SOUTHERN PACIFIC FUNDING CORP, S-1/A, 1997-03-20

SOUTHERN PACIFIC FUNDING CORP
S-1/A, 1997-03-20
MISCELLANEOUS BUSINESS CREDIT INSTITUTION

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997

REGISTRATION NO. 333-23179

--------------

PRE-EFFECTIVE

AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

--------------
SOUTHERN PACIFIC FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 6199 33-0636924
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

ONE CENTERPOINTE DRIVE, SUITE 500, LAKE OSWEGO, OREGON 97035
(503) 684-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

--------------

ROBERT W. HOWARD
PRESIDENT
SOUTHERN PACIFIC FUNDING CORPORATION
ONE CENTERPOINTE DRIVE, SUITE 500, LAKE OSWEGO, OREGON 97035
(503) 684-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:
<TABLE>
<S> <C>
LAURIS G. L. RALL DAVID J. JOHNSON, JR.
PAUL D. TVETENSTRAND ANDREWS & KURTH LLP
THACHER PROFFITT & WOOD 601 S. FIGUEROA STREET, SUITE 4200
TWO WORLD TRADE CENTER LOS ANGELES, CALIFORNIA 90017
NEW YORK, NEW YORK 10048
</TABLE>
IRWIN L. GUBMAN, ESQ.
IMPERIAL CREDIT INDUSTRIES, INC.
23550 HAWTHORNE BLVD.
BUILDING 1, SUITE 110
TORRANCE, CA 90505

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PROSPECTUS
370,000 SHARES

[LOGO OF SPFC]
SOUTHERN PACIFIC FUNDING CORPORATION

COMMON STOCK

----------------

All 370,000 shares of Common Stock of Southern Pacific Funding Corporation,
a California corporation ("SPFC" or the "Company"), offered hereby (the
"Offering") are being sold by Imperial Credit Industries, Inc. ("ICII" or
"Selling Shareholder"). The Company will not receive any proceeds from the
sale of shares by the Selling Shareholder. Upon successful completion of this
Offering, ICII will own 49.4% of the outstanding Common Stock of the Company.
See "Beneficial Ownership of Securities and Selling Shareholder."

The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "SFC." On March 19, 1997, the last reported sale price of the
Common Stock was $17.125 per share. See "Price Range of Common Stock and
Dividend Policy."

----------------
SEE "RISK FACTORS" ON PAGES 9 THROUGH 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.

The shares of Common Stock offered hereby (the "Shares") are being offered
by the Selling Shareholder through NatWest Securities Limited as agent (the
"Agent"). The Agent has agreed to use its reasonable efforts to solicit offers
to purchase the Shares in one or more transactions (which may include block
transactions) on the New York Stock Exchange, in the over-the-counter market
or otherwise, through negotiated transactions or otherwise at market prices
prevailing at the time of sale or at prices otherwise negotiated, subject to
prior sale. The net proceeds to the Selling Shareholder will be the aggregate
price per Share paid by the purchasers thereof, less a placement fee equal to
$.50 per Share payable by the Selling Shareholder to the Agent (before
expenses payable by the Selling Stockholder estimated to be $150,800). See
"Plan of Distribution."

The Company and the Selling Shareholder have agreed to indemnify the Agent
against certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Plan of Distribution."

----------------

NATWEST SECURITIES LIMITED

THE DATE OF THIS PROSPECTUS IS MARCH 20, 1997.
<PAGE>

The Company furnishes its shareholders with annual reports containing
financial statements audited by independent auditors and quarterly reports
containing unaudited financial information for the first three quarters of
each fiscal year.

----------------

FOR UNITED KINGDOM PURCHASERS: THE COMMON STOCK MAY NOT BE OFFERED OR SOLD
IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE
THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS, WHETHER AS
PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO
THE PUBLIC WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995 OR THE FINANCIAL SERVICES ACT 1986), AND THIS PROSPECTUS MAY ONLY BE
ISSUED OR PASSED ON TO ANY PERSON IN THE UNITED KINGDOM IF THAT PERSON IS OF A
KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986 (INVESTMENT
ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996.

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<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus (i) excludes 1,942,200
shares of Common Stock reserved for issuance under the Company's 1995 Stock
Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), of
which 974,700 will be outstanding on the effective date of this Offering, and
1,942,200 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Company's 1995 Senior Management Stock Option
Plan (the "Senior Management Plan"), and (ii) gives effect to a 4,150 for one
stock split effected in April 1996 and a three for two stock split effected in
January 1997. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.

THE COMPANY

Southern Pacific Funding Corporation ("SPFC" or the "Company") is a specialty
finance company engaged in the business of originating, purchasing and selling
high-yielding, sub-prime mortgage loans secured primarily by one-to-four family
residences. The majority of the Company's loans are made to owners of single
family residences who use the loan proceeds for purposes such as debt
consolidation, financing of home improvements and educational expenditures. The
Company focuses on lending to individuals who often have impaired or
unsubstantiated credit histories and/or unverifiable income. As a result, the
Company's customers are less likely to qualify for loans from conventional
mortgage sources and generally pay higher interest rates as compared to
interest rates charged by conventional mortgage sources. Approximately 83.2%
and 98.8% of the Company's mortgage loans originated or purchased during the
year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, were secured by first mortgages, and the remainder were secured
by second mortgages. The Company originates and purchases loans through its
Wholesale Division, its Correspondent Program, its Retail/Telemarketing
Division and its Institutional Division. The Company commenced operations in
January 1993 as a division of Southern Pacific Thrift & Loan Association
("SPTL"), a wholly-owned subsidiary of Imperial Credit Industries, Inc. ("ICII"
or "Selling Shareholder"), and has been an operating subsidiary of ICII since
April 1995. The Company completed the initial public offering (the "IPO") of
its Common Stock in June 1996 and ICII completed a secondary offering (the
"Secondary Offering") of 1,000,000 shares of the Company's Common Stock in
November, 1996. Upon completion of the Secondary Offering, ICII owned
approximately 51.2% of the Company's outstanding Common Stock. In addition,
concurrently with the Secondary Offering, the Company sold $75,000,000
principal amount of Convertible Subordinated Notes due 2006 (the "Notes
Offering"). Upon successful completion of this Offering, ICII will beneficially
own approximately 49.4% of the outstanding Common Stock of the Company. ICII is
a diversified specialty finance company offering financial products in the
following four sectors: sub-prime residential mortgage banking, commercial
mortgage banking, business lending and consumer lending.

The Company originates a majority of its loans through its Wholesale
Division, which is currently comprised of approximately 68 account executives
located in 14 regional branch centers who have established relationships with
independent mortgage brokers. For the nine months ended September 30, 1996, the
Wholesale Division originated loans in 45 states and the District of Columbia.
Of the Wholesale Division's 14 regional branch centers, four are located in
California, two in Oregon, and one in each of Washington, Florida, Colorado,
Illinois, Ohio, Massachusetts, Texas and Virginia. The Company believes that
its competitive strengths include providing prompt, responsive service and
flexible underwriting to independent mortgage brokers. The Company's
underwriters apply its underwriting guidelines on an individual basis but have
the flexibility to deviate from them when an exception or upgrade is warranted
by a particular loan applicant's situation, such as

3
<PAGE>

evidence of a strong mortgage repayment history relative to a weaker overall
consumer-credit repayment history. In most cases, the Company conditionally
approves loans within 24 hours from receipt of application and funds loans
within 21 days after approval. The Wholesale Division originated $183.0
million, $267.4 million and $345.6 million of loans during the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996,
respectively, representing 96.2%, 92.7% and 70.5% of total loan originations
and purchases during the respective periods.

The Company recently formed its Retail/Telemarketing Division to solicit
loans directly from prospective borrowers. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. The predictive dialing machine (i) automatically dials prospective
borrowers, (ii) provides the telemarketer with an on-screen marketing
presentation to market efficiently the Company's loan products, and (iii)
provides an interactive loan underwriting program and loan quotation system to
assess immediately the prospect's borrowing capability.

The Company purchases loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten by the Company's underwriting staff to determine that the loan
packages are complete and materially adhere to the Company's underwriting
guidelines. During the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996, the Company purchased $7.3 million, $21.1
million and $130.6 million of mortgage loans, respectively, through its
Correspondent Program. The Institutional Division, which began operations in
1996, also originates and purchases loans through relationships developed with
small- to medium-sized commercial banks, savings banks and thrift institutions.
During the nine months ended September 30, 1996, the Institutional Division
originated and purchased $13.7 million of mortgage loans.

In order to increase the Company's volume and diversify its sources of loan
originations, the Company has entered into strategic alliances with and, in
some circumstances, has acquired selected mortgage lenders. Pursuant to such
strategic alliances, the Company provides financing arrangements and a
commitment to purchase qualifying loans, and the participant in such a
strategic alliance is entitled to participate in the potential profitability of
Company sponsored securitizations. The Company is also seeking to acquire
additional mortgage lenders whose operations are complementary to the
Company's. The Company believes that such acquisitions will provide the Company
with new strategic broker relationships, additional experienced management
personnel and a greater share of the residential mortgage loan origination
market. The Company may consider acquiring smaller lenders from whom the
Company has purchased or financed mortgage loans or larger companies with
operations and resources similar to the Company's.

The Company sells a majority of its loan origination and purchase volume
through public securitizations. Securitization sales provide the Company with
greater flexibility and operating leverage than a portfolio lender by allowing
the Company to generate fee and interest income and participate in the
continuing profitability of the loans with a significantly smaller capital
commitment than that required by traditional portfolio lenders. Generally, in
each securitization transaction, the Company retains an interest in the loans
sold through interest-only and residual certificates, which are amortized over
an estimated average life. Cash flow received from these interest-only and
residual certificates is subject to the prepayment and loss characteristics of
the underlying loans. During the years ended December 31, 1994 and 1995 and the
nine months ended September 30, 1996, the Company securitized $70.2 million,
$164.9 million and $422.4 million of mortgage loans, respectively.

The Company obtains the servicing rights on all loans it originates or
purchases. In September 1995, the Company chose to outsource its loan servicing
operations to Advanta Mortgage Corp. USA ("Advanta"), which the Company
believes is one of the largest servicers of sub-prime mortgage loans. The
Company believes that by outsourcing loan servicing to Advanta, it is able to
benefit from Advanta's experience in servicing sub-prime

4
<PAGE>

mortgage loans, its comprehensive reporting capabilities, and the cost
efficiencies related to having large amounts of loans serviced by Advanta for
itself and others. Under the Company's servicing agreement with Advanta, the
Company is able to reduce the overhead, administrative and other fixed costs
associated with servicing loans while maintaining control of its servicing
portfolio. Advanta currently services every mortgage loan originated or
purchased by the Company. As of September 30, 1996, the Company's servicing
portfolio (inclusive of securitized loans for which the Company has ongoing
risk of loss but has no remaining servicing rights or obligations) was $651.3
million.

The Company's goal is to increase loan origination and purchase volume
nationwide while maintaining quality customer service and consistent
underwriting practices. The Company intends to achieve this goal by employing
the following strategies: (i) continuing expansion of its Wholesale Division,
(ii) continuing expansion of existing strategic alliances and entering into new
strategic alliances with or acquiring additional mortgage lenders, (iii)
increasing the volume and size of loan packages acquired through its
Correspondent Program, (iv) expanding its Retail/Telemarketing Division and (v)
increasing its pull-through ratio, which is the ratio of loans ultimately
funded to loans approved.

The Company was incorporated in California in October 1994. The Company's
headquarters are located at One Centerpointe Drive, Suite 500, Lake Oswego,
Oregon 97035, and its telephone number is (503) 684-4700.

RECENT DEVELOPMENTS

In October 1996, the Company entered into a $150 million warehouse line of
credit (the "Second Facility") which will expire on October 22, 1997, to
increase its available funds for loan originations and purchases. In February
1997, the capacity under the Second Facility increased to $400 million. The
Company's First Facility was extended to August 24, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

In November 1996, ICII sold 1,000,000 shares of the Company's Common Stock to
the public in the Secondary Offering. The Company did not receive any proceeds
from the Secondary Offering.

Concurrently with the Secondary Offering, the Company sold $75 million
principal amount of Convertible Subordinated Notes (the "Notes") due 2006 in
the Notes Offering. The net proceeds received by the Company from the Notes
Offering, after deducting underwriting discounts and offering expenses payable
by the Company were approximately $72 million. The Company applied the net
proceeds from the Notes Offering in the following manner: (i) to fund loan
originations and purchases; (ii) to support strategic alliances entered into
with selected mortgage lenders; (iii) to support securitization transactions;
and (iv) for general corporate purposes.

The Notes will mature on October 15, 2006, unless previously redeemed or
converted. Interest on the Notes is payable on April 15 and October 15 of each
year, commencing April 15, 1997. The Notes are convertible into Shares of
Common Stock of the Company, at any time prior to maturity, unless previously
redeemed or converted at a conversion price of $23.80 per share (equivalent to
a conversion rate of approximately 42.02 shares per $1,000 principal amount of
Notes), subject to adjustment. The Notes are subordinated in right of payment
to all existing and future senior indebtedness (including trade payables) of
the Company.

RESULTS OF THE QUARTER AND YEAR ENDED DECEMBER 31, 1996

The Company reported net earnings for the three months ended December 31,
1996 of $10.0 million, or $0.43 earnings per share, an increase of 1,054% from
$0.9 million, or $0.06 earnings per share, for the three months ended December
31, 1995. Net earnings for the year ended December 31, 1996 increased 277% to
$27.6 million, or $1.37 earnings per share, compared to $7.3 million, or $0.47
earnings per share, for the year ended December 31, 1995. The increase in
earnings was primarily attributable to the Company's continued

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expansion of its loan production sources and the sale of such loans. For the
three months ended December 31, 1996, the Company originated and purchased
$299.8 million of loans, an increase of 301% from $74.7 million of loans
originated and purchased in the comparable period in the preceding year. During
the three months ended December 31, 1996, the Company sold $235 million in
loans through securitization transactions compared to $12.9 million sold
through whole loans sales and $30.3 million sold through securitization
transactions in the comparable period in the preceding year. As of December 31,
1996 the Company reported total delinquencies of 6.9% of the loan servicing
portfolio of $908 million and net losses for the year ended December 31, 1996
as a percentage of the loan servicing portfolio were .04% or $369,613 for the
year.

OTHER DEVELOPMENTS

Advanta Corp. Advanta Corp., the parent of the servicer of the Company's
mortgage loan portfolio, recently announced that it was exploring strategic
alternatives as a result of increased losses from credit card loans. Although
Advanta Corp. stated that its mortgage business was performing well, there can
be no assurance that a sale of Advanta Corp. or some of its businesses would
not have an adverse effect on the Company. See "Risk Factors--Risks of
Contracted Servicing."

Acquisitions and Strategic Alliances. Pursuant to the Company's strategy to
increase and diversify sources of loan production, the Company recently
organized Hallmark America Inc. ("Hallmark America") and acquired National
Capital Funding ("National Capital") and entered into strategic alliances with
BOMAC Capital Mortgage, Inc. ("BOMAC") and American Funding Group Inc.
("American Funding"). The Company believes that these acquisitions and
strategic alliances permit the Company to secure new and cost effective means
of loan production. As such, the Company is currently in discussions with other
potential acquisition candidates or strategic partners.

Strategic Alliance with BOMAC. In November 1996, SPFC entered into a
strategic alliance with BOMAC, a Dallas, Texas based non-conforming lender.
Pursuant to the strategic alliance agreement, BOMAC has agreed to provide SPFC
with all non-conforming loans originated by BOMAC. Such commitment terminates
upon the earlier of delivery of loans in an aggregate amount of $600 million or
three years after the first securitization in which BOMAC's loans are included
in a SPFC sponsored securitization. SPFC has agreed to provide BOMAC with
financing facilities for the origination of loans and for working capital
purposes and interest-only and residual certificates resulting from the
securitization of BOMAC's loans, less certain fees and expenses.

Acquisition of Hallmark. In December 1996, SPFC organized Hallmark America as
a wholly owned subsidiary and capitalized it with $625,000 in cash, for the
purpose of investing in Hallmark Government Funding ("Hallmark Government").
Hallmark Government is a Bellevue, Washington based mortgage lender which
provides mortgage brokers mortgage banking services and support in return for
the right of first refusal to purchase loans originated by the mortgage broker.
Hallmark America purchased preferred stock of Hallmark Government and various
fixed assets and obtained an exclusive loan purchase commitment from Hallmark
Government for $360,000. Hallmark America also acquired a five year option to
purchase the remaining capital stock of Hallmark Government at fair market
value.

Acquisition of National Capital. In December 1996, SPFC acquired 95% of the
common stock of National Capital for $5 million in cash. National Capital is an
Atlanta, Georgia based diversified financial services company which offers non-
conforming loans through its subsidiary MorCap. MorCap originates loans through
a network of approximately 400 mortgage brokers throughout the southeastern
United States. To incentivize increased loan production and profitability,
management of National Capital has a buy-back option for a controlling interest
in National Capital once certain volume and profitability conditions are met by
MorCap.

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agreement, American Funding has agreed to provide SPFC with all non-conforming
loans originated by American Funding. Such commitment terminates upon the
earlier of delivery of loans in an aggregate amount of $600 million or three
years after the first securitization in which American Funding's loans are
included in a SPFC sponsored securitization. SPFC has agreed to provide
American Funding with financing facilities for the origination of loans and for
working capital purposes and interest-only and residual certificates resulting
from the securitization of American Funding's loans, less certain fees and
expenses.

THE OFFERING

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<S> <C>
Common Stock offered by the Selling
Shareholder......................... 370,000 shares

Common Stock outstanding before and
after the Offering(1)............... 20,737,500 shares

Use of Proceeds...................... The Company will not receive any proceeds
from the Offering.

New York Stock Exchange Symbol....... "SFC"
</TABLE>
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(1) Does not include 1,942,200 shares reserved for issuance under the Stock
Option Plan and 1,942,200 shares reserved for issuance pursuant to options
granted under the Senior Management Plan.

The following options to acquire shares have been granted to certain
executive officers of the Company under the Senior Management Plan and to the
non-employee directors, certain officers and other employees of the Company:

<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE
ISSUED PRICE
--------- --------
<S> <C> <C>
Senior Management Plan
11/01/95.................................................. 1,942,200 $ 7.00
Stock Option Plan
06/13/96 Issuance......................................... 345,000 $11.33
06/24/96 Issuance......................................... 435,000 $11.42
</TABLE>

See "Management--Stock Options."

RISK FACTORS

See "Risk Factors" for a description of certain factors which should be
considered carefully in evaluating an investment in the Common Stock offered by
this Prospectus.

PLAN OF DISTRIBUTION

The Shares are being offered by the Selling Shareholder through NatWest
Securities Limited as agent (the "Agent"). The Agent has agreed to use its
reasonable efforts to solicit offers to purchase the Shares in one or more
transactions (which may include block transactions) on the New York Stock
Exchange, in the over-the-counter market or otherwise, through negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
prices otherwise negotiated, subject to prior sale. See "Plan of Distribution."

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SUMMARY FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)

<TABLE>
<CAPTION>
PRO PRO
FORMA(1) FORMA(1)
-------- --------
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- ------------------------
1993 1994 1995 1995 1995 1996 1996
------ ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................. $1,218 $ 9,572 $17,995 $12,204 $14,338 $38,426 $38,038
Interest income........ 407 2,136 4,305 4,305 3,058 8,326 8,064
------ ------- ------- ------- ------- ------- -------
Total revenues......... 1,625 11,708 22,300 16,509 17,396 46,752 46,102
------ ------- ------- ------- ------- ------- -------
Expenses:
Interest expense....... 175 886 3,414 3,748 2,262 4,756 4,756
Personnel and
commission expense.... 475 2,156 4,190 4,191 2,755 7,398 7,398
General and
administrative
expense............... 239 1,262 2,153 2,387 1,321 3,955 3,955
------ ------- ------- ------- ------- ------- -------
Total expenses......... 889 4,304 9,757 10,326 6,338 16,109 16,109
------ ------- ------- ------- ------- ------- -------
Earnings before taxes... 736 7,404 12,543 6,183 11,058 30,643 29,993
Income taxes............ 305 3,073 5,205 2,566 4,589 13,029 12,753
------ ------- ------- ------- ------- ------- -------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 3,617 $ 6,469 $17,614 $17,240
====== ======= ======= ======= ======= ======= =======
Earnings per share...... $ .22 $ .93 $ .91
======= ======= =======
Weighted average number
of shares
outstanding(2)......... 16,748 18,987 18,987
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996 ACTUAL
-------------
<S> <C>
BALANCE SHEET DATA:
Loans held for sale.............................................. $157,953
Interest-only and residual certificates.......................... 65,088
Total assets..................................................... 241,364
Borrowings under warehouse lines of credit....................... 141,078
Total shareholders' equity....................................... 75,031
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- -------- -------- -------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and purchases:
Fixed-rate loans.................. $ 2,668 $ 28,599 $133,360 $174,565
Variable-rate loans............... 38,888 161,698 155,122 315,636
------- -------- -------- --------
Total loan originations and
purchases........................ $41,556 $190,297 $288,482 $490,201
------- -------- -------- --------
Percent of loans secured by first
mortgages......................... 96.4% 98.0% 83.2% 98.8%
Average principal balance per
loan.............................. $ 127 $ 117 $ 87 $ 114
Weighted average initial loan-to-
value ratio....................... 67.7% 69.5% 76.1% 73.3%
Loan sales:
Whole loan sales.................. $23,410 $121,362 $ 58,595 $ --
Loans sold through
securitizations.................. -- 70,173 164,870 422,400
------- -------- -------- --------
Total loan sales.................. $23,410 $191,535 $223,465 $422,400
======= ======== ======== ========
Weighted average interest rate:
Fixed-rate loans.................. 10.5% 10.1% 11.8% 11.5%
Variable-rate loans............... 8.0% 8.8% 9.3% 10.1%
Delinquencies as a % of loan
servicing portfolio (at period
end)(3)........................... 6.9% 1.3% 3.4% 3.9%
Net losses on loans as a % of loan
servicing portfolio (at period
end)(4)........................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
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(1) See "Pro Forma Financial Data" included herein.
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of the Notes to
the Financial Statements included herein.
(3) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
(4) Includes securitized loans serviced by others and loans held for sale. The
Company has not experienced material loan losses in part due to the
relatively unseasoned portfolio. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.

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<PAGE>

RISK FACTORS

Prospective purchasers of the Common Stock offered hereby should consider
carefully the following factors, as well as the other information appearing
elsewhere in this Prospectus, in evaluating an investment in the Company. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.

LIMITED HISTORY OF INDEPENDENT OPERATIONS

The Company commenced operations in January 1993 as a division of SPTL and
became an operating subsidiary of ICII in April 1995. Although the Company has
been profitable for each year since inception and has experienced substantial
growth in mortgage loan originations and total revenues, there can be no
assurance that the Company will be profitable in the future or that these
rates of growth will be sustainable or indicative of future results.

Since inception in January 1993, the Company's growth in originating and
purchasing loans has been significant. In light of this growth, the historical
financial performance of the Company may be of limited relevance in predicting
future performance. Also, the loans originated and purchased by the Company
and included in the Company's securitizations have been outstanding for a
relatively short period of time. The mortgage loans related to the interest-
only and residual certificates retained by SPTL pursuant to the Contribution
Transaction have generally had higher delinquency ratios than the Company's
delinquency ratios, even though such loans were generally underwritten to
SPFC's underwriting standards. Consequently, the delinquency and loss
experience of the Company's loans to date may not be indicative of future
results. It is unlikely that the Company will be able to maintain delinquency
and loan loss ratios at their present levels as the Company's loan portfolio
becomes more seasoned.

INTEREST-ONLY AND RESIDUAL CERTIFICATES

At September 30, 1996, the Company's balance sheet reflected interest-only
and residual certificates of approximately $65.1 million valued by the Company
in accordance with SFAS No. 115, "Accounting for Certain Debt and Equity
Securities." The Company records as an investment its retained interest in its
securitized loans (both interest-only and residual certificates) and derives a
substantial portion of its income by recognizing gains upon sales of senior
interests in loans through securitizations. Realization of these interest-only
and residual certificates in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
realization of cash flows associated therewith. The Company estimates future
cash flows from these interest-only and residual certificates, values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities in accordance with SFAS No. 115. If actual experience differs from
the assumptions used in the determination of the asset value, future cash
flows and earnings could be negatively impacted and the Company could be
required to reduce the value of its interest-only and residual certificates in
accordance with SFAS No. 115. The value of such certificates can fluctuate
widely and is extremely sensitive to changes in discount rates and projected
mortgage loan prepayments. The Company has not experienced material loan
losses and its aggregate delinquency experience has been relatively low, in
part due to the relatively unseasoned portfolio. The Company believes that its
aggregate delinquency and loan loss experience will increase as its loan
portfolio matures. Certain of the Company's interest-only and residual
certificates relate to mortgage pools which have incurred delinquency and loan
loss experience greater than that experienced by the Company's aggregate
mortgage portfolio, although consistent with the experiences of other
residential subprime mortgage lenders. The Company has provided for the effect
of expected losses on the underlying loans sold through its discounted
recourse liability, which was reflected on its balance sheet with a value of
$6.2 million at September 30, 1996. The Company believes that it is likely
that the mortgage pools it securitizes will experience losses equal to the
discounted recourse liability on its balance sheet. To the Company's
knowledge, there is no active market for the sale of these interest-only and
residual certificates. No assurance can be given that interest-only and
residual certificates could be sold at their reported value, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Accounting Considerations."

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Credit Risk Exposure. The documents governing the Company's securitizations
require the trustee of the securitization to build over-collateralization
levels through retention of cash otherwise payable to the interest-only and
residual certificateholders ("residual interest distributions") and
application thereof to reduce the principal balances of the senior interests
issued by the related trust. This application causes the aggregate principal
amount of the loans in the related pool to exceed the aggregate principal
balance of the outstanding senior interests. Such excess amounts serve as
credit enhancement for the related senior interests and are available to cover
losses realized on loans held by such trust. The Company continues to be
subject to the risks of default and foreclosure following the sale of loans
through securitizations to the extent residual interest distributions are
reduced by losses. Certain of the Company's interest-only and residual
certificates relate to mortgage pools which include loans originated by ICII,
SPTL and other unrelated originators, as well as the Company. To the extent
the loss and delinquency characteristics of loans originated by such other
originators are greater than the Company's, the Company will have additional
credit exposure thereto. If losses exceed the current period residual interest
distributions, an insurance policy will fund the losses and the insurer will
be reimbursed from future residual interest distributions. Such over-
collateralization levels are pre-determined by the entity issuing the
guarantee on the related senior interests and are a condition to obtaining an
"AAA/Aaa" rating thereon. Such retention diverts cash which would otherwise
flow to the Company. In addition, terms of the pooling and servicing
agreements require an increase of over-collateralization levels if the
delinquency levels of loans in a particular pool exceed predetermined levels
set by the monoline insurance carrier which guarantees the senior interest in
the related pools. As of December 31, 1996, the delinquency levels set by the
monoline insurance carrier in one of its mortgage pools had been reached
resulting in an increase in the required over-collateralization levels for
such pools. Such an increase had the effect of delaying cash flow which
otherwise would have been received by the Company. As a result of such delay,
the Company has not recorded any material adjustments to its financial
statements as a whole. However, in the future there is no assurance that the
Company will not have to make such adjustments. See footnote 3 of Notes to
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

RECENT AND PLANNED EXPANSION

The Company's total revenues and net earnings have grown significantly since
inception, primarily due to increased mortgage origination, purchasing and
sales activities. The Company intends to continue to pursue a growth strategy
for the foreseeable future, primarily through the growth and expansion of its
Wholesale Division and Correspondent Program, through the development of its
Retail/Telemarketing Division and entering into strategic alliances with and,
in some circumstances, acquiring selected mortgage lenders. In particular, as
part of the Company's strategic plan, it intends to use the
Retail/Telemarketing Division, with its lower average cost for each originated
loan, to increase the volume of loans originated. In addition, the Company is
seeking to enter into strategic alliances with selected mortgage lenders,
pursuant to which, among other things, the Company would provide financing
arrangements and a commitment to purchase qualifying loans, and the related
participant in such a strategic alliance would be entitled to participate in
the potential profitability of Company sponsored securitizations. The Company
is also seeking to acquire mortgage lenders whose operations are complementary
to the Company's. The Company believes that such acquisitions will provide the
Company with new strategic broker relationships, additional experienced
management personnel and a greater share of the residential mortgage loan
origination market. The Company may consider acquiring smaller lenders from
whom the Company has purchased or financed mortgage loans or larger companies
with operations and resources similar to the Company's.

Each of these plans requires additional personnel and assets and there can
be no assurance that the Company will be able to successfully expand and
operate such divisions and programs profitably. In particular, it is
anticipated that the Company's planned strategic alliances will require
substantial capital commitments to fund residual and working capital
financing, a substantial portion of which could be subject to the credit risk
of the participant in the related strategic alliance. Although it is expected
that the Company's commitments will be secured by the related participant's
interest in the Company's interest-only and residual certificates, as
applicable, in the event of a default by such a participant, the cash
collected from such collateral may not be sufficient, in

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<PAGE>

the event of substantially faster than anticipated prepayments on such
collateral, to repay fully the Company's advances. There can be no assurance
that the Company will anticipate and respond effectively to all of the
changing demands that its expanding operations will have on the Company's
management, information and operating systems and cash reserves and the
failure of the Company to meet challenges of any such expansion could have a
material adverse effect on the Company's results of operations and financial
condition. There can be no assurance that the Company will successfully
achieve its planned expansion or, if achieved, that the expansion will result
in profitable operations.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. The Company anticipates that it will continue operating on a
negative cash flow basis as long as it continues to sell loans through
securitizations and it continues to retain interest-only and residual
certificates in the loans sold. The Company's primary operating cash
requirements include the funding or payment of: (i) originations and
purchases; (ii) investments in interest-only and residual certificates; (iii)
fees and expenses incurred in connection with securitizations; (iv) interest
expense incurred on borrowings under its warehouse facilities; (v) income
taxes; (vi) capital expenditures; (vii) funding advances under its strategic
alliance program; (viii) funding acquisitions of mortgage lenders and (ix)
other operating and administrative expenses. The Company funds these cash
requirements primarily through capital market transactions, warehouse
financing and whole loan sales and securitizations.

Need for Additional Financing. The Company's ability to implement its
business strategy will depend upon its ability to continue to effect
securitizations, establish alternative long-term financing arrangements,
maintain sufficient financing under warehousing facilities upon acceptable
terms and to access the public or private capital markets in connection with
the issuance of its equity or debt securities. There can be no assurance that
such financing will be available to the Company on favorable terms, if at all.
If such financing were not available or the Company's capital requirements
exceed anticipated levels, then the Company would be required to obtain
additional financing. The Company cannot presently estimate the amount and
timing of additional financing requirements because such requirements are
dependent upon, among other things, the growth of the Company. If the Company
were unable to raise such additional capital, its results of operations and
financial condition would be adversely affected. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."

In addition, pursuant to the ICII Note Indenture (as defined below), for so
long as ICII owns more than 50% of the Company's outstanding voting
securities, the Company may be limited in the amount of indebtedness it may
incur. The sale by ICII of at least 264,487 of the shares offered hereby will
reduce ICII's ownership of the Company's outstanding voting securities to less
than 50%. See "--Control by Existing Shareholder; Limitations Imposed."

Dependence on Warehouse Financing. The Company relies upon short-term
warehouse facilities to fund loan originations and purchases. In November
1995, the Company entered into a warehouse and purchase facility (the "First
Facility"). Under the First Facility, the Company has available a $200 million
warehouse line of credit secured by the loans the Company originates or
purchases. The First Facility extends through August 24, 1997. The Company is
required to comply with various operating and financial covenants as defined
in the agreement governing the First Facility. Such covenants include
restrictions on (i) changes in the Company's business that would materially
and adversely affect the Company's ability to perform its obligations under
the Facility, (ii) selling any asset other than in the ordinary course of
business and (iii) guaranteeing the debt obligation of any other entity. The
continued availability of funds provided to the Company under this facility is
subject to the Company's continued compliance with the operating and financial
covenants contained in such agreements.

In October 1996, the Company entered into a second warehouse facility (the
"Second Facility"). Under the Second Facility the Company has available a $400
million warehouse line of credit secured by the loans the Company originates
or purchases. The Company is required to comply with various operating and
financial

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<PAGE>

covenants as defined in the agreement governing the Second Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the Facility, (ii) selling any asset other than in the
ordinary course of business and (iii) guaranteeing the debt obligation of any
other entity. The continued availability of funds provided to the Company
under this facility is subject to the Company's continued compliance with the
operating and financial covenants contained in such agreements.

Dependence on Securitizations. Since March 1994, the Company has pooled and
sold through securitizations senior interests in an increasing percentage of
the loans which it originates or purchases. The Company relies significantly
upon securitizations to generate cash proceeds for repayment of its warehouse
line and to create credit availability to purchase additional loans. Further,
gains on sales from the Company's securitizations represent a significant
portion of the Company's revenue. Several factors affect the Company's ability
to complete securitizations of its loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the credit quality of the Company's portfolio of loans and the
Company's ability to obtain credit enhancement. If the Company were unable to
securitize profitably a sufficient number of its loans in a particular
financial reporting period, then the Company's revenues for such period would
decline which could result in lower income or a loss for such period. In
addition, unanticipated delays in closing a securitization could also increase
the Company's interest rate risk by increasing the warehousing period for its
loans.

In order to gain access to the securitization market, the Company has relied
on credit enhancements provided by monoline insurance companies to guarantee
senior interests in the related trusts to enable it to obtain an "AAA/Aaa"
rating for such interests. Any substantial reductions in the size or
availability of the securitization market for the Company's loans or the
unwillingness of insurance companies to guarantee the senior interests in the
Company's loan pools could have a material adverse effect on the Company's
results of operations and financial condition.

The Company endeavors to effect quarterly public securitizations of its loan
pools. However, market and other considerations, including the conformity of
such loan pools to the requirements of monoline insurance companies and rating
agencies, affect the timing of such transactions. Any delay in the sale of a
loan pool beyond a quarter-end would postpone the recognition of gain related
to such loans and would likely result in lower income or a loss for such
quarter being reported by the Company.

ECONOMIC CONDITIONS

General. The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand
for consumer credit and declining real estate values. Any material decline in
real estate values reduces the ability of borrowers to use home equity to
support borrowings and increases the loan-to-value ratios of loans previously
made by the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of default. Further, delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on borrowers who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources,
whether for reasons of credit impairment, income qualification or credit
history or a desire to receive funding on an expedited basis ("Sub-prime
Borrowers"), the actual rates of delinquencies, foreclosures and losses on
such loans could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general. Any
sustained period of such increased delinquencies, foreclosures or losses could
adversely affect the pricing of the Company's loan sales whether through whole
loan sales or securitizations.

Changes in Interest Rates. Profitability may be directly affected by the
level of and fluctuations in interest rates which affect the Company's ability
to earn a spread between interest received on its loans held for sale and
rates paid on warehouse line. The Company's profitability may be adversely
affected during any period of unexpected or rapid change in interest rates. A
substantial and sustained increase in interest rates could adversely

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<PAGE>

affect the Company's ability to originate and purchase loans. A significant
decline in interest rates could increase the level of loan prepayments and
require the Company to write down the value of its interest-only and residual
certificates, thereby adversely impacting earnings.

Variable-rate mortgage loans (which includes loans that have initial fixed
rate terms of up to three years) originated or purchased by the Company
amounted to $161.7 million, $155.1 million and $315.6 million in principal
amount during the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996, respectively. Substantially all such variable-rate
mortgage loans included a "teaser" rate, i.e., an initial interest rate
significantly below the fully indexed interest rate at origination. Although
these loans are underwritten assuming the fully indexed rate at origination,
borrowers may encounter financial difficulties as a result of increases in the
interest rate over the life of the loans.

The market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company
has implemented various hedging strategies to mitigate the change in market
value of fixed-rate mortgage loans held for sale between the date of
origination and sale. Commencing in August 1995, these strategies have
included selling short and selling forward United States Treasury securities
and pre-funding loan originations in its securitizations. The Company
currently hedges its fixed-rate mortgage loans held for sale by selling
forward a combination of United States Treasury securities of various
maturities whose combined change in value due to a change in interest rates
closely approximates the change in value of the mortgage loans hedged. In the
future the Company may hedge its variable-rate mortgage loans and interest-
only and residual certificates with hedging transactions which may include
forward sales of mortgage loans or mortgage-backed securities, interest rate
caps and floors and buying and selling of futures and options on futures. The
nature and quantity of hedging transactions are determined by the Company's
management based on various factors, including market conditions and the
expected volume of mortgage loan originations and purchases. No assurance can
be given that such hedging transactions will offset the risks of changes in
interest rates, and it is possible that there will be periods during which the
Company could incur losses after accounting for its hedging activities. See
"Business--Hedging."

In addition, the Company hedges future production of mortgage loans through
a pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash (the "pre-funded amount")
into the related trust to purchase the loans the Company commits to sell on a
forward basis. This pre-funded amount is invested pending use in short term
obligations which pay a lower interest rate than the interest rate the trust
is obligated to pay certificate investors on the outstanding balance of the
pre-funded amount. The Company is required to deposit at the closing of the
related transaction an amount sufficient to make up the difference between
these rates.

RISKS RELATED TO LOWER CREDIT GRADE BORROWERS

Loans made to Sub-prime Borrowers may entail a higher risk of delinquency
and higher losses than loans made to borrowers who utilize conventional
mortgage sources. While the Company believes that the underwriting criteria it
employs enable it to mitigate the higher risks inherent in loans made to Sub-
prime Borrowers, no assurance can be given that such criteria or methods will
afford adequate protection against such risks. In the event that pools of
loans sold by the Company in which the Company retains interest-only and
residual certificates experience higher losses than anticipated, the Company's
results of operations or financial condition could be adversely affected.

The Company currently offers multiple mortgage loan products to Sub-prime
Borrowers which it classifies as A through D credit levels. The Company
intends to increase its focus on lower credit levels such as C and D credit
loans. The Company requires a higher interest rate and a lower loan-to-value
ratio on C and D loans than it requires for higher grade sub-prime mortgage
loans. The Company believes that higher interest rates and lower loan-to-value
ratios required for lower credit grade borrowers should offset the risks
inherent in lower credit grade lending. However, there can be no assurance
that the Company will not experience loan losses in

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<PAGE>

connection with such lending activities which could have a material adverse
effect on the Company's results of operations or financial condition.

RISKS OF CONTRACTED SERVICING

The Company currently contracts for the servicing of all loans it
originates, purchases and holds for sale with Advanta. This arrangement allows
the Company to increase the volume of loans it originates and purchases
without incurring the overhead investment in servicing operations. As with any
external service provider, the Company is subject to risks associated with
inadequate or untimely services. The Company regularly reviews the
delinquencies of its servicing portfolio. Many of the Company's borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. A substantial increase in the Company's
delinquency rate or foreclosure rate could adversely affect its ability to
access profitably the capital markets for its financing needs, including
future securitizations. Although the Company periodically reviews the costs
associated with establishing servicing operations to service the loans it
originates and purchases, it has no plans to establish and perform servicing
operations at this time. See "Business--Loan Servicing and Delinquencies."

The Company's servicing agreement with Advanta provides that if the Company
desires to terminate the agreement without cause (as defined in the agreement)
upon 90 days' written notice, the Company will be required to pay Advanta an
amount equal to 1% of the aggregate principal balance of the mortgage loans
being serviced by Advanta at such time. Further, the agreement provides that
the Company shall pay Advanta a transfer fee of $100 per loan for any mortgage
loan which the Company transfers from Advanta to another servicer, without
terminating the agreement. Depending upon the size of the Company's loan
portfolio serviced by Advanta at any point in time, the termination penalty
that the Company would be obligated to pay Advanta may be substantial.

Advanta currently services the loans in each of the Company's public
securitizations. With respect to such loans, the related pooling and servicing
agreements do not permit Advanta to be terminated except under specific
conditions described in such agreements, which generally include various loss
and delinquency tests and failure to make payments, including advances, within
specific time periods. Such termination would generally be at the option of
the holders of the related certificates and/or the financial guaranty insurer
for such securitization and not at the option of the Company. If a new
servicer were selected with respect to any such securitization, the change in
servicing may result in greater delinquencies and losses on the related loans,
which would adversely impact the value of the interest-only and residual
certificates held by the Company in connection with such securitization.

DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL

The Company's growth and development to date have been largely dependent
upon the services of Robert W. Howard and Bernard A. Guy, President and
Executive Vice President, Acting Chief Financial Officer and Acting Secretary
of the Company, respectively. The Company does not have and does not presently
intend to acquire key-man life insurance on any of its key personnel. The loss
of Messrs. Howard's or Guy's services for any reason could have a material
adverse effect on the Company. The Company has entered into employment
agreements with Messrs. Howard and Guy. See "Management--Executive
Compensation--Employment Agreements."

CONTROL BY EXISTING SHAREHOLDER; LIMITATIONS IMPOSED

Upon successful completion of this Offering, ICII will beneficially own
approximately 49.4% of the outstanding Common Stock of the Company. Although
the percentage ownership by ICII will be reduced to less than 50%, it is
likely that ICII will continue to be able to control the election of at least
a majority of the members of the Company's Board of Directors and to exercise
significant influence on corporate actions taken by the Company. The Company's
Board of Directors will independently approve ordinary corporate transactions,
including, but not limited to, financing arrangements between the Company and
non-ICII entities, without the

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<PAGE>

prior approval of ICII. Under the Company's bylaws, as long as ICII directly
owns at least 25% of the Company's outstanding voting stock, the Audit
Committee of the Company's Board of Directors (consisting of directors
independent of both management and ICII) must independently approve all
transactions between the Company and ICII. See "Beneficial Ownership of
Securities and Selling Shareholder." No assurance can be given that the
Offering will be successfully completed.

In January 1997, ICII issued $200 million principal amount of Senior Notes
due 2007 (the "ICII Notes"). The indenture for the ICII Notes (the "ICII Note
Indenture") contains financial and operating covenants of ICII whereby ICII
agrees to take or refrain from taking, and to cause certain of its
subsidiaries for which it owns a majority of the voting securities to take or
refrain from taking, certain actions regarding the financial operations of
ICII and those subsidiaries, including without limitation restrictions on
incurring certain indebtedness, issuing certain securities, selling certain
assets and making certain payments. In addition, certain subsidiaries of ICII
have agreed to guaranty ICII's obligations under the ICII Notes and the ICII
Note Indenture. ICII, by selling the Common Stock of the Company offered
hereby, intends to reduce its percentage ownership in the Company below 50%
and thereby cause the Company not to be required to guaranty ICII's
obligations under the ICII Notes and the ICII Note Indenture, and not to be a
subsidiary to which the various financial and operating covenants in the ICII
Note Indenture would apply. However, if ICII is unable to consummate the
Offering of the Common Stock of the Company as contemplated hereby, the
Company may be adversely affected by the covenants in the ICII Note Indenture,
including a guaranty by the Company of ICII's obligations under the ICII Notes
and limitations on the Company's ability to incur indebtedness. These
limitations could (i) cause the Company to operate in a manner which generated
cash but was less profitable than it otherwise could be, (ii) curtail its
growth plans or (iii) otherwise adversely affect its operations.

CONFLICTS OF INTEREST WITH CONTROLLING SHAREHOLDER

On November 20, 1995, ICII sold certain assets to Imperial Credit Mortgage
Holdings, Inc. ("IMH"), a real estate investment trust. In connection
therewith, ICII executed a non-compete agreement (the "Non-Compete Agreement")
and a right of first refusal agreement (the "Right of First Refusal
Agreement"), each having a term of two years. Pursuant to the Non-Compete
Agreement, except as set forth below, ICII and any entity of which ICII owns
more than twenty-five percent (25%) of the voting securities (a "25% Entity")
may not (i) compete with the warehouse lending operations of IMH (whereby IMH
provides short-term lines of credit to approved mortgage banks to finance
mortgage loans during the time from the closing of the loans to their sale or
other settlement with pre-approved investors), (ii) establish a network of
third party correspondent loan originators and (iii) establish another end-
investor in sub-prime mortgage loans. The Non-Compete Agreement provides
explicitly, however, that the Company "may continue its business which is
primarily to act as a wholesale originator and bulk purchaser of non-
conforming mortgage loans." Pursuant to the Right of First Refusal Agreement,
ICII granted ICI Funding Corporation, a subsidiary of IMH ("ICIFC"), a right
of first refusal to purchase all non-conforming mortgage loans that ICII or
any 25% Entity desires to sell. Under this Agreement, the Company must give
ICIFC 24 hours' prior written notice of the terms of any proposed sales of
non-conforming mortgage loans. There have been no claims made under the Right
of First Refusal Agreement by ICIFC as a result of the Company's operations to
date.

RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN LOAN SALES AND
SECURITIZATIONS

In connection with its securitizations, the Company transfers loans
originated or purchased by the Company to a trust in exchange for cash and
interest-only and residual certificates issued by the trust. The trustee and
the monoline insurance company with respect to such securitization will have
recourse to the Company with respect to the breach of representations or
warranties made by the Company at the time such loans are transferred. In
connection with any such breach with respect to any loan, the Company will be
required either to (i) purchase such loan from the trust or (ii) substitute
such loan with a substantially similar one. While the Company generally has
recourse to the sellers of mortgage loans for any such breaches, there can be
no assurance of the sellers' abilities to honor their respective obligations.
Also, the Company has in the past and may in the future engage in bulk whole
loan sales pursuant to agreements that generally provide for recourse by the
purchaser against the Company in the event of a breach of a representation or
warranty made by the Company, any fraud or

15
<PAGE>

misrepresentation during the mortgage loan origination process or upon early
default on such mortgage loans. The Company generally limits the potential
remedies of such purchasers to the potential remedies the Company receives
from the persons from whom the Company purchased such mortgage loans. However,
in some cases, the remedies available to a purchaser of mortgage loans from
the Company may be broader than those available to the Company against the
sellers of such loans, and should a purchaser enforce its remedies against the
Company, the Company may not always be able to enforce whatever remedies the
Company may have against such sellers.

In the ordinary course of its business, the Company is subject to claims
made against it by borrowers, and by monoline insurance carriers and trustees
in the Company's securitizations, arising from, among other things, losses
that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions of employees,
officers and agents of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely
to be material to the Company's results of operations or financial condition;
however, any claims asserted in the future may result in legal expenses or
liabilities which could have a material adverse effect on the Company's
results of operations and financial condition.

COMPETITION

As a marketer of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these competitors are
substantially larger and have more capital and other resources than the
Company. Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing distribution channels and loan pricing.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans they originate and purchase is
attracting and may continue to attract additional competitors into this market
with the possible effect of lowering gains that may be realized on the
Company's loan sales. Competition may be affected by fluctuations in interest
rates and general economic conditions. During periods of rising rates,
competitors which have locked in low borrowing costs may have a competitive
advantage. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans.

DEPENDENCE ON WHOLESALE BROKERS

The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers for its originations and purchases of
mortgage loans. The Company's competitors also seek to establish relationships
with such independent mortgage brokers, financial institutions and mortgage
bankers, none of whom is contractually obligated to continue to do business
with the Company. In addition, the Company expects the volume of wholesale
loans that it originates and purchases to increase. The Company's future
results may become more exposed to fluctuations in the volume and cost of its
wholesale loans resulting from competition from other originators and
purchasers of such loans, market conditions and other factors.

ENVIRONMENTAL LIABILITIES

In the course of its business, the Company may acquire real property
securing loans that are in default. There is a risk that hazardous substances
or waste, contaminants, pollutants or sources thereof could be discovered on
such properties after acquisition by the Company. In such event, the Company
might be required to remove such substances from the affected properties at
its sole cost and expense. There can be no assurances that the cost of such
removal would not substantially exceed the value of the affected properties or
the loans secured by such properties or that the Company would have adequate
remedies against the prior owners or other responsible parties, or that the
Company would not find it difficult or impossible to sell the affected real
properties either prior to or following any such removal.

16
<PAGE>

LEGISLATIVE OR REGULATORY RISKS

Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes, either entirely or in part, based on borrower income,
type of loan or principal amount. Because many of the Company's loans are made
to borrowers for the purpose of consolidating consumer debt or financing other
consumer needs, the competitive advantages of tax deductible interest, when
compared with alternative sources of financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.

The Company's domestic business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on a substantial portion of its
operations. The Company's consumer lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership
and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act
and Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970,
as amended, the Federal Real Estate Settlement Procedures Act ("RESPA") and
Regulation X, the Fair Housing Act, the Home Mortgage Disclosure Act and the
Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is
also subject to the rules and regulations of and examinations by the
Department of Housing and Urban Development ("HUD") and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing loans. These rules and regulations, among other
things, impose licensing obligations on the Company, establish eligibility
criteria for mortgage loans, prohibit discrimination, provide for inspections
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment
and interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.

Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.

POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK

The market price of the Common Stock may experience fluctuations that are
unrelated to the Company's operating performance. In particular, the price of
the Common Stock may be affected by general market price movements as well as
developments specifically related to the consumer finance industry such as,
among other things, interest rate movements. In addition, the Company's
operating income on a quarterly basis is significantly dependent upon the
successful completion of the Company's loan sales and securitizations in the
market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the
price of the Common Stock.

The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
preferred stock or debt securities. The actual or perceived effect of such
offerings, the timing of which cannot be predicted, may be the dilution of the
book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock and affect the
Company's ability to access the capital markets.

17
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

The sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. Upon successful completion of this Offering,
the Company will continue to have outstanding 20,737,500 shares of Common
Stock. The 370,000 shares of Common Stock offered hereby will be immediately
eligible for sale in the public market without restriction beginning on the
date of this Prospectus. The remaining 10,372,500 shares of Common Stock held
by ICII are "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities
Act") and are eligible for sale subject to the one year holding period, volume
and other limitations imposed thereby. However, the Company has entered into a
registration rights agreement with ICII (the "ICII Registration Rights
Agreement") pursuant to which the Company has agreed to file one or more
registration statements under the Securities Act in the future for the sale of
the shares of the Company held by ICII, subject to certain conditions set
forth therein. Pursuant to the ICII Registration Rights Agreement, the Company
will use its reasonable efforts to cause such registration statements to be
kept continuously effective for the public sale from time to time of shares of
the Company held by ICII. See "Shares Eligible for Future Sale".

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS ISSUED PRICE
-------------- --------
<S> <C> <C>
SENIOR MANAGEMENT PLAN
11/01/95.......................................... 1,942,200 $ 7.00

STOCK OPTION PLAN
06/13/96 Issuance................................. 345,000 $11.33
06/24/96 Issuance................................. 435,000 $11.42
</TABLE>

See "Management--Stock Options."

An additional 1,162,200 shares of Common Stock are reserved for future
issuance pursuant to the Stock Option Plan. The Company has registered under
the Securities Act shares reserved for issuance under the Stock Option Plan
and Senior Management Plan.

18
<PAGE>

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of shares in this
Offering.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock began to trade on the NYSE on June 13, 1996 under
the symbol "SFC." The following table sets forth the range of high and low
last reported sale prices per share for the Common Stock for the periods
indicated as reported by the NYSE from the completion of the IPO on June 13,
1996. On March 19, 1997, the last reported sale price per share for the Common
Stock on the NYSE was $17.125.

1996:

<TABLE>
<CAPTION>
MONTH HIGH LOW
- ----- ------ ------
<S> <C> <C>
June............................................................. $12.67 $10.92
July............................................................. 13.00 10.17
August........................................................... 18.00 13.33
September........................................................ 18.42 16.50
October.......................................................... 22.67 16.67
November......................................................... 21.17 17.33
December......................................................... 21.92 19.50
1997:
<CAPTION>
MONTH HIGH LOW
- ----- ------ ------
<S> <C> <C>
January.......................................................... 26.00 20.25
February......................................................... 23.38 18.25
March (through March 19, 1997)................................... 21.88 17.13
</TABLE>

As of March 11, 1997, there were 17 holders of record of the Common Stock
who the Company believes held shares for in excess of 2,000 beneficial owners.

The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's Board
of Directors.

19
<PAGE>

CAPITALIZATION

The sale of the shares of Common Stock by the Selling Shareholder offered
hereby will not affect the Company's capitalization.

The following table sets forth the capitalization of the Company at
September 30, 1996 as adjusted to give effect to the Notes Offering. This
table should be read in conjunction with the Company's Financial Statements
and the Notes thereto (included elsewhere herein).

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996,
AS ADJUSTED
-------------------
(IN THOUSANDS)
<S> <C>
Short-term debt:
Borrowings under warehouse lines of credit........... $141,078
Due to affiliates.................................... 0
--------
Total short-term debt.............................. $141,078
========
Long-term debt:
6.75% convertible subordinated notes due 2006........ $ 75,000
--------
Total long-term debt............................... $ 75,000
--------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued and outstanding actual and
as adjusted......................................... --
Common Stock, no par value; 75,000,000 shares
authorized; 20,737,500 shares issued and
outstanding; actual and as adjusted*................ $ 53,758
Contributed capital.................................. 250
Retained earnings.................................... 21,023
--------
Total shareholders' equity......................... 75,031
--------
Total capitalization............................... $150,031
========
</TABLE>
- --------
* Does not include 1,942,200 shares reserved for issuance under the Stock
Option Plan and 1,942,200 shares reserved for issuance pursuant to options
granted under the Senior Management Plan.

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS ISSUED PRICE
-------------- --------
<S> <C> <C>
SENIOR MANAGEMENT PLAN
11/01/95................................................ 1,942,200 $ 7.00
STOCK OPTION PLAN
06/13/96 Issuance....................................... 345,000 $11.33
06/24/96 Issuance....................................... 435,000 $11.42
</TABLE>

See "Management--Stock Options."

20
<PAGE>

SELECTED FINANCIAL AND OTHER DATA
(In thousands, except per share data and ratios)

The following selected statements of earnings and balance sheet data as of
December 31, 1995, and for each of the years in the three year period ended
December 31, 1995 have been derived from the Company's financial statements
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears elsewhere herein. Such selected financial data should be read in
conjunction with those financial statements and the notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein. The following selected statements
of earnings and balance sheet data as of September 30, 1996 and for the nine-
month periods ended September 30, 1995 and 1996 have been derived from the
unaudited financial statements of the Company and include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of such financial information for those
periods. Results for the nine months ended September 30, 1996 are not
necessarily indicative of results to be expected for the year ending December
31, 1996 or for any other period within that year. The unaudited historical
balance sheet data as of September 30, 1996 and the pro forma financial data
for the year ended December 31, 1995 and the nine months ended September 30,
1996 reflect the Contribution Transaction.

<TABLE>
<CAPTION>
PRO PRO
FORMA(1) FORMA(1)
-------- -----------
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------------
1993 1994 1995 1995 1995 1996 1996
------ ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Revenues:
Gains on sales of
loans................ $1,218 $ 9,572 $17,995 $12,204 $14,338 $38,426 $38,038
Interest income....... 407 2,136 4,305 4,305 3,058 8,326 8,064
------ ------- ------- ------- ------- ------- -------
Total revenues...... 1,625 11,708 22,300 16,509 17,396 46,752 46,102
------ ------- ------- ------- ------- ------- -------
Expenses:
Interest expense...... 175 886 3,414 3,748 2,262 4,756 4,756
Personnel and
commission expense... 475 2,156 4,190 4,191 2,755 7,398 7,398
General and
administrative
expense.............. 239 1,262 2,153 2,387 1,321 3,955 3,955
------ ------- ------- ------- ------- ------- -------
Total expenses...... 889 4,304 9,757 10,326 6,338 16,109 16,109
------ ------- ------- ------- ------- ------- -------
Earnings before taxes... 736 7,404 12,543 6,183 11,058 30,643 29,993
Income taxes............ 305 3,073 5,205 2,566 4,589 13,029 12,753
------ ------- ------- ------- ------- ------- -------
Net earnings............ $ 431 $ 4,331 $ 7,338 $ 3,617 $ 6,469 $17,614 $17,240
====== ======= ======= ======= ======= ======= =======
Earnings per share...... $ .22 $ .93 $ .91
======= ======= =======
Weighted average number
of shares
outstanding(2)......... 16,748 18,987 18,987
</TABLE>

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996 ACTUAL
-------------
<S> <C>
BALANCE SHEET DATA:
Loans held for sale............................................... $157,953
Interest-only and residual certificates........................... 65,088
Total assets...................................................... 241,364
Borrowings under warehouse lines of credit........................ 141,078
Total shareholders' equity........................................ 75,031
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- -------- -------- -------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and purchases:
Fixed-rate loans.................. $ 2,668 $ 28,599 $133,360 $174,565
Variable-rate loans............... 38,888 161,698 155,122 315,636
------- -------- -------- --------
Total loan originations and
purchases...................... $41,556 $190,297 $288,482 $490,201
------- -------- -------- --------
Percent of loans secured by first
mortgages.......................... 96.4% 98.0% 83.2% 98.8%
Average principal balance per loan.. $ 127 $ 117 $ 87 $ 114
Weighted average initial loan-to-
value ratio........................ 67.7% 69.5% 76.1% 73.3%
Loan sales:
Whole loan sales.................. $23,410 $121,362 $ 58,595 $ --
Loans sold through
securitizations.................. -- 70,173 164,870 422,400
------- -------- -------- --------
Total loan sales................ $23,410 $191,535 $223,465 $422,400
======= ======== ======== ========
Weighted average interest rate:
Fixed-rate loans.................. 10.5% 10.1% 11.8% 11.5%
Variable-rate loans............... 8.0% 8.8% 9.3% 10.1%
Delinquencies as a % of loan
servicing portfolio
(at period end)(3)................. 6.9% 1.3% 3.4% 3.9%
Net losses on loans as a % of loan
servicing portfolio
(at period end)(4)................. 0.0% 0.0% 0.0% 0.0%
</TABLE>
- --------
(1) See "Pro Forma Financial Data" included herein.
(2) For an explanation of the weighted average number of shares outstanding
used to compute pro forma earnings per share, see Note 3 of the Notes to
the Financial Statements included herein.
(3) Includes securitized loans serviced by others and loans held for sale.
Delinquencies include all loans over 30 days past due.
(4) Includes securitized loans serviced by others and loans held for sale. The
Company has not experienced material loan losses in part due to the
relatively unseasoned portfolio. The Company believes that over time its
delinquency and loan loss experience will increase as its loan portfolio
matures.

22
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995, all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division. Shareholders of the Company do not have any interest in
assets retained by SPTL as part of the Contribution Transaction. In June 1996,
the Company completed the IPO, raising net proceeds of approximately $54
million. In November 1996, the Company completed the Notes Offering, raising
net proceeds of approximately $72 million.

GENERAL

Overview

The Company is engaged in the business of originating, purchasing and
selling mortgage loans secured primarily by one-to-four family residences. The
majority of the Company's loans are made to owners of single family residences
who use the loan proceeds to consolidate and refinance debt, finance home
improvements and fund educational expenses. The Company originates and
purchases loans through its Wholesale Division, its Correspondent Program, its
Retail/Telemarketing Division and its Institutional Division.

The Company's primary source of revenue is the recognition of gains from the
sale of senior interests in loans through securitizations. The Company
recognizes gains from the sale of senior interests as the excess of the net
proceeds received on the sale and the fair value of the interest-only and
residual certificates retained by the Company over the Company's basis in such
loans and a provision for credit losses. The fair value of the interest-only
and residual certificates is an estimate of the present value of the future
cash flows from such certificates, which are subject to the prepayment and
loss characteristics of the underlying loans. See "Business--Loan Sales and
Securitizations." The Company securitized and sold senior interests in loans
with principal balances of $70.2 million, $164.9 million and $422.4 million
during the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996, respectively, which represented 36.7%, 73.8% and 100% of
total loans sold by the Company during the respective periods. The Company
anticipates that it will continue to sell senior interests in a majority of
its loans through securitization transactions after the Offering and will
strategically sell loans in whole loan transactions when such transactions are
economically advantageous.

23
<PAGE>

LOAN ORIGINATIONS AND PURCHASES

The following table summarizes the Company's loan originations and purchases
for the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1993 1994 1995 1996
------- -------- -------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance............... $41,556 $190,297 $288,482 $490,201
Number of loans................. 328 1,624 3,313 4,287
Average principal balance per
loan........................... $ 127 $ 117 $ 87 $ 114
Weighted average interest rate.. 8.2% 9.0% 10.4% 10.6%
Weighted average initial loan-
to-value ratio(1).............. 67.7% 69.5% 76.1% 73.3%
Percentage of loans secured by:
One-to-four family resi-
dences....................... 100.0% 100.0% 100.0% 100.0%
First mortgages............... 96.4% 98.0% 83.2% 98.8%
</TABLE>

(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
appraised value of the mortgaged property at origination. The weighted
average initial loan-to-value ratio of a loan secured by a second mortgage
is determined by taking the sum of the outstanding loan and the new loans
secured by the first and second mortgages and dividing by the appraised
value of the mortgaged property at origination.

The Company increased its loan origination and purchase volume from $41.5
million during 1993 to $288.5 million during 1995, representing a compound
annual growth rate of 164% over this two year period. This increase in loan
origination and purchase volume was primarily due to the expansion of the
Company's Wholesale Division, during which the Company opened offices in three
new states and increased the number of account executives from four to 30. At
September 30, 1996, the Company had 68 account executives.

Nine Months Ended September 30, 1996 Compared to the Nine Months Ended
September 30, 1995

Total revenues increased $29.4 million or 169% to $46.8 million for the nine
months ended September 30, 1996 from $17.4 million in the nine months ended
September 30, 1995. During the same period, the Company's total expenses
increased $9.8 million or 154% to $16.1 million from $6.3 million. As a
result, the Company's net earnings increased $11.1 million or 172% to $17.6
million for the nine months ended September 30, 1996 from $6.5 million for the
nine months ended September 30, 1995.

Revenues

The following table sets forth the components of the Company's revenues for
the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans................................... $14,338 $38,426
Interest income........................................... 3,058 8,326
------- -------
Total revenues.......................................... $17,396 $46,752
======= =======
</TABLE>

Total revenues increased $29.4 million or 169% to $46.8 million for the nine
months ended September 30, 1996 from $17.4 million for the nine months ended
September 30, 1995. The increase in revenues was primarily the result of
increased gain on sale of loans and increased interest income due to higher
loan originations and securitizations.

24
<PAGE>

Gains on sales of loans increased $24.1 million or 169% to $38.4 million for
the nine months ended September 30, 1996 from $14.3 million for the nine
months ended September 30, 1995. This increase was primarily the result of
higher loan origination and purchase volume as well as a higher volume of
loans at the beginning of the period which resulted in a higher level of loan
securitization. During the nine months ended September 30, 1996, Wholesale
Division loan originations increased $150 million or 77% to $345.6 million
compared to $195.6 million in the comparable period in 1995, bulk purchases of
loans increased $112.4 million to $130.6 million during the nine months ended
September 30, 1996 compared to $18.2 million in the comparable period in 1995,
Retail/Telemarketing Division loan originations increased to $0.3 million
during the nine months ended September 30, 1996 from $0 million in the
comparable period in 1995 and Institutional Division loan originations
increased to $13.7 million during the nine months ended September 30, 1996
from $0 million in the comparable period in 1995. As a result, total loan
originations and purchases increased $276.4 million or 129% to $490.2 million
in the nine months ended September 30, 1996 from $213.8 million in the
comparable period in 1995. The Company sold $422.4 million of mortgage loans
to securitization trusts in the nine months ended September 30, 1996 compared
to $134.6 million of loans sold during the comparable period in 1995, with a
weighted average gain on securitization of 8.1% and 10.0%, respectively.

Miscellaneous income, included in gains on sales of loans, increased $3.4
million or 390% to $4.3 million for the nine months ended September 30, 1996
from $0.9 million for the nine months ended September 30, 1995. The increase
was primarily the result of a $2.8 million or 311% increase in securities
valuation adjustments on interest-only and residual certificates of $3.7
million and $0.9 million for the nine months ended September 30, 1996 and
1995, respectively, resulting from a higher balance of interest-only and
residual certificates at the beginning of the period.

Interest income increased $5.2 million or 168% to $8.3 million for the nine
months ended September 30, 1996 from $3.1 million for the nine months ended
September 30, 1995. The increase in interest income was primarily due to a
higher average balance of loans held for sale during the nine months ended
September 30, 1996 resulting from the increased loan origination and purchase
volume during such period, and a higher balance of loans held for sale at the
beginning of such period as compared to the corresponding period in 1995.

Expenses

The following table sets forth the components of the Company's expenses for
the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1995 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Expenses:
Interest expense.......................................... $2,262 $ 4,756
Personnel and commission expense.......................... 2,755 7,398
General and administrative expense........................ 1,321 3,955
------ -------
Total expenses.......................................... $6,338 $16,109
====== =======
</TABLE>

Total expenses increased $9.8 million or 154% to $16.1 million for the nine
months ended September 30, 1996 from $6.3 million in the nine months ended
September 30, 1995. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, additional personnel for
the Wholesale Division, added selling expenses and higher operating expenses
related to increased loan origination and purchase volume during the nine
months ended September 30, 1996 as compared to the nine months ended September
30, 1995.

Interest expense increased $2.5 million or 110% to $4.8 million for the nine
months ended September 30, 1996 from $2.3 million in the nine months ended
September 30, 1995. The increase in interest expense was attributable to the
interest costs associated with a higher balance of loans held pending sale
during the nine months ended September 30, 1996 resulting from increased loan
origination and purchase volume during the period and a higher balance of
loans held for sale at the beginning of the period.

25
<PAGE>

Personnel and commission expense increased $4.6 million or 169% to $7.4
million for the nine months ended September 30, 1996 from $2.8 million for the
nine months ended September 30, 1995. The increase in personnel and commission
expense was primarily due to increased staffing levels related to the
Wholesale Division's growth, increased loan originations and an increase in
administrative positions. As of September 30, 1996, the Company operated 14
regional branch centers and employed 217 persons as compared to operating
eight regional branch centers and employing 89 persons as of September 30,
1995.

General and administrative expense, which consists primarily of occupancy,
supplies and other operating expenses, increased $2.7 million or 200% to $4.0
million for the nine months ended September 30, 1996 from $1.3 million for the
nine months ended September 30, 1995. The increase in general and
administrative expense was primarily due to expenses incurred in association
with the number of regional branch centers to 14 at September 30, 1996 from
eight at September 30, 1995 and increased loan origination and purchase
volume.

Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994

Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. During the same period, the Company's total expenses
increased $5.5 million or 128% to $9.8 million from $4.3 million. As a result,
the Company's net earnings increased $3.0 million or 70% to $7.3 million in
1995 from $4.3 million in 1994.

Revenues

The following table sets forth the components of the Company's revenues for
the periods shown.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans.................................... $ 9,572 $17,995
Interest income............................................ 2,136 4,305
------- -------
Total revenues........................................... $11,708 $22,300
======= =======
</TABLE>

Total revenues increased $10.6 million or 91% to $22.3 million in 1995 from
$11.7 million in 1994. The increase in revenues was primarily the result of
increased loan sales and greater loan originations resulting from the
expansion of the Company's Wholesale Division.

Gains on sales of loans increased $8.4 million or 88% to $18.0 million in
1995 from $9.6 million in 1994. This increase was primarily the result of
higher loan origination and purchase volume which resulted in a higher level
of loan sales. During 1995, loan originations increased $84.4 million or 46%
to $267.4 million compared to $183.0 million in 1994. In addition, the Company
acquired $21.1 million in bulk purchases of loans during 1995 compared to $7.3
million in 1994. Total loan originations and purchases increased $98.2 million
or 52% to $288.5 million in 1995 from $190.3 million in 1994. Total loans of
$223.5 million were sold or securitized in the year ended December 31, 1995
compared to $191.5 million during the comparable period in 1994, with a
weighted average gain on securitization of 8.4% in both years. Included in the
gains on sales of loans in 1994 was $0.8 million on the gain on sale of the
servicing of loans. No such gain was recorded in 1995.

Interest income increased $2.2 million or 105% to $4.3 million in 1995 from
$2.1 million in 1994. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1995 resulting from the
increased loan origination and purchase volume and a longer holding period for
such loans resulting from regular quarterly securitizations. Interest income
also increased as a result of higher weighted average interest rates on loans
held during 1995 as compared to 1994, due in large part to the initiation of
originations and purchases of second mortgages.

26
<PAGE>

Expenses

The following table sets forth the components of the Company's expenses for
the periods shown.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Expenses:
Interest expense.......................................... $ 886 $ 3,414
Personnel and commission expense.......................... 2,156 4,190
General and administrative expense........................ 1,262 2,153
------- -------
Total expenses.......................................... $ 4,304 $ 9,757
======= =======
</TABLE>

Total expenses increased $5.5 million or 128% to $9.8 million in 1995 from
$4.3 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, additional personnel for
the Wholesale Division, added selling expenses and higher operating expenses
related to increased loan origination and purchase volume during 1995 as
compared to 1994.

Interest expense increased $2.5 million or 278% to $3.4 million in 1995 from
$0.9 million in 1994. The increase in interest expense was attributable to the
interest costs associated with a higher balance of loans held pending sale
during 1995 resulting from increased loan origination and purchase volume
during the year as well as a longer holding period for such loans resulting
from regular quarterly securitizations.

Personnel and commission expense increased $2.1 million or 100% to $4.2
million in 1995 from $2.1 million in 1994. The increase in personnel and
commission expense was primarily due to increased staffing levels related to
the Wholesale Division's growth and increased loan originations. As of
December 31, 1995, the Company operated eight regional branch centers and
employed 104 persons as compared to operating five regional branch centers and
employing 61 persons as of December 31, 1994.

General and administrative expense, which consists primarily of occupancy,
supplies and other expenses, increased $0.9 million or 69% to $2.2 million in
1995 from $1.3 million in 1994. The increase in general and administrative
expense was primarily due to expenses incurred in association with the growth
of the Wholesale Division and increased loan origination and purchase volume.
Had the Company exclusively used its current independent loan servicer in 1995
and 1994, its general and administrative expenses would have been higher by
approximately $234,000 and $120,000, respectively.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993

Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. During the same period, the Company's total expenses
increased $3.4 million or 378% to $4.3 million from $0.9 million. As a result,
the Company's net earnings increased to $4.3 million in 1994 from $0.4 million
in 1993.

Revenues

The following table sets forth the components of the Company's revenues for
the periods shown.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1993 1994
------ -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gains on sales of loans..................................... $1,218 $ 9,572
Interest income............................................. 407 2,136
------ -------
Total revenues............................................ $1,625 $11,708
====== =======
</TABLE>

27
<PAGE>

Total revenues increased $10.1 million or 631% to $11.7 million in 1994 from
$1.6 million in 1993. The increase in revenues was primarily due to the
combined effect of increased loan originations, purchases and sales of loans
resulting from the expansion of the Company's Wholesale Division and higher
gains realized on the sale of loans through both whole loan transactions and
the completion of securitizations in the first and fourth quarters of 1994.

Gains on sales of loans increased $8.4 million or 700% to $9.6 million in
1994 from $1.2 million in 1993. This increase was primarily attributable to
increased loan originations, purchases and sales during 1994 as compared to
1993. During 1994, loan originations increased $144.4 million or 374% to
$183.0 million compared to $38.6 million in 1993. In addition, the Company
acquired $7.3 million through bulk purchases of loans in 1994 compared to $2.9
million in 1993. Total loan originations and purchases increased $148.8
million or 359% to $190.3 million in 1994 from $41.5 million in 1993. The
Company sold $191.5 million of loans in 1994 compared to $23.4 million in
1993, with a weighted average gain on securitization of 8.4% in 1994. Included
in the gains on sales of loans in 1994 was $0.8 million on the gain on sale of
the servicing of loans.

Interest income increased $1.7 million or 425% to $2.1 million in 1994 from
$0.4 million in 1993. The increase in interest income was primarily due to a
higher average balance of loans held for sale during 1994 resulting from the
increased loan origination and purchase volume, the initiation of loan
securitizations and a longer holding period as loans were accumulated for
securitization. Interest income also increased as a result of the higher
weighted average coupon rate on loans held for sale during 1994 than in 1993.

Expenses

The following table sets forth the components of the Company's expenses for
the periods shown.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1993 1994
---------------
(IN THOUSANDS)
<S> <C> <C>
Expenses:
Interest expense......................................... $ 175 $ 886
Personnel and commission expense......................... 475 2,156
General and administrative expense....................... 239 1,262
------ --------
Total expenses......................................... $ 889 $ 4,304
====== ========
</TABLE>

Total expenses increased $3.4 million or 378% to $4.3 million in 1994 from
$0.9 million in 1993 as additional selling expenses were incurred and new
employees hired to develop and manage the expansion of the Company's Wholesale
Division.

Interest expense increased $0.7 million or 350% to $0.9 million in 1994 from
$0.2 million in 1993. The increase in interest expense was primarily
attributable to the interest costs associated with a larger balance of loans
held pending sale during 1994 resulting from increased loan origination and
purchase volume during the year, the initiation of loan securitizations and a
longer holding period as loans were accumulated for securitization.

Personnel and commission expense increased $1.6 million or 320% to $2.1
million in 1994 from $0.5 million in 1993. The increase in expense was
primarily due to increased staffing levels related to the growth of the
Wholesale Division and increased loan originations and purchases. As of
December 31, 1994, the Company operated five regional branch centers and
employed 61 persons as compared to three regional branch centers operated and
20 persons employed at December 31, 1993.

General and administrative expenses increased $1.1 million or 550% to $1.3
million in 1994 from $0.2 million in 1993 primarily as a result of increased
professional fees and travel, telephone and office supply expenses incurred to
support the increased loan origination and purchase volume. Had the Company
exclusively

28
<PAGE>

used its current independent loan servicer in 1994 and 1993, its general and
administrative costs would have been higher by $120,000 and $222,000,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary operating cash requirements include the funding or
payment of: (i) loan originations and purchases; (ii) investments in interest-
only and residual certificates; (iii) fees and expenses incurred in connection
with securitizations; (iv) interest expense incurred on borrowings under its
warehouse facilities; (v) income taxes; (vi) capital expenditures; (vii) fund
advances under its strategic alliance program; (viii) acquisitions of mortgage
lenders and (ix) other operating and administrative expenses. The Company
generates cash flow from loans sold through securitizations, whole loan sales,
interest income on loans held for sale and borrowings from its warehouse
facilities. The Company also generates cash by accessing the capital markets,
most recently in its initial public offering in June 1996 (the "IPO") and its
offering of Convertible Subordinated Notes (the "Notes") due 2006. In
addition, due to the growth of its business, the Company will be required from
time to time to access the capital markets for additional debt and equity
financing to meet the cash requirements of its operating activities.

The Company issued 5,175,000 shares of its Common Stock in the IPO. The net
proceeds received by the Company from the IPO, after deducting underwriting
discounts and offering expenses payable by the Company were approximately $54
million. The Company applied the net proceeds from the IPO in the following
manner: (i) approximately $34 million was used to fund loan originations and
purchases; (ii) approximately $15 million was used to repay indebtedness owed
to ICII; (iii) approximately $4 million was used to support securitization
transactions; and (iv) $1 million was used as an initial payment to implement
the Telemarketing Agreement (see "Business--Loan Originations and Purchases").
The Company sold $75 million of its Notes in November 1996. The net proceeds
received by the Company from the Notes Offering, after deducting underwriting
discounts and offering expenses payable by the Company were approximately $72
million. The Company applied the net proceeds from the Notes Offering in the
following manner: (i) to fund loan originations and purchases; (ii) to support
strategic alliances entered into with selected mortgage lenders; (iii) to
support securitization transactions; and (iv) used for general corporate
purposes.

The Company relies upon short-term warehouse facilities, loan sales through
securitizations and whole loan sale transactions to continue to fund loan
originations and purchases. In November 1995, the Company entered into a
warehouse and purchase facility. Under the terms of that facility, the Company
has available a $200 million warehouse line of credit facility secured by the
loans the Company originates or purchases. The facility extends through
August 24, 1997. The Company is required to comply with various operating and
financial covenants as defined in the agreements governing the facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the facility, (ii) selling any asset other than in the
ordinary course of business and (iii) guaranteeing the debt obligation of any
other entity. The continued availability of funds provided to the Company
under this facility is subject to the Company's continued compliance with the
operating and financial covenants contained in such agreements. In
October 1996, the Company entered into a $150 million warehouse line of
credit, which will expire in October 1997. In February 1997, this credit
facility was increased to $400 million.

Prior to January 1, 1994, the Company sold its loans to institutional
purchasers in whole loan transactions. In March 1994, the Company completed
its first securitization of loans for $44.5 million. In December 1994 and
during each of the quarters thereafter through the quarter ended September 30,
1996, the Company securitized $25.7 million, $27.6 million, $44.9 million,
$62.1 million, $30.3 million, $102.4 million, $130.6 million and $189.4
million of loans, respectively. The Company expects to continue to depend on
its ability to securitize loans in the secondary market. Several factors
affect the Company's ability to complete securitizations of its loans,
including conditions in the securities markets generally, conditions in the
asset-backed securities market specifically, the credit quality of the
Company's portfolio of loans and the Company's ability to obtain credit
enhancement. Adverse changes in such factors may affect the Company's results
of operations, financial

29
<PAGE>

condition and ability to generate sufficient cash flows needed to continue
originating and purchasing loans at increased levels. In addition, in order to
gain access to the securitization market, the Company has relied on credit
enhancements provided by monoline insurance companies to guarantee senior
interests in the related securitization trusts to enable it to obtain an
"AAA/Aaa" rating for such interests. Unwillingness of insurance companies to
guarantee senior interests in the Company's loan pools could have a material
adverse effect on the Company's results of operations and financial condition.
The Company will continue operating on a negative cash flow basis as long as
it continues to sell loans through securitizations and it continues to retain
interest-only and residual certificates in the loans sold. The use of cash in
excess of cash generated was primarily the result of the ongoing cash
requirements of the Company's operations and the sale of loans through
securitizations and the resulting investment in interest-only and residual
certificates. The Company has historically invested its entire gain on
securitization in the related interest-only and residual certificates
resulting in an insignificant net cash flow from the securitization to the
Company.

The Company believes that its current cash position will be sufficient to
fund the Company's liquidity requirements for approximately 12 months if the
Company were to maintain its operations at current levels. The Company expects
to continue its expansion primarily through its Wholesale Division,
Correspondent Program and its Retail/Telemarketing Division, and to seek to
enter into strategic alliances with and acquire selected mortgage lenders. The
Company has no commitments for additional bank borrowings or warehouse lines
or additional debt or equity financings and there can be no assurance that the
Company will be successful in consummating any such financing transaction in
the future on terms that the Company would consider favorable, if at all.

ADMINISTRATIVE EXPENSES

Historically, the Company has been allocated expenses of various
administrative services provided by ICII and SPTL. The costs of such services
were not directly attributable to a specific division or subsidiary and
primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative assets and liabilities of the division or subsidiary, which
management believed was a reasonable method of allocation. The allocation of
expenses which are included as part of personnel and commission expense and
general and administrative expenses for the years ended December 31, 1993,
1994 and 1995 and the nine months ended September 30, 1996 was approximately
$37,900, $92,700, $256,000 and $344,000, respectively.

The Company intends to provide for itself many of the services previously
provided by ICII. ICII currently provides to the Company mortgage loan
production software and hardware and data communications management, the
managing of the 401(k) plan in which the Company participates, and insurance
coverage, including health insurance.

ACCOUNTING CONSIDERATIONS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). This statement establishes accounting standards for the
recognition of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.

SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively.
The Company has not yet adopted SFAS 121; however, given the Company's current
accounting policies for recording and measuring its long-lived assets and
identifiable intangibles as discussed previously, the Company does not
anticipate a material impact on its operations or financial position from the
implementation of SFAS 121.

30
<PAGE>

In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"). SFAS No. 122
applies prospectively in fiscal years beginning after December 15, 1995 (with
early application encouraged), to transactions in which a mortgage banking
enterprise sells or securitizes mortgage loans with servicing rights retained
and to impairment evaluations of all amounts capitalized as servicing rights,
including those purchased before the adoption of such statement. This
statement requires that a mortgage banking enterprise recognize rights to
service mortgage loans for others as separate assets, regardless of how those
servicing rights are acquired, and that a mortgage banking enterprise assess
its capitalized servicing rights for impairment based on the fair value of the
underlying servicing rights. Because the Company does not intend to retain an
economic interest in or responsibility for loan servicing and the Company
transfers all of its loan servicing rights to Advanta in conjunction with its
securitizations, implementation of SFAS No. 122 as of January 1, 1995 did not
have a material effect on the Company's results of operations or financial
position.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on the price
of the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This statement also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. Those transactions must be accounted
for, or at least disclosed in the case of stock options, based on the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The accounting
requirements of SFAS 123 are effective for transactions entered into in fiscal
years that begin after December 15, 1995. The disclosure requirements of SFAS
123 are effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS 123 is
initially adopted for recognizing compensation cost. The statement permits a
company to choose either a new fair value-based method or the current APB
Opinion 25 intrinsic value-based method of accounting for its stock-based
compensation arrangements. The statement requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value-based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under Opinion 25. The
Company will continue to account for stock options using the intrinsic value
method of Opinion 25.

In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.

SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be measured at fair
value, if practicable. It also requires that servicing assets and other
retained interest in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.

SFAS 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions,
repurchase agreements including "dollar rolls," "wash sales," loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables with recourse, and
extinguishments of liabilities.

31
<PAGE>

SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. The Company does not anticipate a material impact on
its operations or financial position from the implementation of SFAS 125.

RECENT DEVELOPMENTS

In October 1996, the Company entered into a $150 million warehouse line of
credit (the "Second Facility"), which will expire on October 22, 1997, to
increase its available funds for loan originations and purchases. In February
1997, the capacity under the Second Facility increased to $400 million. The
Company's First Facility was extended to August 24, 1997.

In November, 1996, ICII sold 1,000,000 shares of the Company's Common Stock
to the public in the Secondary Offering. The Company did not receive any
proceeds of the Secondary Offering. Concurrently with the Secondary Offering,
the Company sold $75 million principal amount of Convertible Subordinated
Notes (the "Notes") due 2006 in the Notes Offering. The net proceeds received
by the Company from the Notes Offering, after deducting underwriting discounts
and offering expenses payable by the Company were approximately $72 million.

RESULTS OF THE QUARTER AND YEAR ENDED DECEMBER 31, 1996

The Company reported net earnings for the three months ended December 31,
1996 of $10.0 million, or $0.43 per fully diluted share, an increase of 1,054%
from $0.9 million, or $0.06 per fully diluted share, for the three months
ended December 31, 1995. Net earnings for the year ended December 31, 1996
increased 277% to $27.6 million, or $1.37 per fully diluted share, compared to
$7.3 million, or $0.47 per fully diluted share, for the year ended December
31, 1995. The increase in earnings was primarily attributable to the Company's
continued expansion of its loan production sources and the sale of such loans.
For the three months ended December 31, 1996, the Company originated and
purchased $299.8 million of loans, an increase of 301% from $74.7 million of
loans originated and purchased in the comparable period in the preceding year.
During the three months ended December 31, 1996, the Company sold $235 million
in loans through securitization transactions compared to $12.9 million sold
through whole loans sales and $30.3 million sold through securitization
transactions in the comparable period in the preceding year. As of December
31, 1996, the Company reported total delinquencies of 6.9% of the loan
servicing portfolio of $908 million and net losses for the year ended December
31, 1996 as a percentage of the loan servicing portfolio were .04% or $369,613
for the year.

OTHER DEVELOPMENTS

Acquisitions and Strategic Alliances. Pursuant to the Company's strategy to
increase and diversify sources of loan production, the Company recently
organized Hallmark America Inc. ("Hallmark America") and acquired National
Capital Funding ("National Capital") and entered into strategic alliances with
BOMAC Capital Mortgage, Inc. ("BOMAC") and American Funding Group Inc.
("American Funding"). The Company believes that these acquisitions and
strategic alliances permit the Company to secure new and cost effective means
of loan production. As such, the Company is currently in discussions with
other potential acquisition candidates or strategic partners.

32
<PAGE>

to provide SPFC with all non-conforming loans originated by BOMAC. Such
commitment terminates upon the earlier of delivery of loans in an aggregate
amount of $600 million or three years after the first securitization in which
BOMAC's loans are included in a SPFC sponsored securitization. SPFC has agreed
to provide BOMAC with financing facilities for the origination of loans and
for working capital purposes and interest-only and residual certificates
resulting from the securitization of BOMAC's loans, less certain fees and
expenses.

Acquisition of Hallmark. In December 1996, SPFC organized Hallmark America
as a wholly owned subsidiary and capitalized it with $625,000 in cash, for the
purpose of investing in Hallmark Government Funding ("Hallmark Government").
Hallmark Government is a Bellevue, Washington based mortgage lender which
provides mortgage brokers mortgage banking services and support in return for
the right of first refusal to purchase loans originated by the mortgage
broker. Hallmark America purchased preferred stock of Hallmark Government and
various fixed assets and obtained an exclusive loan purchase commitment from
Hallmark Government for $360,000. Hallmark America also acquired a five year
option to purchase the remaining capital stock of Hallmark Government at fair
market value.

Acquisition of National Capital. In December 1996, SPFC acquired 95% of the
common stock of National Capital for $5 million in cash. National Capital is
an Atlanta, Georgia based diversified financial services company which offers
non-conforming loans through its subsidiary MorCap. MorCap originates loans
through a network of approximately 400 mortgage brokers throughout the
southeastern United States. To incentivize increased loan production and
profitability, management of National Capital has a buy-back option for a
controlling interest in National Capital once certain volume and profitability
conditions are met by MorCap.

Strategic Alliance with American Funding. In December 1996, SPFC entered
into a strategic alliance with American Funding, a Denver, Colorado based non-
conforming lender. Pursuant to the strategic alliance agreement, American
Funding has agreed to provide SPFC with all non-conforming loans originated by
American Funding. Such commitment terminates upon the earlier of delivery of
loans in an aggregate amount of $600 million or three years after the first
securitization in which American Funding's loans are included in a SPFC
sponsored securitization. SPFC has agreed to provide American Funding with
financing facilities for the origination of loans and for working capital
purposes and interest-only and residual certificates resulting from the
securitization of American Funding's loans, less certain fees and expenses.

33
<PAGE>

BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

GENERAL

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling high-yielding, sub-prime mortgage loans
secured primarily by one-to-four family residences. The majority of the
Company's loans are made to owners of single family residences who use the
loan proceeds for purposes such as debt consolidation, financing of home
improvements and educational expenditures. The Company focuses on lending to
individuals who often have impaired or unsubstantiated credit histories and/or
unverifiable income. As a result, the Company's customers generally pay higher
interest rates as compared to interest rates charged by conventional mortgage
sources. Approximately 83.2% and 98.8% of the Company's mortgage loans
originated or purchased during the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, were secured by first
mortgages, and the remainder were secured by second mortgages. The Company
originates and purchases loans through its Wholesale Division, its
Correspondent Program, its Retail/Telemarketing Division and its Institutional
Division. The Company commenced operations in January 1993 as a division of
SPTL, a wholly-owned subsidiary of ICII, and has been an operating subsidiary
of ICII since April 1995. The Company completed the IPO in June 1996 and ICII
completed the Secondary Offering in November 1996. Upon completion of the
Secondary Offering, ICII owned approximately 51.2% of the Company's
outstanding Common Stock. ICII is a diversified specialty finance company
offering financial products in the following four sectors: sub-prime
residential mortgage banking, commercial mortgage banking, business lending
and consumer lending. Upon successful completion of this Offering, ICII will
beneficially own approximately 49.4% of the outstanding Common Stock of the
Company.

The Company originates a majority of its loans through the Wholesale
Division, which is currently comprised of approximately 68 account executives
located in 14 regional branch centers who have established relationships with
independent mortgage loan brokers. For the nine months ended September 30,
1996, the Wholesale Division originated loans in 45 states and the District of
Columbia. Of the Wholesale Division's 14 regional branch centers, four are
located in California, two in Oregon, and one in each of Washington, Florida,
Colorado, Illinois, Ohio, Massachusetts, Texas and Virginia. The Company
believes that its competitive strengths include providing prompt, responsive
service and flexible underwriting to independent mortgage brokers. The
Company's underwriters apply its underwriting guidelines on an individual
basis but have the flexibility to deviate from them when an exception or
upgrade is warranted by a particular loan applicant's situation, such as
evidence of a strong mortgage repayment history relative to a weaker overall
consumer-credit repayment history. See "Business--Underwriting" and
"Business--Underwriting--Exceptions." This provides independent mortgage
brokers working with the Company the ability to offer loan packages to
borrowers whose financing needs are not met (whether for reasons of credit
impairment, income qualification or credit history or a desire to receive
funding on an expedited basis) by traditional financial institutions. In most
cases, the Company conditionally approves loans within 24 hours from receipt
of application and funds loans within 21 days after approval. The Wholesale
Division originated $183.0 million, $267.4 million and $345.6 million of loans
during the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996, respectively, representing 96.2%, 92.7% and 70.5% of total
loan originations and purchases during the respective periods.

34
<PAGE>

expand origination volume by marketing directly to borrowers and utilizing
predictive dialers which enable the Company to originate such loans at a lower
cost than traditional retail organizations.

The Company purchases loans through its Correspondent Program. Loans
purchased through the Correspondent Program are complete loan packages that
have been originated, underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten by the Company's underwriting staff to determine that the loan
packages are complete and materially adhere to the Company's underwriting
guidelines. During the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996, the Company purchased $7.3 million, $21.1
million and $130.6 million of mortgage loans, respectively, through the
Correspondent Program. The Institutional Division which began operations in
1996 also originates and purchases loans through relationships developed with
small-to medium-sized commercial banks, savings banks and thrift institutions.
During the nine months ended September 30, 1996, the Institutional Division
originated and purchased $13.7 million of mortgage loans.

In order to increase the Company's volume and diversify its sources of loan
originations, the Company has entered into strategic alliances with and, in
some circumstances, has acquired selected mortgage lenders. Pursuant to such
strategic alliances, the Company provides financing arrangements and a
commitment to purchase qualifying loans, and the participant in such a
strategic alliance is entitled to participate in the potential profitability
of Company sponsored securitizations. In return, the Company expects to
receive a more predictable flow of loans, interest and fee income, and, in
some cases, an option to acquire an equity interest in the related strategic
participant. The Company is also seeking to acquire additional mortgage
lenders whose operations are complementary to the Company's. The Company
believes that such acquisitions will provide the Company with new strategic
broker relationships, additional experienced management personnel and a
greater share of the residential mortgage loan origination market. The Company
may consider acquiring smaller lenders from whom the Company has purchased or
financed mortgage loans or larger companies with operations and resources
similar to the Company's.

The Company sells a majority of its loan origination and purchase volume in
the secondary market through public securitizations (the process of
aggregating similar assets into pools that are used to collateralize newly-
issued securities, which are referred to as mortgage-backed securities).
Securitization sales provide the Company with greater flexibility and
operating leverage than a portfolio lender by allowing the Company to generate
fee and interest income and participate in the continuing profitability of the
loans with a significantly smaller capital commitment than that required by
traditional portfolio lenders. Generally, in each securitization transaction,
the Company retains an interest in the loans sold through interest-only and
residual certificates, which are amortized over an estimated average life.
Cash flow received from these interest-only and residual certificates is
subject to the prepayment and loss characteristics of the underlying loans.
During the years ended December 31, 1994 and 1995 and nine months ended
September 30, 1996, the Company securitized $70.2 million, $164.9 million and
$422.4 million of mortgage loans, respectively.

The Company retains the servicing rights on all loans it originates or
purchases. In September 1995, the Company chose to outsource its loan
servicing operations to Advanta Mortgage Corp. USA ("Advanta"), which the
Company believes is one of the largest servicers of sub-prime mortgage loans.
The Company believes that by outsourcing loan servicing to Advanta, it is able
to benefit from Advanta's experience in servicing sub-prime mortgage loans,
its comprehensive reporting capabilities, and the cost efficiencies related to
having large amounts of loans serviced by Advanta for itself and others. Under
the Company's servicing agreement with Advanta, the Company is able to reduce
the overhead, administrative and other fixed costs associated with servicing
loans while maintaining control of its servicing portfolio. Advanta currently
services every mortgage loan originated by the Company. As of September 30,
1996, the Company's servicing portfolio (inclusive of securitized loans for
which the Company has ongoing risk of loss but has no remaining servicing
rights or obligations) was $651.3 million.

35
<PAGE>

THE CONTRIBUTION TRANSACTION

In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division. Shareholders in the Company will not have any interest in
assets that were retained by SPTL as part of the Contribution Transaction.

BUSINESS STRATEGY

Expand Sources of Loan Production. The Company intends to continue to
further its existing relationships with wholesale and correspondent lenders
and to seek new loan production sources from mortgage lenders in order to
diversify its existing loan production channels and seek more cost efficient
means of originating or purchasing loans. As part of this strategy, the
Company seeks to enter into strategic alliances with selected mortgage lenders
and seeks opportunistic acquisitions.

Expand Market Base. The Company currently offers multiple mortgage loan
products to borrowers ranging from sub-prime A through D credit levels. The
Company intends to increase its focus on lower credit levels such as C and D
credit loans. The Company requires a higher interest rate and a lower loan-to-
value ratio on C and D loans than it requires for higher grade sub-prime
mortgage loans. The Company believes that market opportunities exist in these
lower credit grade mortgage loans and that it will be able to increase volume
and profitability without a commensurate increase in overhead. Additionally,
the Company believes that its ability to approve these loans quickly and
efficiently will enable it to attract a larger percentage of loans from
independent mortgage brokers and provide it with a competitive advantage over
other conventional and non-conventional mortgage lenders.

Maximize Pull-Through Ratio. The Company intends to increase the percentage
of approved loans which are ultimately funded. The Company continually seeks
greater efficiencies in its underwriting and loan processing operations to
better serve the needs of mortgage brokers and loan applicants. By emphasizing
these efficiencies, the Company believes that it can fund a greater percentage
of approved loans without compromising its selling efforts.

Control Operating Costs. The Company intends to continue to emphasize cost
maintenance as it implements its expansion plans. In particular, the Company
believes its practice of establishing regional branch centers permits the
Company to expand throughout the United States without incurring the costs
associated with an extensive retail system. As a further example of cost
controls, the Company has chosen to outsource its loan servicing operations to
Advanta, significantly reducing overhead, administrative and other fixed costs
associated with servicing operations.

Commitment to the Company's Underwriting Guidelines. The Company believes a
key factor in its success to date has been its ability to maintain acceptable
delinquency levels and minimize loan losses when lending to Sub-prime
Borrowers. The Company has been able to achieve these standards by continually
monitoring the performance of its loans as well as reevaluating its
underwriting guidelines and quality control criteria. As a result of these
factors, the Company has been able to maintain delinquency and foreclosure
ratios at acceptable levels. See "Business--Underwriting."

Emphasis on Customer Service. The Company believes that its ongoing emphasis
on prompt and responsive customer service provides support for an increased
level of originations from its independent broker network and repeat lending
opportunities from its existing loan portfolio. Typically, the Company
approves loan applications (subject to credit verification, an independent
third-party appraisal and other documentation) within

36
<PAGE>

24 hours of receipt and funds loans within 21 days thereafter. The Company is
actively seeking to improve its customer service efforts as its operations
expand.

Maximize Gains from Loan Sales. The Company employs a loan sales strategy
which focuses on maximizing operating profits. The Company intends to
continually assess the investment objectives of its loan purchasers to
identify the method of loan sales which maximizes operating profits. The
implementation of this strategy has resulted in securitizations of
substantially all of the loans recently originated and purchased by the
Company. The Company, however, will continue to maintain relations with
institutional purchasers of whole loans, as whole loan transactions permit the
Company to reduce its dependence on the potential volatility of the
securitizations market and to better manage its cash flows.

EXPANSION STRATEGY

Wholesale Division. The Company plans to continue the expansion of its
Wholesale Division on a nationwide basis. The Company originates loans through
its sales force of approximately 68 account executives located in 14 regional
branch centers in ten states that have developed relationships with
independent mortgage brokers through which the Company has originated loans in
45 states and the District of Columbia. The Company is actively seeking to
expand its Wholesale Division pursuant to selected demographic statistics and
other criteria developed by the Company, which are intended to identify the
most attractive markets for the Company's products. The Company typically
enters into a new market using its national sales team, which initially
penetrates a market, to recruit selected brokers for the Company's wholesale
network. The Company's sales strategy is to limit the number of branch centers
and personnel needed to generate and effectively process and underwrite loans.

Retail/Telemarketing Division. The Company recently formed its
Retail/Telemarketing Division to solicit loans directly from prospective
borrowers. The Company has entered into an agreement with vendors to provide
predictive dialing machines, software and training in support of its
Retail/Telemarketing Division. The Company believes that the
Retail/Telemarketing Division represents a significant opportunity to expand
origination volume by marketing directly to borrowers and that the greater use
of automation permitted by the predictive dialers enables the Company to
originate such loans at a lower cost than traditional retail organizations.
The Company believes that by utilizing predictive dialers, it will be able to
achieve a new source of loan origination volume without incurring the fixed
overhead costs associated with traditional retail operations. The cost per
originated loan of such a system is expected to be significantly less than the
cost per originated loan of traditional methods of originating loans, such as
done in the Wholesale Division. See "--Loan Originations and Purchases--
Retail/Telemarketing Division."

Correspondent Program. The Company seeks to increase its purchases of loans
from selected financial institutions and mortgage bankers through its
Correspondent Program. The Correspondent Program enables the Company to
increase loan production and enter new markets without incurring significant
operating expenses.

Strategic Alliances and Acquisitions. In order to increase the Company's
volume and diversify its sources of loan originations, the Company is seeking
to expand its existing strategic alliances and enter into new strategic
alliances with and, in some circumstances, to acquire additional mortgage
lenders. Pursuant to such strategic alliances, the Company would provide
financing arrangements and a commitment to purchase qualifying loans, and the
participant in such a strategic alliance would be entitled to participate in
the potential profitability of Company sponsored securitizations. The Company
is also seeking to acquire additional mortgage lenders whose operations are
complementary to the Company's. The Company believes that such acquisitions
will provide the Company with new strategic broker relationships, additional
experienced management personnel and a greater share of the residential
mortgage loan origination market. The Company may consider acquiring smaller
lenders from whom the Company has purchased or financed mortgage loans or
larger companies with operations and resources similar to the Company's.

Institutional Division. The Company seeks to expand its Institutional
Division which originates and purchases sub prime loans based on relationships
with selected financial institutions.

37
<PAGE>

LOAN ORIGINATIONS AND PURCHASES

Overview

The Company originates and purchases loans through its Wholesale Division,
its Correspondent Program, its Retail/Telemarketing Division and its
Institutional Division. The Wholesale Division originates loans through a
network of independent brokers in coordination with approximately 68 account
executives located in 14 regional branch centers. The Retail/Telemarketing
Division originates loans through predictive dialing machines, which combine
telephone dialing technology with an on-line computer to facilitate the loan
origination process. Loans purchased through the Company's Correspondent
Program are originated, underwritten and funded by approved mortgage bankers
and financial institutions in accordance with industry underwriting standards.
Loans originated or purchased through the Institutional Division are acquired
in connection with relationships with small- to medium-sized regional banks
and thrift institutions.

The Company's borrowers are individuals who do not qualify for or are
unwilling to obtain loans from conventional mortgage lending sources such as
thrift institutions and commercial banks. These conventional mortgage sources
generally impose strict and inflexible underwriting guidelines, such as those
defined by secondary market investors, and require longer to approve and fund
loans than the Company. The Company's borrowers often have impaired or
unsubstantiated credit histories and/or unverifiable income and place a
premium on personalized service and prompt responses to their loan
applications. As a result, the Company's borrowers are less averse to the
higher interest rates charged by the Company than those charged by
conventional sources.

All of the Company's loans are secured by first or second mortgages on
owner-occupied single family residences and are loans that are made to Sub-
prime Borrowers. Proceeds from the Company's loans are typically used to
consolidate or refinance existing indebtedness, finance home improvements and
pay for educational expenditures. The Company focuses on lending to
individuals who often have impaired or unsubstantiated credit histories and/or
unverifiable income; as a result, the Company's customers generally pay higher
interest rates as compared to interest rates charged by conventional mortgage
sources.

Geographic Distribution. The following table breaks down by state the number
of loans currently either held by the Company or securitized by the Company:

GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS AND PURCHASES

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
STATES 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C>
California.................................... 39.5% 29.8% 27.9%
Oregon........................................ 15.5 13.6 9.6
Colorado...................................... 6.6 5.9 8.4
Washington.................................... 10.9 8.8 7.7
Florida....................................... 0.3 1.0 4.6
Maryland...................................... 2.4 4.4 4.0
Hawaii........................................ 9.4 12.4 3.7
Utah.......................................... 3.6 3.4 2.9
Virginia...................................... 0.1 1.5 2.9
All other states.............................. 11.7 19.2 28.3
------ ------ -----
Total....................................... 100.0% 100.0% 100.0%
====== ====== =====
</TABLE>

Wholesale Division. The Company originates a majority of its loans through
its Wholesale Division, which consists of a branch network of 14 regional
branch centers, four of which are located in California, two in Oregon, and
one in each of Colorado, Florida, Illinois, Ohio, Massachusetts, Texas,
Virginia and Washington.

38
<PAGE>

The sales offices are staffed with account executives who have developed
relationships with independent mortgage loan brokers through which the Company
has originated loans in 45 states and the District of Columbia.

Mortgage loan brokers act as intermediaries between property owners and the
Company in arranging mortgage loans that adhere to the Company's underwriting
guidelines. By concentrating on wholesale mortgage banking through its network
of mortgage loan brokers, the Company believes it is able to originate loans
cost-effectively. The Company is actively seeking to expand its Wholesale
Division pursuant to selected demographic statistics and other criteria
developed by the Company which are intended to identify the most attractive
markets for the Company's products. The Company typically enters into a new
market using its national sales team, which initially penetrates a market, to
recruit brokers for the Company's wholesale network. The Company's sales
strategy is to limit the number of regional branch offices and personnel
needed to generate and effectively process and underwrite loans. As such, the
Company typically opens a regional branch only after a minimum level of volume
is achieved in a new market. By utilizing this expansion strategy, the Company
can maintain lower overhead expenses than generally associated with competing
companies utilizing a more extensive retail branch office system.

Generally, loan applications are submitted by mortgage brokers to one of the
Company's regional branch offices where the loan is logged-in for RESPA and
other regulatory compliance purposes, underwritten and conditionally approved
or denied within 24 hours of receipt. The Company strives to respond to each
broker submitting applications as quickly as possible, as mortgage brokers may
submit loan files to several prospective lenders at the same time. If
approved, a "conditional approval" will be issued to the broker with a list of
specific conditions to be met and additional documents to be supplied prior to
the Company funding the loan. A production coordinator and the originating
Company account executive will work directly with the submitting mortgage
broker to collect the requested information and meet all underwriting
conditions and requirements. In most cases, the Company funds loans within 21
days after approval of the loan application.

The following table sets forth selected information relating to loan
originations during the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans....... $38,642 $183,010 $267,409 $345,619
Average principal balance per
loan............................ $ 130 $ 118 $ 89 $ 120
Percent of first mortgage loans.. 99.7% 97.9% 83.2% 98.8%
Weighted average interest rate... 8.0% 9.0% 10.4% 10.5%
Weighted average initial loan-to-
value ratio..................... 68.4% 69.4% 76.4% 72.7%
</TABLE>

Retail/Telemarketing Division. In addition to originating loans through its
Wholesale Division, the Company recently formed its Retail/Telemarketing
Division to solicit loans directly from prospective borrowers. The
Retail/Telemarketing Division originates loans through predictive dialing
machines, which combine telephone dialing technology with an on-line computer
to facilitate the loan origination process. The predictive dialing machine (i)
automatically dials prospective borrowers, (ii) provides the telemarketer with
an on-screen marketing presentation to market efficiently the Company's loan
products, and (iii) provides an interactive loan underwriting program and loan
quotation system to assess immediately the prospect's borrowing capability.
The Company believes that the Retail/Telemarketing Division represents a
significant opportunity to expand origination volume by marketing directly to
borrowers and utilizing predictive dialers which enable the Company to
originate such loans at a lower cost than traditional retail organizations.
The Company believes that by utilizing predictive dialers, it will be able to
achieve a new source of loan origination volume without incurring the fixed
overhead costs associated with traditional retail operations. The cost per
originated loan of such a system is expected to be significantly less than the
cost per originated loan of traditional methods of originating loans, such as
done in the Wholesale Division.

39
<PAGE>

Correspondent Program. In addition to originating loans through its
Wholesale Division and the Retail/Telemarketing Divisions, the Company
purchases loans through its Correspondent Program. Purchases under the
Correspondent Program are in the form of complete loan packages that have been
originated, underwritten and funded by mortgage bankers or financial
institutions. All loans purchased through the Correspondent Program are
reunderwritten by the Company's underwriting staff to determine that the loan
packages are complete and materially adhere to the Company's underwriting
guidelines. Depending on the size of the pool of loans purchased, the Company
will engage a third-party underwriter to reunderwrite the loans, verify the
borrower's employment status, determine credit grade and verify the quality of
the appraisal.

The Company has established relationships with several mortgage bankers who
have been reviewed by the Company to ensure the quality and type of loans
originated. The Company also analyzes the financial condition of the mortgage
banker, including a review of the mortgage bankers' licenses and financial
statements. Upon approval, the Company typically requires each mortgage banker
to enter into a purchase and sale agreement with customary representations and
warranties regarding the loans such mortgage banker will sell to the Company.

The following table sets forth selected information relating to the bulk
purchase of loans during the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal balance of loans........... $ 2,914 $ 7,287 $ 21,073 $130,563
Average principal balance per loan... $ 97 $ 101 $ 69 $ 101
Percent of first mortgage loans...... 53.4% 99.9% 81.7% 99.5%
Weighted average interest rate....... 9.9% 8.7% 10.9% 10.8%
Weighted average initial loan-to-
value ratio......................... 53.0% 73.3% 72.9% 74.8%
</TABLE>

Institutional Division. The Company seeks to expand its Institutional
Division which originates and purchases sub prime loans based on relationships
with selected financial institutions.

UNDERWRITING

The Company's underwriting guidelines are provided to all mortgage loan
brokers and mortgage bankers prior to accepting any loan application or bulk
purchase package. Upon receipt of a loan application from a mortgage loan
broker, the Company's underwriting staff determines if the loan meets the
Company's underwriting guidelines. To assess the credit quality of the loan,
the underwriter considers various factors, including the appraised value of
the collateral property, the applicant's debt payment history, credit profile
and employment status, and the combined debt ratio and loan-to-value ratio
upon completion of the loan.

Prior to funding a loan, the Company's underwriting staff determines the
applicant's creditworthiness and ability to service the loan. In addition, the
underwriting staff reviews the value of the underlying collateral based on a
full review appraisal completed by a pre-approved licensed independent
appraiser. The Company selects its

40
<PAGE>

review appraisers based on professional experience, education, membership in
related professional organizations and by reviewing the review appraiser's
experience with the type of property being used as collateral. For loans
purchased through its Correspondent Program, the Company will typically
request a second review appraisal if the original review appraisal was
completed by a review appraiser not approved by the Company.

Verification of personal financial information and credit history is also
required prior to closing the loan. Generally, loan applicants are required to
have two years of employment with their current employer or two years of
similar business experience. Applicants who are salaried must provide current
employment information as well as recent employment history. The Company
verifies this information for salaried borrowers based on written confirmation
from employers, or a combination of a telephone confirmation from the employer
and the most recent pay stub or W-2 tax form. Self-employed applicants are
generally required to provide copies of complete federal income tax returns
filed for the most recent two years. A merged credit report combining
information gathered from two independent, nationally recognized credit
reporting agencies reflecting the applicant's credit history is also used.
Verification of information regarding the first mortgage, if any, is also
required, including balance, status and whether local taxes, interest,
insurance and assessments are included in the applicant's monthly payment. All
taxes and assessments not included in the payment are required to be verified
as current.

Upon completion of the underwriting process, the closing of the loan is
scheduled with an independent closing attorney who is responsible for closing
the loan in accordance with the Company's closing procedures. The Company has
established classifications with respect to the credit profiles of loans based
on certain of the borrower's characteristics. Each loan applicant is placed
into one of four letter ratings ("A" through "D," with subratings within those
categories), depending upon a number of factors including the applicant's
credit history and employment status. Terms of loans made by the Company, as
well as the maximum loan-to-value ratio and debt service-to-income coverage
(calculated by dividing fixed monthly debt payments by gross monthly income),
vary depending upon the classification of the borrower. Borrowers with lower
credit ratings generally pay higher interest rates and loan origination fees.
The criteria currently used by the Company in classifying loan applicants can
be generalized as follows:

Under the Company's "A" risk category, the prospective borrower must have
generally repaid consumer debt (revolving and installment) according to its
terms with a maximum of three 30-day late payments within the last 12 months
or five 30-day late payments or two 60-day late payments on such obligations
within the last 24 months. Within this 24 month period, however, a maximum of
one 30-day late payment and no 60-day late payments are acceptable in the last
12 months or a maximum of two 30-day late payments and no 60-day payments
within the last 24 months are acceptable on an existing mortgage loan on the
subject property. The existing mortgage obligation must be current. Minor
derogatory items are allowed as to non-mortgage credit. No collections,
charge-offs or judgments over $500 within the last five years are allowed. No
bankruptcy or notice of default filings by the borrower may have occurred
during the preceding five years. A maximum loan-to-value ratio of up to 90%
(or 75% for mortgage loans originated under the non-conforming, no-income
qualifier program, but 80% if the borrower is self-employed) is permitted for
a mortgage loan on a single family owner-occupied property. A maximum loan-to-
value ratio of 80% (or 70% for mortgage loans originated under the non-
conforming no-income qualifier program, but 75% if the borrower is self-
employed) is permitted for a mortgage loan on non-owner-occupied properties
and second home properties. The debt service-to-income ratio generally is 45%
or less, depending on the qualifying rate. The maximum loan amount is $400,000
for single-family owner-occupied properties, regardless of the documentation
program. Exceptions to the maximum loan amount for single-family owner-
occupied properties are considered by the Company on a limited basis. The
maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the non-conforming no-income qualifier program) for mortgage loans on
single-family non-owner-occupied properties or second homes.

Under the Company's "A-" risk category, the prospective borrower must have
generally repaid consumer debt (revolving and installment) according to its
terms with a maximum of five 30-day late payments or two 60-day late payments
within the last 12 months. A maximum of two 30-day late payments, and no 60-
day late payments, within the last 12 months is acceptable on an existing
mortgage loan on the subject property. The existing mortgage obligation must
be current. Minor derogatory items are allowed as to non-mortgage credit. No

41
<PAGE>

unpaid collection accounts, charge-offs or judgments over $500 within the last
two years are allowed. No bankruptcy or notice of default filings by the
borrower may have occurred during the preceding two years. A maximum loan-to-
value ratio of up to 85% (or 75% for mortgage loans originated under the non-
conforming no-income qualifier program, but 80% if the borrower is self-
employed) is permitted for a mortgage loan on a single-family owner-occupied
property. A maximum loan-to-value ratio of up to 75% (or 70% for mortgage
loans originated under the non-conforming no-income qualifier program) is
permitted for a mortgage loan on a non-owner-occupied property or a second
home. The debt service-to-income ratio is generally 45% or less, depending on
the qualifying rate. The maximum loan amount is $650,000 for single-family
owner-occupied properties under the non-conforming full documentation program.
Exceptions to the maximum loan amount for single-family owner-occupied
properties are considered by the Company on a limited basis. The maximum loan
amount is $500,000 for mortgage loans on single-family owner-occupied
properties under the non-conforming no-income qualifier program. The maximum
loan amount is $400,000 (or $350,000 for mortgage loans originated under the
non-conforming no-income qualifier program) for mortgage loans on a single-
family non-owner-occupied property or a second home. Loan applicants with less
favorable credit ratings generally are offered loans with higher interest
rates and lower loan-to-value ratios than applicants with more favorable
credit ratings.

Under the Company's "B" risk category, the prospective borrower must have
generally repaid consumer debt according to its terms, with a maximum of eight
30-day late payments or four 60-day late payments or two 90-day late payments
on such obligations within the last 12 months. A maximum of four 30-day late
payments or three 30-day late payments and one 60-day late payment within the
last 12 months is acceptable on an existing mortgage loan on the subject
property. The existing mortgage obligation must be current. As to non-mortgage
credit, some prior defaults may have occurred. Isolated and insignificant
collections and/or charge-offs, and judgments within the last 18 months,
totaling less than $1,000 are acceptable. No bankruptcy or notice of default
filing by the borrower may have occurred during the preceding 18 months. A
maximum loan-to-value ratio of 80% (70% for mortgage loans originated under
the non-conforming, no-income qualifier program, but 75% if the borrower is
self-employed) is permitted for a mortgage loan on a single family, owner-
occupied property. A maximum loan-to-value ratio of 70% (or 65% for mortgage
loans originated under the non-conforming, no-income qualifier program) is
permitted for a mortgage loan on a non-owner-occupied property or second home.
The debt service-to-income ratio generally is 50% or less, depending on the
qualifying rate. The maximum loan amount is $600,000 for single family owner-
occupied properties under the non-conforming full documentation program. The
maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the non-conforming, no-income qualifier program) for mortgage loans on a
non-owner-occupied property or a second home.

Under the Company's "C" risk category, the prospective borrower may have
experienced significant credit problems in the past. A maximum of twelve 30-
day late payments or six 60-day late payments or four 90-day late payments on
consumer debt within the last 12 months is acceptable. A maximum of five 30-
day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage can be up to 40 days past due at the time of funding of the
loan. As with non-mortgage credit, significant prior defaults may have
occurred. There may be open collections or charge-offs not to exceed $4,000
and up to $6,000 in isolated circumstances. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding year. A maximum
loan-to-value ratio of 75% (or 65% for mortgage loans originated under the
non-conforming, no-income qualifier program, but 70% if the borrower is self-
employed) is permitted on a mortgage loan on a single-family owner-occupied
property. A maximum loan-to-value ratio of 70% (or 60% for mortgage loans
originated under the non-conforming, no-income qualifier program, but 65% if
the borrower is self-employed) is permitted for a mortgage loan on a non-
owner-occupied property or second home. The debt service-to-income ratio is
generally 55% or less, depending on the qualifying rate. The maximum loan
amount is $500,000 (or $400,000 for mortgage loans originated under the
non-conforming, no-income qualifier program) for mortgage loans on single-
family owner-occupied properties. The maximum loan amount is $300,000 (or
$200,000 for mortgage loans originated under the non-conforming no-income
qualifier program) for mortgage loans on a non-owner-occupied property or a
second home.

42
<PAGE>

Under the Company's "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a general disregard for timely payment or credit
standing. With respect to an existing mortgage loan on the subject property,
no payment can be more than 120 days past due. Such existing mortgage loan is
not required to be current at the time the application is submitted. The
borrower may have open collections, charge-offs and judgments, all of which
must be paid simultaneously with the funding of the loan. No current
bankruptcy filings by the borrower are allowed. Borrowers who are in
foreclosure are considered. A maximum loan-to-value ratio of 65% (or 55% for
mortgage loans originated under the non-conforming, no-income qualifier
program, but 60% if the borrower is self-employed) is permitted for a mortgage
loan on a single-family owner-occupied property. No mortgage loans on a non-
owner-occupied property or a second home are made in the "D" risk category.
The maximum loan amount is $350,000 under the non-conforming full
documentation program (or $150,000 for mortgage loans originated under the
non-conforming, no-income qualifier program, but $200,000 if the borrower is
self-employed) for mortgage loans on a non-owner-occupied property or a second
home. The debt service-to-income ratio generally is 60% or less, depending on
the qualifying rate.

Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective mortgagor
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade"
or an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of ownership; a maximum of one 30-day late payment
on all mortgage loans during the last 12 months; stable employment; and the
length of residence in the subject property. Accordingly, the Company may
classify certain mortgage loan applications in a more favorable risk category
than other mortgage loan applications that, in the absence of such
compensating factors, would only satisfy the criteria of a less favorable risk
category.

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following tables set forth information concerning the Company's loan
production by borrower risk classification for loans secured by mortgages for
the year ended December 31, 1995 and the nine months ended September 30, 1996.
Dollars in the table below are in thousands.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
LOAN % OF INTEREST AVERAGE LOAN % OF INTEREST AVERAGE
CREDIT RATING AMOUNT MORTGAGES RATE LTV AMOUNT MORTGAGES RATE LTV
------------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... $ 98,455 34.1% 11.36% 80.6% $ 72,450 14.8% 10.71% 81.2%
A-...................... 135,001 46.8 9.65 76.8 266,599 54.4 10.15 73.6
B....................... 34,906 12.1 10.50 68.2 93,908 19.1 10.93 71.2
C....................... 17,716 6.1 11.01 64.1 40,179 8.2 11.57 67.7
D....................... 2,404 0.9 12.10 58.6 17,065 3.0 12.50 61.3
-------- ----- -------- -----
Total................. $288,482 100.0% 10.44 76.1 $490,201 100.0% 10.58 73.3
======== ===== ======== =====
</TABLE>

LOAN SALES AND SECURITIZATIONS

43
<PAGE>

Generally, in each securitization transaction, the Company retains an
interest in the loans sold through interest-only and residual certificates,
which are amortized over an estimated average life. Cash flow realized from
these interest-only and residual certificates is subject to the prepayment and
loss characteristics of the underlying loans. The interest-only and residual
certificates retained by the Company through securitizations amounted to $65.1
million at September 30, 1996. See "Risk Factors--Interest Only and Residual
Value Certificates."

With respect to the aforementioned securitizations, the Company arranged for
the related trusts to purchase credit enhancements for the senior interests in
the related trusts in the form of insurance policies provided by three AAA/Aaa
rated monoline insurance companies, and, as a result, the senior interests in
each trust received a rating of "AAA" from Standard & Poor's Ratings Services
and "Aaa" from Moody's Investors Service, Inc.

The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in the trusts require the overcollateralization
of the senior interests by using interest receipts on the mortgage loans to
reduce the outstanding principal balance of the senior interests to a pre-set
percentage of the mortgage loans. The overcollateralization percentage may be
reduced over time according to the delinquency and loss experience of the
loans. The Company's interest in each overcollateralized amount is reflected
in the Company's financial statements as a portion of "interest-only and
residual certificates." To the extent that a loss is realized on the loans,
losses will be paid first out of interest available to the interest-only and
residual certificates and ultimately out of the overcollateralization amount
available to the interest-only and residual certificates. If losses exceed the
Company's discounted recourse allowance, the excess losses in any period will
result in a reduction in the value of the interest-only and residual
certificates held by the Company. If losses exceed the amounts available to
the interest-only and residual certificates, the monoline insurance company
policy will pay any further losses experienced by holders of the senior
interests in the related trust. Interest available to the interest-only and
residual certificates, when available, and distributions from the
overcollateralization amount will be used to reimburse the monoline insurance
company for any such payments.

The Company may be required either to repurchase or to substitute for loans
which do not conform to the representations and warranties made by the Company
in the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations.

HEDGING

The market value of fixed-rate mortgage loans has a greater sensitivity to
changes in market interest rates than adjustable-rate mortgage loans. As the
Company's production of fixed-rate mortgage loans has increased, the Company
has begun to implement various hedging strategies to mitigate the change in
market value of fixed-rate mortgage loans held for sale between the date of
origination and sale. Commencing in August 1995, these strategies have
included selling short and selling forward United States Treasury securities
and pre-funding loan originations in its securitizations. The Company
currently hedges its fixed-rate mortgage loans held for sale by selling
forward a combination of United States Treasury securities of various
maturities whose combined change in value due to a change in interest rates
closely approximates the change in value of the mortgage loans hedged. In the
future the Company may hedge its variable-rate mortgage loans and its
interest-only and residual certificates with hedging transactions which may
include forward sales of mortgage loans or mortgage-backed securities,
interest rate caps and floors and buying and selling of futures and options on
futures. The nature and quantity of hedging transactions are determined by the
Company's management based on various factors, including market conditions and
the expected volume of mortgage loan originations and purchases.

The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in market value of
its fixed-rate mortgage loans held for sale. However, an effective hedging
strategy is complex and no hedging strategy can completely insulate the
Company from such changes. In addition, hedging involves transaction and other
costs, and such costs could increase as the period covered by the hedging
protection increases or in periods of rising and fluctuating interest rates.
Therefore, the Company

44
<PAGE>

may be prevented from effectively hedging its fixed-rate loans held for sale,
without significantly reducing the Company's return on equity.

In addition, the Company hedges future production of mortgage loans through
a pre-funding mechanism in connection with its securitizations. In its
securitization transactions, investors deposit cash in a pre-funded amount
into the related trust to purchase the loans the Company commits to sell on a
forward basis. This pre-funded amount is invested pending use in short term
obligations which pay a lower interest rate than the interest rate the trust
is obligated to pay certificate investors on the outstanding balance of the
pre-funded amount. The Company is required to deposit at the closing of the
related transaction an amount sufficient to make up the difference between
these rates.

As of September 30, 1996 and December 31, 1995, the Company had open hedge
positions of $23.9 million and $0 respectively. At December 31, 1995 and
September 30, 1996, the Company's unrealized loss on open hedge positions was
$84,375 and $10,525, respectively, on forward sales of United States Treasury
securities.

LOAN SERVICING AND DELINQUENCIES

Servicing. The Company currently originates or purchases all mortgage loans
on a servicing released basis, thereby acquiring the servicing rights. In
September 1995, the Company entered into a servicing agreement with Advanta
(the "Advanta Agreement") to service all of its current and ongoing
production. In addition, Advanta services or subservices each public
securitization of the Company's loans pursuant to the related pooling and
servicing agreement. According to Advanta's Annual Report on Form 10-K for the
year ended December 31, 1995, Advanta serviced approximately $1.8 billion in
loans with an overall average delinquency rate of approximately 6%. Servicing
includes collecting and remitting loan payments, making required advances,
accounting for principal and interest, holding escrow or impound funds for
payment of taxes and insurance, if applicable, making required inspections of
the mortgaged property, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines. Under the Advanta Agreement, the
Company is obligated to pay Advanta a monthly servicing fee on the declining
principal balance of each loan serviced and a set-up fee for each loan
delivered to Advanta for servicing.

Advanta is required to pay all expenses related to the performance of its
duties under the Advanta Agreement. Further, Advanta is required to make
advances of taxes and required insurance premiums that are not collected from
borrowers with respect to any mortgage loan, only if it determines that such
advances are recoverable from the mortgagor, insurance proceeds or other
sources with respect to such mortgage loan. If such advances are made, Advanta
generally will be reimbursed prior to the Company receiving the remaining
proceeds. Advanta also will be entitled to reimbursement by the Company for
expenses incurred by it in connection with the liquidation of defaulted
mortgage loans and in connection with the restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of Advanta's expenses in the sale, are less than the principal
balance of the related mortgage loan.

The Company may terminate the Advanta Agreement upon the occurrence of one
or more of the events specified in the Advanta Agreement generally relating to
Advanta's proper and timely performance of its duties and obligations under
the Advanta Agreement. Either the Company or Advanta may terminate the Advanta
Agreement without cause upon 90 days' prior written notice to the other party;
provided, that if the Company terminates the Advanta Agreement without cause,
the Company shall pay to Advanta a termination fee of 1% of the aggregate
principal balance of the mortgage loans being serviced by Advanta at such
time; provided, further, that if the Company transfers servicing of any amount
of mortgage loans being serviced by Advanta to another servicer without
terminating the Advanta Agreement, the Company shall pay to Advanta $100 per
mortgage loan

45
<PAGE>

transferred. With respect to mortgage loans securitized by the Company, the
Company will not be able to terminate the servicer without the approval of the
trustee for such securities.

As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans, net of pre-payment penalties, which accrue
to the Company. Advanta receives any benefit derived from interest earned on
collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds. Advanta is required to remit to the Company no later
than the 18th day of each month all principal and interest collected from
borrowers during the monthly reporting period.

The Company subcontracts with outside servicers such as Advanta as this
arrangement allows the Company to increase the volume of its loan originations
and purchases without incurring related overhead investments in servicing
operations.

The following table sets forth certain information regarding the Company's
servicing portfolio of loans for the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning servicing portfolio... $ -- $ 18,074 $ 68,721 $ 270,193
Loans added to the servicing
portfolio...................... 41,556 190,297 288,482 490,201
Loans sold servicing released
and principal paydowns......... (23,482) (139,650) (87,010) (109,126)
-------- --------- -------- ---------
Ending servicing portfolio...... $ 18,074 $ 68,721 $270,193 $ 651,268
======== ========= ======== =========
</TABLE>

Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or nonjudicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.

Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.

46
<PAGE>

The following tables set forth the combined delinquency and foreclosure
experience of: (1) loans held for sale or securitization included in the
Company's servicing portfolio and (2) securitized loans originated by the
Company but serviced by an affiliate of the Company or by Advanta for the
periods indicated.

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 AS OF SEPTEMBER 30, 1996
-------------------- -------------------- --------------------- -----------------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN SERVICING IN SERVICING IN SERVICING IN SERVICING
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------- ------------ ------- ------------ -------- ------------ ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans serviced.......... $18,074 100.0% $68,721 100.0% $270,193 100.0% $ 651,268 100.0%
30-59 days delinquent... 1,194 6.6 321 0.5 3,072 1.1 7,952 1.2
60-89 days delinquent... 60 0.3 199 0.3 1,896 0.7 3,628 0.6
90 days or more
delinquent............. -- -- 383 0.5 4,396 1.6 13,518 2.1
------- ----- ------- ----- -------- ----- ------------- ----------
Total delinquencies..... $ 1,254 6.9% $ 903 1.3% $ 9,364 3.4% $ 25,098 3.9%
======= ===== ======= ===== ======== ===== ============= ==========
Delinquent loans in
foreclosure............ $ -- -- $ 383 0.5% $ 4,883 1.8% $ 10,398 1.6%
Total real estate
owned.................. -- -- -- -- 141 -- 871 0.1%
</TABLE>

As of September 30, 1996, statements to certificateholders prepared by the
trustee for each of four securitizations in which loans originated and
purchased by the Company were included reported no losses; however, the
Company's loans securitized and sold in the secondary market and included in
these securitizations have been outstanding for a relatively short period of
time and consequently the delinquencies, foreclosures and loss experience to
date are not indicative of results to be experienced in the future. In
addition, the mortgage loans related to the interest-only and residual
certificates retained by SPTL pursuant to the Contribution Transaction have
generally had higher delinquency ratios than the Company's delinquency ratios,
even though such loans were generally underwritten to SPFC's underwriting
standards.

COMPETITION

The Company is a relatively new entrant in the industry, is relatively small
compared to many of its competitors and faces intense competition in the
business of originating, purchasing and selling mortgage loans. Competition in
the industry takes many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan. Traditional competitors in the financial services business include other
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Most of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much
larger than the Company have formed national loan origination networks that
are substantially similar to the Company's loan origination programs. In
addition, the current level of gains realized by the Company and its
competitors on the sale of sub-prime loans could attract additional
competitors into this market with the possible effect of lowering gains on
future loan sales.

The Company believes that its competitive strengths include providing
prompt, responsive service and flexible underwriting to independent mortgage
brokers. The Company's underwriters apply its underwriting guidelines on an
individual basis but have the flexibility to deviate from them when an
exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. This provides independent mortgage
brokers working with the Company the ability to offer loan packages to Sub-
prime Borrowers.

REGULATION

The Company's operations are subject to extensive regulation, supervision
and licensing by federal, state and local government authorities. Regulated
matters include, without limitation, loan origination, credit activities,
maximum interest rates and finance and other charges, disclosure to customers,
the terms of secured transactions, the collection, repossession and claims
handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.

47
<PAGE>

The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including the Truth in Lending Act, the Real Estate Settlement Procedures Act,
the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair
Credit Reporting Act and the Fair Housing Act.

The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give consumers the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel
certain credit transactions including loans of the type originated by the
Company. A lender's failure to provide the requisite material disclosures may,
among other things, give rise to a borrower's right of rescission, if
applicable to the transaction and validly invoked. Management of the Company
believes that it is in compliance with TILA in all material respects.

In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. The Riegle Act
contains, among other things, the Homeownership and Equity Protection Act of
1994 (the "High Cost Mortgage Act"), which makes certain amendments to TILA.
The High Cost Mortgage Act, which became effective with respect to loans
consummated after October 1, 1995, generally applies to closed-end loans
secured by a consumer's principal dwelling but not obtained for the purchase
or construction of the dwelling in which the loan has either (i) total points
and fees upon origination in excess of eight percent of the loan amount or
(ii) an annual percentage rate of more than ten percentage points higher than
United States Treasury securities of comparable maturity ("Covered Loans"). A
substantial majority of the loans originated or purchased by the Company are
not Covered Loans.

The High Cost Mortgage Act imposes additional disclosure requirements on
lenders originating Covered Loans and prohibits lenders from, among other
things, originating Covered Loans that are underwritten solely on the basis of
the borrower's home equity without regard to the borrower's ability to repay
the loan. The Company believes that only a small portion of loans it
originated are of the type that, unless modified, would be prohibited by the
High Cost Mortgage Act. The Company's underwriting criteria have always taken
into consideration the borrower's ability to repay.

The High Cost Mortgage Act also prohibits lenders from including prepayment
fee clauses in Covered Loans to borrowers with a debt-to-income ratio in
excess of 50% or Covered Loans used to refinance existing loans originated by
the same lender. The Company will continue to collect prepayment fees on loans
originated prior to the effectiveness of the High Cost Mortgage Act and on
non-Covered Loans as well as on Covered Loans in permitted circumstances.
Because the High Cost Mortgage Act does not apply to loans consummated before
October 1, 1995, the level of prepayment fee revenue was not affected in 1995,
but the level of prepayment fee revenue may decline in future years. The High
Cost Mortgage Act imposes other restrictions on Covered Loans, including
restrictions on balloon payments and negative amortization features, which the
Company does not believe will have a material impact on its operations.

The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
These bases are referred to as "prohibited bases." ECOA, as implemented by
Regulation B, prohibits creditors from discriminating on prohibited bases or
from considering certain types of information in rendering a credit decision.
It also requires certain disclosures by the lender regarding consumer rights
and requires lenders to advise applicants of the reasons for credit denial. In
instances where the applicant is denied credit or the rate or charge for loans
increases as a result of information obtained from consumer reports prepared
by a consumer reporting agency, another statute, the Fair Credit Reporting Act
of 1970, as amended, requires lenders to supply the applicant with the name
and address of the consumer reporting agency and the consumer has a right to
obtain the information contained in the consumer report. The Company is also
subject to the Real Estate Settlement Procedures Act and is required to file
an annual report with the Department of Housing and Urban Development pursuant
to the Home Mortgage Disclosure Act.

48
<PAGE>

In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.

Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.

EMPLOYEES

At September 30, 1996, the Company employed 201 full-time employees and 16
part-time employees. None of the Company's employees is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.

PROPERTIES

The Company's executive and administrative offices are located at One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon, and consist of
approximately 9,922 square feet. The leases on the premises expire between
1999 and 2000, and the current annual rent is approximately $189,180.

The Company also leases space for its branch offices. These facilities
aggregate approximately 42,539 square feet, with an annual aggregate base
rental of approximately $594,900. The terms of these leases vary as to
duration and rent escalation provisions. In general, the leases expire between
1996 and 2000 and provide for rent escalations dependent upon either increases
in the lessors' operating expenses or fluctuations in the consumer price index
in the relevant geographical area.

In the design of its branch operations, the Company has been able to
maintain low overhead expenses by leasing space in office complexes located in
accessible but non-prime locations. The branch offices range in size from
1,521 to 6,534 square feet with lease terms typically ranging from one to five
years. Annual base rents for the branch offices range from $5,400 to $82,328.

LEGAL PROCEEDINGS

SPFC occasionally becomes involved in litigation arising in the normal
course of business. Management believes that any liability with respect to
such legal actions, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.

49
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION
PRO FORMA FINANCIAL DATA
(UNAUDITED)

The following unaudited pro forma statements of earnings have been prepared
based on the Company's historical audited financial statements for the year
ended December 31, 1995 and unaudited financial statements for the nine-month
period ended September 30, 1996. The unaudited pro forma statements of
earnings give effect to the necessary adjustments to reflect the elimination
of interest-only and residual certificates and loans held for sale that were
retained by SPTL at the effective time of the IPO in connection with the
Contribution Transaction. See "Business--the Contribution Transaction." The
pro forma information is for illustrative purposes only and should not be
viewed as a projection or forecast of the Company's performance for any future
period. The pro forma statements of earnings do not purport to represent the
Company's results of operations had the Company operated independently from
SPTL during the periods presented. Such pro forma information should be read
in conjunction with the related notes and with the Company's historical
financial statements and notes thereto included elsewhere herein.

PRO FORMA STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans........... $ 17,995,303 $ (5,791,666)(1) $ 12,203,637
Interest income................... 4,304,760 -- 4,304,760
------------ ------------ ------------
Total revenues.................. 22,300,063 (5,791,666) 16,508,397
------------ ------------ ------------
Expenses:
Interest on borrowings from SPTL
and ICII......................... 1,284,282 334,000 (4) 1,618,282
Interest on other borrowings...... 2,129,370 -- 2,129,370
Personnel and commission expense.. 4,190,566 -- 4,190,566
General and administrative ex-
pense............................ 2,153,220 234,000 (3) 2,387,220
------------ ------------ ------------
Total expenses.................. 9,757,438 568,000 10,325,438
------------ ------------ ------------
Earnings before taxes............... 12,542,625 (6,359,666) 6,182,959
Income taxes........................ 5,205,190 (2,639,262)(5) 2,565,928
------------ ------------ ------------
Net earnings........................ $ 7,337,435 $ (3,720,404) $ 3,617,031
============ ============ ============
Earnings per share.................. $ 0.32
============
Weighted average number of shares
outstanding........................ 16,747,500
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans........... $ 38,426,418 $ (388,808)(1) $ 38,037,610
Interest income................... 8,326,359 (262,000)(2) 8,064,359
------------ ------------ ------------
Total revenues.................. 46,752,777 (650,808) 46,101,969
------------ ------------ ------------
Expenses:
Interest on borrowings............ 4,755,742 -- 4,755,742
Personnel and commission expense.. 7,397,915 -- 7,397,915
General and administrative ex-
pense............................ 3,955,273 -- 3,955,273
------------ ------------ ------------
Total expenses.................. 16,108,930 -- 16,108,930
------------ ------------ ------------
Earnings before taxes............... 30,643,847 (650,808) 29,993,039
Income taxes........................ 13,029,394 (276,593)(5) 12,752,801
------------ ------------ ------------
Net earnings........................ $ 17,614,453 $ (374,215) $ 17,240,238
============ ============ ============
Pro forma earnings per share........ $ 0.93 $ 0.91
============ ============
Weighted average number of shares
outstanding........................ 18,986,723 18,986,723
</TABLE>

See accompanying notes to pro forma financial data.

50
<PAGE>

NOTES TO PRO FORMA FINANCIAL DATA
(unaudited)

In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. At the effective time of the IPO, SPTL retained all
other assets and all liabilities related to the contributed operations,
including all residual certificates generated in connection with
securitizations effected by SPTL's residential lending division. Shareholders
of the Company will not have any interest in assets that were retained by SPTL
as part of the Contribution Transaction.

Pro forma financial statements are presented: (1) to reflect the elimination
of certain assets and liabilities and the related revenues and expenses that
were retained by SPTL and to which the Company has no continuing rights to, or
receives economic benefit from and (2) to reflect increases in certain
expenses consisting of interest expense and increased loan servicing costs as
if the Company had operated using independent warehouse facilities and had
exclusively utilized the services of Advanta during all periods presented.

(1) Gains on sales of loans has been decreased due to elimination of residual
interest balances (and the corresponding liabilities and equity) which
were generated from securitizations occurring in December 1994 and March
and June, 1995. Loans contributed to these securitizations were originated
or purchased during the period of time in which the Company was obtaining
its funding from SPTL. Accordingly, SPTL has elected to retain these
assets and the rights to receive future income from them.

(2) Reflects the elimination of interest income from the residual interest
generated on the December 31, 1994 securitization which was retained by
SPTL as discussed in Note 1.

(3) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company exclusively used its current independent
loan servicer for the entire period. Annual loan servicing costs paid to
ICII were approximately $7.50 per loan per month, while estimated fees
that would have been charged by an independent loan servicer are a one-
time set-up fee of $25.00 per loan and 37.5 basis points per annum, paid
monthly, on the declining principal balance of each loan serviced.

(4) Reflects the inclusion of estimated additional expenses which would have
been incurred had the Company financed its borrowings at market rates
instead of at the SPTL cost of funds rate.

(5) Reflects the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.

51
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H. Wayne Snavely(1).................. 55 Chairman of the Board
Robert W. Howard..................... 50 President, Chief Executive Officer and
Director
Bernard A. Guy....................... 40 Executive Vice President, Acting Chief
Financial Officer, Acting Secretary
and Director
Stephen J. Shugerman(1).............. 49 Director
John D. Dewey(1)..................... 36 Director
A. Van Ruiter(1)(2).................. 44 Director
Frank P. Willey(1)(2)................ 43 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

H. WAYNE SNAVELY has been the Chairman of the Board of the Company since
April 1995. He has been Chairman of the Board and Chief Executive Officer of
ICII since December 1991, Chairman of the Board of Imperial Credit Advisors,
Inc. ("ICAI") since January 1995 and Chairman of the Board of Imperial Credit
Mortgage Holdings, Inc. since November 1995. He has been a director of
Imperial Bancorp and Imperial Bank since 1994. From 1986 to February 1992, Mr.
Snavely served as Executive Vice President of Imperial Bancorp and Imperial
Bank with direct management responsibility for the following bank subsidiaries
and divisions: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason
& Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization.

ROBERT W. HOWARD has been President, Chief Executive Officer and a Director
of the Company since April 1995. From January 1994 to April 1995, he was
Senior Vice President of SPTL's Residential Lending Division and from December
1992 to January 1994, he was Vice President of the same division. From January
1990 to December 1992, Mr. Howard was Senior Vice President at Preferred
Financial Funding Corp., a retail mortgage banking company specializing in
non-conforming credit loans. From March 1981 to December 1990, Mr. Howard was
President of R.W. Howard Financial, a privately owned company specializing in
construction and permanent financing for commercial and residential projects.
Mr. Howard is a licensed CPA in the State of California.

BERNARD A. GUY has been Executive Vice President and a Director of the
Company since April 1995. From January 1994 to April 1995, he was Senior Vice
President of SPTL's Residential Lending Division and from December 1992 to
January 1994, he was Vice President of the same division. From June 1989 to
December 1992, Mr. Guy was Senior Vice President at Preferred Financial
Funding Corp., an independent retail mortgage banking company specializing in
non-conforming credit loans. From June 1984 to June 1989, Mr. Guy was Vice
President/Controller for United First Funding.

STEPHEN J. SHUGERMAN has been a Director of the Company since April 1995.
From June 1987 to the present, Mr. Shugerman has been the President of SPTL.
From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan
Association, a privately owned thrift and loan. From 1979 to 1985, he was
Senior Vice President of Imperial Thrift and Loan Association, a former
subsidiary of Imperial Bank. Mr. Shugerman is a past president of the
California Association of Thrift & Loan Companies.

52
<PAGE>

JOHN D. DEWEY has been a Director of the Company since June 1996. He has
been a director of Sierra Capital Acceptance, a privately held wholesale
mortgage broker, since May 1995 and was their Chief Operating Officer from May
1995 to January 1996. From October 1993 to May 1995, Mr. Dewey served as
Consultant and Transaction Coordinator for ContiTrade Services Corporation's
non-conforming credit, ARM conduit program and was responsible for
administering the program. From March 1991 to September 1993, Mr. Dewey served
as Director of Securitization for First Alliance Mortgage Company, a privately
held retail mortgage banking company specializing in non-conforming credit
loans.

A. VAN RUITER has been a Director of the Company since June 1996. He has
been co-owner of Vantage LLC, a venture capital firm, since January 1996. From
April 1993 to December 1995, he was Chairman, President and Chief Executive
Officer of Gentra Capital Corporation. From May 1989 to April 1993, he was an
Executive Vice President of Pacific First Financial Corporation and Pacific
First Bank, holding the positions of Chief Financial Officer and Chief
Administrative Officer. From March 1986 to May 1989, he was Vice President,
Taxation for Royal Trustco Corporation.

FRANK P. WILLEY has been a Director of the Company since June 1996. He has
been the President of Fidelity National Financial, Inc. since January 1995.
From 1984 to 1994, Mr. Willey was the Executive Vice President and General
Counsel of Fidelity National Title Insurance Company. Mr. Willey is a director
of each of CKE Restaurants, Inc. and Mortgage Capital Resources Company.

BOARD OF DIRECTORS

Directors are elected annually to serve until the next annual meeting of
shareholders and until their successors are elected and qualified. The Company
plans to pay its non-employee directors a $20,000 annual retainer, $1,500 for
each board meeting or committee meeting attended and to reimburse them for
reasonable expenses incurred in attending meetings. The Company has granted
options to purchase an aggregate of 270,000 shares of Common Stock under its
Stock Option Plan to its non-employee directors. See "--Stock Options." No
family relationships exist between any of the executive officers or directors
of the Company.

The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Messrs. Ruiter and Willey, and
is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of the Company's internal accounting controls. The Compensation
Committee is comprised of Messrs. Snavely, Shugerman, Ruiter, Dewey and
Willey, and is responsible for recommending to the Board of Directors all
officer salaries, management incentive programs and bonus payments.

53
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and each of
the other executive officers whose annual salary and bonus during 1995
exceeded $100,000 (the "Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION(2) COMPENSATION
- ------------------------------ ------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Robert W. Howard(3).............. $60,000 $400,250 $12,313 --
President, Chief Executive
Officer and Director
Bernard A. Guy(3)................ 60,000 400,250 15,381 --
Executive Vice President and
Director
</TABLE>
- --------
(1) Gary A. Palmer joined the Company in October 1995 as Executive Vice
President, Chief Financial Officer and Secretary at an annual salary of
$125,000. Mr. Palmer resigned from the Company in January, 1997.
(2) Includes a $6,000 annual car allowance, and a $6,109 cash contribution
made by the Company to a 401(k) profit sharing plan on behalf of each of
Messrs. Howard and Guy, and certain group medical and dental insurance
benefits.
(3) Each of Messrs. Howard and Guy entered into a five-year employment
agreement effective January 1, 1996 at an annual salary of $250,000, plus
a bonus equal to 11/2% of the Company's pre-tax profits. See""--Employment
Agreements."

No options to purchase the Company's securities were granted prior to
November 1995. See "--Stock Options."

In addition, Messrs. Howard and Guy were each granted options to purchase
10,000 shares of ICII common stock at an exercise price of $8.50 per share in
December 1994. These options were scheduled to vest over a five-year period
but were accelerated and became fully vested in January 1996.

Employment Agreements

Mr. Howard serves as President and Chief Executive Officer of the Company
pursuant to the terms of an employment agreement which continues in effect
until January 1, 2001. Under the terms of the agreement, Mr. Howard receives
an annual salary of $250,000 and a quarterly bonus equal to one and one-half
percent of the Company's pre-tax earnings as determined in accordance with
generally accepted accounting principles. In addition to salary and bonus, Mr.
Howard receives an automobile allowance of $1,000 per month. In the event of
termination of employment without cause (as defined in the agreement) by the
Company, or because of death or disability, the Company will pay the present
value of compensation and benefits to which he would have been entitled during
the remaining term of the agreement. In the event Mr. Howard voluntarily
terminates his employment, he will be restricted from competing with the
Company for one year.

Mr. Guy serves as Executive Vice President of the Company pursuant to the
terms of an employment agreement which continues in effect until January 1,
2001. Under the terms of the agreement, Mr. Guy receives an annual salary of
$250,000 and a quarterly bonus equal to one and one-half percent of the
Company's pre-tax earnings as determined in accordance with generally accepted
accounting principles. In addition to salary and bonus, Mr. Guy receives an
automobile allowance of $1,000 per month. In the event of termination of
employment without cause (as defined in the agreement) by the Company, or
because of death or disability, the Company will pay the present value of
compensation and benefits to which he would have been entitled during the
remaining term of the agreement. In the event Mr. Guy voluntarily terminates
his employment, he will be restricted from competing with the Company for one
year.

54
<PAGE>

STOCK OPTIONS

Stock Option Plan

The Company has adopted the 1995 Stock Option, Deferred Stock and Restricted
Stock Plan (the "Stock Option Plan"), which provides for the grant of
qualified incentive stock options ("ISOs") that meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
stock options not so qualified ("NQSOs") and awards consisting of deferred
stock, restricted stock, stock appreciation rights and limited stock
appreciation rights ("Awards"). The Stock Option Plan is administered by a
committee of directors appointed by the Board of Directors (the "Committee").
ISOs may be granted to the officers and key employees of the Company or any of
its subsidiaries. The exercise price for any option granted under the Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the outstanding Common
Stock) of the fair market value of the shares of Common Stock at the time the
option is granted. The purpose of the Stock Option Plan is to provide a means
of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the Stock Option Plan is November 1, 1995.

The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,942,200 shares of Common Stock. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan.

Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Board of Directors' approval, in connection
with the exercise of stock options granted under the Stock Option Plan. If
shares of Common Stock are pledged as collateral for such indebtedness, such
shares may be returned to the Company in satisfaction of such indebtedness. If
so returned, such shares shall again be available for issuance in connection
with future stock options and Awards under the Stock Option Plan.

Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan after November 1, 2005.

Options granted under the Stock Option Plan will become exercisable upon the
terms of the grant made by the Committee. Awards will be subject to the terms
and restrictions of the Award made by the Committee. The Committee has
discretionary authority to select participants from among eligible persons and
to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO, and when and in what
increments shares covered by the option may be purchased.

Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.

Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.

The exercise price of any option granted under the Stock Option Plan is
payable in full (1) in cash, (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to
the optionholder, or (4) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable Internal Revenue Service or Securities and Exchange
Commission regulations or other relevant pronouncements.

Unless otherwise determined by the Committee or the Board at or after grant
but prior to a change of control, if a change of control (as defined in the
Stock Option Plan) occurs, (i) any indebtedness extended by the Company for
the purpose of exercising any option will also be forgiven and collateral
pledged will be released,

55
<PAGE>

(ii) all restricted and deferred stock awards, stock appreciation rights
outstanding for at least six months and stock options will be fully vested and
(iii) the value of all outstanding stock options, stock appreciation rights
and restricted and deferred stock awards will, to the extent determined by the
Committee at or after grant, be cashed out. This cash out will be based on the
higher of the highest price per share paid or offered in any transaction
related to a change of control or the highest price per share paid on the
exchange or national market during the preceding sixty day period, except that
in the case of ISOs and related stock appreciation rights, the price will be
based only on transaction reported for the date on which the Committee decides
to cash out the ISOs.

The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
Stock Option Plan or decrease the exercise price of a stock option to less
than 100% of fair market value on the date of grant (with the exception of
adjustments resulting from changes in capitalization), materially modify the
class of participants eligible to receive options or Awards under the Stock
Option Plan, materially increase the benefits accruing to participants under
the Stock Option Plan or extend the maximum option term under the Stock Option
Plan.

The Company has granted to Thomas Bowser (the Company's Senior Vice
President, Wholesale Division) options to purchase 37,500 shares of Common
Stock at a per share exercise price equal to $11.33, vesting 20% per year over
a period of five years after the date of grant. In addition, the Company has
granted to Messrs. Snavely, Shugerman, Dewey, Ruiter and Willey options to
purchase 150,000, 75,000, 15,000, 15,000 and 15,000 shares of Common Stock,
respectively, at a per share exercise price equal to $11.33, vesting 100% on
the first anniversary of the date of grant. In June 1996 and November 1996,
stock options for an additional 435,000 and 187,500 shares of Common Stock,
respectively, have been granted to certain employees of the Company under the
Stock Option Plan at a per share exercise price equal to $11.42 and $17.50,
respectively, vesting 20% per year over a period of five years after the date
of grant and none of which, except in the event of a change of control of the
Company, will be exercisable until 1997.

Senior Management Stock Option Plan

The Company's Senior Management Stock Option Plan (the "Senior Management
Plan") was adopted by the Board of Directors on November 1, 1995. The Company
has reserved 1,942,200 shares of Common Stock for issuance under the Senior
Management Plan.

The Senior Management Plan is administered by the Compensation Committee of
the Board of Directors. The Compensation Committee has the authority to adopt,
alter and repeal the administrative rules, guidelines and practices governing
the Senior Management Plan. All decisions made by the Compensation Committee
pursuant to the Senior Management Plan are final and binding on all persons,
including the Company and the participants in the Senior Management Plan.

Stock options granted under the Senior Management Plan may be exercised in
whole or in part at any time during the relevant option period, by giving
written notice of exercise to the Company specifying the number of shares to
be purchased, accompanied by payment in full of the purchase price in cash or
its equivalent, as determined by the Committee. An optionee shall generally
have the rights to dividends and other rights of a stockholder with respect to
shares subject to the option only after the optionee has given written notice
of exercise, has paid in full for such shares, and, if requested by the
Compensation Committee, has given certain representations regarding himself to
the Company.

In the event the Company is acquired by merger, consolidation or asset sale,
or there otherwise occurs a "Change in Control" of the Company as defined in
the Senior Management Plan, unless otherwise determined by the Compensation
Committee or the Board of Directors at or after the date of grant but prior to
such event, all stock options granted under the Senior Management Plan shall
become fully exercisable and vested. Additionally, if a participant is
terminated without cause pursuant to his employment agreement with the
Company, such person may exercise all or any portion of any stock option
granted under the Senior Management

56
<PAGE>

Plan at any time prior to the expiration of such option. If a participant's
employment with the Company terminates due to his death or permanent
disability or due to the dissolution of the Company, such person may exercise
all or part of the unexercised portion of any option granted under the Senior
Management Plan within the earliest to occur of the period ending 12 months
following such termination or the expiration of such option. If a participant
voluntarily terminates his employment with the Company or terminates his
employment agreement with the Company with the mutual agreement of the
Company, such person may not exercise any part of the unexercised portion of
any stock option granted pursuant to the Senior Management Plan.

The following table sets forth the stock options granted to Messrs. Howard
and Guy under the Senior Management Plan as of October 1, 1996:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SHARES PERCENTAGE STOCK PRICE APPRECIATION
UNDERLYING OF OPTIONS EXERCISE FOR OPTION TERM(4)
OPTIONS GRANTED TO PRICE EXPIRATION ------------------------------
NAME GRANTED(1) EMPLOYEES ($/SH)(2) DATE(3) 5%($) 10%($)
- ---- ---------- ---------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Howard........ 971,100 50% $7.00 11/1/05 $ 4,275,000 $ 10,834,000
Bernard A. Guy.......... 971,100 50% 7.00 11/1/05 4,275,000 10,834,000
</TABLE>
- --------
(1) Such stock options vest 20% per year over a period of five years after the
date of grant.
(2) The exercise price for all options equaled the fair market value of such
shares at the date of grant as determined by the Board of Directors.
(3) Such stock options expire ten years from the date of grant.
(4) Amounts reflect assumed rates of appreciation set forth in the Securities
and Exchange Commission's executive compensation disclosure requirements.

LIMITATION OF LIABILITY

The Company's Articles of Incorporation contain provisions limiting the
personal liability of directors to the Company and its shareholders, and the
Company's Bylaws contain provisions indemnifying directors, officers,
employees and agents of the Company for actions in their capacity as such, to
the fullest extent permitted by law. In addition, the Underwriting Agreement
provides for reciprocal indemnification between the Company and its
controlling persons on the one hand, and the Underwriters and their
controlling persons on the other hand, against certain liabilities in
connection with the registration statement of which this Prospectus is a part.
Each of the foregoing may include indemnification for liabilities under the
Securities Act. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

CERTAIN TRANSACTIONS

THE CONTRIBUTION TRANSACTION

In October 1994, ICII incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
residential lending division. To further this strategy, in December 1994, ICII
made a capital contribution of $250,000 to the Company in exchange for 100% of
its outstanding capital stock, and in April 1995, ICII caused SPTL to
contribute to the Company certain customer lists of SPTL's residential lending
division relating to the ongoing operations of such division. In addition, in
April 1995 all employees of SPTL's residential lending division became
employees of the Company. SPTL retained all other assets and all liabilities
related to the contributed operations including all residual interests
generated in connection with securitizations effected by SPTL's residential
lending division.

57
<PAGE>

ARRANGEMENTS WITH ICII AND ITS AFFILIATES

The Company and ICII have entered into agreements for the purpose of
defining their ongoing relationship. The agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's-length negotiations between independent parties. It is the intention
of the Company and ICII that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company as could have been
obtained from unaffiliated parties.

Additional or modified arrangements and transactions may be entered into by
the Company, ICII and their respective affiliates after completion of this
Offering. Any such future arrangements and transactions will be determined
through negotiations between the Company and ICII, and it is possible that
conflicts of interest will develop. The Unaffiliated Directors, consisting of
directors independent of the Company and ICII, must independently approve all
transactions between the Company and ICII.

The following is a summary of certain arrangements and transactions between
the Company and ICII.

Tax Agreement

The Company entered into an agreement (the "Tax Agreement") with ICII for
the purposes of (1) providing for filing certain tax returns, (2) allocating
certain tax liability and (3) establishing procedures for certain audits and
contests of tax liabilities.

Under the Tax Agreement, ICII agreed to indemnify and hold the Company
harmless from any tax liability attributable to periods ending on or before
June 1996 in excess of such taxes as the Company has already paid or provided
for. For periods ending after June 1996, the Company will pay its tax
liability directly to the appropriate taxing authorities. To the extent that
(1) there are audit adjustments that result in a tax detriment to the Company
or (2) the Company incurs losses that are carried back to an earlier year and
any such adjustment described in (1) or loss described in (2) results in a tax
benefit to ICII or its affiliates, then ICII will pay to the Company an amount
equal to the tax benefit as that benefit is realized. ICII also agreed to
indemnify the Company for any liability arising out of the filing of a federal
consolidated return by ICII or any return filed with any state or local taxing
authority. To the extent there are audit adjustments that result in any tax
detriment to ICII or any of its affiliates with respect to any period ending
on or before June 1996, and, as a result thereof, the Company for any taxable
period after June 1996 realizes a tax benefit, then the Company shall pay to
ICII the amount of such benefit at such time or times as the Company actually
realizes such benefit.

ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before June 1996, although
ICII cannot compromise or settle any issue that increases the Company's
liability without first obtaining the consent of the Company. The Company
generally controls all other audits and administrative and judicial
proceedings.

Services Provided by ICII

The Company has been historically allocated expenses of various
administrative services provided to it by ICII. The costs of such services
were not directly attributable to a specific division or subsidiary and
primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative number of employees and assets and liabilities of the
division or subsidiary, which management believed was a reasonable method of
allocation. The allocation of expenses for the years ended December 31, 1993,
1994 and 1995 and the nine months ended September 30, 1996 were approximately
$37,900, $92,700, $256,000 and $344,000, respectively.

58
<PAGE>

The Company itself is performing many of the services previously provided by
ICII. ICII currently provides to the Company mortgage loan production software
and hardware and data communications management, the managing of the 401(k)
plan in which the Company participates, and insurance coverage, including
health insurance.

Other Arrangements

From the point of commencement of operations until March 1994, SPTL served
as the servicer of the Company's loans. From March 1994 through September
1995, the Company subcontracted all of its servicing obligations under
mortgage loans originated or acquired on a servicing released basis to ICII
pursuant to a servicing agreement containing fees and other terms that are
comparable to industry standards. In addition, ICII was the servicer of loans
securitized by the Company in 1994 and 1995 under the respective pooling and
servicing agreements. Effective May 1, 1996 ICII transferred the servicing for
all of the Company's loans it serviced to Advanta or subcontracted with
Advanta to perform such servicing functions.

In February and March 1996, certain of ICII's conforming residential
mortgage origination offices were transferred to the Company.

In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL. Advances under this agreement were
collateralized by the Company's interest-only and residual certificates (other
than those retained by SPTL pursuant to the Contribution Transaction) at an
interest rate of 2% above LIBOR. In April 1996 the loan was repaid and the
agreement was canceled pursuant to affiliate-transaction restrictions imposed
on SPTL by state regulations.

During 1995, the Company borrowed approximately $1.5 million from ICII, such
sum bearing interest at approximately 10.3% per annum. At June 18, 1996 the
amount owed to ICII was approximately $17 million. As of September 30, 1996,
all amounts owed to ICII had been repaid.

In June 1996, the Company entered into a five year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances.

The Company entered into the ICII Registration Rights Agreement with ICII in
November, 1996, pursuant to which the Company agreed to register for sale
under the Securities Act in the future all of ICII's remaining shares of the
Company's Common Stock subject to certain conditions set forth therein. This
Offering is pursuant to the ICII Registration Rights Agreement.

59
<PAGE>

BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING SHAREHOLDER

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1996, and as
adjusted to reflect the sale of 370,000 shares by ICII offered hereby, by (i)
each director of the Company, (ii) each of the named Executive Officers, (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the Common Stock and (iv) all directors and executive officers of the Company
as a group. Upon successful completion of this Offering, ICII will
beneficially own approximately 49.4% of the outstanding Common Stock of the
Company.

<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK OWNED TO BE OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING
----------------------- NUMBER OF ------------------
NUMBER OF SHARES TO BE SOLD IN NUMBER OF
SHARES PERCENT THE OFFERING SHARES PERCENT
------------- --------- -------------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Imperial Credit Industries,
Inc.(2).................... 10,612,500 51.2% 370,000 10,242,500 49.4%
Robert W. Howard(3)(4)(5)... 218,220 1.0 -- 218,220 1.0
Bernard A. Guy(3)(4)(5)..... 226,905 1.1 -- 226,905 1.1
H. Wayne Snavely(2)(4)...... -- -- -- -- --
Stephen J. Shugerman(4)(6).. 1,500 * -- 1,500 *
Frank P. Willey(4).......... 6,000 * -- 6,000 *
A. Van Ruiter(4)............ 7,500 * -- 7,500 *
John D. Dewey(4)............ 7,800 * -- 7,800 *
All Directors and Officers
as a Group (8 persons)..... 468,091 2.2 -- 468,091 2.2
</TABLE>
- --------
* Less than 0.1%.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Each of such persons may be reached at 23550 Hawthorne Boulevard, Building
One, Suite 110, Torrance, California 90505.
(3) Each of such persons may be reached through the Company at One
Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035.
(4) For information regarding the granting of options to senior management,
certain directors and other officers of the Company, see "Management--
Stock Options."
(5) Includes 194,220 shares subject to stock options exercisable within 60
days.
(6) Mr. Shugerman may be reached at 12300 Wilshire Boulevard, Los Angeles,
California 90025.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. At November 30, 1996,
there were 20,737,500 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held.
California law generally permits holders of Common Stock to cumulate votes for
the election of directors upon giving notice as required by law and as to be
described in any proxy solicitation material distributed by the Company to
shareholders in connection with such election. The Company's Articles of
Incorporation do not contain a prohibition on cumulative voting. The Common
Stock is not convertible into any other security.

Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Price Range of Common Stock and Dividend Policy." In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock would be

60
<PAGE>

entitled to share in the Company's assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of Preferred Stock. The Common Stock has no
preemptive or other subscription rights. The outstanding shares of Common
Stock, including the Common Stock offered hereby, are fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
shareholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to make
removal of management more difficult. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by
the shareholders including, but not limited to, a tender offer to purchase
Common Stock at a premium over then current market prices. The Company has no
present plan to issue any shares of Preferred Stock.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A., Minneapolis, Minnesota.

DESCRIPTION OF THE 6.75% CONVERTIBLE SUBORDINATED NOTES

In November 1996, the Company issued its 6.75% Convertible Subordinated
Notes in aggregate principal amount of $75,000,000 pursuant to an Indenture
(the "Indenture") dated as of November 1, 1996, by and between the Company and
The Bank of New York, as trustee (the "Trustee"). The terms of the Notes
include those set forth in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Notes are subject to all such terms, and holders of Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of the Notes and the Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by,
reference to all of the provisions of the Indenture and the Notes, including
the definitions therein contained.

GENERAL

The Notes are unsecured obligations of the Company. The Notes are
subordinated in right of payment to all existing and future Senior
Indebtedness of the Company, as described under "Subordination" below. At
September 30, 1996, Senior Indebtedness of the Company and indebtedness of its
subsidiaries aggregated $141.1 million. Neither the Indenture nor the Notes
will limit the amount of Senior Indebtedness or other indebtedness that the
Company or any subsidiary may incur.

The Notes will mature on October 15, 2006. The Notes bear interest at 6.75%
per annum payable semi-annually in arrears on April 15 and October 15 of each
year (each an "Interest Payment Date"), commencing on April 15, 1997.

SUBORDINATION

The Notes are subordinated in right of payment to all existing and future
Senior Indebtedness of the Company and rank at least pari passu with other
unsecured subordinated indebtedness of the Company that pursuant to its terms
provides for such ranking. The rights of holders of Notes are effectively
subordinated

61
<PAGE>

by operation of law to all liabilities (including trade payables and
commitments under leases) of the Company's subsidiaries, if any. Neither the
Indenture nor the Notes restrict the incurrence of Senior Indebtedness or
other indebtedness by the Company or any subsidiary, or the right of the
Company to form, acquire or have an interest in any subsidiary. Any right of
the Company to receive assets of any subsidiary upon liquidation or
reorganization thereof (and the consequent right of the holders of the Notes
to participate in those assets) are effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subject to any security interests in the assets of such
subsidiary and subordinated to any indebtedness of such subsidiary senior to
that held by the Company.

CONVERSION RIGHTS

The Notes are convertible into Common Stock, initially at the conversion
price of $23.80 per share (equivalent to approximately 42.02 shares of Common
Stock for each $1,000 principal amount of Notes), at any time prior to
redemption or maturity. The right to convert a Note called for redemption or
delivered for repurchase pursuant to an offer to repurchase the Notes upon a
Change of Control (a "Change of Control Offer") will terminate at the close of
business on the second Business Day next preceding the redemption date for
such Note (unless the Company shall default in making the redemption payment
when due, in which case the conversion right shall terminate at the close of
business on the date such default is cured or such Note is redeemed). Holders
of the Notes have the right to convert Notes called for redemption until
terminated in accordance with the preceding sentence.

The conversion price is subject to adjustment in certain events, including
(i) dividends (and other distributions) payable in Common Stock on any class
of capital stock of the Company, (ii) the issuance to all holders of Common
Stock of rights, options or warrants entitling them to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at less
than the then-current market price (as determined in accordance with the
Notes) unless holders of Notes are entitled to receive the same upon
conversion, (iii) subdivisions, combinations and reclassifications of Common
Stock and (iv) distributions to all holders of Common Stock of evidences of
indebtedness of the Company or assets (including securities, but excluding not
only those rights, options, warrants, but also dividends and distributions
referred to above, dividends and distributions paid in cash out of the
retained earnings of the Company).

OPTIONAL REDEMPTION

The Notes may be redeemed, at the option of the Company, in whole or in
part, at any time on and after October 31, 1999, upon not less than 30 nor
more than 60 days notice at a redemption price equal to 103% of their
principal amount if redeemed during the period commencing October 31, 1999
through October 14, 2000, 102% of their principal amount if redeemed during
the 12-month period commencing October 15, 2000, 101% of their principal
amount if redeemed during the 12-month period commencing October 15, 2001 and
100% of their principal amount if redeemed on or after October 15, 2002, in
each case together with accrued and unpaid interest to the date fixed for
redemption. In the event of a partial redemption, the Notes to be redeemed
will be selected by the Trustee by such method as the Trustee shall deem fair
and appropriate.

Except as set forth under "--Change of Control" the Company will not be
required to make mandatory redemption payments with respect to the Notes.
There are no sinking fund payments with respect to the Notes.

In addition, the Company may at any time and from time to time repurchase
the Notes in the open market or in private transactions at prices it considers
attractive. Notes repurchased by the Company will be canceled.

CHANGE OF CONTROL

Each holder of a Note has the right, at such holder's option, to cause the
Company to purchase such Note (equal to $1,000 or an integral multiple
thereof) in whole or in part, for a cash amount equal to 100% of the principal
amount, together with accrued and unpaid interest to the repurchase date, if a
Change of Control (as defined herein) occurs or has occurred.

62
<PAGE>

A "Change of Control" will be deemed to have occurred (i) upon any merger or
consolidation of the Company with or into any person or any sale, transfer or
other conveyance, whether direct or indirect, of all or substantially all of
the assets of the Company, on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction, any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of
the total voting power in the aggregate normally entitled to vote in the
election of directors, managers, or trustees, as applicable, of the transferee
or surviving entity, other than any such person or group that held such voting
power as of the date of the Indenture, (ii) when any "person" or "group" (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate
normally entitled to vote in the election of directors of the Company, other
than any such person or group that held such voting power as of the date of
the Indenture, or (iii) when, during any period of 12 consecutive months after
the Closing Date, individuals who at the beginning of any such 12-month period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.

The Change of Control provisions described above may make more difficult or
discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control provisions will not prevent a leveraged
buyout led by Company management, a recapitalization of the Company or change
in a majority of the members of the Board of Directors which is approved by
the then-current Board of Directors, if such transaction does not constitute a
Change of Control, as set forth above.

The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable and
will file a Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase Notes at the option of
holders thereof upon a Change of Control.

EVENTS OF DEFAULT

The Indenture defines an Event of Default with respect to the Notes as any
of the following events: (i) the failure by the Company to pay any installment
of interest on, the Notes as and when the same becomes due and payable and the
continuance of any such failure for a period of 30 days, (ii) the failure by
the Company to pay all or any part of the principal of, or premium, if any, on
the Notes as and when the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, (iii) the failure of the Company to
perform any conversion of Notes required under the Indenture and the
continuance of any such failure for a period of 60 days, (iv) the failure by
the Company to observe or perform any other covenant or agreement contained in
the Notes or the Indenture and, subject to certain exceptions, the continuance
of such failure for a period of 60 days after appropriate written notice is
given to the Company by the Trustee or to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the Notes
outstanding, (v) certain events of bankruptcy, insolvency or reorganization in
respect of the Company or any of its subsidiaries, (vi) a default in the
payment of principal, premium, if any, or interest when due that extends
beyond any stated period of grace applicable thereto or an acceleration for
any other reason of the maturity of any Indebtedness of the Company or any of
its subsidiaries with an aggregate principal amount in excess of $5 million,
and (vii) final judgements not covered by insurance aggregating in excess of
$2 million, at any one time rendered against the Company or any of its
subsidiaries and not satisfied, stayed, bonded or discharged within 60 days.

The Indenture provides that if an Event of Default occurs and is continuing,
then the Company will provide notice thereof to the Trustee within five
Business Days after the Company becomes aware of such Event of Default, and
the Trustee shall then notify the holders of Notes thereof within 90 days
after its receipt of notice from the Company. If an Event of Default occurs
and is continuing, the Trustee or the holders of 25% in

63
<PAGE>

aggregate principal amount of the Notes then outstanding may, by notice in
writing to the Company (and to the Trustee, if given by the holders) (an
"Acceleration Notice"), declare all principal and accrued interest thereon to
be due and payable immediately.

GOVERNING LAW

The Notes and the Indenture will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to its conflicts
of law rules.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will continue to have
outstanding 20,737,500 shares of Common Stock. Of the outstanding shares,
10,365,000 shares will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.

The remaining 10,365,000 shares of Common Stock outstanding are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act and are eligible for sale subject to the holding period, volume
and other limitations imposed by that rule. As described below, Rule 144
permits resales of restricted securities subject to certain restrictions.
However, the Company has entered into the ICII Registration Rights Agreement
pursuant to which the Company has agreed to file one or more registration
statements under the Securities Act in the future for shares of the Company
held by ICII, subject to certain conditions set forth therein. Pursuant to the
ICII Registration Rights Agreement, the Company will use its reasonable
efforts to cause such registration statements to be kept continuously
effective for the public sale from time to time of the shares of the Company
held by ICII. In addition, 1,942,200 shares of Common Stock are currently
subject to outstanding stock options held by senior management pursuant to the
Senior Management Plan, none of which, except in certain circumstances, will
be exercisable until November 1996. Stock options for an additional 967,500
shares (including stock options granted in November 1996) of Common Stock have
been granted to certain non-employee directors and employees of the Company
under the Stock Option Plan, none of which, except in the event of a change of
control of the Company, will be exercisable until 1997. An additional 974,700
shares of Common Stock are reserved for future issuance under the Stock Option
Plan.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company (as
the term "affiliate" is defined under the Securities Act), would be entitled
to sell within any three-month period a number of such shares that does not
exceed the greater of 1% of the shares of the Company's Common Stock then
outstanding (207,375 shares) and the average weekly trading volume in the
Company's Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. A person who is not
deemed to have been an "affiliate" of the Company any time during the six
months immediately preceding a sale and who has beneficially owned shares for
at least two years would be entitled to sell such shares under Rule 144
without regard to any volume limitation.

The Company has filed a Registration Statement on Form S-8 covering the
shares that have been reserved for issuance under the Stock Option Plan and
the Senior Management Plan, thus permitting the resale of such shares in the
public market.

64
<PAGE>

PLAN OF DISTRIBUTION

The Shares are being offered by the Selling Shareholder through NatWest
Securities Limited as agent ("NatWest Securities" or the "Agent"). The Agent
has agreed to use its reasonable efforts to solicit offers to purchase the
Shares. It is expected that all or a substantial portion of the Shares may be
sold by NatWest Securities, as agent for the Selling Shareholder to
institutional purchasers in one or more transactions (which may involve block
transactions) on the New York Stock Exchange, in the over-the-counter market
or otherwise, through negotiated transactions, through the writing of options
on Shares (whether such options are listed on an options exchange or
otherwise) or otherwise, or in a combination of such at market prices
prevailing at the time of sale or at prices otherwise negotiated, subject to
prior sale. The Agent may effect such transactions by selling Shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the Agent and/or the purchasers of
such Shares for whom they may act as agents or to whom they may sell as
principal.

In connection with the sale of the Shares, the Agent will receive
compensation from the Selling Shareholder in the form of commissions or
discounts and may receive compensation from purchasers of the Shares for whom
they may act as agents or to whom they may sell as principal in the form of
commissions or discounts, in each case in amounts which will not exceed those
customary in the types of transactions involved. The Agent and dealers that
participate in the sale of the Shares may be deemed to be underwriters, and
any discounts received by them from the Selling Shareholder and any
compensation received on the resale of the Shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act.

The Placement Agency Agreement provides that the Company and the Selling
Shareholder will indemnify the Agent against certain liabilities, including
civil liabilities under the Securities Act, or contribute to payments that the
Agent may be required to make in respect thereof.

From time to time, NatWest Securities has provided, and may continue to
provide, investment banking services to the Company.

NatWest Securities, a United Kingdom broker-dealer and a member of the
Securities and Futures Authority Limited, has agreed that, as part of the sale
of the shares of Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any shares of Common Stock within the
United States, its territories or possessions or to persons who are citizens
thereof or residents therein. The Placement Agency Agreement does not limit
the sale of the shares of Common Stock offered hereby outside of the United
States.

NatWest Securities has also represented and agreed that (i) it has not
offered or sold and will not offer or sell any Common Stock to persons in the
United Kingdom prior to admission of the Common Stock to listing in accordance
with Part IV of the Financial Services Act 1986 (the "Act") except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 or the Act, (ii) it has
complied and will comply with all applicable provisions of the Act with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom and (iii) it has only issued or passed
on, and will only issue or pass on, in the United Kingdom any document
received by it in connection with the issue of the Common Stock, other than
any document which consists of or any part of listing particulars,
supplementary listing particulars or any other document required or permitted
to be published by listing rules under Part IV of the Act, to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the
document may otherwise lawfully be issued or passed on.

65
<PAGE>

LEGAL MATTERS

Certain matters relating to this Offering are being passed upon for the
Company by Thacher Proffitt & Wood, New York, New York and by Baker &
Hostetler, Los Angeles, California, special California counsel for the
Company, and for the Selling Shareholder by Irwin L. Gubman, Esq., General
Counsel of ICII. Andrews & Kurth L.L.P., Los Angeles, California, will act as
counsel to the Agent.

EXPERTS

The financial statements of Southern Pacific Funding Corporation as of
December 31, 1994, and 1995 and for each of the years in the three-year period
ended December 31, 1995 have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Common
Stock offered pursuant to this Prospectus. Statements contained in this
Prospectus as to the contents of any agreement or other document referred to
herein are not necessarily complete and reference is made to the copy of such
agreement or other document filed as an exhibit or schedule to the
Registration Statement. For further information, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith,
which are available for inspection without charge at the principal office of
the Commission in Washington, D.C. Copies of the materials containing this
information may be obtained from the Commission upon payment of the prescribed
fee. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement, including the
exhibits thereto, for further information with respect to the Company and the
Common Stock offered hereby. Statements contained in this Prospectus
concerning the provisions of such documents are necessarily summaries of such
documents and each such statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission as an exhibit
hereto.

The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Commission. For further information with respect to the
Company, reference is hereby made to such reports and other information which
can be inspected and copied (at prescribed rates) at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1025,
Washington, D.C. 20549 and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies may also be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site that contains reports and other information regarding the
Company at (http://www.sec.gov). The Company's Common Stock is listed on the
NYSE. The Company's reports, proxy statements and other information concerning
the Company can be inspected at the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.

66
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Southern Pacific Funding Corporation:

We have audited the accompanying balance sheets of Southern Pacific Funding
Corporation as of December 31, 1994 and 1995, and the related statements of
earnings, shareholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Pacific Funding
Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.

KPMG Peat Marwick llp

Los Angeles, California
April 1, 1996

F-1
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash............................... $ 250,000 $ -- $ 12,846,933
Loans held for sale................ 16,727,023 80,263,671 157,953,455
Loans held under repurchase
agreement......................... -- 12,800,565 --
Interest-only and residual
certificates...................... 4,897,920 25,658,601 65,088,271
Accrued interest receivable........ 49,255 977,374 959,894
Premises and equipment, net........ 36,330 421,695 2,215,375
Other assets....................... -- 282,831 2,300,127
----------- ------------ ------------
Total assets..................... $21,960,528 $120,404,737 $241,364,055
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank overdraft..................... $ -- $ 619,517 $ --
Discounted recourse liability...... 664,377 3,189,959 6,234,532
Borrowings under warehouse lines of
credit............................ -- 96,130,120 141,078,418
Borrowings from SPTL............... 15,698,684 2,758,147 --
Due to affiliates.................. -- 1,585,150 --
Other liabilities.................. 46,183 3,233,125 19,019,749
----------- ------------ ------------
Total liabilities................ 16,409,244 107,516,018 166,332,699
Shareholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized; none
issued or outstanding at
December 31, 1994 and 1995, and
September 30, 1996 (unaudited).. -- -- --
Common stock, no par value,
75,000,000 shares authorized;
15,562,500 issued and
outstanding at December 31, 1994
and 1995 and 20,737,500 issued
and outstanding at September 30,
1996 (unaudited)................ -- -- 53,758,259
Contributed capital................ 789,591 789,591 250,000
Retained earnings.................. 4,761,693 12,099,128 21,023,097
----------- ------------ ------------
Total shareholders' equity....... 5,551,284 12,888,719 75,031,356
----------- ------------ ------------
Total liabilities and
shareholders' equity............ $21,960,528 $120,404,737 $241,364,055
=========== ============ ============
</TABLE>

See accompanying notes to financial statements.

F-2
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
PRO FORMA
-----------------------
YEARS ENDED DECEMBER 31,
---------------------------------- YEAR ENDED DECEMBER 31,
1993 1994 1995 1995
---------- ----------- ----------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................ $1,217,805 $ 9,571,583 $17,995,303 $12,203,637
Interest income....... 406,812 2,135,886 4,304,760 4,304,760
---------- ----------- ----------- -----------
Total revenues...... 1,624,617 11,707,469 22,300,063 16,508,397
---------- ----------- ----------- -----------
Expenses:
Interest on other
borrowings........... 175,238 886,055 3,413,652 3,747,652
Personnel and
commission expense... 474,464 2,155,945 4,190,566 4,190,566
General and
administrative
expense.............. 239,031 1,261,708 2,153,220 2,387,220
---------- ----------- ----------- -----------
Total expenses...... 888,733 4,303,708 9,757,438 10,325,438
---------- ----------- ----------- -----------
Earnings before taxes... 735,884 7,403,761 12,542,625 6,182,959
Income taxes............ 305,392 3,072,560 5,205,190 2,565,928
---------- ----------- ----------- -----------
Net earnings........ $ 430,492 $ 4,331,201 $ 7,337,435 $ 3,617,031
========== =========== =========== ===========
Pro forma earnings per
share.................. $ 0.22
===========
Weighted average number
of shares outstanding.. 16,647,500
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
PRO FORMA
-----------------
NINE MONTHS ENDED
SEPTEMBER 30, NINE MONTHS ENDED
----------------------- SEPTEMBER 30,
1995 1996 1996
----------- ----------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gains on sales of loans............ $14,338,327 $38,426,418 $38,037,610
Interest income.................... 3,058,064 8,326,359 8,064,359
----------- ----------- -----------
Total revenues................... 17,396,391 46,752,777 46,101,969
----------- ----------- -----------
Expenses:
Interest .......................... 2,261,645 4,755,742 4,755,742
Personnel and commission expense... 2,754,968 7,397,915 7,397,915
General and administrative expense. 1,321,019 3,955,273 3,955,273
----------- ----------- -----------
Total expenses................... 6,337,632 16,108,930 16,108,930
----------- ----------- -----------
Earnings before taxes................ 11,058,759 30,643,847 29,993,039
Income taxes......................... 4,589,385 13,029,394 12,752,801
----------- ----------- -----------
Net earnings..................... $ 6,469,374 $17,614,453 $17,240,238
=========== =========== ===========
Earnings per share................... $ 0.42 $ .93 $ .91
=========== =========== ===========
Weighted average number of shares
outstanding......................... 15,562,500 18,986,723 18,986,723
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992.. $ -- $ -- $ -- $ --
Capital contribution, 1993.. -- 539,591 -- 539,591
Net earnings, 1993.......... -- -- 430,492 430,492
----------- --------- ----------- -----------
Balance, December 31, 1993.. -- 539,591 430,492 970,083
Common stock issued, 1994... -- 250,000 -- 250,000
Net earnings, 1994.......... -- -- 4,331,201 4,331,201
----------- --------- ----------- -----------
Balance, December 31, 1994.. -- 789,591 4,761,693 5,551,284
Net earnings, 1995.......... -- -- 7,337,435 7,337,435
----------- --------- ----------- -----------
Balance, December 31, 1995.. -- 789,591 12,099,128 12,888,719
Effect of contribution
transaction (unaudited).... -- (539,591) (8,690,484) (9,230,075)
Proceeds from initial public
offering of 5,175,000
shares of common stock, net
of offering expenses of
$4,891,742 (unaudited)..... 53,758,258 -- -- 53,758,258
Proceeds from sale of 6.75%
Convertible Notes due 2006
net offering expenses of
$2,837,564.................
Net earnings, nine months
ended September 30, 1996
(unaudited)................ -- -- 17,614,453 17,614,453
----------- --------- ----------- -----------
Balance, September 30, 1996
(unaudited)................ $53,758,258 $ 250,000 $21,023,097 $75,031,355
=========== ========= =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings........... $ 430,492 $ 4,331,201 $ 7,337,435 $ 6,469,374 $ 17,614,453
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation......... -- 6,446 51,488 40,000 375,830
Discounted recourse
liability........... -- 664,377 2,525,582 1,986,557 4,356,617
Net changes in:
Mortgage loans held
for sale........... (18,074,904) 1,347,881 (63,536,648) (31,959,172) (78,527,193)
Loans held under
repurchase
agreement.......... -- -- (12,800,565) (14,786,520) 12,800,565
Interest only and
residual
certificates....... -- (4,897,920) (20,760,681) (16,703,888) (51,952,581)
Accrued interest
receivable......... (66,338) 17,083 (928,119) (225,791) 17,480
Other assets........ -- -- (282,831) (239,487) (2,017,296)
Other liabilities... -- 46,183 3,186,942 2,456,492 15,786,624
------------ ----------- ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ (17,710,750) 1,515,251 (85,207,397) (52,962,435) (81,545,501)
------------ ----------- ------------ ------------ ------------
Cash used in investing
activities--
Purchases of premises
and equipment......... -- (42,776) (436,853) (89,209) (2,169,510)
------------ ----------- ------------ ------------ ------------
Cash flows from
financing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............... -- -- 96,130,120 60,419,935 44,948,298
Borrowings from SPTL.. 17,171,159 (1,472,475) (12,940,537) (15,698,684) 322,053
Due to affiliates..... -- -- 1,585,150 7,768,475 (1,585,150)
Bank overdraft........ -- -- 619,517 311,918 (881,517)
Capital contribution... 539,591 -- -- -- --
Proceeds from issuance
of common stock....... -- 250,000 -- -- 53,758,259
------------ ----------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ 17,710,750 (1,222,475) 85,394,250 52,801,644 96,561,943
Net change in cash..... -- 250,000 (250,000) (250,000) 12,846,932
Cash at beginning of
year.................. -- -- 250,000 250,000 --
------------ ----------- ------------ ------------ ------------
Cash at end of year.... $ -- $ 250,000 $ -- $ -- $ 12,846,932
============ =========== ============ ============ ============
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
AND THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995

1. ORGANIZATION

Southern Pacific Funding Corporation ("SPFC" or the "Company") is the
successor to the Residential Lending Division of Southern Pacific Thrift and
Loan ("SPTL"). The Company originates and acquires non-conforming single-
family residential loans, including loans secured by second mortgages and
sells interests in them to investors. In October 1994, Imperial Credit
Industries, Inc. ("ICII") incorporated the Company as part of a strategic
decision to form a separate subsidiary through which to operate SPTL's
Residential Lending Division. In April 1995, ICII caused SPTL to contribute
(the "Contribution Transaction") to SPFC certain customer lists of SPTL's
Residential Lending Division to the ongoing operations of such division. In
addition, in April 1995 all employees of SPTL's Residential Lending Division
became employees of SPFC. Currently the Company conducts its business from 14
regional branch centers located in ten states.

2. BASIS OF PRESENTATION

The historical operations of SPFC as a division of SPTL have been presented
in the financial statements as if SPFC had operated as a stand-alone company.
Certain adjustments, as described below, are made to historical operations in
order to provide fair presentation of the financial operations of SPFC. In the
opinion of management, except for the adjustments described below and certain
adjustments recognized in the accompanying pro forma financial data, the
historical accounting records reflect all costs that would have been incurred
had the Company operated as a stand-alone company for all periods presented
(See Note 9).

The unaudited pro forma statements of earnings give effect to the necessary
adjustments to reflect the elimination of interest-only and residual
certificates retained by SPTL on the effective date of the Company's IPO.

Operations prior to 1993

Efforts to establish SPFC as a division within SPTL began in December 1992,
but operations did not commence until January 1993. As operations did not
start until January 1993, the accompanying financial statements reflect no
amounts in the balance sheet accounts, including shareholder's equity, as of
December 31, 1992.

Borrowings from Affiliates

Historical operations of SPFC have been adjusted to reflect the funding of
net assets by SPTL. These adjustments are disclosed in the accompanying
financial statements as "Borrowings from SPTL." Because these borrowings would
have been secured primarily by mortgage loans held for sale, no more than 95%
of the mortgage loans held for sale were reflected in the borrowings from SPTL
(based on management's assumption that a lender would typically lend up to 95%
on an asset of this type). Additionally, the historical operations of SPFC
have been adjusted to reflect interest charges on these borrowings in the
accompanying statements of earnings.

The 1993 and 1994 historical interest charges are based upon estimated
average borrowings and SPTL's estimated cost of funds. Borrowing rates used
were SPTL's actual average cost of funds for the years ended December 31, 1993
and 1994. The borrowing rates for the year ended December 31, 1995 and the
nine months ended September 30, 1995 and 1996 are based upon SPTL's average
cost of funds for "Borrowings from SPTL." For amounts due to ICII, which were
$1,585,150 and $0, at December 31, 1995 and September 30, 1996, respectively,
interest expense was charged based on ICII's cost of funds. For borrowings
under the "Note Payable to SPTL" interest was charged at LIBOR plus 2 percent.
The average borrowings and interest rates used

F-7
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

to determine the weighted average interest on borrowings for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995
and 1996 are as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Estimated average
borrowings............. $4,586,742 $25,195,833 $34,777,138 $31,107,138 $5,954,921
Interest rate........... 3.40% 4.15% 3.69% 3.49% 6.25%
Interest on borrowings.. $ 175,238 $ 866,055 $ 1,284,282 $ 1,086,073 $ 255,785
</TABLE>

Equity

Prior to April 1995, SPFC was operated as a division of SPTL and had no
capital paid-in or retained earnings recorded in its accounts. To properly
reflect the historical financial operations of SPFC, retained earnings were
recorded as a result of income from operations on an adjusted historical
basis, and contributed capital was recorded to fund SPFC's assets in the
amount of the shortfall of borrowings plus retained earnings. Under this
criteria, allocated capital contributions were reflected in 1993 in the amount
of $539,591.

Income Taxes

SPFC did not record income taxes in its historical operations. The
accompanying financial statements reflect income taxes for SPFC as if it had
been a separate entity for all years presented. SPFC accounts for income taxes
under the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under the asset and liability method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or
market. The cost of mortgage loans held for sale is the cost of the mortgage
loans reduced or increased by the net deferred fees or costs associated with
originating or acquiring the loan and increased by costs that are recognized
upon sale. On an ongoing basis, management of the Company monitors the loan
portfolio and considers such factors as historical loan loss experience,
underlying collateral values, known problem loans, assessment of economic
conditions, including changes in interest rates, and other appropriate data to
identify risks in the loan portfolio. Based on the Company's experience, no
allowance for loan loss has been established.

Interest-only and Residual Certificates

Assets reflected in the accompanying balance sheets as interest-only and
residual certificates in real estate mortgage investment conduits (REMICs) are
recorded as a result of the Company's securitization of loans through various
trust vehicles. The Company is subject to certain recourse provisions in
connection with its securitizations which are measured using a 6% risk free
rate. The Company has presented its obligation under these provisions as a
liability in the accompanying balance sheets. The Company estimates future
cash flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading

F-8
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

securities at fair value in accordance with SFAS No. 115, "Accounting for
Certain Debt and Equity Securities." Unrealized gains and losses are included
in gains on sales of loans in the accompanying financial statements. To the
Company's knowledge, there is no active market for the sale of these interest-
only and residual certificates.

The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold over the lives of the loans, and (4)
fees payable to the trustee and monoline insurer. Prepayment assumptions used
in the present value computation are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment rates
on new portfolios, taking into consideration the current interest rate
environment and its expected impact on prepayment rates. The cash flows
expected to be received by the Company, not considering the expected losses,
are discounted at an interest rate that the Company believes an unaffiliated
third-party purchaser would require as a rate of return on such a financial
instrument. Expected losses are discounted using a rate equivalent to the
risk-free rate for securities with a duration similar to that estimated for
the underlying loans sold and a discounted recourse liability is recorded. The
undiscounted recourse liability as of December 31, 1994 and 1995 and September
30, 1996 was $786,261, $3,858,553 and $7,752,053, respectively. The overall
effect of discounting the cash flows expected to be received by the Company
using an interest rate (12%) that the Company believes an unaffiliated third
party purchaser would require and a rate equivalent to a risk-free rate for
expected credit losses for the combined cash flows is a discount rate of
approximately 15%. To the extent that actual future excess cash flows are
different from estimated excess cash flows, the fair value of the Company's
interest-only and residual certificates will be adjusted quarterly with
corresponding adjustments made to earnings in that period.

In certain of its securitizations, the Company provided an initial
overcollateralization on the securities sold and in all its securitizations
the Company builds overcollateralization as cash flows projected as described
above are used by the trustee to reduce the outstanding balance of the
securities sold by the Company. The current amount of such
overcollateralization is recorded by the Company as part of its interest-only
and residual certificates.

Gains on Sales of Loans

Gains on sales of loans are determined by deducting from the gross proceeds
of the sales or securitizations the allocated basis in the loans sold or
securitized and related transaction costs. Included in gains on sales of loans
are gains on sales of loan servicing, which amounted to $810,000 in 1994.
Unrealized gains and losses on interest-only and residual certificates are
included in gains on sales of loans. In accordance with the provisions of
paragraph 7(b) of FAS No. 104, "Statements of Cash FlowsNet Reporting of
Certain Cash Receipts and Cash Payments and Classification of Cash Flows from
Hedging Transactions," cash flows from contracts hedging indentifiable
transactions or events will be classified in the same category as the cash
flows from the items being hedged.

Interest Income

Interest income includes interest earned on mortgage loans held for sale.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of individual assets (three to five years). Leasehold
improvements are amortized over the terms of the related leases or the
estimated useful lives of improvements, whichever is shorter.

F-9
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Dividends

The Company intends to retain all of its future earnings to finance its
operations.

Use of Estimates

Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

Pro Forma Earnings Per Share

Pro forma earnings per share is determined by dividing pro forma net
earnings by the average number of shares of common stock outstanding during
the year adjusted for the dilutive effect of common stock equivalents. Pro
forma earnings per share for 1995 and the nine months ended September 30, 1996
and all share data related to shares issued and outstanding have been restated
to give retroactive recognition to a 4,150 for one stock split effected April
1, 1996 and a three for two stock split effected January 7, 1997.

4. LOANS HELD UNDER REPURCHASE AGREEMENT

In September 1995, the Company entered into an agreement to acquire certain
mortgage loans under a master repurchase agreement with a financial
institution. The Company advances the financial institution 98% of the
outstanding principal balance of a loan, and all rights (including title) are
transferred to the Company under the repurchase agreement. In the event that
the financial institution defaults on its obligations under the repurchase
agreement, the Company could receive less than its cost basis on the sale of
the loans to another party. This risk is offset by the requirement that the
financial institution maintain at all times a margin account for the Company
equal to 102% of the value of the loans underlying the repurchase agreement.

At December 31, 1995 and September 30, 1996, the Company held $12,800,565
and $0, respectively, in loans under repurchase agreements which were
scheduled to mature within 60 days. The maximum amount of loans held under
repurchase agreements with the financial institution during the year ended
December 31, 1995 and the nine months ended September 30, 1996 was
approximately $14,904,000 and $24,200,000, respectively, and the average
amount held during the year ended December 31, 1995 and the nine months ended
September 30, 1996 was approximately $4,718,000 and $4,334,667, respectively.

During 1995 and the nine months ended September 30, 1996, the Company
purchased approximately $30,400,000 and $24,600,000, respectively in loans
subject to the repurchase agreement of which approximately $17,600,000 and
$25,100,000, respectively, were included in the Company's 1995 and February
1996 loan securitizations. The financial institution receives a share of the
proceeds from the securitizations and a share of the interest-only and
residual certificates in return for incurring its proportionate share of the
securitization costs and a 75 basis point annual management fee.

5. INTEREST-ONLY AND RESIDUAL CERTIFICATES

Assets generated from the Company's loan securitizations as of December 31,
1994 and 1995, September 30, 1996, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Interest-only Certificates.............. $ -- $ 2,629,184 $50,489,426
Residual Certificates................... 4,897,920 23,029,417 14,598,844
---------- ----------- -----------
$4,897,920 $25,658,601 $65,088,271
========== =========== ===========
</TABLE>

F-10
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

6. PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 1994 and
1995 and September 30, 1996:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- ----------------
1994 1995 1996
------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Premises and equipment................. $42,776 $479,629 $2,496,458
Less accumulated depreciation and amor-
tization.............................. (6,446) (57,934) (281,083)
------- -------- ----------
$36,330 $421,695 $2,215,375
======= ======== ==========
</TABLE>

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB Statement No. 107, "Disclosures about Fair Values of Financial
Instruments" ("SFAS 107"), requires disclosures of fair value information
about financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate that value. Because no market exists
for certain of the Company's assets and liabilities, fair value estimates are
based on judgments regarding credit risk, investor expectations of future
economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.

In addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments.

The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1994 and 1995 and September 30, 1996 in accordance with SFAS 107:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
----------------------- ------------------------ -------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 250,000 $ 250,000 $ -- $ -- $ 12,846,933 $ 12,846,933
Loans held for sale..... 16,727,023 17,228,833 80,263,671 82,671,581 157,953,455 164,271,573
Loans held under
repurchase agreement... -- -- 12,800,565 13,453,656 -- --
Interest-only and
residual certificates.. 4,897,920 4,897,920 25,658,601 25,658,601 65,088,271 65,088,271
Less: Discounted
recourse liability..... 664,377 664,377 3,189,959 3,189,959 6,234,532 6,234,532
----------- ----------- ------------ ----------- ------------ ------------
Net.................... 22,539,320 4,233,543 121,912,796 22,468,642 58,853,737 58,853,737
Bank overdraft.......... -- -- 619,517 619,517 -- --
Borrowings under
warehouse lines of
credit................. -- -- 96,130,120 96,130,120 141,078,418 141,078,418
Borrowings from SPTL.... 15,698,684 15,698,684 2,758,147 2,758,147 -- --
Due to affiliates....... -- -- 1,585,150 1,585,150 -- --
</TABLE>

The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 14, are as follows:

Cash (bank overdraft). The carrying values reported are the asset's
(liability's) fair value.

Loans held for sale and loans held under repurchase agreement. The Company
has estimated the fair values reported based on recent sales and
securitizations.

F-11
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Interest-only and residual certificates and discounted recourse
liability. Fair value is determined using estimated discounted future cash
flows taking into consideration anticipated prepayment rates and loss
experience.

Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.

Borrowings from SPTL and due to affiliates. The carrying value reported
approximates fair value due to the variable interest rates on the borrowings.

Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.

8. HEDGING TRANSACTIONS

The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market. The Company classifies these sales
as hedges of specific loans held for sale. The gains or losses derived from
these sales are deferred and recognized as an adjustment to gains on sales of
loans when the loans are sold or securitized.

As of December 31, 1994 and 1995 and September 30, 1996, the Company had
open hedge positions of $0, $0 and $23.4 million respectively. At December 31,
1995 and September 30, 1996, the Company's unrealized loss on open hedge
positions was $84,375 and $10,525, respectively, on forward sales of United
States Treasury securities.

9. RELATED PARTY TRANSACTIONS

Intracompany Cost Allocations

The Company historically has been allocated expenses of various
administrative services provided to it by ICII and SPTL. The costs of such
services were not directly attributable to a specific division or subsidiary
and primarily included general corporate overhead, such as accounting and cash
management services, human resources and other administrative functions. These
expenses were calculated as a pro rata share of certain administrative costs
based on relative assets and liabilities of the division or subsidiary, which
management believes was a reasonable method of allocation. The allocation of
expenses that are included as part of personnel and commission expense and
general and administrative expenses for the years ended December 31, 1993,
1994 and 1995 and the nine months ended September 30, 1995 and 1996 were
$37,900, $92,700, $256,000, $128,000, and $344,000, respectively.

Contribution Transaction

As part of the Contribution Transaction described in Note 1, on the
effective date of the IPO, certain assets and related liabilities generated
from securitizations occurring in December 1994 and March and June 1995 were
retained by SPTL as follows (unaudited):

<TABLE>
<S> <C>
Loans held for sale.......................................... $ 837,405
Interest only and residual certificates...................... 12,522,911
Discounted recourse liability................................ 1,312,044
Borrowings from SPTL......................................... 3,080,200
</TABLE>

F-12
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Loan Servicing

From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses. In March 1994, ICII assumed
the role of loan servicer for a servicing fee of approximately $7.50 per loan
per month, so that the Company could complete its first securitization. In
September 1995, the Company began to utilize the services of Advanta, an
independent loan servicer, as the master servicer. Fees charged by Advanta to
board and service each loan are $25 per loan and 37.5 basis points per annum
on the declining principal balance of each loan serviced, paid monthly,
respectively, which fees are higher than those previously paid to ICII due to
the additional collection activities performed by Advanta. Had the Company
exclusively used its current independent loan servicer in 1993, 1994 and 1995,
its servicing fees would have been higher by approximately $222,000, $120,000,
and $234,000, respectively.

Loan Sales

During 1995, the Company sold approximately $10,912,000 in loans to ICII.
Upon completion of the transaction, the Company recorded a gain on sale of
approximately $252,000.

Cash

Prior to its incorporation as a subsidiary of ICII in October 1994, SPFC did
not have a cash account as all operations were funded directly by SPTL. As
explained in note 2, adjustments were made to SPFC's financial statements to
reflect these fundings by SPTL as "Borrowings from SPTL" on the balance sheets
of SPFC. SPFC did not reflect any accounts receivable or payable on its
balance sheets prior to the incorporation because all transactions of SPFC
either increased or decreased its borrowings from SPTL. Subsequent to
incorporation, ICII managed and funded the Company's cash account. Cash
transactions either increased or decreased the Company's borrowings from ICII.

10. INCOME TAXES

SPFC's income taxes were as follows for the years ended December 31, 1993,
1994 and 1995 and pro forma for the year ended December 31, 1995:

<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
-------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................... $250,200 $2,064,622 $2,731,115 $ 910,319
State........................... 55,192 455,431 602,452 200,806
-------- ---------- ---------- ----------
Total current................. 305,392 2,520,053 3,333,567 1,111,125
Deferred:
Federal......................... -- 452,656 1,533,378 1,191,887
State........................... -- 99,851 338,245 262,916
-------- ---------- ---------- ----------
Total deferred................ -- 552,507 1,871,623 1,454,803
-------- ---------- ---------- ----------
Total income taxes................ $305,392 $3,072,560 $5,205,190 $2,565,928
======== ========== ========== ==========
</TABLE>

F-13
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes arise from differences between the timing of
recognition of income and expense for tax and financial reporting purposes.
The following table shows the primary components of SPFC's net deferred tax
liability at December 31, 1994 and 1995. Net deferred tax liabilities are
included in borrowings from SPTL for those periods of time during which the
Company operated as a division of SPTL, and are included as part of other
liabilities for the periods during which the Company operated as a subsidiary
of ICII.

<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates.............. $552,507 $2,424,130
-------- ----------
Total............................................ $552,507 $2,424,130
======== ==========
</TABLE>

A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes are as follows for the years ended December 31, 1993, 1994 and
1995 and the pro forma year ended December 31, 1995:

<TABLE>
<CAPTION>
PRO FORMA
1993 1994 1995 1995
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory U.S. Federal income tax rate..... 34.0% 34.0% 34.0% 34.0%
Increases in rate resulting from state
income taxes, net of Federal benefit...... 7.5 7.5 7.5 7.5
---- ---- ---- ----
Effective income tax rate.................. 41.5% 41.5% 41.5% 41.5%
==== ==== ==== ====
</TABLE>

11. EMPLOYEE BENEFIT PLANS

Profit Sharing and 401(k) Plan

Prior to July 1, 1993, Imperial Bancorp (the majority shareholder of ICII)
had a noncontributory profit sharing plan in which employees of SPFC were
eligible to participate if they had been employed for at least 1,000 hours
during the year. No contributions were made to the plan by the Company in
1993.

Employees of SPFC were also eligible to participate in a 401(k) plan
sponsored by Imperial Bancorp. Under the plan, eligible employees could
contribute up to 14% of their salaries. SPFC matched one-third of the
employee's contribution, up to a maximum of 2% of the employee's compensation.

On July 1, 1993, ICII terminated its participation in Imperial Bancorp's
401(k) and profit sharing plans, established its own 401(k) plan (the "ICII
401(k) Plan") in which employees of SPFC are eligible to participate. On
September 30, 1993, Imperial Bancorp transferred all plan assets to the ICII
401(k) Plan.

Under the ICII 401(k) plan, employees may elect to enroll on the first day
of any month, provided that they have been employed by SPFC for at least six
months. Employees may contribute up to 14% of their compensation to the ICII
401(k) Plan and SPFC will match 50% of the first 4% of employee contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $4,100, $12,100, and $26,000
for the years ended December 31, 1993, 1994 and 1995, respectively.

An additional company contribution may be made to the ICII 401(k) Plan, at
the discretion of SPFC. Should a discretionary contribution be made, the
contribution would first be allocated to those employees deferring salaries in
excess of 4%. The matching contribution would be 50% of any deferral in excess
of 4% up to a maximum deferral of 8%. Should discretionary contribution funds
remain following the allocation outlined above, any remaining company matching
funds would be allocated as a 50% match of employee contributions,

F-14
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

based on the first 4% of the employee's deferrals. Discretionary contributions
of approximately $2,600, $21,700 and $23,000 were charged to operations of
SPFC for the years ending December 31, 1993, 1994 and 1995, respectively.

12. STOCK OPTIONS

Effective November 1, 1995, the Company reserved and granted options for
1,942,200 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $7.00 per share, the fair value
on the date of grant. The options vest ratablely over a five-year period
commencing one year after the date of grant.

Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
stock options not so qualified, and awards consisting of deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights. The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of 1,942,200 shares of Company common stock. If an
option granted under the Stock Option Plan expires or terminates, or an Award
is forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan. As of March 31, 1996, no options had been
granted under the Stock Option Plan. On the effective date of the IPO
discussed in note 16, the Company granted options exercisable at the initial
public offering price to purchase 150,000 shares to the Chairman of the Board
of the Company, 37,500 each to two senior officers of the Company, 75,000 to a
director of the Company and 15,000 each to the other non-employee directors of
the Company pursuant to the Plan.

13. WAREHOUSE LINES OF CREDIT AND BORROWINGS FROM AFFILIATES

In April 1995, SPFC obtained a warehouse line of credit in the amount of $50
million from an investment bank (the "Initial Facility") for the purpose of
funding one-to-four family residential first lien mortgage loans. The Company
paid a fee of $85,000 to obtain the line of credit, which is being amortized
into interest expense over the term of the line, which expired on April 30,
1996. As of December 31, 1995, $41,181,611 was outstanding on the line of
credit. Interest rates charged on the line of credit vary based on the type of
loan funded with the proceeds. The weighted average interest rate on
borrowings on the Initial Facility for 1995 was 6.7%. Interest expense
associated with the line of credit approximated $1,999,000 and $269,000, for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.

Under the terms of the Initial Facility the Company is required to meet
certain operating and financial covenants and collateral requirements. At
December 31, 1995 the Company was overextended on the Initial Facility by
approximately $4.4 million, as the amount of the Company's borrowings exceeded
the required collateral amounts as specified in the agreement. Under the terms
of the Initial Facility, the lender had the option of terminating the line of
credit when the collateral level is insufficient to meet the level of the
borrowings. On March 22, 1996 the Company used proceeds of a Note Payable to
SPTL (see Note 16) to repay the overextended amount on the Initial Facility,
and terminate the warehouse line of credit.

In November 1995, the Company obtained another line of credit from another
investment bank, for the purpose of funding one-to-four family residential
first and second mortgage loans (the "First Facility"), which is subject to
certain operating and financial covenants and collateral requirements. Such
covenants include

F-15
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

restrictions on (i) changes in the Company's business that would materially
and adversely affect the Company's ability to perform its obligations under
the First Facility, (ii) selling any asset other than in the ordinary course
of business and (iii) guaranteeing the debt obligation of any other entity.
Under the terms of the First Facility, the Company must pay a quarterly
commitment fee of $62,500. Total borrowings under the warehouse line are
limited to $200 million, and the line is scheduled to expire on August 24,
1997. In addition, the Company is allowed to borrow only $20 million against
loans for which the loan documents have not yet been deposited with the loan
custodian. The continued availability of funds to the Company under this
facility is subject to the Company's continued compliance with the operating
and financial covenants contained in such agreements.

As of December 31, 1995 and September 30, 1996, $54,948,509 and
$141,078,418, respectively, was outstanding on the line of credit, on which
interest was charged based on the type of loan funded. Interest expense
incurred for the year ended December 31, 1995 and the nine months ended
September 30, 1996 amounted to approximately $131,000 and $4,257,000,
respectively, with a weighted average interest rate of 5.5% for 1995, and
6.25% for the nine months ended September 30, 1996.

In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. The continued availability of funds under
the SPTL Agreement was subject to downward adjustment pursuant to affiliate-
transaction restrictions imposed by state regulations, and in April, 1996 the
Company repaid all borrowings outstanding under the SPTL Agreement and it was
canceled.

14. BUSINESS CONCENTRATIONS

During 1995, 29.8%, 13.6% and 12.4% of the Company's loan origination and
purchase volume was concentrated in California, Oregon and Hawaii,
respectively. In addition, approximately 10% of the 1995 loan originations
were attributed to a single mortgage loan broker. The Company does not believe
that it is exposed to any significant credit risk as of December 31, 1995 as
its portfolio of loans held for sale is well diversified, and the economies of
the states of loan origination are diverse. Upon securitization, any estimate
of credit loss is computed based on a percent of loan value basis and included
as part of the discounted recourse allowance.

15. COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off Balance Sheet Risk

The Company is a party to financial instruments with off balance sheet risk
in the normal course of business. These financial instruments include
agreements to fund fixed and variable-rate mortgage loans and loans in
process. For agreements to fund fixed-rate loans, the contract amounts
represent exposure to loss from market fluctuations as well as credit loss.
The Company controls the credit risk of its agreements to fund fixed and
variable-rate loans through credit approvals, limits and monitoring
procedures.

Agreements to fund mortgage loans are agreements to lend to customers as
long as there is no violation of any condition established in the contracts.
Such agreements generally have fixed expiration dates or other termination
clauses. Since some agreements may expire without being drawn upon, the total
agreement amounts do not necessarily represent future cash requirements. As of
December 31, 1995 and September 30, 1996, the Company had agreements to fund
loans of $3,248,500 and $28,616,790, respectively.

F-16
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Sales of Loans and Servicing Rights

In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a risk free rate, in determining
its discounted recourse liability. On a periodic basis, the Company reviews
its assumptions in light of historical experience and economic trends to
evaluate their reasonableness in measuring the fair value of recorded assets.

At December 31, 1995 and September 30, 1996, the Company had approximately
$70,296,000 and $157,953,000, respectively, in loans held for sale and under a
repurchase agreement which were serviced by Advanta Mortgage Corp. USA
("Advanta"). The Company's servicing agreement with Advanta provides that if
the Company desires to terminate the agreement without cause upon 90 days'
written notice, the Company will be required to pay Advanta an amount equal to
1.0% of the aggregate principal balance of the mortgage loans being serviced
by Advanta at that time. The agreement also provides that a transfer service
fee of $100 per loan shall be paid to Advanta for any mortgage loan for which
the Company transfers servicing from Advanta to another servicer, without
terminating the agreement.

Loan Servicing

As of September 30, 1996 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss but has no
remaining servicing rights or obligations) was $651 million. All of the
Company's loan servicing has either been outsourced or subcontracted to
Advanta.

Operating Leases

The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1995
were as follows:

<TABLE>
<S> <C>
1996............................ $200,886
1997............................ 108,091
1998............................ 66,972
1999............................ 66,972
2000............................ 55,810
--------
Total......................... $498,731
========
</TABLE>

Rent expense amounted to $32,381, $139,030, $309,607, $24,978 and $287,560
for the years ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996, respectively.

Telemarketing Agreement

In March 1996, the Company entered into an agreement with a telemarketing
company and a telecommunications equipment manufacturer pursuant to which the
Company will originate loans utilizing a telemarketing system. Under the terms
of the telemarketing agreement, the Company is required to pay a $1.0 million
fee upon the completion of its offering of shares to the public and to
purchase telemarketing equipment.

F-17
<PAGE>

SOUTHERN PACIFIC FUNDING CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

16. TRANSACTIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED)

On April 1, 1996 the Company declared a stock split of 4,150 for 1. All
pertinent share and per share information for 1993, 1994 and 1995 have been
retroactively restated to reflect this split.

Following the stock split, management and the Board of Directors authorized
the filing of a registration statement on Form S-1 to offer for sale to the
public 7,500,000 shares of common stock (the "IPO") plus an overallotment
option of 1,125,000 shares. In June 1996, the offering was completed, whereby
5,175,000 new shares of common stock were issued by the Company generating net
proceeds of approximately $54 million. 3,450,000 shares were sold by ICII in
the IPO. Subsequent thereto, in November, 1996, ICII sold 1,500,000 shares of
the Company's Common Stock in the Secondary Offering. Concurrently with the
Secondary Offering, the Company completed the Notes Offering, generating net
proceeds of approximately $72 million.

At the effective date of the IPO, the Company entered into a tax agreement
with ICII whereby, among other things, ICII will indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of the IPO in excess of such taxes as the Company
has already paid or provided for. For periods ending after the effective date
of the IPO, the Company will pay its tax liability directly to the appropriate
taxing authorities.

In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances.

F-18
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY THE AGENT.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 19
Price Range of Common Stock and Dividend Policy........................... 19
Capitalization............................................................ 20
Selected Financial and Other Data......................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Recent Developments....................................................... 32
Business.................................................................. 34
Pro Forma Financial Data.................................................. 50
Management................................................................ 52
Certain Transactions...................................................... 57
Beneficial Ownership of Securities and Selling Shareholder................ 60
Description of Capital Stock.............................................. 60
Description of the 6.75% Convertible Subordinated Notes................... 61
Shares Eligible for Future Sale........................................... 64
Plan of Distribution...................................................... 65
Legal Matters............................................................. 66
Experts................................................................... 66
Available Information..................................................... 66
Independent Auditors' Report.............................................. F-1
Financial Statements...................................................... F-2
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

370,000 SHARES

[LOGO OF SPFC]
SOUTHERN PACIFIC
FUNDING CORPORATION

COMMON STOCK

-------------------

P R O S P E C T U S

-------------------

NATWEST SECURITIES LIMITED

March 10, 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:

<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Securities and Exchange Commission registration fee........... $ 2,102
NASD filing fee............................................... 1,194
Printing expenses............................................. 55,000
Accounting fees and expenses.................................. 37,000
Legal fees and expenses....................................... 47,000
Fees and expenses (including legal fees) for qualifications
under state securities laws.................................. 2,500
Transfer agent's fees and expenses............................ 5,000
Miscellaneous................................................. 1,004
--------
Total....................................................... $150,800
========
</TABLE>
- --------
* The Selling Shareholder has agreed to pay the expenses of this Offering.

All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is in certain circumstances permitted to indemnify its
directors and officers against certain expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or
are parties, or are threatened to be made parties, by reason of the fact that
they were or are directors or officers of the Registrant, if such persons
acted in good faith and in a manner they reasonably believed to be in the best
interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
addition, the Registrant is in certain circumstances permitted to indemnify
its directors and officers against certain expenses incurred in connection
with the defense or settlement of a threatened, pending or completed action by
or in the right of the Registrant, and against amounts paid in settlement of
any such action, if such persons acted in good faith and in a manner they
believed to be in the best interests of the Registrant and its shareholders
provided that the specified court approval is obtained.

As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum
extent permitted by Section 317 of the CGCL. In addition, agreements entered
into by the Registrant with its directors and its executive officers require
the Registrant to indemnify such persons against expenses, judgments, fines,
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person

II-1
<PAGE>

may be made a party by reason of the fact that such person was an agent of the
Registrant (including judgments, fines and settlements in or of a derivative
action, unless indemnification is otherwise prohibited by law), provided such
person acted in good faith and in a manner he reasonably believed to be in the
best interests of the Registrant and, in the case of a criminal proceeding,
had no reason to believe his conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.

The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of the director's duty to the corporation may be eliminated, except
for the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In December 1994 the Company issued 15,562,500 shares of Common Stock (after
giving effect to the 4,150 to 1 forward stock split effected in April 1996 and
three for two stock split effected in January, 1997) to Imperial Credit
Industries, Inc. in return for a capital contribution of $250,000.

In November 1995 the Company granted to each of Robert W. Howard and Bernard
A. Guy, the President and Executive Vice President of the Company,
respectively, options to purchase 971,000 shares of the Company's Common Stock
under the 1995 Senior Management Stock Option Plan. The options vest at a rate
of 20% per year commencing one year from the date of grant, and are
exercisable at a price of $7.00 per share.

The aforementioned transactions are exempt from registration under Section
4(2) of the Securities Act of 1933 as transactions not involving a public
offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1++ Form of Placement Agency Agreement
3.1** Form of Articles of Incorporation of the Company, as amended
3.2** Bylaws of the Company, as amended
5.1++ Opinion of Baker & Hostetler
10.1** 1995 Senior Management Stock Option Plan and Form of Senior Management
Stock Option Agreement
10.2** 1995 Stock Option, Deferred Stock and Restricted Stock Plan and Form of
Stock Option Agreement
10.3** Services Agreement effective June 13, 1996 by and between the
Registrant and Imperial Credit Industries, Inc.
10.4** Tax Agreement effective June 13, 1996 by and between the Registrant and
Imperial Credit Industries, Inc.
10.5** Loan Servicing Agreement dated September 14, 1995 by and between the
Registrant and Advanta Mortgage Corp. USA
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
10.6** Whole Loan Financing Program dated March 21, 1995 by and among the
Registrant, DLJ Mortgage Capital, Inc. and Bankers Trust Company
10.7** Master Repurchase Agreement dated August 5, 1995 by and between the
Registrant and Oceanmark Bank
10.8** Revolving Credit and Term Loan Agreement by and between the Registrant
and Southern Pacific Thrift and Loan Association
10.9** Wet Inc., Interim and Pre-Sale Funding Facility dated November 17,
1995 by and between the Registrant and Lehman Commercial Paper, Inc.
10.10** Telemarketing Agreement dated March 25, 1995 by and among the
Registrant, Results Technologies, Inc. and Tele-Quote, Inc.
10.11** Office Lease Agreement dated September 13, 1995 by and between the
Registrant and Property Reserve, Inc.
10.12** Office Lease Agreement dated November 29, 1995 by and between the
Registrant and Property Reserve, Inc.
10.13** Sublease dated January 23, 1996 by and between the Registrant and
Property Reserve, Inc.
10.14** Office Building Lease dated January 8, 1996 by and between the
Registrant and Doug Jacobs
10.15** Employment Agreement effective January 1, 1996 by and between the
Registrant and Robert W. Howard
10.16** Employment Agreement effective January 1, 1996 by and between the
Registrant and Bernard A. Guy
10.17** Contribution Agreement effective April 1, 1995 by and among the
Registrant, Imperial Credit Industries, Inc. and Southern Pacific
Thrift and Loan Association, Inc.
10.18*+ Consulting and Noncompetition Agreement, dated May 15, 1996, by and
between the Registrant and The Dewey Consulting Group
10.19*+ Letter of Intent, dated September 5, 1996, by and between the
Registrant and BOMAC Capital Mortgage, Inc.
10.20*+ Amendment to Loan Servicing Agreement, dated August 12, 1996, by and
between the Registrant and Advanta Mortgage Corp. USA
10.21** Registration Rights Agreement, dated October 17, 1996, between the
Registrant and Imperial Credit Industries, Inc.
10.22*+ Master Loan and Security Agreement, dated as of October 22, 1996,
between the Registrant and Morgan Stanley Mortgage Capital Inc.
11++ Statement re: computation of per share earnings
23.1 Consent of KPMG Peat Marwick LLP
23.2++ Consent of Baker & Hostetler (contained in Exhibit 5.1)
23.3++ Consent of Thacher Proffitt & Wood
24.1++ Power of Attorney (included on signature page of Registration
Statement)
27.1++ Financial Data Schedule
</TABLE>
- --------
* Previously filed in connection with Registration Statement No. 333-14181
and hereby incorporated by reference.
** Previously filed in connection with Registration Statement No. 333-3270 and
hereby incorporated by reference.
+ Portions of these exhibits have been omitted and are subject to a
confidential treatment request filed with the Securities Exchange
Commission pursuant to Rule 406.

++ Previously filed in connection with this Registration Statement.

II-3
<PAGE>

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
and

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT
NO. 333-23179 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF LAKE OSWEGO, STATE OF OREGON ON MARCH 19, 1997.

Southern Pacific Funding Corporation

/s/ Robert W. Howard
By: _________________________________
ROBERT W. HOWARD
PRESIDENT

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 333-23179 HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED ON MARCH 19, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*/s/ H. Wayne Snavely Chairman of the Board
- -------------------------------------
H. WAYNE SNAVELY

/s/ Robert W. Howard President and Director (Principal
- ------------------------------------- Executive Officer)
ROBERT W. HOWARD

/s/ Bernard A. Guy Executive Vice President, Acting
- ------------------------------------- Chief Financial Officer and
BERNARD A. GUY Secretary (Principal Accounting
Officer) and Director

*/s/ Stephen J. Shugerman Director
- -------------------------------------
STEPHEN J. SHUGERMAN
</TABLE>

II-5
<PAGE>

SIGNATURE TITLE
--------- -----
<S> <C>
*/s/ John D. Dewey Director
- -------------------------------------
JOHN D. DEWEY

*/s/ A. Van Ruiter Director
- -------------------------------------
A. VAN RUITER

*/s/ Frank P. Willey Director
- -------------------------------------
FRANK P. WILLEY

*By: /s/ Bernard A. Guy
- -------------------------------------
BERNARD A. GUY
(Attorney-in-fact)
</TABLE>

II-6
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1++ Form of Placement Agency Agreement

3.1** Form of Articles of Incorporation of the Company, as amended

3.2** Bylaws of the Company, as amended

5.1++ Opinion of Baker & Hostetler

10.1** 1995 Senior Management Stock Option Plan and Form of Senior
Management Stock Option Agreement

10.2** 1995 Stock Option, Deferred Stock and Restricted Stock Plan and
Form of Stock Option Agreement

10.3** Services Agreement effective June 13, 1996 by and between the
Registrant and Imperial Credit Industries, Inc.

10.4** Tax Agreement effective June 13, 1996 by and between the
Registrant and Imperial Credit Industries, Inc.

10.5** Loan Servicing Agreement dated September 14, 1995 by and between
the Registrant and Advanta Mortgage Corp. USA

10.6** Whole Loan Financing Program dated March 21, 1995 by and among
the Registrant, DLJ Mortgage Capital, Inc. and Bankers Trust
Company

10.7** Master Repurchase Agreement dated August 5, 1995 by and between
the Registrant and Oceanmark Bank

10.8** Revolving Credit and Term Loan Agreement by and between the
Registrant and Southern Pacific Thrift and Loan Association

10.9** Wet Inc., Interim and Pre-Sale Funding Facility dated November
17, 1995 by and between the Registrant and Lehman Commercial
Paper, Inc.

10.10** Telemarketing Agreement dated March 25, 1995 by and among the
Registrant, Results Technologies, Inc. and Tele-Quote, Inc.

10.11** Office Lease Agreement dated September 13, 1995 by and between
the Registrant and Property Reserve, Inc.

10.12** Office Lease Agreement dated November 29, 1995 by and between
the Registrant and Property Reserve, Inc.

10.13** Sublease dated January 23, 1996 by and between the Registrant
and Property Reserve, Inc.

10.14** Office Building Lease dated January 8, 1996 by and between the
Registrant and Doug Jacobs

10.15** Employment Agreement effective January 1, 1996 by and between
the Registrant and Robert W. Howard

10.16** Employment Agreement effective January 1, 1996 by and between
the Registrant and Bernard A. Guy

10.17** Contribution Agreement effective April 1, 1995 by and among the
Registrant, Imperial Credit Industries, Inc. and Southern
Pacific Thrift and Loan Association, Inc.

10.18*+ Consulting and Noncompetition Agreement, dated May 15, 1996, by
and between the Registrant and The Dewey Consulting Group
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------------------ ------------
<C> <S> <C>
10.19*+ Letter of Intent, dated September 5, 1996, by and between the
Registrant and BOMAC Capital Mortgage, Inc.

10.20*+ Amendment to Loan Servicing Agreement, dated August 12, 1996, by
and between the Registrant and Advanta Mortgage Corp. USA

10.21* Registration Rights Agreement, dated October 17, 1996, between
the Registrant and Imperial Credit Industries, Inc.

10.22*+ Master Loan and Security Agreement, dated as of October 22,
1996, between the Registrant and Morgan Stanley Mortgage
Capital Inc.

11++ Statement re: computation of per share earnings

23.1 Consent of KPMG Peat Marwick LLP

23.2++ Consent of Baker & Hostetler (contained in Exhibit 5.1)

23.3++ Consent of Thacher Proffitt & Wood

24.1++ Power of Attorney (included on signature page of Registration
Statement)

27.1++ Financial Data Schedule
</TABLE>
- --------
* Previously filed in connection with Registration Statement No. 333-14181
and hereby incorporated by reference.
** Previously filed in connection with Registration Statement No. 333-3270 and
hereby incorporated by reference.
+ Portions of these exhibits have been omitted and are subject to a
confidential treatment request filed with the Securities Exchange
Commission pursuant to Rule 406.

++ Previously filed in connection with this Registration Statement.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Southern Pacific Funding Corporation

We consent to the use of our report included herein and to the references to
our firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.

KPMG Peat Marwick LLP

Portland, Oregon

March 19, 1997