-----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, C7QPNC00k8UN1o63RwMMTTSJSjb3fh8QmNjAtZTNmIP1llbj2vh9nG62EPyQO8pR pF8eMdH86iADTQFXUA5KKg== 0000944209-98-001952.txt : 19981118 0000944209-98-001952.hdr.sgml : 19981118 ACCESSION NUMBER: 0000944209-98-001952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751720 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 7145560122 MAIL ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: BUILDING ONE SUITE 110 CITY: TORRANCE STATE: CA ZIP: 90505 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, 1998 COMMISSION FILE NUMBER: 0-19861 IMPERIAL CREDIT INDUSTRIES, INC. CALIFORNIA 95-4054791 ---------- ---------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER) IDENTIFICATION NUMBER) 23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505 (310) 791-8020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest possible date:
CLASS SHARES OUTSTANDING AT NOVEMBER 11, 1998 ----- --------------------------------------- Common Stock, no par value 36,840,276
================================================================================ IMPERIAL CREDIT INDUSTRIES, INC. FORM 10-Q TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION -------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE -------------------- ---- Consolidated Balance Sheets September 30, 1998 and December 31, 1997.................... 2 Consolidated Statements of Operations - Three and nine months ended September 30, 1998 and 1997............................................................ 3 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997.... 4 Consolidated Statement of Changes in Shareholders' Equity -- Nine months ended September 30, 1998................................................ 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 ---------------------------- ITEM 1. Legal Proceedings........................................................................ 35 ITEM 2. Changes in Securities.................................................................... 35 ITEM 3. Defaults Upon Senior Securities.......................................................... 35 ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 35 ITEM 5. Other Information........................................................................ 35 ITEM 6. Exhibit -- Statement Regarding Computation of Earnings Per Share......................... 36-37 Signatures............................................................................... 38
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, 1998 1997 ---- ---- ASSETS Cash...................................................................... $ 283,938 $ 45,379 Interest bearing deposits................................................. 14,187 103,738 Investment in Federal Home Loan Bank stock................................ 4,586 5,646 Securities held for trading, at market.................................... 70,993 120,905 Securities available for sale, at market.................................. 69,937 100,917 Loans and leases held for sale............................................ 330,897 153,469 Loans and leases held for investment, net................................. 1,310,193 1,232,912 Purchased and originated servicing rights................................. 4,677 4,731 Retained interest in loan and lease securitizations....................... 23,208 22,895 Accrued interest receivable............................................... 11,099 9,687 Premises and equipment, net............................................... 10,444 7,583 Other real estate owned, net.............................................. 10,121 10,905 Goodwill, net............................................................. 38,418 35,607 Investment in Southern Pacific Funding Corporation........................ -- 65,303 Investment in Franchise Mortgage Acceptance Company....................... 60,192 53,099 Other assets.............................................................. 31,735 47,091 Net assets of discontinued AMN operations................................. 50,687 74,522 ---------- ---------- Total assets........................................................... $2,325,312 $2,094,389 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits.................................................................. $1,711,397 $1,156,022 Borrowings from Federal Home Loan Bank.................................... 20,000 45,000 Other borrowings.......................................................... 20,544 144,841 Remarketed Par Securities................................................. 70,000 70,000 Senior Notes.............................................................. 219,847 219,813 Accrued interest payable.................................................. 22,231 21,484 Accrued income taxes payable.............................................. 5,917 76,048 Minority interest in consolidated subsidiaries............................ 3,086 3,174 Other liabilities......................................................... 26,768 34,074 ---------- ---------- Total liabilities...................................................... 2,099,790 1,770,456 ---------- ---------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding.. -- -- Common stock, no par value. Authorized 80,000,000 shares; 36,840,276 and 38,791,439 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively........................................ 128,711 147,109 Retained earnings......................................................... 94,619 174,898 Shares held in deferred executive compensation plan....................... 2,165 -- Unrealized gain on securities available for sale, net..................... 27 1,926 ---------- ---------- Total shareholders' equity............................................. 225,522 323,933 ---------- ---------- Total liabilities and shareholders' equity............................. $2,325,312 $2,094,389 ========== ==========
See accompanying notes to consolidated financial statements 2 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- REVENUE: 1998 1997 1998 1997 ---- ---- ---- ---- Gain on sale of loans and leases.............................................. $ 3,807 $20,973 $ 12,652 $ 57,736 --------- ------- --------- -------- Interest on loans and leases.................................................. 51,811 44,700 149,227 133,008 Interest on investments....................................................... 8,856 9,959 19,294 17,001 Interest on other finance activities.......................................... 1,183 750 4,844 2,142 --------- ------- --------- -------- Total interest income...................................................... 61,850 55,409 173,365 152,151 Interest on deposits.......................................................... 24,055 18,615 62,253 52,699 Interest on other borrowings.................................................. 1,100 5,880 4,494 18,548 Interest on long term debt.................................................... 7,618 7,554 22,726 18,423 --------- ------- --------- -------- Total interest expense..................................................... 32,773 32,049 89,473 89,670 --------- ------- --------- -------- Net interest income........................................................ 29,077 23,360 83,892 62,481 Provision for loan and lease losses........................................... 9,500 3,400 16,800 9,650 --------- ------- --------- -------- Net interest income after provision for loan and lease losses................. 19,577 19,960 67,092 52,831 --------- ------- --------- -------- Loan servicing income......................................................... 3,326 2,437 9,112 5,055 (Loss) gain on sale of securities............................................. (571) 16,678 (564) 20,581 Equity in net income of Southern Pacific Funding Corporation.................. -- 6,432 12,739 19,363 Equity in net income of Franchise Mortgage Acceptance Company................. 507 -- 7,093 -- Investment banking fees....................................................... 2,175 -- 13,142 -- Asset management fees......................................................... 2,207 858 4,987 3,674 Loss on impairment of securities.............................................. (120,138) -- (120,138) -- Mark to market on securities and loans held for sale.......................... (42,063) (136) (40,528) (141) Other income (expense)........................................................ 7,407 (824) 9,940 655 --------- ------- --------- -------- Total other (expense) income............................................... (147,150) 25,445 (104,217) 49,187 --------- ------- --------- -------- Total revenue................................................................. (123,766) 66,378 (24,473) 159,754 --------- ------- --------- -------- EXPENSES: Personnel expense............................................................. 17,785 14,860 45,598 34,617 Amortization of PMSR's and OMSR's............................................. 437 206 1,138 431 Occupancy expense............................................................. 1,604 1,052 4,308 2,941 Data processing expense....................................................... 500 515 1,300 1,320 Net (income) expense of other real estate owned............................... (671) 1,146 (742) 5,383 Professional services......................................................... 3,344 1,731 7,971 7,803 Telephone and other communications............................................ 1,479 636 2,637 1,611 Amortization of Goodwill...................................................... 585 657 1,901 1,862 Provision for loss on repurchase of former mortgage banking operations loans.. 4,750 -- 4,750 -- General and administrative expense............................................ 9,519 9,500 20,166 18,796 --------- ------- --------- -------- Total expenses............................................................. 39,332 30,303 89,027 74,764 --------- ------- --------- -------- (Loss) income before income taxes, minority interest, discontinued operations, and extraordinary item.......................................... (163,098) 36,075 (113,500) 84,990 Income taxes.................................................................. (64,516) 13,319 (46,155) 31,711 Minority interest in (loss) income of consolidated subsidiaries............... (1,808) 4,901 (1,574) 9,555 --------- ------- --------- -------- (Loss) income before discontinued operations.................................. (96,774) 17,855 (65,771) 43,724 Loss from discontinued operations of AMN (net of income taxes of $926,000).... (1,390) (3,266) (3,232) (4,030) Loss from discontinued operations of AMN, including provision of $3.7 million for operating income during phase-out period (less applicable income taxes of $7.5 million)............................................... (11,276) -- (11,276) -- --------- ------- --------- -------- (Loss) income before extraordinary item....................................... (109,440) 14,589 (80,279) 39,694 Extraordinary item--Loss on early extinguishment of debt, net of income taxes................................................... -- -- -- (3,995) --------- ------- --------- -------- Net (loss) income.......................................................... $(109,440) $14,589 $ (80,279) $ 35,699 ========= ======= ========= ======== BASIC INCOME PER SHARE: (Loss) income before discontinued operations.................................. $ (2.50) $ 0.46 $ (1.70) $ 1.13 Loss from discontinued operations, net of income taxes........................ (0.04) (0.08) (0.08) (0.10) Loss on disposal of AMN, net of income taxes.................................. (0.29) -- (0.29) -- Extraordinary item--Loss on early extinguishment of debt, net of income taxes................................................... -- -- -- (0.10) --------- ------- --------- -------- Net (loss) income per common share, basic..................................... $ (2.83) $ 0.38 $ (2.07) $ 0.93 ========= ======= ========= ======== DILUTED INCOME PER SHARE: (Loss) income before discontinued operations.................................. $ (2.50) $ 0.44 $ (1.70) $ 1.07 Loss from discontinued operations, net of income taxes........................ (0.04) (0.08) (0.08) (0.10) Loss on disposal of AMN, net of income taxes.................................. (0.29) -- (0.29) -- Extraordinary item--Loss on early extinguishment of debt, net of income taxes................................................... -- -- -- (0.10) --------- ------- --------- -------- Net (loss) income per common share, diluted................................... $ (2.83) $ 0.36 $ (2.07) $ 0.87 ========= ======= ========= ========
See accompanying notes to consolidated financial statements 3 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ---- ---- (IN THOUSANDS) Cash flows from operating activities: Net (loss) income from continuing operations................................................ $ (65,771) $ 43,724 Adjustments to reconcile net income (loss) from continuing operations to net cash (used in) provided by operating activities: Cash used in discontinued operations of AMN............................................... (4,861) (164,301) Provision for loan and lease losses....................................................... 16,800 9,650 Loss on impairment of securities.......................................................... 120,138 -- Mark to market on securities and loans held for sale...................................... 40,528 141 Provision for loss on repurchase of former mortgage banking operations.................... 4,750 -- Depreciation.............................................................................. 2,600 2,981 Amortization of goodwill.................................................................. 1,901 1,862 Amortization of servicing rights.......................................................... 1,138 431 Accretion of discount..................................................................... (4,844) (2,142) Gain on sale of loans and leases.......................................................... (12,652) (57,736) Gains on sale of SPFC stock............................................................... -- (9,488) Loss (gains) on sale of IMH stock......................................................... 204 (11,496) Equity in net earnings of SPFC............................................................ (12,739) (19,363) Equity in net earnings of FMAC............................................................ (7,093) -- Loss on sale of OREO...................................................................... 501 4,345 (Recovery) writedowns on OREO............................................................. (1,515) 166 Originations of loans held for sale....................................................... (514,900) (905,400) Sales and collections on loans held for sale.............................................. 322,650 1,374,642 Purchase of trading securities............................................................ (39,210) -- Sale of trading securities................................................................ 79,751 -- Net change in accrued interest receivable................................................. (1,412) (3,694) Net change in retained interest in loan and lease securitizations......................... (4,713) 13,358 Other, net................................................................................ (50,777) (54,900) --------- ---------- Net cash (used in) provided by operating activities......................................... (129,526) 222,780 --------- ---------- Cash flows from investing activities: Net change in interest bearing deposits................................................... 89,551 (188,037) Sales of securities available for sale.................................................... 8,309 27,955 Purchases of securities available for sale................................................ (16,827) -- Proceeds from sale of Impac Mortgage Holdings stock....................................... 415 11,950 Redemption of stock in Federal Home Loan Bank............................................. 1,209 12,679 Purchase of securities held to maturity................................................... -- (2,748) Net change in loans held for investment................................................... (101,711) (114,699) Proceeds from sale of other real estate owned............................................. 9,428 2,651 Purchases of premises and equipment....................................................... (5,769) (3,744) Proceeds from sale of SPFC stock.......................................................... -- 13,707 --------- ---------- Net cash used in investing activities....................................................... (15,395) (240,286) --------- ---------- Cash flows from financing activities: Net increase in deposits.................................................................. 555,375 175,225 Advances from Federal Home Loan Bank...................................................... 44,500 50,000 Repayments of advances from Federal Home Loan Bank........................................ (69,500) (170,500) Net change in other borrowings............................................................ (124,297) (210,597) Proceeds from issuance of Senior Notes due 2007........................................... -- 194,500 Proceeds from offering of Remarketed Par Securities....................................... -- 68,075 Repayments of Senior Notes due 2004....................................................... -- (73,241) Retirement of common stock................................................................ (23,499) -- Net change in minority interest........................................................... (88) (43,787) Proceeds from exercise of stock options................................................... 989 1,053 --------- ---------- Net cash provided by (used in) financing activities......................................... 383,480 (9,272) --------- ---------- Net change in cash.......................................................................... 238,559 (26,778) Cash at beginning of period................................................................. 45,379 74,247 --------- ---------- Cash at end of period....................................................................... $ 283,938 $ 47,469 ========= ==========
4 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
SHARES HELD UNREALIZED IN DEFERRED GAIN (LOSS) ON NUMBER OF EXECUTIVE SECURITIES TOTAL SHARES COMMON RETAINED COMPENSATION AVAILABLE SHAREHOLDERS' OUTSTANDING STOCK EARNINGS PLAN FOR SALE, NET EQUITY ----------- ----- -------- ---- ------------- ------ Balance, December 31, 1997............. 38,791 $147,109 $174,898 $ -- $ 1,926 $323,933 Exercise of stock options.............. 228 989 -- -- -- 989 Retirement of stock.................... (2,415) (23,499) -- -- -- (23,499) Purchase of stock for deferred executive compensation plan.......... (148) (2,165) -- -- -- (2,165) Shares held in deferred executive compensation plan.................... 148 -- -- 2,165 -- 2,165 Issuance of stock for Statewide Documentation, Inc. acquisition...... 236 5,000 -- -- -- 5,000 Tax benefit from exercise of stock options.............................. -- 1,277 -- -- -- 1,277 Decrease in unrealized gain on Securities available for sale, net... -- -- -- -- (1,899) (1,899) Net loss for the nine months ended September 30, 1998................... -- -- (80,279) -- -- (80,279) ------ -------- -------- ------ ------- -------- Balance, September 30, 1998............ 36,840 $128,711 $ 94,619 $2,165 $ 27 $225,522 ====== ======== ======== ====== ======= ========
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Imperial Credit Industries, Inc., was incorporated in 1986 in the State of California. The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII"), and its wholly or majority owned consolidated subsidiaries, (collectively the "Company"). The wholly-owned subsidiaries include but are not limited to Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Commercial Asset Management Corporation, ("ICCAMC"), and Imperial Credit Asset Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a majority owned consolidated subsidiary which is approximately 60% owned by the Company and approximately 40% owned by ICG's management. All material intercompany balances and transactions with consolidated subsidiaries have been eliminated. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 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, 1997. In preparing the consolidated 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 1998 presentation. 3. NET (LOSS) INCOME PER SHARE INFORMATION The following table reconciles the number of shares used in the computations of basic and diluted (loss) income per share for the third quarter and nine months ended September 30, 1998 and 1997:
FOR THE FOR THE NINE MONTHS QUARTER ENDED SEPTEMBER 30, PERIOD ENDED SEPTEMBER 30, 1998 1997 1998 1997 ---- ---- ---- ---- Weighted-average common shares outstanding during the period used to compute basic income (loss) per share........... 38,604,536 38,720,693 38,699,267 38,550,218 Assumed common shares issued on exercise of stock options........................................................ -- 2,163,449 -- 2,252,826 ---------- ---------- ---------- ---------- Number of common shares used to compute diluted income (loss) per share............................................... 38,604,536 40,884,142 38,699,267 40,803,044 ========== ========== ========== ==========
4. COMPREHENSIVE INCOME The Company's comprehensive income is comprised of net income plus the change in the unrealized gain (loss) on securities available for sale, net for all periods reported. Comprehensive (loss) income for the three and nine months ended September 30, 1998 totaled ($106.6) million and ($82.2) million, as compared to $8.1 million and $31.0 million for the same periods last year, respectively. Accumulated other comprehensive income, consisting of the unrealized gain on securities available for sale at September 30, 1998 and September 30, 1997 totaled $27,000 and $268,000 respectively. 5. ACCOUNTING PRONOUNCEMENTS In October 1998, the Financial Accounting Standards Board "FASB" issued Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65." Statement No. 134 amends Statement No. 65, "Accounting for Certain Mortgage Banking Activities" to conform the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the 6 securitization of other types of assets by a nonmortgage banking enterprise. After the securitization of a mortgage loan held for sale, any retained mortgage-backed securities shall be classified in accordance with the provisions of Statement 115. However, a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. Statement No. 134 is effective for the first quarter beginning after December 15, 1998 and enterprises may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place when the Statement is initially applied. Management is in the process of determining the impact, if any, adoption will have on the consolidated financial statements. 6. DISCONTINUED OPERATIONS During the third quarter ended September 30, 1998, management determined to cease operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a disposal plan was formulated, whereby daily operations of AMN were terminated in two months. It is management's plan to sell remaining assets within one year. Losses from AMN's discontinued operations were as follows: (In thousands)
Period From Period From July 1, 1998 to Three months August 1, 1998 to July 31, 1998 Ended September 30, 1998 (measurement date) September 30, 1997 ------------------ ------------------ ------------------ Loss from discontinued operations $ - $1,390 $3,266 Loss on disposal of AMN 11,276 - - ------- ------ ------ Net loss from discontinued operations $11,276 $1,390 $3,266 ======= ====== ======
Period From Period From January 1, 1998 to Nine months August 1, 1998 to July 31, 1998 Ended September 30, 1998 (measurement date) September 30, 1997 ------------------ ------------------ ------------------ Loss from discontinued operations $ - $3,232 $4,030 Loss on disposal of AMN 11,276 - - ------- ------ ------ Net loss from discontinued operations $11,276 $3,232 $4,030 ======= ====== ======
The loss on disposal of AMN included charges (net of taxes) for the following items: $5.6 million for securities valuation, $1.3 million for the disposition of furniture and equipment, $5.3 million for estimated future servicing obligations to a third party servicer, $1.3 million in liquidation allowances for nonaccrual loans and repossessed autos, $2.0 million in severance pay, occupancy and general and administrative expenses. The charges listed above were partially offset by the estimated net interest income on loans and securities for the next year (disposition period) of $4.2 million. The net assets of AMN discontinued operations were as follows:
AT SEPTEMBER 30, ---------------- 1998 ---- Loans held for sale $12,269 Loans held for investment, net 4,641 Securities held for sale 7,593 Retained interests in loans 13,195 Income taxes receivable 11,435 Other net assets 1,554 ------- $50,687 =======
AMN's warehouse lines of credit of $16.2 million are classified as other borrowings in the consolidated financial statements at September 30, 1998. Total nonperforming AMN loans were $3.8 million as of September 30, 1998 as compared to $22.7 million at December 31, 1997. AMN's allowance for loan losses was $3.6 million at September 30, 1998 as compared to $11.1 million at December 31, 1997. AMN originated $2.7 million and $10.8 million in sub-prime auto loans for the operating periods from July 1, 1998 to July 31, 1998 and January 1, 1998 to July 31, 1998, respectively. 7. LOSSES ON EQUITY INVESTMENTS As a result of the decline in the United States and global financial and equity markets, the market values of the Company's equity holdings have declined substantially, resulting in a pre-tax loss of $120.1 million. The Company recorded pre-tax losses of $24.5 million and $13.0 million related to an other than temporary decline in the market value of equity investments in Impac Mortgage Holdings, Inc. ("IMH"), AMEX: IMH, and Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"), Nasdaq:ICMI, respectively. This loss also includes the pre-tax write-off of $82.6 million, which represents the Company's total investment in SPFC. As of September 30, 1998, the Company owned 47.0% of SPFC's common stock. On October 1, 1998, SPFC filed a petition for bankruptcy with the U.S. Bankruptcy Court for the District of Oregon, and then ceased loan origination activity. 7 8. LOANS HELD FOR SALE Loans held for sale consisted of the following at September 30, 1998 and December 31, 1997:
AT SEPTEMBER 30, AT DECEMBER 31, ---------------- ---------------- 1998 1997 ---- ---- (IN THOUSANDS) Loans secured by real estate: Single family 1-4.................................................. $ 99,908 $ 13,169 Multi-family....................................................... 51,096 68,294 -------- -------- 151,004 81,463 Automobile loans...................................................... 136,434 -- Installment loans..................................................... 9,703 -- Leases................................................................ 8,440 13,561 Commercial loans...................................................... 25,316 58,445 -------- -------- $330,897 $153,469 ======== ========
As of September 30, 1998 and December 31, 1997, loans held for sale in the discontinued operations at AMN were $12.3 million and $9.1 million, respectively. 9. STOCK REPURCHASE PROGRAM In November 1997, the Company announced a share repurchase program to buyback 5% or approximately 1.9 million shares of the Company's outstanding shares of common stock. As of September 30, 1998, the Company has completed the original stock repurchase program at an average price of $10.62. In September 1998, the Company announced an additional repurchase program to buyback up to 10% or approximately 3.7 million shares of the Company's outstanding shares of common stock. As of November 11, 1998, the Company has repurchased 500,000 common shares at an average price of $6.63 under the additional repurchase program. As of November 11, 1998 the Company, through its trustee, has also acquired 273,706 common shares under its deferred executive compensation plan at an average price of $10.85. 10. LOAN AND LEASE COMMITMENTS At September 30, 1998, the Company's consolidated lending commitments were as follows: (In thousands)
ICII COMMITMENT FUNDED UNFUNDED TYPE OF LENDING COMMITMENT BUSINESS UNIT AMOUNT AMOUNT COMMITMENT - -------------------------- ------------- ------ ------ ---------- Loan and unused line commitments SPB $1,983,390 $977,513 $1,005,877 Standby letters of credit SPB 2,238 238 2,000 Commercial letters of credit SPB 2,364 2,364 -- ---------- --------- ---------- $1,987,992 $980,115 $1,007,877 ========== ========= ==========
8 11. CONSOLIDATING FINANCIAL INFORMATION The following represents summarized consolidating financial information as of September 30, 1998 and December 31, 1997, and for the nine months ended September 30, 1998 and 1997, with respect to the financial position, results of operations and cash flows of the Company and its wholly-owned and majority-owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875% Senior Notes due 2007. As of September 30, 1998, the 9.875% Senior Notes are guaranteed by seven of the Company's wholly-owned subsidiaries, IBC, ICAI, ICARI, ICCAMC, ICW, SDI and AMN (the "Guarantor Subsidiaries"). As of September 30, 1998, the non-guarantor subsidiaries are SPB, ICG and ICCTI. Franchise Mortgage Acceptance Corporation ("FMAC") was a guarantor subsidiary through September 30, 1997. 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. None of the subsidiary guarantors are restricted from making distributions to the Company. CONSOLIDATING CONDENSED BALANCE SHEET SEPTEMBER 30, 1998
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash................................................. $ (731) $ 1,294 $ 283,490 $ (115) $ 283,938 Interest bearing deposits............................ 12,994 659 534 -- 14,187 Investment in Federal Home Loan Bank stock........... -- -- 4,586 -- 4,586 Trading and available for sale securities............ 88,624 7,385 44,895 26 140,930 Loans and leases held for sale....................... 1,902 27,211 301,784 -- 330,897 Loans and leases held for investment, net............ 62,676 (9,173) 1,291,690 (35,000) 1,310,193 Investment in FMAC................................... 60,192 -- -- -- 60,192 Purchased and originated servicing rights............ -- -- 4,677 -- 4,677 Retained interest in loan and lease securitizations.. -- 23,208 -- -- 23,208 Investment in subsidiaries........................... 291,440 -- -- (291,440) -- Goodwill............................................. -- 17,516 20,902 -- 38,418 Net assets of discontinued operations................ -- 50,687 -- -- 50,687 Other assets......................................... 48,179 (2,864) 18,960 (876) 63,399 -------- -------- ---------- --------- ---------- Total assets....................................... $565,276 $115,923 $1,971,518 $(327,405) $2,325,312 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits............................................. -- -- 1,711,512 (115) 1,711,397 Borrowings from FHLB................................. -- -- 20,000 -- 20,000 Other borrowings..................................... 1,220 19,324 35,875 (35,875) 20,544 Remarketed Par Securities............................ 72,165 (2,165) -- -- 70,000 Senior notes......................................... 219,847 -- -- -- 219,847 Minority interest in consolidated subsidiaries....... 946 1,942 137 61 3,086 Other liabilities.................................... 45,576 8,571 6,662 (5,893) 54,916 -------- -------- ---------- --------- ---------- Total liabilities.................................. 339,754 27,672 1,774,186 (41,822) 2,099,790 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock...................................... -- 12,000 -- (12,000) -- Common stock......................................... 128,711 134,781 113,275 (248,056) 128,711 Retained earnings.................................... 94,619 (58,530) 84,057 (25,527) 94,619 Shares held in executive deferred compensation plan.. 2,165 -- -- -- 2,165 Unrealized gain on securities available for sale..... 27 -- -- -- 27 -------- -------- ---------- --------- ---------- Total shareholders' equity......................... 225,522 88,251 197,332 (285,583) 225,522 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity......... $565,276 $115,923 $1,971,518 $(327,405) $2,325,312 ======== ======== ========== ========= ==========
9 CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1997
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) ASSETS ------ Cash................................................. $ 13,229 $ 1,451 $ 43,318 $ (12,619) $ 45,379 Interest bearing deposits............................ 31,390 1,149 71,199 -- 103,738 Investment in Federal Home Loan Bank stock........... -- -- 5,646 -- 5,646 Trading and available for sale securities............ 107,671 14,222 99,929 -- 221,822 Loans and leases held for sale....................... 12,138 14,592 126,739 -- 153,469 Loans and leases held for investment, net............ 78,922 11,135 1,197,430 (54,575) 1,232,912 Investment in SPFC................................... 65,303 -- -- -- 65,303 Investment in FMAC................................... 53,099 -- -- -- 53,099 Purchased and originated servicing rights............ -- -- 4,731 -- 4,731 Retained interest in loan and lease securitizations.. -- 22,895 -- -- 22,895 Investment in subsidiaries........................... 281,454 -- -- (281,454) -- Goodwill............................................. -- 13,229 22,378 -- 35,607 Net assets of discontinued operations................ -- 74,522 -- -- 74,522 Other assets......................................... 59,911 (8,185) 26,473 (2,933) 75,266 -------- -------- ---------- --------- ---------- Total assets....................................... $703,117 $145,010 $1,597,843 $(351,581) $2,094,389 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits............................................. $ -- $ -- $1,189,841 $ (33,819) $1,156,022 Borrowings from FHLB................................. -- -- 45,000 -- 45,000 Other borrowings..................................... -- 30,250 151,528 (36,937) 144,841 Remarketed Par Securities............................ 72,165 (2,165) -- -- 70,000 Senior notes......................................... 219,813 -- -- -- 219,813 Minority interest in consolidated subsidiaries....... 946 20 111 2,097 3,174 Other liabilities.................................... 86,260 (449) 45,166 629 131,606 -------- -------- ---------- --------- ---------- Total liabilities.................................. 379,184 27,656 1,431,646 (68,030) 1,770,456 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock...................................... -- 12,000 -- (12,000) -- Common stock......................................... 147,109 127,305 87,177 (214,482) 147,109 Retained earnings.................................... 174,898 (21,951) 79,020 (57,069) 174,898 Unrealized gain on securities available for sale..... 1,926 -- -- -- 1,926 -------- -------- ---------- --------- ---------- Total shareholders' equity......................... 323,933 117,354 166,197 (283,551) 323,933 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity......... $703,117 $145,010 $1,597,843 $(351,581) $2,094,389 ======== ======== ========== ========= ==========
10 CONSOLIDATING CONDENSED INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 30, 1998
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: Gain on sale of loans and leases....................... $ 46 $ 3,977 $ 8,629 $ -- $ 12,652 --------- -------- -------- ------- --------- Interest income........................................ 23,132 8,531 145,053 (3,351) 173,365 Interest expense....................................... 22,751 547 69,526 (3,351) 89,473 --------- -------- -------- ------- --------- Net interest income.................................... 381 7,984 75,527 -- 83,892 Provision for loan and lease losses.................... 4,500 1,300 11,000 -- 16,800 --------- -------- -------- ------- --------- Net interest (expense) income after provision for loan and lease losses............................... (4,119) 6,684 64,527 -- 67,092 --------- -------- -------- ------- --------- Loan servicing (expense) income........................ (489) 3,847 5,754 -- 9,112 Loss on sale of securities............................. (198) (50) (316) -- (564) Equity in net income of SPFC........................... 12,739 -- -- -- 12,739 Equity in net income of FMAC........................... 7,093 -- -- -- 7,093 Investment banking fees................................ -- -- 13,142 -- 13,142 Asset management fees.................................. -- 4,987 -- -- 4,987 Loss on impairment of securities....................... (120,138) -- -- -- (120,138) Mark to market on securities and loans held for sale... (7,087) (13,688) (19,753) -- (40,528) Other income (expense)................................. 178 (181) 9,943 -- 9,940 --------- -------- -------- ------- --------- Total other income................................... (107,902) (5,085) 8,770 -- (104,217) --------- -------- -------- ------- --------- Total revenues.................................... (111,975) 5,576 81,926 -- (24,473) --------- -------- -------- ------- --------- EXPENSES: Personnel expense...................................... 3,847 6,952 34,799 -- 45,598 Amortization of servicing rights....................... -- -- 1,138 -- 1,138 Occupancy expense...................................... 956 714 2,638 -- 4,308 Data processing expense................................ 393 20 887 -- 1,300 Net income of other real estate owned.................. (524) (55) (163) -- (742) Professional services.................................. 2,567 1,648 3,756 -- 7,971 Telephone and other communications..................... 261 334 2,042 -- 2,637 Amortization of goodwill............................... -- 713 1,188 -- 1,901 Provision for loan repurchases......................... 4,750 -- -- 4,750 General and administrative expense..................... 1,942 2,649 15,575 -- 20,166 --------- -------- -------- ------- --------- Total expenses....................................... 14,192 12,975 61,860 -- 89,027 --------- -------- -------- ------- --------- (Loss) income before income taxes, minority interest, discontinued operations and extraordinary item........ (126,167) (7,399) 20,066 -- (113,500) Income taxes........................................... (56,203) (32) 10,080 -- (46,155) Minority interest in (loss) income of Consolidated subsidiaries.......................................... -- (78) 39 (1,535) (1,574) --------- -------- -------- ------- --------- (Loss) income before discontinued operations........... (69,964) (7,289) 9,947 1,535 (65,771) Loss from discontinued operations, net of income taxes. -- (3,232) -- -- (3,232) Loss on disposal of AMN, net of income taxes........... -- (11,276) -- -- (11,276) --------- -------- -------- ------- --------- (Loss) income before equity in undistributed income of subsidiaries and extraordinary item......... (69,964) (21,797) 9,947 1,535 (80,279) Equity in undistributed (loss) income of subsidiaries.. (10,315) -- -- 10,315 -- --------- -------- -------- ------- --------- Net (loss) income.................................... $ (80,279) $(21,797) $ 9,947 $11,850 $ (80,279) ========= ======== ======== ======= =========
11 CONSOLIDATING CONDENSED INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 30, 1997
NON- GUARANTOR GUARANTOR ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) REVENUE: (Loss) gain on sale of loans and leases.............. $(2,637) $ 6,737 $ 53,636 $ -- $ 57,736 ------- ------- -------- -------- -------- Interest income...................................... 20,713 6,423 129,307 (4,292) 152,151 Interest expense..................................... 18,365 2,410 73,187 (4,292) 89,670 ------- ------- -------- -------- -------- Net interest income.................................. 2,348 4,013 56,120 -- 62,481 Provision for loan and lease losses.................. -- 625 9,025 -- 9,650 ------- ------- -------- -------- -------- Net interest income after provision for loan and lease losses................................. 2,348 3,388 47,095 -- 52,831 ------- ------- -------- -------- -------- Loan servicing (expense) income...................... (1,960) 2,831 4,184 5,055 Gain on sale of securities........................... 18,713 411 891 566 20,581 Equity in net income of SPFC......................... 19,363 -- -- -- 19,363 Asset management fees................................ -- 3,674 -- -- 3,674 Other (expense) income............................... (1,942) 1,409 1,047 -- 514 ------- ------- -------- -------- -------- Total other income................................. 34,174 8,325 6,122 566 49,187 ------- ------- -------- -------- -------- Total revenues.................................. 33,885 18,450 106,853 566 159,754 ------- ------- -------- -------- -------- EXPENSES: Personnel expense.................................... 2,100 6,241 26,276 -- 34,617 Amortization of servicing rights..................... -- 431 -- -- 431 Occupancy expense.................................... 823 418 1,700 -- 2,941 Data processing expense.............................. 427 270 623 -- 1,320 Net expense of other real estate owned............... 3,548 -- 1,835 -- 5,383 Professional services................................ 2,659 747 4,397 -- 7,803 Telephone and other communications................... 170 334 1,107 -- 1,611 Amortization of goodwill............................. -- 717 1,145 -- 1,862 General and administrative expense................... 3,526 7,081 8,189 -- 18,796 ------- ------- -------- -------- -------- Total expenses..................................... 13,253 16,239 45,272 -- 74,764 ------- ------- -------- -------- -------- Income before income taxes, minority interest, discontinued operations, equity in undistributed income of subsidiaries and extraordinary item....... 20,632 2,211 61,581 566 84,990 Income taxes......................................... 16,588 934 13,950 239 31,711 Minority interest in income of consolidated subsidiaries........................................ - - - 9,555 9,555 ------- ------- -------- -------- -------- Income (loss) before discontinued operations and extraordinary item.................................. 4,044 1,277 47,631 (9,228) 43,724 Loss from discontinued operations.................... -- (4,030) -- -- (4,030) ------- ------- -------- -------- -------- Income (loss) before equity in undistributed income of subsidiaries and extraordinary item....... 4,044 (2,753) 47,631 (9,228) 39,694 Equity in undistributed income of subsidiaries....... 35,650 -- -- (35,650) -- Extraordinary item--Loss on early extinguishment of debt, net of income taxes.......................... (3,995) -- -- -- (3,995) ------- ------- -------- -------- -------- Net income (loss).................................. $35,699 $(2,753) $ 47,631 $(44,878) $ 35,699 ======= ======= ======== ======== ========
12 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1998
NON- ---- GUARANTOR GUARANTOR --------- --------- ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash provided by (used in) operating Activities............................................. $ 18,077 $(31,480) $(104,706) $(11,417) $(129,526) -------- -------- --------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits............... 18,396 489 71,200 (534) 89,551 Purchase of securities available for sale............. (16,827) -- -- -- (16,827) Proceeds from sale of OREO............................ 817 8,385 226 -- 9,428 Net change in loans held for investment............... 11,269 20,074 (105,127) (27,927) (101,711) Net change in investment in Subsidiaries.............. (22,467) -- -- 22,467 -- Other, net............................................ (1,935) 8,162 (2,464) 401 4,164 -------- -------- --------- -------- --------- Net cash (used in) provided by investing activities..... (10,747) 37,110 (36,165) (5,593) (15,395) -------- -------- --------- -------- --------- Cash flows from financing activities: Net increase in deposits.............................. -- -- 521,671 33,704 555,375 Advances from Federal Home Loan Bank.................. -- -- 44,500 -- 44,500 Repayments of advances from Federal Home Loan Bank........................................... -- -- (69,500) -- (69,500) Net change in other borrowings........................ 1,220 (10,926) (115,653) 1,062 (124,297) Retirement of common stock............................ (23,499) -- -- -- (23,499) Other, net............................................ 989 (78) 26 (36) 901 -------- -------- --------- -------- --------- Net cash (used in) provided by financing activities..... (21,290) (11,004) 381,044 34,730 383,480 -------- -------- --------- -------- --------- Net change in cash.................................... (13,960) (5,374) 240,173 17,720 238,559 Cash at beginning of period........................... 13,229 6,668 43,318 (17,836) 45,379 -------- -------- --------- -------- --------- Cash at end of period................................. $ (731) $ 1,294 $ 283,491 $ (116) $ 283,938 ======== ======== ========= ======== =========
13 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997
NON- ---- GUARANTOR GUARANTOR --------- --------- ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---- ------------ ------------ ------------ ------------ (IN THOUSANDS) Net cash (used in) provided by operating activities............................................. $(61,182) $(198,943) $ 514,127 $(31,222) $ 222,780 -------- --------- --------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits............... (59,512) 163 (128,688) -- (188,037) Net change in loans held for investment............... (83,910) 85,749 (167,855) 51,317 (114,699) Proceeds from sale of SPFC stock...................... 13,707 -- -- -- 13,707 Redemption of Federal Home Loan Bank stock............ -- -- 12,679 -- 12,679 Net change in investment in Subsidiaries.............. 90,298 -- -- (90,298) -- Other, net............................................ (19,196) 141 19,575 35,544 36,064 -------- --------- --------- -------- --------- Net cash (used in) provided by investing activities..... (58,613) 86,053 (264,289) (3,437) (240,286) -------- --------- --------- -------- --------- 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........................................... -- -- (170,500) -- (170,500) Net change in other borrowings........................ (15,363) 113,169 (325,754) 17,351 (210,597) Proceeds from offering of Senior Notes................ 194,500 -- -- -- 194,500 Repurchase of Senior Notes............................ (73,241) -- -- -- (73,241) Proceeds from offering of Remarketed Par Securities... 68,075 -- -- -- 68,075 Net change in minority interest....................... (44,400) -- -- 613 (43,787) Other, net............................................ 1,053 -- (12,754) 12,754 1,053 -------- --------- --------- -------- --------- Net cash provided by (used in) financing activities..... 131,687 113,169 (284,846) 30,718 (9,272) -------- --------- --------- -------- --------- Net change in cash.................................... 11,892 279 (35,008) (3,941) (26,778) Cash at beginning of period........................... 5,213 7,973 64,755 (3,694) 74,247 -------- --------- --------- -------- --------- Cash at end of period................................. $ 17,105 $ 8,252 $ 29,747 $ (7,635) $ 47,469 ======== ========= ========= ======== =========
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 $2.3 billion as of September 30, 1998, is a diversified commercial lending, financial services and investment holding company, organized in 1986 with its headquarters located in Torrance, California. The Company's principal business activities are primarily conducted through its wholly and majority owned subsidiaries including; Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Commercial Asset Management Corporation ("ICCAMC"), Imperial Credit Asset Management, Inc. ("ICAM") and Imperial Capital Group, LLC ("ICG"). The Company's core business has remained consistent in that it originates loans and leases funded primarily by deposits and secondarily by warehouse lines of credit, repurchase facilities, asset backed securitizations and whole loan sales in the secondary market. The Company's business strategy currently emphasizes: . Holding the majority of the loans and leases originated by the Company for investment, except for those loans originated by SPB for sale. . Investing in and managing businesses in high margin niche segments of the financial services industry. . Adhering to conservative, disciplined underwriting and credit risk management standards. . Originating loans and leases on a wholesale basis, where possible. . Maintaining business and financial flexibility to take advantage of changing market conditions with respect to funding alternatives and the opportunistic expansion or contraction of its various financial services businesses. The Company diversified its business lines to include investment products and asset management services by focusing on the creation or acquisition of additional businesses in the financial services industry in order to reduce its sole dependency on residential and commercial mortgage lending. The Company now operates as a diversified commercial lending, financial services and investment holding company providing financial services products in the following sectors: business lending, asset management services and investment banking and brokerage services. Continued below is a discussion of the Company's significant businesses, for a discussion of the consolidated results of operations for the Company, see Management's Discussion and Analysis of Financial Condition and Results of Operations "Results of Operations." BUSINESS LENDING The Company's largest subsidiary is SPB, a $1.9 billion industrial loan company, which operates four of the Company's core businesses, Coast Business Credit is an asset based lender; the Income Property Lending Division, a multifamily and commercial loan originator; and the Loan Participation and Investment Group, an investor in syndicated bank loan participations. SPB also owns a mortgage lending subsidiary, Princap Mortgage Warehouse, Inc. which provides warehouse loans to third party residential mortgage loan originators. Each of these businesses is primarily funded by the FDIC insured deposits of SPB. COAST BUSINESS CREDIT ("CBC") At September 30, 1998, CBC's outstanding loan portfolio had increased 28% to $622.0 million from the $484.8 million outstanding at December 31, 1997. CBC had total loan commitments at September 30, 1998 of approximately $1.1 billion, leaving $443.5 million in outstanding unfunded commitments. CBC has historically concentrated its lending efforts in the technology industry. At September 30, 1998 loans to technology companies represented 30.2% or $188.0 million of CBC's outstanding loan portfolio as compared to 41.6% or $201.8 million at December 31, 1997, respectively. At September 30, 1998, CBC had lending relationships with approximately 170 customers, with an average total outstanding loan balance of $3.7 million. The average yield on CBC's outstanding loan portfolio was 13.06% and 13.18% for the three and nine months ended September 30, 1998. CBC had no delinquent loans at September 30, 1998 or December 31, 1997. 15 During 1997 CBC executed an expansion plan, which has increased its customer base outside of California. CBC now operates four loan production centers in California and additional loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland, Detroit, Minneapolis, Phoenix, Portland, Providence, and Seattle. Total revenue and expenses from CBC for the nine months ended September 30, 1998 were $29.7 million and $13.7 million as compared to $18.8 million and $8.9 million for the same period of the prior year, respectively. INCOME PROPERTY LENDING DIVISION ("IPLD") At September 30, 1998, IPLD's outstanding balance of loans held for sale had increased 107.4% to $123.2 million from $59.4 million outstanding at December 31,1997. For the three and nine months ended September 30, 1998, the IPLD division of SPB originated approximately $96.9 million and $268.5 million in multifamily and commercial loans, as compared to $58.6 million and $206.8 million for the same periods last year, respectively. For the three and nine months ended September 30, 1998, IPLD sold $73.7 million and $263.7 million in multifamily and commercial loans as compared to $203.1 million for the three and nine months ended September 30, 1997. The average yield on IPLD's outstanding loan portfolio was 11.67% and 9.74% for the three and nine months ended September 30, 1998. IPLD had loans 30 days or more delinquent of $2.9 million and $2.8 million at September 30, 1998.and December 31, 1997, respectively. IPLD operates 24 loan origination offices in California, Washington, Oregon, Colorado, Texas, Arizona, Illinois, Minnesota, Michigan, Ohio, Georgia, Massachusetts, Florida and New Jersey. Total revenue and expenses from IPLD for the nine months ended September 30, 1998 were $13.8 million and $7.5 million as compared to $23.4 million and $4.7 million for the same periods of the prior year, respectively. The decline in revenues at IPLD for the nine months ended September 30, 1998 resulted primarily from a decrease in margin on loans originated. Subsequent to September 30, 1998, the margins on IPLD originated loans increased to historical levels. PRINCAP MORTGAGE WAREHOUSE In October 1997, SPB acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of approximately $6.8 million. PrinCap's primary business is residential mortgage warehouse lending to medium-sized brokers and mortgage bankers on a national basis. At September 30, 1998 and December 31, 1997, PrinCap had outstanding loans of $167.4 million, and $122.5 million, respectively. PrinCap had total loan commitments at September 30, 1998 of $405.6 million, leaving $238.2 million in outstanding unfunded commitments. The average yield of Princap's warehouse loan portfolio was 10.47% and 10.38% for the three and nine months ended September 30, 1998. Total revenue and expenses from PrinCap for the nine months ended September 30, 1998 were $7.0 million and $1.7 million as compared to none for the same periods of the prior year, respectively. LOAN PARTICIPATION AND INVESTMENT GROUP ("LPIG") At September 30, 1998, loans outstanding under LPIG's commitments totaled $190.2 million. LPIG had total loan commitments at September 30, 1998 of $512.3 million, leaving $322.1 million in outstanding unfunded commitments. At September 30, 1998, LPIG had outstanding participations from 36 nationally syndicated credits, with an average outstanding participation balance of $5.2 million. At September 30, 1998, the size of LPIG's participation interests ranged from approximately $400,000 to approximately $13.8 million, as compared to approximately $450,000 to approximately $19.0 million at September 30, 1997, respectively. The average yield on LPIG's outstanding loan portfolio was 8.08% and 8.28% for the three and nine months ended September 30, 1998. LPIG had no delinquent participation interests at September 30, 1998 or December 31, 1997. In addition to the on-balance sheet funding of LPIG's investments in loan participations, SPB has entered into off-balance sheet total rate of return swap contracts with various investment bank counterparties. The provisions of the swap agreements entitle SPB to receive the total return on various commercial loan participations in exchange for a floating payment of one month LIBOR plus a spread. As of September 30, 1998, SPB was party to total rate of return swap contracts with a total notional amount of $155.0 million. 16 These contracts are off-balance sheet funding instruments. For the three and nine months ended September 30, 1998, SPB recognized $701,000 of net swap income on total return swaps as compared to no such income in the same periods last year. The Company plans on de-emphasizing this business going forward in order to reallocate the capital currently deployed to support LPIG's operations to higher-margin business such as CBC, PrinCap and IPLD. Total revenue and expenses from LPIG for the nine months ended September 30, 1998 were $6.4 million and $893,000 as compared to $4.3 million and $690,000 for the same periods of the prior year, respectively. COMMERCIAL EQUIPMENT LEASING The Company conducts its equipment lease origination and servicing operations through IBC. IBC's lease originations totaled $23.0 million and $84.7 million for the three and nine months ended September 30, 1998 as compared to $46.0 million and $110.5 million for the same period last year. IBC securitized $24.4 million and $91.1 million of leases during the three and nine months ended September 30, 1998 as compared to $22.2 million and $137.7 million of leases for the same periods last year. At September 30, 1998, IBC had 23,332 active customer accounts with an average total outstanding lease balance of $10,500. The average yield on IBC's serviced loan portfolio was 14.19% and 14.32% for the three and nine months ended September 30, 1998. IBC had on-balance sheet loans delinquent 30 or more days of $342,000 and $1.4 million at September 30, 1998 and December 31, 1997, respectively. Total revenue and expenses from IBC for the nine months ended September 30, 1998 were $6.4 million and $8.5 million as compared to $14.4 million and $8.3 million for the same periods of the prior year, respectively. The loss for the nine months ended September 30, 1998 was primarily attributable to the $4.0 million writedown of Retained Interest of Lease Securitization and narrowing of margins on Lease Securitations during the third quarter ended 1998. ASSET MANAGEMENT The Company conducts asset management, investment and other advisory services through its ICCAMC and ICAM subsidiaries. IMPERIAL CREDIT COMMERCIAL ASSET MANAGEMENT CORPORATION ("ICCAMC") In October 1997, the Company completed an initial public offering of the common stock of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial loans, commercial mortgage-backed securities and real property investments. ICCAMC was formed in the third quarter of 1997 to oversee the day- to-day operations of ICCMIC pursuant to a management agreement. For the three months and nine months ended September 30, 1998, ICCAMC earned $1.8 million and $4.3 million, respectively, in management fees from ICCMIC. At September 30, 1998, the Company owned 3,070,000 shares or 10.5% of the outstanding common stock of ICCMIC. In addition to receiving asset management fees from ICCMIC, the Company invested $43.0 million in the common stock of ICCMIC and has received cash dividends of $2.6 million and $1.4 million during the nine months and year ended September 30, 1998 and December 31, 1997, respectively. As of September 30, 1998, ICCMIC's stock price declined to $9.75 per share as compared to the Company's book value of $13.98 per share. Subsequent to September 30, 1998, ICCMIC's stock price continued to decline to $8.813 per share as of October 23, 1998. As a result of the decline in market value of ICCMIC's common stock, the Company wrote-down its investment in ICCMIC to $9.75 per share and recognized an impairment loss of $13.0 million. Total revenue and expenses from ICCAMC for the nine months ended September 30, 1998 were $4.3 million and $2.2 million as compared to none and $78,000 for the same period of the prior year, respectively. 17 IMPERIAL CREDIT ASSET MANAGEMENT, INC. ("ICAM") For the three and nine months ended September 30, 1998, ICAM earned management fees of $252,000 from Pacifica Partners I L.P., a $500 million collateralized loan obligation ("CLO") fund launched by the Company on August 26, 1998. At September 30, 1998, Pacifica Partners I L.P. invested $400 million in loan participations and $100 million in high yield bonds under management by ICAM. The Company invested net cash of $18.7 million in the subordinated and equity interests of the CLO. The return on the Company's investment in the CLO was $400,000 for the nine months ended September 30, 1998. As a result of the recent financial market decline, and a dramatic increase in yield on subordinate bonds, the Company wrote-down its investment in the subordinate bonds by $3.3 million. In addition, the Company invested $10.0 million in the Cambria Investment Partnership I, L.P., a newly formed hedge fund investing in syndicated bank loans and managed by ICAM. The return on the Company's investment in Cambria was $(132,000) and $650,000 during the three and nine months ended September 30, 1998, respectively. The Company did not experience any impairment related write- downs on its investment in Cambria. At September 30, 1998, Cambria had total assets under management of $165.5 million. INVESTMENT BANKING AND BROKERAGE The Company conducts investment banking and brokerage through its ICG subsidiary. IMPERIAL CAPITAL GROUP, LLC ("ICG") In July 1997, the Company formed ICG, which, together with its subsidiaries Imperial Capital, LLC ("IC") and Imperial Asset Management, LLC ("IAM"), to offer individual and institutional investors financial products and services. IC is a registered broker/dealer with the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc.. IC provides investment opportunities and research to individual and institutional investors, raises private and public capital for middle market companies, and trades debt, equity and asset backed securities. IAM is an investment advisor registered with the United States Securities and Exchange Commission, and provides investment management services to high net worth individuals and institutional clients. ICG is a consolidated subsidiary in which the Company maintains an approximate 60% voting and equity ownership interest. For the three and nine months ended September 30, 1998, ICG generated $3.3 million and $13.1 million in investment banking revenues as compared to none for the same periods last year. For the three and nine months ended September 30, 1998, ICG incurred expenses of $7.8 million and $16.9 million as compared to none for the same periods last year. The loss recorded by ICG for the three and nine months ended September 30, 1998 was primarily due to the writedown of securities held for trading at ICG, resulting from the recent decline in the financial and equity markets. OTHER ACTIVITIES In addition to the Company's significant individual businesses, the Company engages in following other activities. 18 FRANCHISE MORTGAGE ACCEPTANCE COMPANY ("FMAC") FMAC is a publicly traded specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. More recently, FMAC has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses), funeral homes, cemeteries and golf operating businesses (golf courses and golf practice facilities). FMAC originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. FMAC also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. In March 1998, FMAC purchased Bankers Mutual, an originator of multifamily income property loans. During the fourth quarter of 1997, FMAC completed an initial public offering of its common stock pursuant to which ICII was a selling stockholder. As a result of the Company's participation in the public offering, the Company's percentage ownership of FMAC was reduced to 38.4% from 66.7%. Consequently, commencing with the quarter ended December 31, 1997, the financial statements of FMAC are no longer consolidated with those of ICII. As of September 30, 1998, ICII owned 11,023,492 shares of FMAC common stock. ICII's investment in FMAC is reflected on the Company's consolidated balance sheet as "Investment in Franchise Mortgage Acceptance Company" and is accounted for pursuant to the equity method of accounting. Equity in the net income of FMAC for the three and nine months ended September 30, 1998 was $507,000 and $7.1 million, respectively, as compared to none for the same periods last year. According to a press release by FMAC on October 20, 1998, FMAC had total assets of $871.6 million and net income of $1.3 million and $18.4 million for the three and nine months ended September 30, 1998. TOTAL RATE OF RETURN SWAPS The Company has entered into total rate of return swap contracts to deploy a portion of its available liquidity. These swaps are entered into with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various loan participations in exchange for a floating payment of one month LIBOR plus a spread. As of September 30, 1998, the Company is party to total rate of return swap contracts with a total notional amount of $46.9 million, under which the Company was to receive one month LIBOR plus a weighted average spread of 2.01% and is obligated to pay one month LIBOR plus a weighted average spread of 0.76%. For the three and nine months ended September 30, 1998, the Company recognized $1.2 million and $3.3 million, respectively, of interest income on total return swaps as compared to $2.7 million and $3.5 million for the same periods last year. The weighted average remaining life of these contracts was 46.1 months as of September 30, 1998. These contracts are off-balance sheet financing instruments. IMPERIAL CREDIT WORLDWIDE, LTD. ("ICW") ICW is a holding company for the Company's international finance activities and is a majority owner of Credito Imperial Argentina, a mortgage banking company conducting residential mortgage business in Argentina. ICW originated $14.2 million and $31.0 million in residential loans for the third quarter and nine months ended September 30, 1998, respectively, as compared to none for the same periods last year. During the third quarter of 1998, ICW recognized a lower of cost or market write-down of $7.3 million on its mortgage loans held for sale. The write-down resulted from the overall decline in the Latin American financial markets. Total revenue and expenses from ICW for the nine months ended September 30, 1998 were ($6.6) million and $1.4 million. The loss at ICW was primarily related to the aforementioned write-down of $7.3 million on its loans held for sale. 19 Due to the decline in the Latin American financial markets, the Company is pursuing various strategies including the sale of the existing portfolio and conducting future operations as a mortgage broker which would entitle the Company to receive broker fees to originate loans for others. IMPAC MORTGAGE HOLDINGS, INC. ("IMH") Pursuant to a termination agreement entered into in December of 1997, related to the management agreement between ICAI and IMH, the Company received 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and operates as the loan origination unit of IMH. The Company owned 8.0% of the outstanding common stock of IMH as of September 30, 1998. At September 30, 1998, IMH's stock price had declined to $13.50 per share as compared to the Company's book basis of $17.44 per share. Shortly after the third quarter ended September 30, 1998, IMH announced liquidity concerns and the delay of the payment date of its previously announced third quarter 1998 dividend to January 6, 1999 and that it does not expect to make a further dividend payments in 1998. Subsequent to this announcement IMH's stock price declined significantly resulting in the Company writing down its investment to $5.00 per share resulting in a loss of $24.5 million during the third quarter of 1998. HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT At September 30, 1998, SPB's Consumer Credit Division ("CCD") loans outstanding increased 41.2% to $57.6 million from $40.8 million at December 31,1997. During the three and nine months ended September 30, 1998, CCD originated $13.5 million and $31.5 million in loans as compared to $4.4 million and $14.4 million for the same periods last year, respectively. The weighted average yield on SPB's CCD originated loans was 9.42% and 10.44% for the three and nine months ended September 30, 1998. At September 30, 1998, CCD had loans 30 days or more delinquent of $760,000. Subsequent to September 30, 1998, the Company announced the closing of CCD. Management has determined that the returns generated by CCD were not meeting the Company's profitability expectations, and that the time necessary to improve profitability did not warrant further investment in the current financial market. Closure costs for CCD are not expected to be material. Total revenue and expenses from CCD for the nine months ended September 30, 1998 were $1.5 million and $3.1 million. SUB-PRIME AUTO LENDING SPB's Auto Lending Division originated $24.0 million and $97.2 million in sub- prime auto loans during the three and nine months ended September 30, 1998 as compared to $23.4 million and $63.1 million, for the same periods last year, respectively. At September 30, 1998, SPB's auto loans outstanding increased 71.6% to $189.8 million from $110.6 million at December 31,1997. At September 30, 1998 SPB's auto loan portfolio had loans delinquent more than 30 days of $31.1 million. The weighted average yield on SPB's auto loan portfolio was 18.28% and 20.24% for the three and nine months ended September 30, 1998. During the third quarter of 1998, the Company decided to aggressively market SPB's auto loan portfolio. Based on price discovery at September 30, 1998, the Company recognized a lower of cost or market charge of $18.0 million. The write-down resulted from a decline in the asset backed securities markets. Total revenue and expenses from SPB's Auto Lending Division for the nine months ended September 30, 1998 were $(480,000) and $7.1 million as compared to $959,000 and $1.6 million for the same periods of the prior year, respectively. The loss at SPB's Auto Lending Division for the nine months ended September 30, 1998 was primarily related to the aforementioned write-down of $18.0 million on its auto loans held for sale. 20 Additionally during the third quarter ended September 30, 1998, the Company announced it's decision to discontinue the operations of AMN, a subprime Auto lender. See "Note 6 of Notes to Consolidated Financial Statements-- "Discontinued Operations," describing AMN's discontinued operations. SOUTHERN PACIFIC FUNDING CORPORATION ("SPFC") As of September 30, 1998, ICII owned 9,742,500 shares of SPFC common stock, representing 47.0% of the outstanding common stock of SPFC, which, commencing with the three months ended March 31, 1997, is reflected on the Company's consolidated balance sheet as "Investment in Southern Pacific Funding Corporation" and until its bankruptcy filing and cessation of new business activities was accounted for pursuant to the equity method of accounting. On October 1, 1998, SPFC, a publicly traded sub-prime mortgage banking company which originated, purchased and sold high yielding, single family sub-prime mortgage loans petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy laws, in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the resultant decline in its common stock to below one dollar per share, the Company wrote-off its total investment in SPFC. The write-off was $82.6 million during the quarter ended September 30, 1998. Equity in the net income of SPFC for the three and nine months ended September 30, 1998 was $0 and $12.7 million, respectively, as compared to $6.4 million and $19.4 million for the same periods last year. Equity in the net income of SPFC represents the Company's share of SPFC's net income based on the Company's ownership percentage. During the third quarter ended September 30, 1998, SPFC borrowed a maximum of $4.3 million from the Company at an interest rate of 12%. The average loan balance during the quarter was $2.6 million. As a result of SPFC declaring Chapter 11 bankruptcy, ceasing most operations, and beginning the liquidation of the company, the loan balance plus accrued interest was written-off as a part of the Company's total investment in SPFC as of September 30, 1998. FUNDING DEPOSITS AND FHLB BORROWINGS The Company primarily funds its loan originations through its subsidiary, SPB. SPB is an FDIC insured industrial loan company which is regulated by the California Department of Financial Institutions and the FDIC. SPB obtains the necessary liquidity to fund its own lending activities primarily through deposits and, if necessary, through borrowings from the FHLB. SPB's deposit portfolio consists primarily of certificates of deposit which increased to $1.7 billion as of September 30, 1998 as compared to $1.2 billion at December 31, 1997. The average cost of funds of SPB's deposits was 5.71% and 5.80% at September 30, 1998 and December 31, 1997, respectively. 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. The Company tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at 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. At September 30, 1998 and December 31, 1997, SPB had available lines of credit from the FHLB equal to $22.3 million and $45.8 million, respectively. The FHLB advances are secured by the investment in stock of FHLB and certain real estate loans with a carrying value of $58.1 million and $228.5 million at September 30, 1998 and December 31, 1997, respectively. The highest FHLB advance outstanding during the quarter ended September 30, 1998 was $20.0 million, with an average outstanding balance of $20.0 million. The outstanding balance of FHLB advances was $20.0 million at September 30, 1998. 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 investment or sale. 21 WAREHOUSE LINES OF CREDIT AND NOTES PAYABLE ICII and its subsidiaries had notes payable and various revolving warehouse lines of credit available at September 30, 1998, as follows:
INTEREST INDEX -------- ----- RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE -------- ---------- ----------- -------------- --------------- (DOLLARS IN THOUSANDS) Greenwich Capital Financial (AMN)...... 6.98% $100,000 $16,154 Libor plus 135 March 9, 1999 CoreStates (IBC)....................... 7.43% 30,000 3,170 Libor plus 220 November 30, 1998 Notes Payable (ICII)................... 8.00% ------ 1,220 Fixed rate None -------- ------- $130,000 $20,544 ======== =======
SECURITIZATION TRANSACTIONS AND LOAN SALES During the quarter ended September 30, 1998, SPB sold $73.7 million of commercial, multifamily loans, single family loans and Imperial Business Credit, Inc ("IBC"), securitized $24.4 million of leases. During the quarter ended September 30, 1997, the Company securitized $207.4 million of loans and leases originated by SPB's Income Property Lending Division, FMAC and IBC. Excluding loans securitized by FMAC, the Company securitized $22.2 million of IBC leases for the quarter ended September 30, 1997. RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 The Company's consolidated net loss for the three and nine months ended September 30, 1998 was $109.4 million and $80.3 million or $2.83 and $2.07 diluted net loss per share as compared to income of $14.6 million and $35.7 million or $0.36 and $0.87 diluted net income per share for the same period last year, respectively. The net loss for the three and nine months ended September 30, 1998 included charges and operating losses of $12.7 million or $0.33 diluted net loss per share and $14.5 million or $0.37 diluted net loss per share related to the previously announced discontinued operations of AMN, a sub-prime auto lending subsidiary. Net income for the three and nine months ended September 30, 1997, includes an extraordinary loss of none and $4.0 million or none and $0.10 basic and diluted per share representing a loss on the Company's early extinguishment of debt and operating losses of $3.3 million and $4.0 million or $0.08 and $0.10 basic and diluted per share representing loss from discontinued operations of AMN, respectively. Basic consolidated net (loss) income per share for the three and nine months ended September 30, 1998 was ($2.83) and ($2.07) per basic share as compared to $0.38 and $0.93 per basic share for the same period last year, respectively. Basic consolidated net loss per share for the three and nine months ended September 30, 1998 included charges and operating losses of $0.33 and $0.37 basic net loss per share related to the discontinued operations of AMN as compared to $0.08 and $0.10 basic net loss per share for the same periods last year. The significant loss reported for the quarter ended September 30, 1998 was primarily due to unstable financial markets in the United States and abroad and resulted in $97.9 million of non-cash after-tax write downs of the Company's securities and loans held for sale portfolios. Additionally, the Company has recorded other non-core pre-tax losses of $8.0 million primarily related to loss allowances and writedowns in the Company's former mortgage banking operations. During the third quarter of 1998, the Company completed an analysis of its potential exposure from losses on the repurchase of the loans still remaining from its former mortgage banking operations. The completion of this analysis resulted in the aforementioned $8.0 million charge being taken in the third quarter of 1998. 22 DECONSOLIDATION OF FMAC During the fourth quarter of 1997, the Company reduced its ownership percentage in FMAC from 66.7% to 38.4% through an initial public offering of FMAC common stock. The income from FMAC is accounted for by the equity method of accounting beginning with the quarter ended December 31, 1997. For the three and nine months ended September 30, 1998, the equity in net income of FMAC was $507,000 and $7.1 million, respectively. As a result of the deconsolidation of FMAC, gain on sale of loans, net interest income, other income and, general and administrative expenses are not comparable to the prior year. Therefore, the following income statements present the results of operations of the Company as if FMAC had been accounted for as an equity investment for all periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUE: Gain on sale of loans and leases.................................. $ 3,807 $ 284 $ 12,652 $ 16,836 --------- ------- --------- -------- Interest income................................................... 61,850 47,727 173,365 135,170 Interest expense.................................................. 32,773 26,051 89,473 75,748 --------- ------- --------- -------- Net interest income............................................ 29,077 21,676 83,892 59,422 Provision for loan and lease losses............................... 9,500 3,400 16,800 9,650 --------- ------- --------- -------- Net interest income after provision for loan and lease losses..... 19,577 18,276 67,092 49,772 --------- ------- --------- -------- Other income: Loan servicing income........................................... 3,326 1,583 9,112 2,825 (Loss) gain on sale of securities............................... (571) 16,678 (564) 20,984 Equity in net income of Southern Pacific Funding Corp........... -- 6,432 12,739 19,363 Equity in net income of Franchise Mortgage Acceptance Company... 507 9,800 7,093 19,110 Investment banking fees......................................... 2,175 -- 13,142 -- Asset management fees........................................... 2,207 858 4,987 3,674 Loss on impairment of securities................................ (120,138) -- (120,138) -- Mark to Market on securities and loans held for sale............ (42,063) (136) (40,528) (141) Other income.................................................... 7,407 63 9,940 1,542 --------- ------- --------- -------- Total other income................................................ (147,150) 35,278 (104,217) 67,357 --------- ------- --------- -------- Total revenue..................................................... (123,766) 53,838 (24,473) 133,965 --------- ------- --------- -------- EXPENSES: Personnel expense................................................. 17,785 10,240 45,598 25,332 Amortization of servicing rights.................................. 437 206 1,138 431 Occupancy expense................................................. 1,604 884 4,308 2,497 Data processing expense........................................... 500 492 1,300 1,254 Net (income) expenses of other real estate owned.................. (671) 1,146 (742) 5,383 General, administrative and other expense......................... 19,677 9,698 37,425 23,633 --------- ------- --------- -------- Total expenses................................................. 39,332 22,666 89,027 58,530 --------- ------- --------- -------- (Loss) income before income taxes, minority interest, discontinued operations and extraordinary item................. (163,098) 31,172 (113,500) 75,435 Income taxes...................................................... (64,516) 13,319 (46,155) 31,711 Minority interest in loss of consolidated subsidiaries............ (1,808) -- (1,574) -- --------- ------- --------- -------- (Loss) income before discontinued operations and extraordinary item.............................................. (96,774) 17,853 (65,771) 43,724 Loss from discontinued operations, net of income taxes............ (1,390) (3,264) (3,232) (4,030) Loss on disposal of AMN, net of income taxes...................... (11,276) -- (11,276) -- --------- ------- --------- -------- (Loss) income before extraordinary item........................... (109,440) 14,589 (80,279) 39,694 Extraordinary item--Loss on early extinguishment of debt, net of income taxes.................................................... -- -- -- (3,995) --------- ------- --------- -------- Net (loss) income.............................................. $(109,440) $14,589 $ (80,279) $ 35,699 ========= ======= ========= ========
23 REVENUES GENERAL Total revenues for the Company during the third quarter ended September 30, 1998 excluding the loss from the write down of certain securities and held for sale loan portfolios were $38.4 million as compared to $66.5 million reported for the same period in 1997. The decrease was due primarily to reduced revenue contributions from SPFC and the deconsolidation of FMAC. SPFC and FMAC contributed total revenues to the Company of $507,000 in the quarter ended September 30, 1998 as compared to $16.2 million in the same period of the previous year. Total revenues for the nine months ended September 30, 1998, excluding the loss from the write-down of certain securities and held for sale loan portfolios and gains on sale of SPFC and IMH stock were $136.2 million, as compared to $139.2 million for the same period last year. Excluding the gains on the sale of SPFC and IMH stock for the nine month periods ended September 30, 1997 and adjusting the nine months ended September 30, 1997 as if the deconsolidation of FMAC occurred on January 1, 1997, adjusted total revenues increased by 20.5% to $136.2 million from $113.0 million, respectively. GAIN ON SALE OF LOANS AND LEASES Consistent with the Company's objective of becoming less reliant on gain on sale as a source of revenue, gain on sale of loans and leases decreased $17.2 million to $3.8 million during the third quarter of 1998 from $21.0 million for the same period last year. Gain on sale of loans and leases consists primarily of gains recorded upon the sale of loans and leases, net of associated expenses, and to a lesser extent, fees received on the origination of loans, and fees received for commitments to fund loans. Gain on sale of loans decreased $45.0 million to $12.7 million for the nine months ended September 30, 1997 from $57.7 million for the same period last year, primarily as a result of the deconsolidation of FMAC and lower volume of securitizations at SPB. Gain on sale of loans and leases decreased to 9.9% and 9.3% of total revenues excluding loss on impairment of securities and mark-to-market adjustments on certain held for sale securities and loan portfolios for the quarter and nine months ended September 30, 1998, as compared to 31.5% and 36.1% of total revenues for the same periods last year, respectively. During the quarter ended September 30, 1998, SPB sold $73.7 million of commercial and multifamily loans and $2.1 million of single family residential mortgage loans to independent third-parties resulting in a combined gain of $2.7 million. IBC securitized $24.4 million of leases generating a gain of $699,000. During the quarter ended September 30, 1997, the Company securitized $207.4 million of loans and leases originated by SPB's income property division, FMAC and IBC. Excluding loans securitized by FMAC, the Company securitized $22.2 million of IBC leases for the quarter ended September 30, 1997. TOTAL INTEREST INCOME For the three and nine months ended September 30, 1998, total interest income increased to $61.9 million and $173.4 million, respectively, from $55.4 million and $152.2 million for the same periods last year. The increase in total interest income is primarily attributable to increases in yield as well as the outstanding average balance on interest-earning assets. The increase in the average yield on interest-earning assets in 1998 is primarily attributable to increases in the average yields on loans held for investment and sale reflecting a more diversified and higher-yielding mix of loan products relative to 1997. The comparison of total interest income for the three months ended September 30, 1998 and 1997 is also impacted by the deconsolidation of FMAC. Excluding FMAC's interest income for the three and nine months ended September 30, 1997, total interest income would have been $47.7 million and $135.2 million. TOTAL INTEREST EXPENSE For the three months and nine months ended September 30, 1998, total interest expense remained essentially the same at $32.8 million and $89.5 million, respectively, as compared to $32.0 million and $89.7 million for the same periods last year. The increase in interest on deposits and long term debt was attributable to the increase in deposits at SPB in 1998 and the interest expense related to the issuance of $70 million of Remarketed Par Securities in June of 1997. 24 Total deposits at SPB increased to $1.7 billion from $1.2 billion at September 30, 1998 and 1997, respectively. The yield on SPB deposits was 5.71% and 5.95% at September 30, 1998 and 1997, respectively. The decrease in interest on other borrowings was primarily attributable to the deconsolidation of FMAC. Excluding FMAC's interest expense for the three and nine months ended September 30, 1997, total interest expense would have been $26.1 million and $75.7 million. PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses was $9.5 million and $16.8 million for the three and nine months ended September 30, 1998, respectively, as compared to $3.4 million and $9.7 million for the same periods last year. The increase in the loan and lease loss provision for the three months ended September 30, 1998 was primarily the result of a $1.5 million loan loss provision relating to one credit relationship with a $4.0 million outstanding balance at September 30, 1998, a $3.0 million loan loss provision relating to increased delinquent loans in SPB's auto loan portfolio, and a $1.0 million lease loss provision relating to increased loss experience for IBC's equipment leases. The increase in the loan and lease loss provision for the nine months ended September 30, 1998 was primarily attributable to the former mortgage banking operations and SPB's auto loan portfolio. At September 30, 1998, nonaccrual loans declined to $52.0 million as compared to $70.6 million at December 31, 1997. Excluding AMN's discontinued operations, nonaccrual loans were $48.2 million and $48.0 million at September 30,1998 and December 31, 1997 or 3.5% and 3.6% of gross loans held for investment, respectively. Additionally, excluding net charge-offs of $12.8 million and $3.3 million of AMN related loans for the nine months ended September 30, 1998 and 1997, net charge-offs were $15.5 million and $8.7 million, respectively. The increase in net charge-offs was primarily attributed to an increase in net charge-offs in SPB's auto loan portfolio, partially offset by a decrease in charge-offs in the Company's lease portfolios at SPB and IBC. LOSS ON IMPAIRMENT OF SECURITIES As a result of the decline in the United States and global financial and equity markets, the market values of the Company's equity holdings have declined substantially, resulting in a pre-tax loss of $120.1 million. The Company recorded pre-tax losses of $24.5 million and $13.0 million related to a non- temporary decline in the market value of equity investments in IMH and ICCMIC, respectively. At September 30, 1998, the equity investments in IMH and ICCMIC are carried on the Company's balance sheet as securities available for sale at $9.9 million and $29.9 million, respectively. To the degree that market values drop significantly below these amounts, the Company may be exposed to further writedowns. The reported loss also includes a pre-tax write-off of $82.6 million, which represents the Company's total investment in SPFC. On October 1, 1998, SPFC filed a petition for bankruptcy with the U.S. Bankruptcy Court for the District of Oregon, and ceased most operations. SPFC has begun the liquidation of the company. The recovery of any written off amounts is dependent on proceeds received from the liquidation of SPFC's net assets, if any. MARK TO MARKET ON SECURITIES AND LOANS HELD FOR SALE The combination of market pricing movements and developments in the global, corporate debt, and asset backed financial markets had a negative impact on the Company's investment, available for sale, and trading securities portfolios. In addition to the write-downs previously discussed, the Company wrote-down its retained interests and other asset backed securities by $9.4 million. During the third quarter, the Company sponsored and invested approximately $18.7 million in the subordinate and equity interests of Pacifica Partners I, LP., a $500.0 million Collateralized Loan Obligation ("CLO") fund. The CLO is a leveraged investment backed by syndicated bank debt and high yield bonds. Also as a result of the recent financial market decline, the Company wrote-down its investment in the subordinate interest of the CLO by $3.3 million. Additionally, ICG, the parent of one of the Company's registered investment advisors and its broker/dealer subsidiary, recorded a loss of $4.5 million primarily due to a decline and the related write-down in the value of its securities held for trading, resulting from the recent decline in the financial and equity markets. To the degree that market values drop significantly below these amounts, the Company may be exposed to further writedowns. OTHER NON-CORE, NON-CASH WRITE DOWNS The Company provided additional loss allowances of $4.8 million for exposure to losses from the repurchase of residential mortgage loans under representations and warranties given to loan purchasers related to the Company's former mortgage banking operations. The Company also recorded an additional loss of $5.4 million, primarily consisting of a 25 loss provision of $4.5 million related to the Company's auto loan portfolio and remaining loans held for investment from the former mortgage banking operations. LOAN SERVICING INCOME Loan servicing income for the three and nine months ended September 30, 1998 was $3.3 million and $9.1 million, respectively, as compared to $2.4 million and $5.1 million for the same periods last year. The increase in loan servicing income was primarily attributable to a decrease in servicing related expenses associated with the Company's former residential mortgage banking loan portfolio and an increase in the average outstanding balance of loans and leases serviced for others at SPB and IBC. Total loans serviced for others averaged $986.8 million and $548.8 million during the nine months ended September 30, 1998 and 1997, respectively. EQUITY IN NET INCOME OF SPFC Equity in the net income of SPFC for the three and nine months ended September 30, 1998 was $0 and $12.7 million, respectively, as compared to $6.4 million and $19.4 million for the same periods last year, which represents the Company's share of SPFC's net income based on the Company's ownership percentage. At September 30, 1997 and 1998, the Company's ownership percentage in SPFC was 47.0%. Prior to SPFC's cessation of new operations, the Company accounted for its investment in SPFC using the equity method. On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy laws, in the U.S. Bankruptcy Court for the District of Oregon, ceased most operations, and began the liquidation of the company. As of September 30, 1998, the Company has completely written-off its investment in SPFC. EQUITY IN NET INCOME OF FMAC Equity in the net income of FMAC for the three and nine months ended September 30, 1998 was $507,000 and $7.1 million, respectively, as compared to $0 for the same periods last year, which represents the Company's share of FMAC's net income based on the Company's ownership percentage. The increase in the equity in net income of FMAC is due to the difference in accounting methods used for the Company's investment in FMAC at September 30, 1998 and 1997. At September 30, 1998, the Company's ownership percentage in FMAC was 38.4%, and accordingly, the Company accounted for its investment in FMAC using the equity method. During the quarter and nine months ended September 30, 1997, FMAC was a 66.67% owned consolidated subsidiary of the Company, which contributed pre-tax earnings to the Company of $9.8 million and $19.1 million, respectively. ASSET MANAGEMENT FEES Asset management fees were $2.2 million and $5.0 million for the three and nine months ended September 30, 1998, respectively, compared to $858,000 million and $3.7 million for the same periods last year, respectively. The management fees primarily relate to the activities of ICCAMC. ICCAMC was formed in the third quarter of 1997 to oversee the day-to-day operations of ICCMIC, a commercial real estate investment trust, pursuant to a management agreement. For the three months and nine months ended September 30, 1998, ICCAMC earned $1.8 million and $4.3 million, respectively, in management fees from ICCMIC. INVESTMENT BANKING FEES Investment banking fees were $2.2 million and $13.1 million for the three and nine months ended September 30, 1998, respectively, compared to none for the same periods last year. During the fourth quarter of 1997, the Company capitalized a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. The investment banking fees consist of fees related to equity and debt offerings and brokerage commissions. GAIN ON SALE OF SPFC STOCK During the three and nine months ended September 30, 1998, the Company did not sell any shares of its common stock ownership in SPFC. During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a pre-tax gain of $4.3 million. During the third quarter of 1997, the Company sold 500,000 shares of SPFC common stock at $15.11 per share generating cash proceeds of $7.6 million and a pre-tax gain of $5.2 million. 26 EXPENSES Total expenses for the Company during the third quarter of 1998 were $39.3 million as compared to $30.3 million for the same period last year. For the nine months ended September 30, 1998 total expenses were $89.0 million as compared to $74.8 million for the same period last year. Excluding the effect of the FMAC deconsolidation, expenses for the three and nine month periods ended September 30, 1997 were $22.7 million and $58.5 million, respectively. The increase in total expenses for the three and nine month periods ended September 30, 1998 was attributable to continued growth and increased activities at the Company's new business lines including PrinCap, ICW, CBC, ICG and ICCAMC. PERSONNEL EXPENSE Personnel expense increased to $17.8 million and $45.6 million for the three and nine months ended September 30, 1998, respectively, as compared to $14.9 million and $34.6 million for the same periods of the previous year. This increase was primarily the result of growth and increased activities at the Company's new business lines, including ICG, ICW and ICCAMC. AMORTIZATION OF SERVICING RIGHTS Amortization of servicing rights increased to $437,000 and $1.1 million for the three and nine months ended September 30, 1998 as compared to $206,000 and $431,000 for the same periods last year. The increase was primarily the result of an increased balance of servicing rights retained from recent loan sales and securitizations at SPB. OCCUPANCY EXPENSE Occupancy expense increased to $1.6 million and $4.3 million for the three and nine months ended September 30, 1998, respectively, as compared to $1.1 million and $2.9 million for the same periods of the previous year. The increase was primarily attributable to the Company's acquisition and expansion activities throughout 1997 and during the first nine months of 1998. NET INCOME/EXPENSES OF OTHER REAL ESTATE OWNED During the three and nine months ended September 30, 1998, income from OREO operations were $671,000 and $742,000 as compared to expenses of $1.1 million and $5.4 million, respectively, for the same periods last year. The income generated from OREO operations in 1998 as compared to the expenses in 1997 primarily resulted from a lower level of losses and write-downs related to the sale of properties from the Company's former mortgage banking operations. OTHER EXPENSES All other expenses (including data processing, professional services, telephone and other communications, amortization of goodwill and general and administrative expense) for the three and nine months ended September 30, 1998 totaled $15.4 million and $34.0 million, respectively, as compared to $13.0 million and $31.4 million for the same periods last year. The comparison of other expenses for the first quarter 1998 and 1997 is also impacted by the deconsolidation of FMAC. Excluding FMAC's total other expenses for the three and nine months ended September 30, 1997, other expenses would have been $10.2 million and $24.9 million, respectively, as compared to the consolidated total expenses of $15.4 million and $34.0 million. This increase reflects the Company's acquisition and expansion activities. MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES The Company's minority interest in (loss) income of consolidated subsidiaries was ($1.8) million and ($1.6) million for the three and nine months ended September 30, 1998, respectively, as compared to $4.9 million and $9.6 million for the same periods last year. The minority interest in income of consolidated subsidiaries for the three and nine months ended September 30, 1998 is attributable to the Company's approximately 60% ownership in ICG. The minority interest in income of consolidated subsidiaries for the same period last year was attributable to the Company's 66.7% ownership in FMAC. The comparison of the Company's minority interest in income of consolidated subsidiaries for the three and nine months ended September 30, 1998 and 1997 is impacted by the deconsolidation of FMAC. Excluding the Company's minority interest in income of FMAC for the three and nine months ended September 30, 1997, total minority interest in 27 income (loss) of consolidated subsidiaries would have been $0 when compared to ($1.8) million and ($1.6) million for the current periods presented. EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT During the first quarter of 1997, the Company successfully completed a $200.0 million offering of 9.875% Senior Notes due 2007. A portion of the proceeds from the offering were used to repurchase $69.8 million of 9.75% Senior Notes due 2004 for which the Company recorded an extraordinary after-tax charge of $4.0 million. The Company engaged in the new issuance in order to obtain more favorable debt covenants and to raise new capital to support its growing businesses. ASSET QUALITY NONACCRUAL LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES At September 30, 1998, nonaccrual loans declined to $52.0 million as compared to $70.6 million at December 31, 1997. Excluding AMN's discontinued operations, nonaccrual loans were $48.2 million and $48.0 million at September 30,1998 and December 31, 1997 or 3.5% and 3.6% of gross loans held for investment, respectively. Additionally, excluding net charge-offs of $12.8 million and $3.3 million of related loans at AMN for the nine months ended September 30, 1998 and 1997, net charge-offs were $15.5 million and $8.7 million, respectively. The increase in net charge-offs was primarily attributed to an increase in net charge-offs in SPB's auto loan portfolio, partially offset by a decrease in charge-offs in the Company's lease portfolios at SPB and IBC. The balance of nonaccrual loans relating to the former mortgage banking operations included $5.3 million and $6.9 million of loans at September 30, 1998 and December 31, 1997, respectively. The Company periodically reviews the allowance for loan and lease losses in connection with the overall loan and lease portfolio. Based on the Company's charge-off experience and relatively stable balance of nonaccrual loans, management believes the current balance of the allowance for loan and lease losses is sufficient in relation to the amount of risk in the loan and lease portfolio. 28 The Company's activity in the allowance for loan and lease losses was as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1998 1997 ---- ---- (IN THOUSANDS) BEGINNING BALANCE AS OF DECEMBER 31, 1997 AND 1996........................... $ 38,047 $ 19,999 Provision for loan and lease losses.......................................... 16,800 9,650 Provision for loan losses- AMN............................................... 5,250 8,515 Business acquisitions and bulk loan purchases................................ -- 7,484 Sale of Leases............................................................... -- (900) Deconsolidation of ICIFC..................................................... -- (687) -------- -------- 60,097 44,061 -------- -------- LOANS CHARGED OFF: Single family residential.................................................... (1,971) (2,160) Multifamily mortgage......................................................... (591) (420) Commercial mortgage.......................................................... (135) (955) Leases....................................................................... (830) (3,737) AMN related loans............................................................ (12,767) (3,345) Consumer loans............................................................... (14,026) (5,399) -------- -------- Total........................................................................ (30,320) (16,016) -------- -------- RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF: Single family residential.................................................... 189 46 Multifamily mortgage......................................................... 142 -- Commercial mortgage.......................................................... 35 -- Leases....................................................................... 1,004 425 Consumer..................................................................... 645 183 -------- -------- Total........................................................................ 2,015 654 -------- -------- Net charge-offs.............................................................. (28,305) (15,362) -------- -------- BALANCE INCLUDING AMN AS OF SEPTEMBER 30, 1998 AND 1997...................... $ 31,792 $ 28,699 ======== ========
Excluding the discontinued operations of AMN, the balance of the allowance for loan and lease losses at September 30, 1998 and December 31, 1997 was $28.2 million and $27.0 million, respectively. 29 The Company's allowance for loan and lease losses decreased to $28.2 million as compared to $27.0 million at December 31, 1997. The allowance for loan and lease losses as a percentage to non-accrual loans at September 30, 1998 and December 31, 1997 is as follow:
AT SEPTEMBER 30, 1998 AT DECEMBER 31, 1997 --------------------- -------------------- PERCENTAGE TO PERCENTAGE TO ------------- ------------- BALANCE NON-ACCRUING LOANS BALANCE NON-ACCRUING LOAN ------- ------------------ ------- ----------------- Allowance for loan and lease losses excluding AMN $28,216 58.48% $26,954 56.21% AMN's allowance for loan losses 3,576 94.55% 11,093 48.91% ----- ------ Total $31,792 61.10% $38,047 53.87% ======= =======
NONPERFORMING ASSETS ("NPA") The Company's NPA's consist of non-accruing loans, OREO and repossessed property. Total NPA's were $62.9 million as of September 30, 1998 as compared to $90.5 million at December 31, 1997. Total NPA's as a percentage of loans, OREO and repossessed assets were 3.61% at September 30, 1998, as compared to 6.04% at December 31, 1997. 30 The Company's NPA's as a percentage of loans, OREO and repossessed assets at AMN, former mortgage banking operations and all other lending activities were 19.79%, 48.45% and 3.09% at September 30, 1998, as compared to 69.88%, 52.51% and 3.57% at December 31, 1997. The decrease in NPA's as a percentage of loans, OREO and repossessed assets was mainly attributable to loan charges-offs and sales of OREO properties offset by an increase in SPB nonperforming assets during the nine months ended September 30, 1998. The following table sets forth the amount of non performing assets attributable to the Company's other lending activities, former mortgage banking operations and AMN.
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- FORMER AUTO FORMER AUTO ALL OTHER MORTGAGE MARKETING ALL OTHER MORTGAGE MARKETING LENDING BANKING NETWORK, INC LENDING BANKING NETWORK, INC. ACTIVITIES OPERATIONS OPERATIONS ACTIVITIES OPERATIONS OPERATIONS ------------- ------------- -------------- ------------- ------------- -------------- (DOLLARS IN THOUSANDS) Nonaccrual loans: One to four family....... $ 17,797 $ 5,273 $ -- $ 27,573 $ 6,874 $ -- Commercial property...... 3,553 -- -- 5,058 -- -- Multi-family property.... 1,605 -- -- 1,837 -- -- Leases and installment... 20,020 -- 3,782 6,608 -- 22,681 ---------- ------- ------- ---------- ------- ------- Total nonaccrual loans.... 42,975 5,273 3,782 41,076 6,874 22,681 ---------- ------- ------- ---------- ------- ------- OREO: One to four family....... 7,379 1,328 -- 2,552 5,774 -- Commercial property...... 877 -- -- 2,526 -- -- Multi-family property.... 537 -- -- 53 -- -- ---------- ------- ------- ---------- ------- ------- Total OREO................ 8,793 1,328 -- 5,131 5,774 -- ---------- ------- ------- ---------- ------- ------- Repossessed property: Equipment held for sale.. 405 -- -- 4,437 -- -- Repossessed vehicles..... -- -- 340 -- -- 4,563 ---------- ------- ------- ---------- ------- ------- Total repossessed property 405 -- 340 4,437 -- -- ---------- ------- ------- ---------- ------- ------- Total NPAs................ $ 52,173 $ 6,601 $ 4,122 $ 50,644 $12,648 $27,244 ========== ======= ======= ========== ======= ======= Total loans, OREO and repossessed property..... $1,689,873 $13,625 $20,826 $1,417,357 $24,087 $38,989 Total NPA's as a percentage of loans, OREO and repossessed 3.09% 48.45% 19.79% 3.57% 52.51% 69.88% property.................
There are no loans over 90 days past due accruing interest at September 30, 1998 or December 31, 1997, respectively. 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 uncollectable 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. Loans held for investment consisted of the following at September 30, 1998 and December 31, 1997:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (IN THOUSANDS) Loans secured by real estate: Single Family 1-4........................................... $ 145,211 $ 244,588 Multi-Family................................................ 61,129 17,261 Commercial.................................................. 40,803 1,085 ---------- ---------- 247,143 262,934 Leases...................................................... 2,966 7,745 Installment loans........................................... 35,332 129,595 Franchise loans............................................. 54,532 62,219 Asset based loans........................................... 622,021 484,832 Loan participations......................................... 182,394 196,339 Mortgage warehouse lines.................................... 167,420 122,488 Commercial.................................................. 36,642 6,480 ---------- ---------- Total..................................................... 1,348,450 1,272,632 Unearned income............................................. (5,314) (7,850) Deferred loan fees.......................................... (4,727) (4,916) ---------- ---------- Total..................................................... 1,338,409 1,259,866 Allowance for loan and lease losses......................... (28,216) (26,954) ---------- ---------- Total..................................................... $1,310,193 $1,232,912 ========== ==========
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, participations in commercial loan syndications and loans to experienced franchisees of nationally recognized restaurant concepts. The increase in loans held for investment was primarily attributable to loan originations at SPB's Coast Business Credit, Loan Participation and Investment Group, and Consumer Credit divisions. Additionally, SPB's acquisition of PrinCap Mortgage Warehouse Inc. during the fourth quarter of 1997 contributed to the increase in loans held for investment. The auto loans held for investment related to AMN's discontinued operations were $8.2 million and $25.3 million at September 30, 1998 and December 31, 1997, respectively. 31 YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the Year 2000 problem ("Y2K") concerning existing computer systems. Y2K affects every computer and subsystem the Company operates, both in-house and from independent servicers and vendors. The issue is whether the Company's computer systems will properly recognize the "00" and the prefix "20" dates when the year changes to 2000. Since many existing computer programs use only two digits to identify a year field with the assumption that the first two digits are always "19", most computer systems that do not properly recognize the new prefix century date of "20" and "00" date could generate erroneous data or cause a computer system to fail. Systems that calculate, compare or sort using the incorrect date may cause erroneous results, ranging from system malfunction to incorrect or incomplete processing. The Company does not have any proprietary in-house systems to renovate. Reputable vendors with national and international client bases have supplied the Company's software. These firms are committed to addressing the Y2K issue and have been working closely with the Company. STATE OF READINESS Consistent with the requirements of the Memorandum of Understanding ("MOU") described below, the Company is concentrating its efforts on the accounting, human resource, telecommunication and networking issues concerning Y2K. At SPB, the Company assigned a full-time Year 2000 Project Manager to handle issues concerning Y2K with testing and certification being performed on loan and deposit subsystems. At the Company's other subsidiaries, the Y2K responsibility is being provided by the corporate Management Information Systems group. A full Y2K assessment of all systems, facilities and peripheral devices was conducted in the fourth quarter of 1997. As a result of the Y2K assessment, only two critical systems were deemed to be non-compliant. The first computer system that was non-compliant will be replaced this year, and the second non-compliant system will be converted to a Y2K compliant platform during the first quarter of 1999. The Company has contacted all major vendors and received assurances that they will be fully compliant. Since vendor certification alone is not acceptable to many of the regulatory agencies, the Company has begun an extensive program of integration testing. YEAR 2000 PROJECT STATUS As of the third quarter ended 1998, the Company has completed the awareness and assessment phases of the project. Vendor certification has been received for all major systems. The renovation phase is nearly complete with the exception of a few improvements to be installed in the Company's personal computer networks, the installation of a new asset based lending system and the conversion of a portion of the consumer loan servicing system. The Company's asset based lending system will be installed and tested prior to December 31, 1998. The non- compliant portion of the Company's consumer loan servicing system will be converted in March 1999 to a new system that is Y2K compliant for consumer loans and mortgages. The Company has just completed a test of all personal computers owned by the Company in order to assess their ability to handle the Y2K date change, with a success rate of greater than 90%. The remainder of 1998 will be spent in the validation phase of the Y2K Project with software test scripts being developed, system testing and Y2K certification being performed. Most of the Company is already running Y2K compliant hardware and software including the Company's general ledger system. The Company and its subsidiaries plan to be fully Y2K compliant by March 31, 1999. COSTS TO ADDRESS THE Y2K ISSUE The Company is utilizing both internal and external resources to correct reprogram and test the computer systems for Y2K compliance. It is anticipated that all reprogramming changes will be completed and installed by December 31, 1998, allowing adequate time for testing all data from the Company's in-house, independent servicers and vendor computer systems through March 31,1999. The Company currently estimates that its total internal and external costs associated with making these internal systems Y2K compliant will be approximately $1.0 million to $2.0 million. The Company expects to fund these costs through operating cash flows. CONTINGENCY PLANS The Company established a series of target dates for vendors of critical systems to supply Y2K compliant software for testing. In those cases where the target dates were not met, alternative vendors and systems were acquired. The Company has scheduled testing with third-party vendors and service providers. For systems that are not critical to its operation, the Company will rely upon certifications of Y2K compliance from vendors and service providers. Most vendors and service providers have targeted December 1998 and March 1999 as their expected compliance completion dates. The Company believes its Y2K compliance process should enable it to be successful in modifying its computer systems to be Y2K compliant. As previously stated, the Company's general ledger system is already Y2K compliant and testing has begun on SPB's vendor certified deposit and loan servicing subsystems. 32 In addition to Y2K compliance, the Company has developed contingency plans for all other systems classified as critical and essential for operations. These contingency plans provide various alternatives in the event of the failure of a system to be adequately modified and/or sufficiently tested and certified to be Y2K compliant. However, there can be no assurance that either the compliance process or contingency plans will avoid partial or total system interruptions or cost necessary to update hardware and software systems successfully. In addition, there can be no assurance that the impact of any failure of the Company or its third-party vendors and service providers to be Y2K compliant will not have a material adverse effect on the Company's business, financial condition or results of operations. REGULATORY MATTERS MEMORANDUM OF UNDERSTANDING On October 28, 1998, Southern Pacific Bank entered into a Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Corporation ("FDIC"). The agreement requires that Southern Pacific Bank (i), within 30 days of the MOU, shall correct certain deficiencies relating to general ledger account reconcilements and implement monthly reporting to the Board of Directors regarding this effort (ii), within 45 days of the MOU, shall correct certain deficiencies relating to the Y2K assessment and implement monthly reporting to the Board of Directors regarding this effort (iii), within 45 days of the MOU, shall correct certain other deficiencies as noted in the Report of Examination- Information Systems, and (iv), within 30 days of the first month following the MOU, shall furnish written progress reports to the Regional Director of the FDIC. Southern Pacific Bank management has initiated actions to correct the deficiencies identified, has commenced monthly reporting to the Board of Directors and will provide monthly reports to the Regional Director of the FDIC. 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 regulations and (iii) the FDIC Leverage ratio regulation as of September 30, 1998.
MINIMUM MINIMUM WELL CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT ------ ----------- ----------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (IN THOUSANDS EXCEPT FOR RATIO DATA) California Leverage Limitation... $150,000 11.41% $150,000 5.00% $ - -% Risk-based Capital............... 216,805 10.33% 167,976 8.00% 209,970 10.00% Risk-based Tier 1 Capital........ 164,993 7.86% 83,988 4.00% 125,982 6.00% FDIC Leverage Ratio.............. 164,993 8.79% 75,026 4.00% 93,782 5.00%
LIQUIDITY AND CAPITAL RESOURCES 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 loan and lease originations and acquisitions, points and expenses paid in connection with the acquisition of wholesale loans, and ongoing administrative and other operating expenses. The Company's liquidity consists of cash, interest bearing deposits, securities available for sale, trading securities and equity investments. At September 30, 1998 and December 31, 1997 these sources of liquidity amounted to $503.8 million and $495.0 million, respectively. At September 30, 1998, liquidity at the parent company amounted to $12.2 million in cash and interest bearing deposits, $61.7 million in securities available for sale, $27.0 million in trading securities, and $60.2 million in equity investments for a total of $161.1 million. 33 The Company has financed its activities through warehouse lines of credit and repurchase facilities with financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPB, dividends from SPB, and securitizations. The Company believes that such sources will be sufficient to fund the Company's liquidity requirements for the foreseeable future. There can be no assurance that the Company will have access to the capital markets in the future or that financing will be available to satisfy the Company's operating and debt service requirements or to fund its future growth. The ability of SPB to dividend funds to the Company is subject to regulatory restrictions. SPB obtains the necessary liquidity to fund its own lending activities through deposits and, if necessary through borrowings from the FHLB. At September 30, 1998 and December 31, 1997, SPB had available lines of credit from the FHLB equal to $22.3 million and $45.8 million, respectively. The FHLB advances are secured by the investment in stock of FHLB and certain real estate loans with a carrying value of $58.1 million and $228.5 million at September 30, 1998 and December 31, 1997, respectively. The highest FHLB advance outstanding during the quarter ended September 30, 1998 was $20.0 million, with an average outstanding balance of $20.0 million. The outstanding balance of FHLB advances was $20.0 million at September 30, 1998. 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. SPB's deposit portfolio, which consists primarily of certificate accounts, increased to $1.7 billion as of September 30, 1998 as compared to $1.2 billion at December 31, 1997. 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. The Company tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at 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. In addition to warehouse lines of credit and SPB borrowings, the Company has also accessed the capital markets to fund its operations. In January 1997, the Company issued $200.0 million principal amount of 9.875% Senior Notes and used a portion of the proceeds to purchase approximately $69.8 million of its previously issued 9.75% Senior Notes. The Company contributed $35.0 million of the proceeds to SPB in the form of subordinated indebtedness, and the balance of the funds were used for general corporate purposes. During the second quarter of 1997, ICII issued $70.0 million of Senior Notes under a proprietary product known as "ROPES." These securities can be redeemed at par upon their maturity or remarketed as 30 year capital instruments. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering are being used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. During the fourth quarter of 1997, FMAC completed an initial public offering of its common stock pursuant to which ICII was a selling stockholder. FMAC and ICII and another selling stockholder received net proceeds from such offering of approximately $114.3 million, $59.7 million and $18.5 million, respectively. 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- On April 22, 1998, the Company was served with an alleged class action complaint filed in the Superior Court of San Diego County, California by plaintiff Michael Belch. Plaintiff seeks to represent a class of individuals who, since March 1994, requested, obtained and were charged fees for both loan payoff statements and corporate, recording and other fees incurred in the early repayment of mortgage loans where the borrowers were obtaining refinancing from other lenders. The complaint alleges, on behalf of the purported class, that the fees charged were unauthorized, unreasonable or in violation of applicable statute. The case involves the discontinued mortgage banking operations of the Company. The Company and plaintiff have reached a settlement agreement in principle, subject to final documentation and court approval. The settlement does not have a material impact on the financial condition of the Company. Following the October 1, 1998 filing for protection under Chapter 11 of the U.S. Bankruptcy Code by Southern Pacific Funding Corporation ("SPFC"), lawsuits were filed in the U.S. District Courts for the District of Oregon, the Eastern District of New York, the Eastern District of Wisconsin, and the Central District of California setting forth purported class-action complaints relating to alleged violations of the Federal securities laws in connection with securities filings and public statements made by SPFC with respect to its business during various periods specified in the respective complaints that range from October 9, 1997 to October 1,1998. The initial suits claim to be filed on behalf of shareholders, noteholders and bondholders of SPFC and name, among the defendants, H. Wayne Snavely, who served as chairman of the board of directors of the Company and of SPFC during the period referred to in the lawsuits, and the Company. While there are variations among the lawsuits, they in general allege among other things, that the market prices of SPFC's securities were artificially inflated due to the failure to mark down the value of its residual securities due to what are alleged to have been unduly positive statements in SPFC's filings with the Securities and Exchange Commission and in its press releases, failure to properly reflect increased levels of prepayments on SPFC loans and actual prepayment and default rates on its loans. The complaints allege that the statements made by SPFC constitute violations of Securities and Exchange Commission Rule 10b-5 and that the individual defendants and the Company have liability for such statements as "controlling persons" of SPFC. More recently, similar lawsuits have been filed on behalf of shareholders and bondholders of ICII based on the individual defendants' alleged status as "controlling persons" of ICII and ICII's alleged misrepresentation of material facts about the Company's revenues and operations which artificially inflated the market prices of ICII's securities. The latter cases name, in addition to Mr. Snavely and ICII, other Company officers, including Kevin E. Villani, Brad S. Plantiko, Paul B. Lasiter, and Charles O'Hara, and directors Perry A. Lerner and G. Louis Graziadio, III. The Company is a named defendant in the cases of Roth, et al v. Howard, et al, Case No. CV98-1315ST, Chalmers, et al v. Howard, et al, Case No. CV98-1239MA, and Massel Investments, Ltd. v. Howard, et al, Case No. CV98-1322JO, all of which have been filed in the U.S. District Court for the District of Oregon. The case of Sieger and Weiser v. Howard, et al, Case No. CV98-6190, was filed in the U.S. District Court for the Eastern District of New York. It does not name the Company as a defendant but does name the board of directors of SPFC, including Messrs. Snavely and Stephen J. Shugerman, President of SPB and a director of ICII and SPFC. The case of Mortensen v. Snavely, Case No. 98-8842DT, was filed in the U.S. District Court for the Central District of California. The case of Prentice Securities v. Imperial Credit Industries, Inc., et al, Case No. 98-C- 1092, was filed in the U.S. District Court for the Eastern District of Wisconsin. No responsive pleadings have been filed in any of these cases to date. The Company anticipates that additional, similar cases may be filed in these and other jurisdictions and will actively defend against all such cases. ITEM 2. Changes in Securities --------------------- None ITEM 3. Defaults in securities ---------------------- None ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None ITEM 5. Other Information ----------------- None 35 PART II. OTHER INFORMATION - CONTINUED ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- The registrant filed the following report on Form 8-K dated August 14, 1998. On July 13, 1998, the Company announced the acquisition of all of the outstanding shares of the capital stock of Statewide Documentation, Inc., a company providing loan documentation preparation, loan closing, notary and recording services and marketing of insurance products, for shares of ICII common stock On July 31, 1998, the Company announced that the operations of its wholly owned subsidiary Auto Marketing Network, Inc. ("AMN) were being discontinued. AMN's near term activities will be limited to managing the remaining loans and residual interests in its securitizations. The registrant filed the following report on Form 8-K dated October 2, 1998. On September 23, 1998, the Board of Directors of Imperial Credit Industries authorized a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, no par value, of the Company. The dividend is payable on October 12, 1998 to the shareholders of record at the close of business on that date. Each right entitles the registered holder to purchase from the Company one onehundredth of a share of series A Junior Participating Preferred Stock, par value $0.0001 per share, of the Company ("Preferred Shares") at a price of $40 per one onehundredth of a Preferred Share, subject to adjustment. The description and terms of the Rights are set forth in an Agreement between the Company and the U. S. Stock Transfer Corporation, as Rights Agent. 36 ITEM 6 IMPERIAL CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF (LOSS) EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER QUARTER NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------ ------------ ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- (Loss) income before discontinued operations and extraordinary item $(96,774) $17,855 $(65,771) $43,724 Loss from discontinued operations of AMN, net of income taxes (1,390) (3,266) (3,232) (4,030) Loss on disposal of AMN, net of income taxes (11,276) - (11,276) - Extraordinary item - Early extinguishment of debt, net of income taxes - - - (3,995) --------- ------- -------- ------- Net (loss) income $(109,440) $14,589 $(80,279) $35,699 ========= ======= ======== ======= Weighted average common shares outstanding used to compute basic income per share 38,605 38,721 38,699 38,550 Assumed common shares issued on exercise of stock options - 2,163 - 2,253 --------- ------- -------- ------- Number of common shares used to compute diluted income per share 38,605 40,884 38,699 40,803 ========= ======= ======== ======= BASIC EARNINGS PER SHARE: - ------------------------- (Loss) income before discontinued operations $ (2.50) $ 0.46 $ (1.70) $ 1.13 Loss from discontinued operations of AMN, net of income taxes (0.04) (0.08) (0.08) (0.10) Loss from disposal of AMN, net of income taxes (0.29) - (0.29) - Extraordinary item- Loss on early extinguishment of debt, net of income taxes - - - (0.10) --------- ------- -------- ------- Net (loss) income per common share $ (2.83) $ 0.38 $ (2.07) $ 0.93 ========= ======= ======== ======= DILUTED EARNINGS PER SHARE: - --------------------------- (Loss) income before discontinued operations $ (2.50) $ 0.44 $ (1.70) $ 1.07 Loss from discontinued operations of AMN, net of income taxes (0.04) (0.08) (0.08) (0.10) Loss from disposal of AMN, net of income taxes (0.29) - (0.29) - Extraordinary item - Loss on early extinguishment of debt, net of income taxes - - - (0.10) --------- ------- -------- ------- Net income per common share $ (2.83) $ 0.36 $ (2.07) $ 0.87 ========= ======= ======== =======
37 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 13, 1998 By: /s/ Brad S. Plantiko -------------------- Brad S. Plantiko Executive Vice President-- Chief Financial Officer 38 EXHIBIT INDEX -------------
Exhibit Number - -------------- 27.1 Financial data schedule for September 30, 1998 27.2 Financial data schedules for September 30, 1997 and 1996.
EX-27.1 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 283,938 14,187 0 70,993 69,937 0 0 1,672,882 31,792 2,325,312 1,711,397 40,544 58,002 289,847 0 0 128,711 96,784 2,325,312 149,227 19,294 4,844 173,365 62,253 89,473 83,892 16,800 0 87,453 (113,500) (80,279) 0 0 (80,279) (2.07) (2.07) 0 52,030 0 0 0 38,047 30,320 2,015 28,305 31,792 0 0
EX-27.2 3 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS 9-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 SEP-30-1997 SEP-30-1996 47,469 57,938 191,406 314,192 0 0 66,028 0 32,355 7,937 0 0 0 0 1,721,155 1,629,923 28,699 14,461 2,410,693 2,246,137 1,244,409 1,052,352 503,755 338,000 134,780 146,222 289,803 88,169 0 0 0 0 147,381 142,943 124,677 74,082 2,410,693 2,246,137 133,008 139,284 17,001 2,831 2,142 6,957 152,151 149,072 52,699 44,652 89,670 100,767 62,481 48,305 9,650 6,142 0 0 84,319 79,117 84,990 118,785 39,694 61,090 (3,995) 0 0 0 35,699 61,090 .93 1.72 .87 1.60 0 0 65,006 46,585 0 0 0 0 0 0 44,061 13,729 16,016 5,523 654 113 28,699 14,461 28,699 14,461 0 0 0 0 RESTATED SEPTEMBER 30, 1997 AND 1996 FINANCIAL DATA SCHEDULES PER FAS 128
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