 12,000,000 Restatement of net earnings -- 834,019 834,019 Restatement of cash dividends -- (834,019) (834,019) ----------- ---------- ---------- Balance, December 31, 1991, as restated 12,000,000 -- 12,000,000 Net earnings for the year ended December 31, 1992 -- 3,791,777 3,791,777 Cash dividends -- (3,791,777) (3,791,777) Distribution of capital to parent (2,800,000) -- (2,800,000) ----------- ---------- ---------- Balance, December 31, 1992 9,200,000 -- 9,200,000 Net earnings for the year ended December 31, 1993 -- 3,888,408 3,888,408 Cash dividends -- (3,888,408) (3,888,408) Additional paid-in capital 2,800,000 -- 2,800,000 ----------- ---------- ---------- Balance, December 31, 1993 $12,000,000 -- 12,000,000 =========== ========== ==========
See accompanying notes to financial statements. -19- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Statements of Cash Flows Years ended December 31, 1993 and 1992
1993 1992 ----------- ---------- (Restated) Cash flows from operating activities: Net earnings $ 3,888,408 3,791,777 ---------- ---------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 37,209 36,697 Amortization of goodwill 166,427 166,428 Provision for loan losses 600,000 600,000 Gain on sale of depreciable assets -- (8,625) Net decrease (increase) in accrued interest receivable and other assets 29,066 (16,410) Net increase in deferred income taxes receivable from parent (1,332,633) -- Net increase (decrease) in accrued expenses 84,144 (42,163) Net (decrease) increase in other liabilities (249,441) 560,254 ---------- ---------- Total adjustments (665,228) 1,296,181 ---------- ---------- Net cash provided by operating activities 3,223,180 5,087,958 ---------- ---------- Cash flows from investing activities: Proceeds from sale of real estate -- 1,192,385 Net decrease (increase) in loans receivable 18,574,949 (19,885,121) Proceeds from sale of real estate held for sale -- 1,399,262 Additions to depreciable assets (12,509) (5,590) Proceeds from sale of depreciable assets -- 8,625 ---------- ---------- Net cash provided (used) by investing activities 18,562,440 (17,290,439) ---------- ---------- Cash flows from financing activities: (Decrease) increase in due to parent (23,702,760) 17,671,438 Cash dividends paid (3,888,408) (3,791,777) Capital distributions -- (2,800,000) Additional paid-in capital 2,800,000 -- ---------- ---------- Net cash (used) provided by financing activities (24,791,168) 11,079,661 ---------- ---------- Net decrease in cash (3,005,548) (1,122,820) Cash at beginning of year 4,785,082 5,907,902 ---------- ---------- Cash at end of year $ 1,779,534 4,785,082 ========== ==========
See accompanying notes to financial statements. -20- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements December 31, 1993 and 1992 (1) Summary of Significant Accounting Policies - ----------------------------------------------- General ------- The financial statements of CoastFed Business Credit Corporation (CBCC), a wholly owned subsidiary of Coast Federal Bank, Federal Savings Bank (Coast), have been prepared in conformity with generally accepted accounting principles. 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 date of the statement of financial condition and revenues and expenses for the period reported in the accompanying statement of earnings. Actual results could differ from those estimates. Allowance for Loan Losses ------------------------- Valuation allowances for estimated losses on loans are provided to absorb known and inherent risks in the loan portfolio. The allowance is based on management's evaluation of many factors, including current economic trends, industry experience, historical loss experience, the borrower's ability to repay, probability of foreclosure and estimated collateral values assuming orderly liquidations. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Management believes that the allowance for losses on loans is adequate. Management uses available information to recognize losses on loans; future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination of Coast, periodically review CBCC's allowance for losses on loans. Such agencies may require CBCC to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Interest Income on Loans ------------------------ Interest income on loans is accrued as it is earned. Interest receivable on loans deemed uncollectible is excluded from interest income. Goodwill -------- In 1990, CBCC reevaluated the estimated useful life of its goodwill and, as a result, revised the amortization period to 5 years from the 30-year period previously utilized. The effect of this change in estimate was to increase the amortization of goodwill to approximately $166,000 annually. Loan Origination Fees --------------------- Virtually all costs to originate loans are reimbursed by the borrower. Loan origination fees are deferred and amortized into interest income using a method that approximates the interest method. -21- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued Dividends - --------- CBCC remits net earnings to its parent on a quarterly basis. Depreciation and Amortization - ----------------------------- Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the assets or the term of the lease. Change in Accounting Principles - ------------------------------- Income Taxes - On February 10, 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 109, entitled "Accounting for Income Taxes" (SFAS 109), which superseded Statement of Financial Accounting Standards No. 96 of the same title (SFAS 96). Under SFAS 109, deferred tax liabilities are recognized on all taxable temporary differences (reversing differences where tax deductions initially exceed financial statement expense, or income is reported for financial statement purposes prior to being reported for tax purposes). In addition, deferred tax assets are recognized on all deductible temporary differences (differences where tax deductions initially are less than financial statement expense, or income is reported for tax purposes prior to being reported for financial statement purposes). In addition, deferred tax assets are recognized on all deductible temporary differences (reversing differences where financial statement expense initially exceeds tax deductions, or income is reported for tax purposes prior to being reported for financial statement purposes) and operating loss and tax credit carryforwards. Valuation allowances are established to reduce deferred tax assets if it is determined to be "more likely than not" that all or some portion of the potential deferred tax assets will not be realized. CBCC adopted SFAS 109 as of January 1, 1992. The adoption of SFAS 109 did not impact earnings for 1992, and there was no cumulative effect of a change in accounting principle. Loan Impairment - During 1993, the FASB issued Statement of Financial Accounting Standards No. 114, entitled "Accounting by Creditors for Impairment of a Loan" (SFAS 114), which will become effective for financial statements for fiscal years beginning after December 15, 1994, with earlier application encouraged, and requiring that the initial application be as of the beginning of the reporting company's fiscal year. SFAS 114 will significantly alter the prescribed methodology for determining the amount by which a loan is impaired, the required manner for reporting such impairment and the classification of such assets. Management does not believe that there will be an adverse material impact from the adoption of SFAS 114; however, it has not yet determined when SFAS 114 will be implemented. -22- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued (2) Loans Receivable, Net --------------------- The following is a summary of loans receivable:
1993 1992 ------------ ----------- Loans secured by: Accounts receivable $ 64,210,768 71,745,245 Inventory 14,714,361 21,055,216 Machinery, equipment and real estate 28,591,841 33,291,458 ------------ ----------- 107,516,970 126,091,919 Less allowance for loan losses 3,229,841 2,629,841 ------------ ----------- Loans receivable, net $104,287,129 123,462,078 ============ ===========
The weighted average yield on loans receivable was 11.02% and 11.07% at December 31, 1993 and 1992, respectively. As allowed by the loan agreements, CBCC adds interest receivable to the loan balance for loans secured by accounts receivable, inventory and machinery and equipment. CBCC provides an allowance for interest receivable deemed uncollectible. The provision is accounted for as a reduction of interest income, and the allowance is offset against loans receivable. The table shown below reflects the changes in the valuation allowance on loans receivable for the years indicated:
1993 1992 ------------ ----------- Balance at beginning of period $ 2,629,841 2,782,150 Additions charged to operations 600,000 600,000 Losses charged -- (752,309) ------------ ----------- Balance at end of period $ 3,229,841 2,629,841 ============ ===========
CBCC had commitments to make additional fundings on loans receivable to existing borrowers of approximately $140,000,000 and $113,000,000 at December 31, 1993 and 1992, respectively. The additional fundings are contingent upon the borrower maintaining sufficient collateral. CBCC, through a commercial bank, processes letters of credit guaranteeing purchases or commitments of its borrowers. Since CBCC no longer has a letter of credit line, all requests to process letters of credit must be secured in advance by cash. Requests to process letters of credit are secured by collateral pledged by the borrowers. Advances outstanding at December 31, 1993 and 1992 totaled $0 and $155,391, respectively. The loan portfolio is concentrated in Southern California. There is no concentration of loans to borrowers in a specific industry. -23- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued (3) Depreciable Assets ------------------ The following is a summary of depreciable assets, which are recorded at cost:
1993 1992 -------- ------- Furniture, fixtures and equipment $389,816 377,307 Leasehold improvements 44,038 44,038 -------- ------- 433,854 421,345 Less accumulated depreciation 301,405 264,196 -------- ------- Depreciable assets $132,449 157,149 ======== =======
CBCC leases certain premises and equipment under operating leases that expire in 2000. Lease expense for office facilities amounted to $261,107 and $257,974 for the years ended December 31, 1993 and 1992, respectively. The total annual minimum lease commitment under noncancelable operating leases at December 31, 1993 was as follows for the years indicated: Year ending December 31: 1994 $257,400 1995 145,860 1996 145,860 -------- $549,120 ========
(4) Due to Parent ------------- Coast provides funds to CBCC to meet requests for loans to borrowers and any other liquidity needs. Coast charges interest on the advances on a monthly basis at the rate of Bank of America's prime lending rate less 2%. The advances from Coast are made on a continuing basis consistent with an agreement between Coast and CBCC. (5) Income Taxes ------------ CBCC is included in the consolidated Federal income tax return and combined California franchise tax return of Coast Savings Financial, Inc., the parent company of Coast. During 1993, CBCC accounted for its net deferred tax assets and liabilities on a separate-company basis. The balance of CBCC's net deferred tax asset at December 31, 1993 is approximately $1.3 million and is comprised entirely of temporary differences related to the excess of the allowance for loan losses for financial reporting purposes over the allowance for tax purposes. There was no valuation allowance at December 13, 1993, and management believes that it is more likely than not that all of the deferred tax asset will be realized. -24- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued Current and deferred income taxes have been computed by applying the provisions of SFAS 109 as if CBCC were a separate taxpayer. In 1992 and prior years, CBCC settled its tax liability, including its net deferred tax assets and liabilities, with Coast through an intercompany account at the end of each quarter. The amount of CBCC's net deferred tax asset at December 31, 1992 would have been approximately $1.0 million if it had not been settled with the parent. Income tax expense consists of the following components:
Federal State Total ---------- ------- --------- (Restated) 1993: Current $2,322,961 806,358 3,129,319 Deferred (181,560) (66,000) (247,560) ---------- ------- --------- $2,141,401 740,358 2,881,759 ========== ======= ========= 1992: Current $2,043,064 706,400 2,749,464 Deferred 46,089 16,754 62,843 ---------- ------- --------- $2,089,153 723,154 2,812,307 ========== ======= =========
The deferred tax expense is primarily due to the provision for loan losses. For financial reporting purposes, CBCC is on the reserve method for loan losses. For income tax purposes, loan losses are deducted when charged off. A reconciliation from the expected Federal income tax rate to the effective income tax rate follows:
1993 1992 ---- ---- Expected Federal income tax rate 34.0% 34.0% Increase in taxes resulting from: California franchise taxes, net of Federal tax effect 7.5 7.5 Goodwill 1.0 1.0 ---- ---- Effective income tax rate 42.5% 42.5% ==== ====
(6) Pension Plan - ----------------- CBCC's employees' pension plan benefits are provided by the Coast Pension Plan, which covers substantially all employees of Coast and its wholly owned subsidiaries. Benefits are based on an employee's years of service and average earnings in the five highest consecutive years during the last ten years of employment and are reduced by a specified percentage of the employee's primary Social Security benefits. No expense has been allocated to CBCC by Coast for the years ended December 31, 1993 and 1992. -25- COASTFED BUSINESS CREDIT CORPORATION (A Wholly Owned Subsidiary of Coast Federal Bank, Federal Savings Bank) Notes to Financial Statements, Continued (7) Contingent Liabilities - --------------------------- CBCC is involved in litigation arising in the normal course of business. Management does not believe such litigation will have a material adverse effect on the financial condition of CBCC. (8) Subsequent Event - --------------------- On January 17, 1994, Los Angeles, California experienced a strong earthquake, followed by a series of significant aftershocks. These tremors caused damage to property and infrastructure over a widespread area of Los Angeles and surrounding communities. CBCC's corporate offices did not sustain material damage as a result of the earthquakes. In addition, CBCC anticipates that the effect of the earthquakes on its loan portfolio will be immaterial to its financial condition or results of operations. (9) Restatement of 1993 and 1992 Financial Statements - ------------------------------------------------------ The 1993 and 1992 financial statements have been restated to reflect the recognition of certain deferred income items into net earnings. The effect of the restatements resulted in increases in 1993 and 1992 net earnings of $646,002 and $615,659, respectively. -26- (b) Pro Forma Financial Information PRO FORMA INCOME STATEMENT December 31, 1995
As Reported Pro forma Consolidated Acquisition Consolidated 12/31/95 CBC (1) 12/31/95 ------------ ----------- ------------ Revenues Gain on sale of loans $ 39,557 $ -- $ 39,557 Interest income 129,482 13,043 142,525 Interest expense (2) 95,728 4,789 100,517 -------- ------- -------- Net interest income before provision for loan losses 33,754 8,254 42,008 Provision for loan losses 5,450 300 5,750 -------- ------- -------- Net interest income after provision for loan losses 28,304 7,954 36,258 Loan servicing income 12,718 12,718 Gain on sale of servicing rights 3,578 3,578 Other income 1,151 54 1,205 -------- ------- -------- Total other income 17,447 54 17,501 -------- ------- -------- Total revenues 85,308 8,008 93,316 -------- ------- -------- Expenses Personnel expense 34,053 1,731 35,784 Amortization of PMSR's & OMSR's 3,986 3,986 Occupancy expense 3,904 192 4,096 Data processing expense 1,461 1,461 Net expense of other REO 1,912 1,912 Professional services 2,769 2,769 FDIC insurance premiums 1,137 1,137 Telephone and other communications 2,509 2,509 General and administrative expense (3) 9,448 974 10,422 -------- ------- -------- Total expenses 61,179 2,897 64,076 Income before income taxes, minority interest, and extraordinary item 24,129 5,111 29,240 Income taxes (4) 10,144 2,121 12,265 Minority interest in income (loss) of consolidated subsidiaries (208) (208) -------- ------- -------- Net income $ 14,193 $ 2,990 $ 17,183 ======== ======= ========
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PRO FORMA INCOME STATEMENT December 31, 1994 As Reported Pro Forma Consolidated Acquisition Consolidated 12/31/94 CBC(1) 12/31/94 ------------ ------------ ------------ Revenues: Gain on sale of loans $ 8,628 $ 8,628 Interest income 82,783 15,220 98,003 Interest expense (2) 61,674 4,681 66,355 ------------ ------------ ------------ Net interest income before provision for loan losses 21,109 10,540 31,649 Provision for loan losses 5,150 600 5,750 ------------ ------------ ------------ Net interest income after provision for loan losses 15,959 9,940 25,899 Loan servicing income 16,332 16,332 Gain on sale of servicing rights 30,837 30,637 Gain on sale of securities - - Other income 1,048 577 1,625 ------------ ------------ ------------ Total other income 48,217 577 48,794 ------------ ------------ ------------ Total revenues 72,804 10,517 83,321 ------------ ------------ ------------ Expenses: Personnel expense 33,477 1,808 35,285 Amortization of PMSR's & OMSR's 3,176 3,176 Occupancy expense 3,399 256 3,655 Data processing expense 1,323 1,323 Net expense of other REO 969 969 Professional services 1,528 1,528 FDIC insurance premiums 2,170 2,170 Telephone and other communications 2,820 2,820 General and administrative expense (3) 12,652 1,537 14,189 ------------ ------------ ------------ Total expenses 61,514 3,601 65,115 Income before income taxes and extraordinary item 11,290 6,916 18,206 Income taxes (4) 4,685 2,960 7,645 ------------ ------------ ------------ Income before extraordinary item 6,605 3,956 10,561 Extraordinary item-repurchase of Senior Notes, net of income taxes 919 919 ------------ ------------ ------------ Net income $ 7,524 $ 3,956 $ 11,480 ============ ============ ============
(1) Amounts reflect the acquisition by the Company of CoastFed Business Credit Corporation and the merger of its operations into the Coast Business Credit ("CBC") division of the Company's wholly-owned subsidiary, Southern Pacific Thrift and Loan Association ("SPTL") as if it had occurred on January 1 of each year presented. (2) Interest expense has been adjusted to reflect a rate more indicative of the rate to be incurred as a division of SPTL. Historical interest expense has been reduced. (3) Goodwill with respect to the acquisition is amortized over 15 years, and has been reflected as an adjustment to general and administrative expenses. (4) Assumes effective tax rates of 42.8% and 41.5% for the years ended December 31, 1994 and 1995, respectively, with respect the operations of CoastFed Business Credit Corporation. -28- -----END PRIVACY-ENHANCED MESSAGE-----