<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
IMPERIAL FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 911817448
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1840 CENTURY PARK EAST, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 712-8600
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10
BY REFERENCE
CROSS REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM 1. BUSINESS
The information required by this item is contained in the sections "Summary
of Certain Information," "Introduction," "The Transactions" and "Business" of
the Information Statement (the "Information Statement").
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained in the sections "Summary
of Certain Information--Summary Historical Combined Financial Data" and "--
Summary Unaudited Pro Forma Combined Financial Data," "Capitalization,"
"Selected Combined Financial Data," "Unaudited Pro Forma Combined Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Information Statement.
ITEM 3. PROPERTIES
The information required by this item is contained in the section
"Business--Properties" of the Information Statement.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections "Security
Ownership of Certain Beneficial Owners of Common Stock" and "Executive
Compensation" of the Information Statement.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the section
"Management" of the Information Statement.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained in the section "Executive
Compensation" of the Information Statement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section
"Relationship and Agreements Among the Company, the Bank and Bancorp After the
Distribution" of the Information Statement.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained in the section
"Business--Legal Proceedings" of the Information Statement.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the sections "The
Transactions--Manner of Effecting the Distribution," "Security Ownership of
Certain Beneficial Owners of Common Stock" and "Description of Capital Stock"
of the Information Statement.
2
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained in the sections
"Description of Capital Stock" and "Purposes and Effects of Certain Provisions
of the Company's Certificate of Incorporation, Bylaws and Delaware Law" of the
Information Statement.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained in the sections
"Limitation on Liability and Indemnification of Officers and Directors" and
"Purposes and Effects of Certain Provisions of the Company's Certificate of
Incorporation, Bylaws and Delaware Law" of the Information Statement.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is identified in "Index to Financial
Information" of the Information Statement.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL INFORMATION
See Index to Financial Statements on page F-1 of the Information
Statement.
(B) EXHIBITS
<TABLE>
<C> <S>
2 Information Statement of Imperial Bancorp to be distributed to
Imperial Bancorp's shareholders (attached to this Registration
Statement as Annex A)
*3.1 Form of Amended and Restated Certificate of Incorporation of Imperial
Financial Group, Inc.
*3.2 Form of Amended and Restated Bylaws of Imperial Financial Group, Inc.
*4 Specimen form of certificate representing Class A Common Stock of
Imperial Financial Group, Inc.
*10.1 Form of Capital Contribution and Distribution Agreement to be entered
into among Imperial Bancorp, Imperial Bank, Imperial Financial Group,
Inc. and Crown American Bank
*10.2 Form of Transition Services Agreement to be entered into between
Imperial Bank and Imperial Financial Group, Inc.
*10.3 Form of Tax Sharing Agreement to be entered into between Imperial
Bancorp and Imperial Financial Group, Inc.
*10.4 Form of Imperial Financial Group, Inc. Credit Agreement among Imperial
Bank, Imperial Financial Group, Inc., each of the banks or other
lending institutions party thereto and NationsBank, N.A.
*10.5 Imperial Financial Group, Inc. 1997 Share Incentive Plan
*10.6 Form of 1998 Stock Option Plan of Imperial Financial Group, Inc.
*10.7 Form of Imperial Financial Group, Inc. Deferred Compensation Plan
*10.8 Form of Offer Letter between G. Louis Graziadio, III and the Company
*10.9 Form of Offer Letter between Robert M. Franko and the Company
*10.10 Employment Agreement dated as of July 23, 1997 between Imperial Bank
and Lewis P. Horwitz
*10.11 Consulting Agreement dated as of November 1, 1991 between Imperial
Bank and Second Southern Corp.
*11 Computation of per share earnings
*21 Subsidiaries of Imperial Financial Group, Inc.
*27 Financial Data Schedule
*99.1 Private letter ruling from the Internal Revenue Service
</TABLE>
- --------
*Previously filed
3
<PAGE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On March 20, 1997, Imperial Financial Group, Inc. (the "Company") issued 100
shares of its common stock, for a total consideration of $100, to Imperial
Bank, which is and will be the Company's sole stockholder until the
Distribution (as defined in the Information Statement) has been completed. The
issuance of such shares was made in a transaction exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
4
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMPERIAL FINANCIAL GROUP, INC.
By: /s/ Robert M. Franko
---------------------------------
Name: Robert M. Franko
Title: President
August 26, 1998
5
<PAGE>
ANNEX A
[IMPERIAL BANCORP LETTERHEAD]
September , 1998
[DRAFT]
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Imperial Bancorp
("Bancorp") has declared a distribution to Bancorp's holders of record of
Common Stock ("Bancorp Stock") on September 17, 1998 (the "Record Date") of
all of the outstanding shares of Class A Common Stock of Imperial Financial
Group, Inc. ("IFG"), a subsidiary of Bancorp. The distribution will occur on
October 1, 1998.
If you own Bancorp Stock at the close of business on the Record Date, you
will receive one share of IFG Class A Common Stock for every two shares of
Bancorp Stock that you own on that date. If such distribution would cause you
to receive a fractional share of IFG Class A Common Stock, you will instead
receive cash for such fractional share. You do not need to take any action to
receive your shares of IFG Class A Common Stock. A shareholder vote is not
required in connection with this matter and, accordingly, your proxy is not
being sought.
Stock certificates representing your shares of IFG Class A Common Stock,
together with any cash which may be owed to you in lieu of receiving
fractional shares, will be forwarded to you after the distribution.
The attached Information Statement contains important information about
IFG's organization, business and properties, including combined financial
statements and other financial information. I urge you to read it carefully.
Your Board of Directors has carefully considered the distribution of IFG and
believes the distribution is in the best interests of the shareholders of
Bancorp and will result in organizational and operational changes that should
benefit both Bancorp's businesses and IFG's businesses.
Sincerely,
George L. Graziadio, Jr.
Chairman of the Board
<PAGE>
[IMPERIAL FINANCIAL GROUP, INC. LETTERHEAD]
[DRAFT]
September , 1998
Dear Stockholder:
The enclosed Information Statement includes detailed information about
Imperial Financial Group, Inc. ("IFG"), the company of which you will soon
become a stockholder.
We would like to take this opportunity to welcome you as a stockholder and
to introduce you to our company. IFG will conduct, among other businesses, the
LHO motion picture production lending, small business lending and trust
businesses presently conducted by Imperial Bancorp ("Bancorp"). Following the
distribution of IFG's Class A Common Stock to the shareholders of Bancorp, IFG
will conduct those businesses as a separate, publicly-owned company whose
shares will trade on the New York Stock Exchange under the symbol "IFG". In
connection with the distribution, Bancorp will also contribute to IFG all of
the Imperial Credit Industries, Inc. common stock owned by Imperial Bank.
We are excited about IFG's prospects as an independent public company and
look forward to your participation in our future.
Sincerely,
G. Louis Graziadio, III
Co-Chairman and Chief
Executive Officer
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED +
+WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY INFORMATION +
+STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN +
+OFFER TO BUY THESE SECURITIES. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY COPY, DATED AUGUST 26, 1998
-- FOR INFORMATION ONLY --
INFORMATION STATEMENT
OF IMPERIAL BANCORP
[LOGO]
This Information Statement is being furnished by Imperial Bancorp, a
California corporation ("Bancorp"), in connection with the distribution (the
"Distribution") by Bancorp to its shareholders of all the outstanding shares of
Class A common stock, par value $0.01 per share (the "Company Class A Common
Stock"), of Imperial Financial Group, Inc., a Delaware corporation (the
"Company"). The Company is currently a wholly-owned subsidiary of Imperial Bank
(the "Bank"), which in turn is a wholly-owned subsidiary of Bancorp. As a
result of the Distribution, each holder of record as of September 17, 1998 (the
"Distribution Record Date") of common stock, no par value, of Bancorp (the
"Bancorp Common Stock") will receive one share of Company Class A Common Stock
for every two shares of Bancorp Common Stock owned as of the Distribution
Record Date (the "Distribution Ratio").
In connection with the Distribution, the Bank will contribute to the Company
(i) all of the assets and liabilities relating to The Lewis Horwitz
Organization, a division of the Bank that provides motion picture and
television financing, (ii) all of the common stock of Crown American Bank, a
newly formed thrift and loan company that conducts, among other businesses, the
small business lending operations previously conducted by the Bank, (iii) all
of the common stock of Imperial Trust Company, a California licensed trust
company that offers a wide range of trust and investment management services,
and (iv) all of the common stock owned by the Bank (representing approximately
23.0% of all outstanding common stock as of June 30, 1998) in Imperial Credit
Industries, Inc., a publicly traded, diversified specialty finance company
("ICII"). The Company also recently entered into an agreement with another
shareholder of ICII which provides the Company with beneficial ownership of an
additional 3.0% of the outstanding common stock of ICII. Accordingly, as of
August 15, 1998, the Company beneficially owned approximately 26.0% of the
outstanding common stock of ICII.
Subject to the satisfaction of certain conditions, the Distribution will be
effective on or about October 1, 1998 (the "Distribution Date"). No
consideration will be paid by Bancorp's shareholders for Company Class A Common
Stock received by them in the Distribution, nor will they be required to
surrender or exchange Bancorp Common Stock in order to receive Company Class A
Common Stock. There is no current public market for the Company Class A Common
Stock, although it is expected that a "when-issued" trading market will develop
prior to the Distribution Date. The Company Class A Common Stock will be listed
on the New York Stock Exchange under the symbol "IFG."
-----------
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION, NO
PROXIES ARE BEING SOLICITED, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
-----------
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 INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE SHARES OF CLASS A COMMON STOCK BEING DISTRIBUTED HEREBY ARE NOT SAVINGS
OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY ANY GOVERNMENTAL AUTHORITY OR
OTHER PERSON OR ENTITY.
-----------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
-----------
Shareholders of Bancorp with inquiries related to the Distribution should
contact American Stock Transfer and Trust Co., the Distribution Agent for the
Distribution. After the Distribution Date, shareholders of the Company with
inquiries relating to the Distribution or their investment should contact the
Company's Investor Relations Department.
The date of this Information Statement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C>
SUMMARY OF CERTAIN INFORMATION............................................ 1
INTRODUCTION.............................................................. 11
THE TRANSACTIONS.......................................................... 12
RISK FACTORS.............................................................. 15
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 22
LISTING AND TRADING OF THE COMMON STOCK................................... 23
DISTRIBUTION CONDITIONS AND TERMINATION................................... 24
REGULATORY APPROVALS AND CONSIDERATIONS................................... 25
RELATIONSHIP AND AGREEMENTS AMONG THE COMPANY, THE BANK AND BANCORP AFTER
THE DISTRIBUTION......................................................... 28
DIVIDEND POLICY........................................................... 30
CAPITALIZATION............................................................ 31
SELECTED COMBINED FINANCIAL DATA.......................................... 32
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA............................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 39
BUSINESS.................................................................. 60
MANAGEMENT................................................................ 93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK........... 96
EXECUTIVE COMPENSATION.................................................... 97
DESCRIPTION OF CAPITAL STOCK.............................................. 104
CREDIT FACILITIES......................................................... 105
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW................................... 106
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS..... 110
ADDITIONAL INFORMATION.................................................... 111
INDEX TO FINANCIAL INFORMATION............................................ F-1
</TABLE>
i
<PAGE>
SUMMARY OF CERTAIN INFORMATION
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information and financial statements, including the notes
thereto, set forth in this Information Statement, which should be read in its
entirety. In this Information Statement, (i) all financial information is
presented in accordance with accounting principles generally accepted in the
United States ("GAAP"); (ii) references to the activities of, and financial
information with respect to, the Company prior to the Distribution are to
historical activities and combined historical financial information of the IFG
Business (as defined herein) as if the Company existed as a stand alone entity
that owned the IFG Business during the periods presented; and (iii) all
references to the Company include Imperial Financial Group, Inc. and its
consolidated subsidiaries, unless otherwise expressly set forth herein. The
Contribution (as defined herein), the Distribution and the other transactions
contemplated thereby are sometimes collectively referred to herein as the
"Transactions."
THE COMPANY'S BUSINESS
The Company is a diversified financial services company primarily engaged in
three business segments: (i) motion picture and television production finance,
through the Company's division, The Lewis Horwitz Organization ("LHO"), (ii)
small business lending, primarily in conjunction with Small Business
Administration (the "SBA") sponsored programs, through the Company's
subsidiary, Crown American Bank ("CAB"), a newly formed thrift and loan company
(sometimes also referred to herein interchangeably as an industrial loan
company), and (iii) a wide range of trust and investment management services,
through the Company's subsidiary, Imperial Trust Company ("ITC"), a California
licensed trust company. In addition, the Company owned, as of June 30, 1998,
approximately 23.0% of the common stock of Imperial Credit Industries, Inc.
("ICII"), a publicly traded, diversified specialty finance company. The Company
also recently entered into an agreement with another shareholder of ICII which
provides the Company with beneficial ownership of an additional 3.0% of the
outstanding common stock of ICII. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "Business--Imperial Credit Industries, Inc."
The Company's LHO division is a leading provider of senior, secured financing
for independent motion picture and television production. As of June 30, 1998
and 1997, and December 31, 1997, the aggregate principal amount of the
Company's LHO loans was approximately $108 million, $73 million and $100
million, respectively. During the six months ended June 30, 1998 and 1997, the
LHO division originated 18 loans and 28 loans, respectively, in an aggregate
principal amount of approximately $35 million and $49 million, respectively.
During the year ended December 31, 1997, the LHO division originated 59 loans
in an aggregate principal amount of approximately $98 million. During the six
months ended June 30, 1998 and 1997 , the LHO division, through Imperial Bank,
issued letters of credit totalling approximately $2.4 million and $14.0
million, respectively. During the year ended December 31, 1997, the LHO
division issued $19 million of letters of credit. Total revenue for the LHO
division for the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997 was $3.4 million, $2.5 million and $5.7 million,
respectively, representing 16.8%, 12.8% and 11.1%, respectively, of the
Company's total revenue for such periods. Net income for the LHO division for
the six months ended June 30, 1998 and 1997, and the year ended December 31,
1997 was $1.0 million, $0.2 million and $1.3 million, respectively,
representing 19.9%, 4.4% and 8.5%, respectively, of the Company's net income
for such periods.
The Company also is a provider of secured small business loans, the majority
of which are guaranteed in part by the SBA. The Company offers small business
loans to a wide variety of businesses located in California, Nevada and
Arizona, including hotels, residential care facilities, beauty salons and
restaurants. The Company's small business lending activities are conducted
through CAB, a recently formed industrial loan company. As of June 30, 1998 and
1997, and December 31, 1997, the aggregate outstanding principal amount of the
Company's
1
<PAGE>
small business loans was approximately $42 million, $40 million and $40
million, respectively. During the six months ended June 30, 1998 and 1997, CAB
originated 69 and 62 loans, respectively, in an aggregate amount of $30 million
and $28 million, respectively. During the year ended December 31, 1997, CAB
originated 116 loans in an aggregate principal amount of $49 million. Total
revenue for CAB for the six months ended June 30, 1998 and 1997, and the year
ended December 31, 1997 was $4.0 million, $2.9 million and $6.1 million,
respectively, representing 19.6%, 15.3% and 11.8%, respectively, of the
Company's total revenue for such periods. Net income for CAB for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $0.2
million, $0.2 million and $0.8 million, respectively, representing 3.7%, 5.5%
and 5.0%, respectively, of the Company's net income for such periods.
The Company, through ITC, provides a full array of investment management and
fiduciary services to individual investors, corporations, benefit plans and
foundations. These services include investment management, personal trust
services, custody services and trust administration of employee benefit plans.
Total revenue for ITC for the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997 was $4.5 million, $4.1 million and $8.4 million,
respectively, representing 22.0%, 21.3% and 16.3%, respectively, of the
Company's total revenue for such periods. Net income for ITC for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $0.6
million, $0.4 million and $1.0 million, respectively, representing 11.5%, 10.6%
and 6.3%, respectively, of the Company's net income for such periods. At June
30, 1998 and at December 31, 1997, the Company maintained total assets under
administration of approximately $9.5 billion and $8.7 billion, respectively.
ITC was the fifteenth largest licensed trust company in California at March 31,
1998 based on assets under administration.
ICII is a diversified specialty finance company and offers, principally
through its subsidiaries, financial products such as non-conforming residential
mortgage banking (non-conforming single family mortgage loans), commercial
mortgage banking (franchise loans and income property loans), business lending
(equipment leasing, asset-based financing and loan participations) and consumer
loans (sub-prime auto loans, home improvement loans and other consumer credit).
The majority of ICII's loans and leases are sold in the secondary market
through securitizations and whole loan sales. During the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997, ICII generated total
revenues of $103.1 million, $97.8 million and $309.6 million, respectively. The
Company is currently the largest shareholder of ICII. In addition, three
members of the Board of Directors of the Company (the "Company Board") are also
officers and/or directors of ICII and, as such, are in a position to
significantly influence the management and policies of ICII. Total revenue
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $6.7 million, $7.8
million and $28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and for the year ended December 31, 1997 was $3.7 million,
$2.2 million and $11.5 million, respectively, representing 76.0%, 52.7% and
76.2%, respectively, of the Company's net income for such periods.
The Company's business strategy emphasizes (i) opportunistic expansion of
businesses in niche segments of the financial services industry, (ii) hiring
management experienced in a wide array of financial services businesses to
operate and grow the Company's businesses, (iii) conservative and disciplined
underwriting and credit risk management, (iv) sale in secondary markets of
Company SBA loans where the Company expects to receive a premium over the
principal amount of the loan and (v) maintaining business and financial
flexibility to take advantage of changing market conditions with respect to
specific financial services businesses.
The Company's principal executive offices are located at 1840 Century Park
East, 10th Floor, Los Angeles, California 90067, and its telephone number is
(310) 712-8600.
2
<PAGE>
THE DISTRIBUTION
Distributing Company............ Imperial Bancorp, a California
corporation ("Bancorp").
Distributed Company............. Imperial Financial Group, Inc., a
Delaware corporation (the "Company") and
currently a wholly owned subsidiary of
Imperial Bank (the "Bank"), which is in
turn a wholly owned subsidiary of
Bancorp.
Reasons for the Distribution....
The boards of directors of Bancorp and
the Bank selected the businesses of LHO,
CAB and ITC to be contributed to the
Company because (i) each business has
been operating with a separate management
structure as a stand-alone operation and
with an entrepreneurial management
philosophy, (ii) each business has
demonstrated high return on equity in
recent years and (iii) none of the three
businesses requires demand banking
deposits for its funding. In addition,
the boards of Bancorp and the Bank
believe the businesses of LHO, CAB and
ITC, as well as the business of ICII,
complement each other and that many
cross-referral opportunities exist
between such businesses, including with
respect to lending and private banking
products offered to the clients of LHO,
CAB and ITC. The boards of directors of
Bancorp and the Bank also believe that
the Transactions will provide the Company
with increased access to capital markets,
which should allow the Company to expand
its businesses. The Company intends to
initially raise capital to promote this
expansion by conducting a public or
private offering of its equity securities
that it expects to complete during the
fourth quarter of 1998. The Federal
Reserve Board has advised Bancorp that it
considers the retention by the Bank of
its shares of ICII stock to be in
violation of the Bank Holding Company Act
of 1956 (the "BHCA"). In addition, the
Federal Deposit Insurance Corporation
(the "FDIC") has advised the Bank that it
considers the retention of its shares of
ICII stock to be in violation of the
Federal Deposit Insurance Act. The boards
of Bancorp and the Bank have been
informed by the Federal Reserve Board and
the FDIC that contributing the stock of
ICII to the Company in connection with
the Transactions will satisfy these
concerns and allow Bancorp to continue to
be in compliance with the requirements of
the BHCA and the Bank to continue to be
in compliance with the Federal Deposit
Insurance Act, while the ICII stock
simultaneously will provide the Company
with additional financing flexibility to
expand its operations and operate as a
separate publicly traded company, without
any assistance from either Bancorp or the
Bank. Moreover, the Company intends to
expand the specialty lending and finance
businesses contributed to it by the Bank
by operating as a separate publicly
traded company that is not subject to the
same federal and state banking laws and
regulations applicable to Bancorp and the
Bank and their respective subsidiaries.
See "The Transactions--Background and
Reasons for the Distribution."
3
<PAGE>
Shares to be Distributed........
Approximately 19,878,335 shares of
Company Class A Common Stock (based on
39,756,670 shares of Bancorp Common Stock
outstanding on June 30, 1998). The shares
to be distributed will constitute 100% of
the outstanding shares of Company Class A
Common Stock. The Company's Amended and
Restated Certificate of Incorporation
also authorizes preferred stock and Class
B Common Stock, par value $.01 per share
(the "Company Class B Common Stock"). The
Company Class B Common Stock may only be
issued pursuant to the terms of, or upon
the exercise of, outstanding options
granted under any of the Company's
employee benefit plans, as stock
dividends to holders of Company Class B
Common Stock or in connection with shares
issued to a third party in a transaction
approved by the Company Board. Holders of
Company Class B Common Stock are entitled
to one-tenth of one vote for each share
on all matters voted on by stockholders
and will vote together as a single class
with the holders of Company Class A
Common Stock. Each share of the Company
Class B Common Stock will convert into
one share of Company Class A Common Stock
on the earlier of the fifth anniversary
of the Distribution Date and a change of
control of the Company. See "Description
of Capital Stock." No capital stock of
the Company other than the Company Class
A Common Stock will be outstanding on the
Distribution Date.
Distribution Ratio.............. One share of Company Class A Common Stock
for every two shares of Bancorp Common
Stock held on the Distribution Record
Date. See "The Transactions--Manner of
Effecting the Distribution."
Fractional Share Interests ..... Fractional share interests will not be
issued in the Distribution, but a cash
payment in lieu thereof will be
distributed to those shareholders
otherwise entitled to receive a
fractional share of Company Class A
Common Stock. The amount of such cash
payment will be based on the then
prevailing prices of the Company Class A
Common Stock. See "The Transactions--
Manner of Effecting the Distribution."
Distribution Record Date........
Close of business on September 17, 1998.
Distribution Date...............
October 1, 1998. On, or as soon as
practicable after, the Distribution Date,
the Distribution Agent will commence
mailing share certificates representing
the Company Class A Common Stock to
Bancorp shareholders. Bancorp
shareholders will not be required to make
any payment or to take any other action
to receive their Company Class A Common
Stock. See "The Transactions--Manner of
Effecting the Distribution."
Federal Income Tax Consequences
of the Distribution............
Bancorp has received a ruling (the
"Ruling") from the Internal Revenue
Service ("IRS") to the effect, among
other things, that receipt of shares of
Company Class A Common Stock will be tax-
free for federal income tax purposes to
4
<PAGE>
Bancorp and to the shareholders of
Bancorp (except with respect to cash
received in lieu of fractional shares),
and that neither Bancorp nor the Bank
will recognize income, gain or loss as a
result of the Distribution. Bancorp
shareholders are urged to consult their
own tax advisors as to the specific tax
consequences to them of the Distribution.
See "Certain Federal Income Tax
Considerations."
Financing of IFG Business.......
Prior to the Distribution, the Company's
lending activities were financed by the
Bank. In connection with the
Distribution, the Company will enter into
credit facilities with lenders not
affiliated with the Bank (the "Credit
Facilities") that will finance The Lewis
Horwitz Organization's lending activities
after the Distribution Date. The Credit
Facilities will be composed of revolving
credit facilities in the aggregate amount
of $135 million, including a letter of
credit sub-facility in the amount of $45
million. See "Risk Factors" and "Credit
Facilities."
Dividend Policy................. It is currently contemplated that the
Company will not pay cash dividends on
Company Class A Common Stock for the
immediately foreseeable future following
the Distribution. The declaration of
dividends by the Company will be at the
discretion of the Company Board and will
depend upon the Company's future
earnings, financial condition, capital
requirements and other factors, including
any limitations under then existing
credit agreements. See "Dividend Policy."
Anti-takeover Provisions........ The Company's Amended and Restated
Certificate of Incorporation, Amended and
Restated Bylaws and the Delaware General
Corporation Law (the "DGCL") contain
provisions which may have the effect of
discouraging unsolicited takeover bids
from third parties. See "Purposes and
Effects of Certain Provisions of the
Company's Certificate of Incorporation,
Bylaws and Delaware Law."
Relationship among the Company,
the Bank and Bancorp after the
Distribution...................
The Company, the Bank and Bancorp and
certain of the Company's subsidiaries
will enter into agreements to effect the
Contribution and the Distribution and to
define their ongoing relationship after
the Distribution Date. These agreements
will include a capital contribution and
distribution agreement providing for the
transfer of designated assets to, and the
assumption of designated liabilities by,
the Company and certain of its
subsidiaries and providing for the
payment of the Distribution by Bancorp
(the "Contribution Agreement") and an
interim services agreement relating to
human resources support in payroll,
recordkeeping, recruiting and other
employee benefit areas, audit services,
loan review and security services to be
provided by the Bank to the Company. In
addition, certain directors and officers
of
5
<PAGE>
Bancorp serve as directors and/or
officers of the Company. See
"Management." Other than the agreements
described above and overlapping directors
and officers, it is expected that Bancorp
and the Bank, on the one hand, and the
Company, on the other, will cease to have
any material contractual or other
material relationships with each other,
other than on an arm's-length basis. See
"Relationship and Agreements Among the
Company, the Bank and Bancorp After the
Distribution."
Trading Market and Symbol for
the Common Stock...............
Currently, there is no public trading
market for the Company Class A Common
Stock, although a "when-issued" trading
market (as described herein) is expected
to develop prior to the Distribution
Date. Subject to official notice of
issuance from the New York Stock Exchange
(the "NYSE"), the Company Class A Common
Stock will be listed on the NYSE and will
trade under the symbol "IFG." See
"Listing and Trading of the Common
Stock."
Bancorp Common Stock will continue to be
listed and traded on the NYSE after the
Distribution Date.
Distribution Agent.............. American Stock Transfer and Trust Co. The
address and telephone number of the
Distribution Agent are 40 Wall Street,
New York, New York 10005, (800) 937-5449.
Conditions to the Distribution.. The Distribution is conditioned upon,
among other things, (i) the Ruling not
having been withdrawn or modified in a
manner adverse to Bancorp, the Bank or
Bancorp's shareholders, (ii) the Company
Class A Common Stock having been approved
for listing on the NYSE subject to
official notice of issuance, (iii) the
Company's Registration Statement on Form
10, of which this Information Statement
is a part (the "Registration Statement"),
having been declared effective by the
Securities and Exchange Commission (the
"Commission"), (iv) receipt of regulatory
consents and approvals from various state
and federal banking and trust authorities
and (v) the Credit Facilities being in
place and all conditions to borrowing
thereunder having been satisfied or
waived. Any condition to the Distribution
may be waived, at any time prior to the
Distribution Date, for any reason, in the
sole discretion of the Bancorp Board of
Directors (the "Bancorp Board"). Even if
all conditions are satisfied, the Bancorp
Board has reserved the right to abandon,
defer or modify the Distribution and the
related transactions described herein at
any time prior to the Distribution Date.
See "Introduction" and "Distribution
Conditions and Termination."
Risk Factors.................... Bancorp shareholders should carefully
consider the matters discussed under
"Risk Factors" in this Information
Statement.
6
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Information Statement, including those under the
captions "Summary of Certain Information," "The Transactions," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Information Statement, the words "estimate", "project," "intend," "expect,"
"anticipate," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are based on various factors, many
of which are beyond the Company's control, and were derived utilizing numerous
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements including, but
not limited to, the following: matters described herein under "Risk Factors";
uncertainty as to the Company's future profitability after the Distribution;
the effectiveness of the Company's growth strategy; competition in the
Company's existing and potential future lines of business; and the accuracy of
the Company's estimates of its funding requirements for the performance of
certain lending activities. Other factors and assumptions not identified above
were also involved in the derivation of these forward-looking statements, and
the failure of such other assumptions to be realized as well as other factors
may also cause actual results to differ materially from those projected. The
Company assumes no obligation to update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
7
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The summary combined income statement data for the years ended December 31,
1995, 1996 and 1997 and the summary combined balance sheet data as of December
31, 1996 and 1997 have been derived from the Company's audited combined
financial statements included herein. The summary combined income statement
data for the year ended December 31, 1994 and summary combined balance sheet
data as of December 31, 1995 have been derived from the Company's audited
combined financial statements not included herein. The summary combined income
statement data for the year ended December 31, 1993 and the summary combined
balance sheet data as of December 31, 1993 and 1994 have been derived from the
unaudited combined financial statements of the Company not included herein. The
summary combined income statement data for the six months ending June 30, 1997
and 1998 and the summary combined balance sheet data as of June 30, 1998 have
been derived from the unaudited combined financial statements of the Company
included herein and include all adjustments, consisting solely of normal
recurring accruals, which management considers necessary for a fair
presentation of such financial information for those periods. Historical
combined financial information may not be indicative of the Company's future
performance as an independent company. See also "Selected Combined Financial
Data," "Summary Unaudited Pro Forma Combined Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income
after provision for
loan losses........... $ 2,682 $ 4,103 $ 4,100 $ 7,033 $ 8,755 $ 4,122 $ 5,575
Equity in net income
of Imperial Credit
Industries, Inc.
("ICII").............. 7,898 2,388 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock ................ 14,538 -- -- 25,650 4,977 -- --
Gain from sale of
stock by ICII......... -- -- -- 10,761 -- -- --
Other income........... 6,549 9,011 10,875 16,263 17,354 10,026 8,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........ 31,667 15,502 20,627 81,151 51,346 19,153 20,336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Personnel expense...... 3,388 4,338 4,827 6,153 9,315 4,623 6,296
Other expenses......... 4,357 4,515 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses....... 7,745 8,853 10,395 16,833 27,449 12,560 11,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes and
extraordinary item.. 23,922 6,649 10,232 64,318 23,897 6,593 8,468
Income taxes........... 10,129 2,821 4,313 25,674 8,737 2,423 3,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary item.. 13,793 3,828 5,919 38,644 15,160 4,170 4,896
Extraordinary item--
gain on
extinguishment of
ICII debt, net of
taxes................. -- 370 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........... 13,793 4,198 5,919 38,644 15,160 4,170 4,896
Other comprehensive
income(1)............. -- (40) 38 2 228 74 (418)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income. $ 13,793 $ 4,158 $ 5,957 $ 38,646 $ 15,388 $ 4,244 $ 4,478
========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(2):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted.............. 17,391,309 17,738,940 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share(3):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78 $ 0.22 $ 0.25
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------ AT JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale.... $ 2,579 $ 1,648 $ 2,648 $ 5,531 $ 3,763 $ 8,441
Loans held for
investment, net....... 36,847 26,369 75,518 72,528 134,407 139,210
Investment in stock of
ICII.................. 27,445 30,934 36,126 57,736 75,001 81,700
Total assets........... 75,456 69,650 125,030 149,348 227,983 250,616
Borrowings from
Imperial Bank......... 13,889 -- 49,897 6,184 77,934 47,225
Total liabilities...... 25,370 15,406 66,829 52,502 115,745 123,900
Stockholder's equity... 50,086 54,244 58,201 96,846 112,238 126,716
</TABLE>
- -------
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income as of January 1, 1998.
(2) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
(3) Based on the Company's historical net income and weighted average shares as
if the Transactions occurred at the beginning of each of the years
presented.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA:
Loans originated:
LHO.................. $40,206 $25,857 $70,224 $55,951 $ 97,854 $49,139 $35,321
SBA and companion
loans............... 11,164 21,204 21,533 38,792 49,092 27,831 29,642
------- ------- ------- ------- -------- ------- -------
Total.............. $51,370 $47,061 $91,757 $94,743 $146,946 $76,970 $64,963
======= ======= ======= ======= ======== ======= =======
Trust assets under
administration (in
millions)............. $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716 $ 8,386 $ 9,534
======= ======= ======= ======= ======== ======= =======
SELECTED RATIOS:
Average equity to
average assets........ 16.56% 70.74% 63.37% 56.02% 54.00% 61.05% 48.30%
Return on average
common equity......... 30.00 8.02 10.32 49.51 14.66 8.47 8.50
Return on average
assets................ 4.97 5.67 6.54 27.74 7.92 5.17 4.10
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 4.30% 3.27% 2.96% 3.42% 2.30% 1.77% 2.33%
Allowance for loan
losses as a
percentage of non-
accrual loans......... 37.48 47.79 56.89 53.42 102.54 153.77 103.65
Net charge-offs as a
percentage of average
loans held for
investment............ 0.62 0.26 1.21 0.87 0.66 0.53 0.26
</TABLE>
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary unaudited pro forma combined income statement data reflect the
Transactions as if they occurred at the beginning of each of the periods
presented. The summary unaudited pro forma balance sheet data reflect the
Transactions as if they occurred at December 31, 1996 and 1997 and June 30,
1998. The summary unaudited pro forma combined financial data reflect the
expected capitalization of the Company as a result of the Distribution, the
incurrence by the Company of indebtedness under the Credit Facilities (which is
identified below as "Line of credit"), the assumed interest expense relating to
such borrowings, amortization of capitalized costs incurred in connection with
the Credit Facilities and retention of certain assets and liabilities by
Bancorp. This pro forma information does not necessarily reflect the results of
operations or financial position of the Company which would have been achieved
had the Transactions actually been consummated as of such dates. Also, this pro
forma information is not indicative of the future results of operations or
future financial position of the Company. See "Capitalization" and "Unaudited
Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income
after provision for
loan losses........... $ 4,444 $ 7,175 $ 6,389 $ 2,966 $ 4,015
Equity in net income of
ICII.................. 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock................. -- 25,650 4,977 -- --
Gain from sale of stock
by ICII............... -- 10,761 -- -- --
Other income........... 10,875 16,263 17,351 10,026 8,062
---------- ---------- ---------- ---------- ----------
Total revenue.......... 20,971 81,293 48,977 17,997 18,776
---------- ---------- ---------- ---------- ----------
Personnel expense...... 4,827 6,153 9,315 4,623 6,754
Other expenses......... 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ----------
Total expenses......... 10,395 16,833 27,449 12,560 12,326
---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 10,576 64,460 21,528 5,437 6,450
Income taxes........... 4,458 25,734 7,742 1,938 2,725
---------- ---------- ---------- ---------- ----------
Net income............. $ 6,118 $ 38,726 $ 13,786 $ 3,499 $ 3,725
========== ========== ========== ========== ==========
Weighted average number
of shares
outstanding(1):
Basic ................. 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted ............... 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share:
Basic ................. $ 0.34 $ 2.06 $ 0.71 $ 0.18 $ 0.19
Diluted ............... $ 0.33 $ 2.05 $ 0.70 $ 0.18 $ 0.18
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,245 $ 2,813 $ 10,448
Securities available for sale, at fair
value..................................... 1,179 6,027 3,507
Loans held for sale........................ 5,531 3,763 8,441
Loans held for investment, net............. 63,304 128,614 134,276
Investment in stock of ICII ............... 57,736 75,001 81,700
Other assets............................... 6,885 5,733 8,941
-------- -------- --------
Total assets............................... $139,880 $221,951 $247,313
======== ======== ========
Time deposits.............................. $ -- $ -- $ 37,480
Line of credit ............................ 35,382 113,512 95,231
Income taxes payable....................... 39,728 29,984 29,972
Other liabilities.......................... 5,978 7,962 7,749
-------- -------- --------
Total liabilities.......................... 81,088 151,458 170,432
Stockholder's equity....................... 58,792 70,493 76,881
-------- -------- --------
Total liabilities and stockholder's equity. $139,880 $221,951 $247,313
======== ======== ========
</TABLE>
- -------
(1) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
10
<PAGE>
INTRODUCTION
On February 20, 1997, the Bancorp Board approved a plan to spin off to its
shareholders in a tax-free distribution a portion of its specialty lending and
finance businesses that focuses on the entertainment industry, loans to small
businesses (a majority of which are guaranteed in part by the SBA), and trust
services. On March 13, 1997, the Company was incorporated in Delaware to own
and operate these businesses.
These businesses will be contributed to the Company on or prior to the
Distribution Date. The Bank has contributed to CAB all of the assets relating
to the Bank's small business lending division and CAB has assumed all of the
liabilities relating thereto. The Bank will contribute to the Company (i) all
of the assets relating to LHO, a division of the Bank that provides motion
picture and television production financing, and the Company will assume all
of the liabilities relating thereto, (ii) all of the common stock of CAB,
(iii) all of the common stock of ITC, a California licensed trust company that
offers a wide range of trust and investment management services, and (iv) all
of the common stock owned by the Bank (which, as of June 30, 1998, was
8,941,106 shares, which represented approximately 23.0% of all outstanding
common stock as of such date) in ICII, a publicly traded, diversified
specialty finance company. The foregoing businesses are collectively referred
to herein as the "IFG Business" and the asset contributions and related
assumptions of liabilities are collectively referred to herein as the
"Contribution." The Company also beneficially owns an additional 1.2 million
shares (or 3.0% of the outstanding ICII common stock as of August 15, 1998)
pursuant to an agreement, dated August 3, 1998, with Bear, Stearns & Co. Inc.,
a shareholder of ICII (the "ICII Shareholders Agreement"), which grants the
Company the right to vote all of such shares and provides the Company with an
option to purchase these shares. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "Business--Imperial Credit Industries, Inc."
Bancorp has received rulings from the IRS to the effect, among other things,
that receipt of shares of Company Class A Common Stock will be tax free for
federal income tax purposes to Bancorp and the shareholders of Bancorp (except
with respect to cash received in lieu of fractional shares), and that neither
Bancorp nor the Bank will recognize income, gain or loss as a result of the
Distribution (the "Ruling"). The Distribution is subject to, among other
things, (i) the Ruling not having been withdrawn or modified in a manner
adverse to Bancorp, the Bank or Bancorp's shareholders, (ii) the Company Class
A Common Stock being approved for listing on the NYSE subject to official
notice of issuance, (iii) the Registration Statement having been declared
effective by the Commission, (iv) receipt of regulatory consents and approvals
from various state and federal banking and trust authorities and (v) the
Credit Facilities being in place and all conditions to borrowing thereunder
having been satisfied or waived. Any condition to the Distribution may be
waived, at any time prior to the Distribution Date, for any reason, in the
sole discretion of the Bancorp Board. However, even if all the conditions to
the Distribution are satisfied, the Bancorp Board has reserved the right to
abandon, defer or modify the Contribution and the Distribution at any time
prior to the Distribution Date. See "Distribution Conditions and Termination."
References to the "Company" herein for time periods prior to the Distribution
mean the IFG Business as conducted by the Bank and, for time periods following
the Distribution, mean the Company as capitalized pursuant to the
Contribution.
The Distribution will be effected by a dividend of all of the outstanding
shares of Company Class A Common Stock to holders of record of Bancorp Common
Stock on the Distribution Record Date at a ratio of one share of Company Class
A Common Stock for every two shares of Bancorp Common Stock held by such
holders. The Distribution will occur on October 1, 1998.
NO ACTION IS REQUIRED BY BANCORP SHAREHOLDERS IN ORDER TO RECEIVE COMPANY
CLASS A COMMON STOCK TO WHICH THEY WILL BE ENTITLED IN THE DISTRIBUTION UPON
PAYMENT OF THE DIVIDEND.
Shareholders of Bancorp with inquiries related to the Distribution should
contact American Stock Transfer and Trust Co., the Distribution Agent for the
Distribution. After the Distribution Date, stockholders of the Company with
inquiries related to the Distribution or their investment should contact the
Company's Investor Relations Department.
11
<PAGE>
This Information Statement is being furnished by Bancorp solely to provide
information to holders of Bancorp Common Stock in connection with the
Contribution and the Distribution and, subject to the satisfaction of the
conditions to the Distribution, the receipt of Company Class A Common Stock
pursuant to the Distribution. This Information Statement is not, and should
not be construed as, an inducement or encouragement to buy or sell any
securities of Bancorp or the Company. The information contained in this
Information Statement is believed by Bancorp and the Company to be accurate as
of the date set forth on its front cover. Changes may occur after that date,
and neither Bancorp nor the Company will update the information except that,
after the Distribution, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file quarterly, annual and certain
other periodic reports that will contain updated information.
THE TRANSACTIONS
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Bancorp Board has determined, subject to satisfaction of certain
conditions, that it is in the best interests of Bancorp and its shareholders,
for the reasons set forth below, to distribute to Bancorp shareholders in the
Distribution the IFG Business as a separate publicly traded company to be
known as Imperial Financial Group, Inc.
Bancorp's management and the Bancorp Board have regularly looked for ways in
which to improve Bancorp's operations and thereby provide value to Bancorp's
shareholders. Beginning in the fourth quarter of 1996, as part of its regular
review process, Bancorp's management re-examined various strategies for
enhancing Bancorp's value through both internal operating initiatives and
restructuring strategies. On January 23, 1997, the Bank retained NationsBanc
Montgomery Securities LLC ("NationsBanc Montgomery") as its financial advisor
for the purpose of advising Bancorp and the Bank concerning the possible sale
of common stock in a registered public offering of a newly formed company that
would hold the IFG Business and/or the possible distribution of all of the
capital stock of such entity to the shareholders of Bancorp. On February 20,
1997, NationsBanc Montgomery presented its analysis of the benefits of such a
distribution to the Bancorp Board. The Bancorp Board unanimously determined,
after review and discussions, that the Contribution and the Distribution
provided an excellent opportunity to enhance shareholder value. The boards of
directors of Bancorp and the Bank determined not to engage in an initial
public offering of the Company's capital stock because, among other things,
the boards did not believe that adequate value would be received in a public
offering and also believed that the contribution of all of the common stock of
ICII to the Company would address the concerns of regulators and provide the
Company with operating benefits, each of which is described below.
The boards of directors of Bancorp and the Bank selected the businesses of
LHO, CAB and ITC to be contributed to the Company because (i) each business
has been operating with a separate management structure as a stand-alone
operation and with an entrepreneurial management philosophy, (ii) each
business has demonstrated high return on equity in recent years and (iii) none
of the three businesses requires demand banking deposits for its funding. In
addition, the boards of Bancorp and the Bank believe the businesses of LHO,
CAB and ITC, as well as the business of ICII, complement each other and that
many cross-referral opportunities exist between such businesses, including
with respect to lending and private banking products offered to the clients of
LHO, CAB and ITC.
The boards of directors of Bancorp and the Bank believe that the
Transactions will provide the Company with increased access to capital
markets, which should allow the Company to expand its businesses. One business
the Company is considering engaging in is the broker/dealer business, although
the Company has not determined whether it would seek to establish its own
broker/dealer or seek to acquire an existing broker/dealer. The Company
intends to initially raise capital to promote this expansion by conducting a
public or private offering of its equity securities that it expects to
complete prior to the end of 1998. There can be no assurance if this offering
will be consummated, and if the offering is consummated, there can be no
assurance in what manner the Company will attempt to expand its business with
the proceeds therefrom.
12
<PAGE>
The boards of Bancorp and the Bank believe that the ICII stock will provide
the Company with additional financing flexibility to expand its operations and
operate as a separate publicly traded company, without any assistance from
either Bancorp or the Bank, while the disposition of the ICII stock by Bancorp
will satisfy the concerns of the Federal Reserve Board and allow Bancorp to
continue to be in compliance with certain regulatory requirements described
below. Moreover, the Company will be able to expand the specialty lending and
finance businesses contributed to it by the Bank by operating as a separate
publicly traded company that is not subject to the same federal and state
banking laws and regulations applicable to Bancorp and the Bank. See
"Business--Regulatory Matters." The separation of the businesses will also
allow each of Bancorp and the Company to provide its employees with incentive
compensation linked solely to the financial performance of his or her
employer.
As the holder of all of the issued and outstanding shares of capital stock
of the Bank, Bancorp is subject to the BHCA and Regulation Y promulgated
thereunder ("Regulation Y"). The BHCA and Regulation Y provide that a bank
holding company may not acquire or retain direct or indirect ownership or
control of any company which is not a bank or bank holding company or which
engages in any nonbanking activities except such activities as are determined
by order or regulation by the Federal Reserve Board to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto
(a "closely related activity"). Certain activities which have been determined
by the Federal Reserve Board to be closely related activities are set forth in
Regulation Y. To the extent a bank holding company wishes to engage de novo in
a nonbanking activity or to acquire an entity engaged in such activity,
Regulation Y provides for prior notice to and/or approval by the Federal
Reserve Board for the conduct of such activity.
The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
BHCA. This position is apparently a consequence of the Federal Reserve Board's
view that ICII is engaged in activities which are not determined by regulation
to be a closely related activity and that Bancorp did not file or obtain a
notice or approval to engage in such activities in accordance with Regulation
Y. The Bank believes that the BHCA should not be interpreted to limit the
investment activities of a California-chartered non-member bank which is
subject to the regulation of the Federal Deposit Insurance Corporation
("FDIC") and not the Federal Reserve Board. However, the provisions of the
BHCA are clearly applicable to direct investments by Bancorp and accordingly
the Federal Reserve Board is likely to take the position that the retention of
such shares by Bancorp violates the BHCA absent prior approval by the Federal
Reserve Board. Bancorp believes that such approval, if sought, would not be
granted.
The FDIC does not regulate the activities of bank holding companies, and
accordingly has not taken a position on Bancorp's indirect ownership of the
shares of ICII currently held by the Bank. However, the FDIC has expressed the
view that the retention of ICII shares by the Bank is not permitted by Section
24 of the Federal Deposit Insurance Act (the "FDIA"). Section 24 of the FDIA
limits the investments of state-chartered banks, such as the Bank, to
investments which are permitted investments for national banks or are
otherwise permitted under Section 24. See "Business--Regulatory Matters." On
June 10, 1996, the Bank filed an application for approval of retention of its
ownership of ICII stock. The Bank has submitted additional information to the
FDIC in response to FDIC requests. Subsequently, the FDIC requested that the
Bank submit a divestiture plan with respect to its investment in ICII. In
response to this request, the Bank has advised the FDIC of its intention to
effect the Contribution and Distribution. The boards of Bancorp and the Bank
have been informed by the Federal Reserve Board and the FDIC that contributing
the stock of ICII to the Company in connection with the Transactions will
satisfy these concerns and allow Bancorp to continue to be in compliance with
the FDIA.
Due to the perceived existence of significant issues as to whether approval
by the Federal Reserve Board of an application to retain Bancorp's ownership
in ICII or approval of the FDIC of the application to retain the Bank's
ownership in ICII would be forthcoming, and for the additional business
reasons discussed above, the Bancorp Board has determined not to seek Federal
Reserve Board approval at this time of its ownership of ICII stock, but rather
to address these regulatory concerns through the Contribution and
Distribution. The boards of directors of Bancorp and the Bank also considered
selling the ICII stock to address these concerns but believed (i) the block of
ICII stock held by the Bank represents a "control block" which should have
value in excess of
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the market value of the stock, (ii) the value of ICII stock would increase in
the near future from current levels, (iii) the costs of selling the ICII stock
would include an underwriting fee and the proceeds of the sale would be
subject to an immediate and significant cash tax payment, (iv) the sale of
such a large block of ICII stock would likely depress the market value of such
stock, further decreasing the proceeds to be realized by the Company from the
sale, (v) the ICII stock would provide the Company with financing flexibility
as described above and herein under "Credit Facilities" and (vi) the ICII
stock would benefit the Company's earnings. See "Risk Factors--Negative Impact
on Earnings Should Ownership Level of ICII Stock be Reduced; Substantial
Dependence on ICII-Related Revenue."
MANNER OF EFFECTING THE DISTRIBUTION
Following completion of the Contribution and subject to the satisfaction of
the conditions to the Distribution, the Board of Directors of the Bank will
declare a dividend on its common stock payable in Company Class A Common Stock
to its sole shareholder, Bancorp. Immediately thereafter, the Bancorp Board
will formally authorize the Distribution by declaring a dividend on the
Bancorp Common Stock payable in Company Class A Common Stock to holders of
record of Bancorp Common Stock on the Distribution Record Date. Only
shareholders of record as of the Distribution Record Date will receive the
Company Class A Common Stock in the Distribution. No cash will be paid to
Bancorp in connection with the Transactions.
Bancorp will effect the Distribution by delivering share certificates for
Company Class A Common Stock to the Distribution Agent, for delivery to the
holders of Bancorp Common Stock at the close of business on the Distribution
Record Date, without further action by such holders. It is expected that the
Distribution Agent will begin mailing share certificates representing Company
Class A Common Stock as soon as practicable after the Distribution Date. The
Distribution will be deemed effective upon notification by Bancorp to the
Distribution Agent that the Distribution has been declared and that the
Distribution Agent is authorized to proceed with the distribution of Company
Class A Common Stock. All shares of Company Class A Common Stock to be
distributed in the Distribution will be fully paid and nonassessable. See
"Description of Capital Stock."
No holder of Bancorp Common Stock on the Distribution Record Date will be
required to pay any cash or other consideration for the shares of Company
Class A Common Stock to be received in the Distribution or to surrender or
exchange shares of Bancorp Common Stock or take any other action in order to
receive shares of Company Class A Common Stock.
No certificates or scrip representing fractional shares of Class A Common
Stock will be issued to holders of Bancorp Common Stock as part of the
Distribution. The Distribution Agent will aggregate fractional shares into
whole shares and sell them in the open market at then prevailing prices on
behalf of holders who otherwise would be entitled to receive fractional share
interests, and such persons will receive instead a cash payment in the amount
of their pro rata share of the total sale proceeds. Such sales are expected to
be made on, or as soon as practicable after, the Distribution Date. The
Company will bear the cost of commissions incurred in connection with such
sales. See "Certain Federal Income Tax Considerations."
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RISK FACTORS
Readers should be aware of the following risk factors to which the Company
has been subject in the past, is currently and may in the future be subject,
and which could materially adversely affect the performance of the Company.
LACK OF OPERATING HISTORY AS AN INDEPENDENT COMPANY
The Company does not have an operating history as an independent public
company. The historical combined and pro forma combined financial information
included herein may not necessarily reflect the results of operations,
financial condition and cash flows of the Company in the future or what the
results of operations, financial condition and cash flows would have been had
the Company been a separate, stand-alone entity during the periods presented.
There can be no assurance that the Company can be operated profitably as a
stand-alone enterprise. See "Unaudited Pro Forma Combined Financial Data,"
including the discussion of the assumptions reflected therein, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEGATIVE IMPACT ON EARNINGS SHOULD OWNERSHIP LEVEL OF ICII STOCK BE REDUCED;
SUBSTANTIAL DEPENDENCE ON ICII-RELATED REVENUE
As of June 30, 1998, the Company owned 8,941,106 shares of common stock of
ICII, which represented approximately 23.0% of the outstanding shares as of
such date. In addition, on August 3, 1998, the Company entered into the ICII
Shareholders Agreement granting the Company the right to vote an additional
1.2 million shares of ICII common stock (or 3.0% of the outstanding ICII stock
as of August 15, 1998) and providing the Company with an option to purchase
these shares. Accordingly, as of August 15, 1998, the Company beneficially
owned approximately 26.0% of the outstanding common stock of ICII. The Company
accounts for its investment in ICII in the Company's combined financial
statements as an equity investment. This accounting treatment has allowed the
Company to include in its net income a portion of the net income generated by
ICII based upon the Company's percentage ownership of ICII stock.
During the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997, ICII generated total revenues of $103.1 million, $97.8
million and $309.6 million, respectively. Total revenue related to the
Company's ownership of ICII stock for the six months ended June 30, 1998 and
1997, and the year ended December 31, 1997 was $6.7 million, $7.8 million and
$28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $3.7 million, $2.2
million and $11.5 million, respectively, representing 76.0%, 52.7% and 76.2%,
respectively, of the Company's net income for such periods.
If the Company's ownership of ICII common stock is reduced to less than 20%,
the Company may no longer be able to account for its ownership of ICII common
stock as an equity investment. In addition, if the Company's beneficial
ownership of ICII common stock is reduced to less than 25% and the Company is
not able to exceed the 25% threshold after 90 days, under certain
circumstances such reduction could cause the termination of commitments under
the Credit Facilities. This termination would have a material adverse effect
on the Company's ability to conduct its businesses. Accordingly, it is
unlikely that the Company will sell a significant amount of its ICII shares.
In addition, pursuant to a letter agreement dated June 11, 1998, ICII has
granted the Company certain rights to maintain its percentage ownership in
ICII in connection with certain proposed public offerings of ICII stock by
ICII. See "Business--Imperial Credit Industries, Inc." The ICII stock,
however, will be pledged to the lenders under the Credit Facilities to secure
the Company's obligations thereunder. If an event of default under the Credit
Facilities occurs, the lenders could seek to enforce their rights by causing a
transfer of the ICII stock. See "Credit Facilities." If the Company had not
been able to account for its ownership in ICII common stock as an equity
investment, the Company's net income for the six months ended June 30, 1998
and 1997, and the year ended December 31, 1997 would have been reduced by
approximately 88%, 77% and 86%,
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respectively. Although the Company intends to continue to own in excess of 25%
of the common stock of ICII, there can be no assurance that the Company's
ownership will not be diluted by future stock issuances by ICII (including
stock issued upon exercise of outstanding stock options), or that the Company
will not be required, due to presently unforeseen circumstances, to sell
shares of ICII common stock to raise capital. In addition, ICII-related
revenues recognized by the Company have been highly variable and may remain
variable in the future.
INVESTMENT COMPANY ACT
The Company believes that it is not an investment company as defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Investment Company Act and the rules and regulations thereunder require the
registration of, and impose various substantive restrictions on, companies
that engage primarily in the business of investing, reinvesting or trading in
securities or engage in the business of investing, reinvesting, owning,
holding or trading in securities and own or propose to acquire investment
securities having a value in excess of 40% of a company's total assets. After
the Distribution, the Company intends to continue its financial services
businesses and conduct its operations so as not to become regulated under the
Investment Company Act. If the Commission or its staff were to take the
position that the Company was an investment company, the Company could be
subject to a number of substantive restrictions on its operations, capital
structure and management and it could result in a termination of the
commitments under the Credit Facilities. In addition, registration under the
Investment Company Act by the Company would constitute a violation of the
Credit Facilities. See "Credit Facilities."
LIMITED AVAILABILITY OF FUNDING SOURCES; NEGATIVE IMPACT SHOULD VALUE OF ICII
STOCK DECLINE
Prior to the Distribution, the Bank financed the Company's loan origination
activities. The Company has a continuing need for capital to finance its
lending activities. In connection with the Distribution, the Company will
enter into the Credit Facilities with a syndicate of banks not affiliated with
the Bank in order to finance a portion of its lending activities. See "Credit
Facilities." The Company intends to secure a portion of these borrowings with
all of the common stock of ICII owned by the Company, if the value of the ICII
stock were to be reduced, or if the Company were to dispose of ICII stock, the
amount of available funds to the Company under the Credit Facilities also
would be reduced. If the Company's available funds under the Credit Facilities
were reduced or its borrowing needs increase, there can be no assurance that
such financing will be obtainable on favorable terms. To the extent that the
Company is unable to arrange new lines of credit, the Company may have to
curtail its loan origination activities, which could have a material adverse
effect on the Company's operations and financial position. Moreover, if an
event of default under the Credit Facilities occurs, the lenders could seek to
enforce their rights by causing a transfer of the ICII stock. This transfer
could trigger a significant tax liability for the Company which could have a
material adverse effect on the Company's financial position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business is highly dependent upon the members
of the senior management of the Company. The loss of the services of one or
more of them could have a material adverse effect upon the Company's business
and development. In addition, the Company conducts its business through
subsidiaries and divisions operated by individual management teams. In each
subsidiary and division, there are key personnel, the loss of whom may have an
adverse effect on that subsidiary or division including, with respect to the
Company's LHO division, Lewis P. Horwitz, the President and Chief Executive
Officer of LHO. Although the Company has established incentive compensation
plans and entered into employment arrangements to retain certain key
personnel, including Mr. Horwitz, no assurances can be made that key personnel
will not depart, or that their departure would not have adverse consequences
to the operations of the Company or any of its subsidiaries and divisions. See
"Executive Compensation--Employment Arrangements."
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COMPETITION AND CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE BANK
The Company's competitors include banks and other financial institutions,
many of which are substantially larger and have significantly greater
resources than the Company. A significant competitor of the Company's LHO
division is the Bank's Entertainment Industries Group. No agreement between
the Company and the Bank will exist that restricts the activities of the
Bank's Entertainment Industries Group and the Company following the
Distribution. In addition, the Bank and the Company will not be prohibited
from using confidential information of the other party for its own internal
purposes that may have been obtained prior to the Distribution. Moreover,
there recently has been a significant increase in the number of competitors
providing financing for film and television production. There can be no
assurance that the Company will be able to compete successfully with such
other companies.
The small business lending and trust services businesses are also highly
competitive and CAB and ITC compete with a variety of banks and non-bank
lending institutions, many of which are larger than the Company and have
greater financial and other resources, and, with respect to CAB, many of which
also participate in SBA sponsored programs. These other banks maintain larger
marketing and sales staff and use a wide variety of marketing strategies, some
of which may be too expensive for the Company to conduct. See "Business."
RISKS PARTICULAR TO THE COMPANY'S LOAN PORTFOLIO
The Company's lending business is subject to various risks, including, but
not limited to, the risk that borrowers will not satisfy their debt service
obligations, the risk that the value of the collateral securing a liquidated
loan is less than the principal amount of such loan and the risk of the
narrowing of the interest rate spread between the Company's yield on its loans
and the cost of the Company's borrowings. In addition, significant changes in
interest rates could accelerate the rate of loan repayments from existing
borrowers. All or any one of the foregoing lending risks could have a material
adverse effect on the Company's results of operations and financial position.
As of June 30, 1998, approximately $8.0 million in aggregate principal
amount of loans in the Company's portfolio were 30 days or more delinquent,
including $4.7 million of which were no longer accruing interest. Any increase
in delinquent loans could result in an increase in the Company's provision for
loan losses or a reduction of the Company's interest income, each of which
could have a material adverse effect on the Company's results of operations
and financial position. See "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
LHO Lending. The LHO business is dependent on the production of independent
films and television shows and series. If the number of productions were to
decline in the future, the need for financing would decrease as well. Any such
decline in these industries could have a material adverse effect on the
Company's results of operations. In addition, borrowers are generally single-
purpose corporations whose sole function is to produce a motion picture or
television film and, accordingly, have no meaningful financial assets prior to
distribution of the production. In addition, as described herein under
"Business--LHO," these loans are secured principally by the revenues to be
received from the worldwide distribution of the production. The distributors
are in many instances privately held small businesses that do not provide the
Company with financial information and have limited assets. If the
distributors fail to make the minimum guaranteed payment, the borrower could
attempt to license the distribution rights to another distributor but there
can be no assurance as to whether a new distributor would be engaged or if
such new distributor would be able to make the minimum guaranteed payment. As
a result, this could adversely affect the Company's ability to proceed against
the collateral if the borrower fails to repay the loan. In addition, the LHO
business is subject to risks relating to potential economic and political
instability in certain foreign countries where such distributors have agreed
to license production rights. An occurrence of an event such as war or
currency devaluation in such a country could cause such distributors to
default on their agreements to provide distribution revenue, which is LHO's
primary source of collateral securing repayment. This could have a material
adverse effect on the Company's results of operations and financial condition.
With regards to currency risk, all international contracts are made in U.S.
dollars, and most of the
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distributors do not hedge this risk. As a result, if the local currency falls
in value in relation to the dollar, the actual price of the film to the
distributor at time of delivery is higher than such distributor had
anticipated. This situation has occurred recently in South Korea and Thailand,
where both currencies have undergone devaluations, and it could continue to be
a threat throughout much of Asia. As a result, the Company has removed South
Korea from its list of "primary" territories, and has discounted the value of
contracts emanating from other Asian countries which the Company deems to have
unstable currency.
In addition, a substantial percentage of the Company's financings made in
the first six months of 1998 and all of 1997 and 1996 through LHO have been
"gap" financings (for a description of gap financing, see "Business--LHO--Loan
Types"), which are riskier than traditional entertainment lending because
certain rights available for distribution not sold at time of funding may not
be sold thereafter. As a result, the aggregate principal amount of such loans
may exceed the value of the collateral at time of funding. Prior to 1995, the
LHO division of the Company did not provide "gap" financing and, as a result,
many of the loans in the Company's loan portfolio have not been outstanding
for a sufficient period of time to determine whether there are material
adverse credit, delinquency, loss, prepayment or other issues associated with
"gap" loans.
CAB Lending. The Company's small business lending segment commenced
operations within the Bank in 1993. As a result, many of the loans in the
Company's small business loan portfolio have not been outstanding for a
sufficient period of time to determine whether there are material adverse
credit, delinquency, loss, prepayment or other issues associated with these
loans. There can be no assurance that the delinquency, prepayment and loss
experience of these loans will be consistent with management's assumptions and
estimates. Any material change in delinquencies, prepayments and losses from
management's assumptions and estimates may adversely affect the Company's
financial condition and results of operations. See "Business--CAB."
Moreover, with respect to loans guaranteed by the SBA, if the SBA
establishes that any loss resulting from a borrower default is attributable to
significant technical deficiencies in the manner in which the loan was
originated, documented or funded by the Company, the SBA may refuse to make
payment on its guarantee or may seek recovery from the Company of any funds
advanced by the SBA. CAB could also be subject to risk if a particular
industry in which it has developed a concentration of loans were to suffer an
economic downturn. As of June 30, 1998, approximately 40% of the Company's
small business loan portfolio consisted of loans made to owners of motels. If
the motel industry were to suffer an economic downturn, the Company's
financing to this industry likely would similarly decline.
ASSETS SUBJECT TO PREPAYMENT RISK
At June 30, 1998, the Company's combined balance sheet reflected
approximately $4.2 million in interest only strips and servicing assets
subject to prepayment risk. Realization of these assets in cash is subject to
the prepayment and loss characteristics of the underlying loans and to the
timing and ultimate realization of the stream of cash flows associated
therewith. The Company estimates future cash flows from these assets and
values them utilizing assumptions that it believes are consistent with those
that would be utilized by an unaffiliated third party purchaser. If actual
experience differs from the assumptions used in the determination of asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of the assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE OF SMALL BUSINESS LENDING OPERATIONS ON SBA PROGRAMS
During the six months ended June 30, 1998 and the year ended December 31,
1997, approximately 100% and 97%, respectively, of the SBA loan origination
activity engaged in by the Company through CAB was in connection with the SBA
Section 7(a) program. See "Business--CAB--The SBA Guaranteed Loan Program."
Discontinuation, elimination or a significant reduction of this program would
have a material adverse effect on the Company. The SBA lending program is a
federal government program, instituted through legislation. Uncertainties
exist surrounding government programs, including the SBA, due to scrutiny by
the United States Congress. There can be no assurance that the SBA lending
program will continue in its present manner.
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There have also been significant attempts in previous years to eliminate the
SBA or to curtail its activities or funding by Congress. In 1995, the SBA
temporarily ceased guaranteeing small business loans after Congress determined
that the appropriations in the federal budget for such guarantees had been
fully utilized. Although Congress later determined that it had incorrectly
calculated the amount of such appropriations and the SBA was able to continue
guaranteeing appropriate small business loans, any future utilization of such
appropriations and subsequent cessation of SBA guarantees would have a
material adverse effect on the Company's results of operations and financial
position.
In recent years, Congress has enacted legislation that reduced the maximum
amount of SBA guarantees on certain types of loans from 85% to 75%, required
the payment of a fee to the SBA by the lender equal to half of the proceeds
from the sale of a loan that exceeds 110% of the outstanding balance of the
SBA guaranteed portion of the loan and required that the SBA be paid a portion
of the annual servicing fee. There can be no assurance that additional
legislation relating to the SBA will not adversely affect the Company's
results of operations and financial position.
The SBA has the right to cease guaranteeing new loan origination by the
Company upon ten days' prior written notice. The occurrence of such an event
would have a significant adverse impact on the liquidity and earnings of the
Company but would not affect guarantees on outstanding loans. The Company's
income from the SBA lending business is materially dependent upon the premium
at which the SBA guaranteed portions of loans are sold in the secondary
market. In addition, in the event that CAB were to lose its status as a
"Preferred Lender," CAB could be materially and adversely affected. See
"Business--CAB."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 84% and 70% of the aggregate principal amount of loans
originated by the Company through LHO and CAB during the six months ended June
30, 1998 and the year ended December 31, 1997, respectively, were originated
in California and secured by assets located in California. Although the
Company anticipates further expansion in these businesses outside California
in the future, the Company's loan originations may remain concentrated in
California for the foreseeable future. Consequently, the Company's results of
operations, financial condition and business prospects are dependent on the
California economy. In the early 1990s, the California economy experienced an
economic slowdown or recession. Although the California economy has improved
over the last few years, any economic decline would adversely affect the value
of the collateral securing the loans. A decline in the value of the loan
collateral may result in the principal balances of such loans, together with
any other financing by such borrowers, equaling or exceeding the value of the
collateral. In addition, California is vulnerable to certain natural disaster
risks, such as earthquakes and floods. These disasters are not typically
covered by the standard hazard insurance policies maintained by borrowers and
may adversely impact borrowers' ability to repay loans made by the Company.
The existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations, financial condition and business prospects. See
"Business--LHO" and "--CAB."
ASSUMED LIABILITIES AND OBLIGATIONS
Pursuant to the Contribution, the Company will assume responsibility for all
liabilities and obligations related to the IFG Business, whether such
liabilities and obligations arose prior to the Contribution or arise on or
after the Contribution. See "Relationship and Agreements Among the Company,
the Bank and Bancorp After the Distribution." The Company believes that it has
provided for these liabilities and obligations in accordance with GAAP. Actual
results, however, could differ from these estimates, and changes in facts and
circumstances may result in revised estimates and assumptions. For a
description of certain of these liabilities and obligations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Some assignments and transfers may require prior consent by third parties
and various filings or recordings with governmental entities. See "Business--
Regulatory Matters."
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CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by the level of and
fluctuations in interest rates because they affect the Company's ability to
earn a spread between interest received on its loans and the costs of its
liabilities. While the Company monitors the interest rate environment and
employs a strategy designed to reduce the impact of changes in interest rates,
there can be no assurance that the profitability of the Company would not be
adversely affected during any period of changes in interest rates. A
substantial and sustained increase in interest rates could adversely affect
the Company's ability to originate or sell loans, reduce the average size of
loans underwritten by the Company and reduce the gains recognized by the
Company upon their sale. Fluctuating interest rates also may affect the net
income earned by the Company resulting from the difference between the yield
to the Company on loans held pending sale and funds borrowed by the Company to
finance the origination of such loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
CAB--Funding."
ECONOMIC SLOWDOWN OR RECESSION
The risks associated with the Company's businesses become more acute in any
economic slowdown or recession. Periods of economic slowdown or recession may
be accompanied by decreased demand for consumer or commercial credit and
declining real estate and other asset values. In the secured lending business,
any material decline in collateral values 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 a default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. In addition, in an economic slowdown or recession,
the Company's servicing costs will increase. Any sustained period of increased
delinquencies, foreclosures, losses or increased costs could adversely affect
the Company's ability to sell loans and could increase the cost of selling
loans, which in either case could adversely affect the Company's financial
condition and results of operations.
ENVIRONMENTAL LIABILITY
In the course of its business, the Company may foreclose on properties
securing loans that are in default. There is a risk that hazardous or toxic
substances or petroleum constituents could be on such properties. In such
event, it is possible that the Company could be held responsible for the cost
of cleaning up or removing such waste depending upon the lender's activities,
and such cost could exceed the value of the underlying properties. In
addition, there can be no assurance 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. Moreover, in the course of the
Company's trust business, the Company, as trustee, may be considered the
record owner of property for which it acts as trustee. As a result, it would
be held responsible for the cost of cleanup or removal of any hazardous or
toxic substances on these properties.
Under the laws of certain states, contaminated property may be subject to a
lien on the property to assure payment for cleanup costs. In several states,
such a lien has priority over the lien of an existing mortgage or owner's
interest. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may be liable for cleanup of a property and adjacent
properties that are contaminated by releases from the mortgaged property if
the lender engages in certain activities. These activities include foreclosure
on the property and participation in the management or operational aspects of
such property. In 1996 CERCLA was amended to eliminate federal lender
liability under CERCLA in certain circumstances, including foreclosure if the
lender resells the property at the earliest practicable, commercially
reasonable time on commercially reasonable terms. In addition, the amendments
defined the term participation in management, which provided some guidance to
lenders about the nature of activities that would and would not give rise to
liability under CERCLA. These amendments do not apply to state Superfund laws.
Also, foreclosure and other activities on contaminated property may subject a
lender to state tort liability.
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GOVERNMENT REGULATION
The Company and its subsidiaries are subject to extensive regulation and
oversight by federal and state regulators administering applicable federal and
state laws and regulations, including, among others, the following: the Small
Business Act, the Small Business Investment Act of 1958, the California
Finance Lenders Law, the California Industrial Loan Law, the Community
Reinvestment Act, the Federal Deposit Insurance Act, portions of the
California Banking Law and the Federal Reserve Act and certain regulations of
the Federal Reserve Board. Such laws and regulations materially impact the
business operations of the Company and its subsidiaries, including, among
other areas, rate of growth, ability to pay dividends, rates payable on
deposits, permissible sources of financing, terms and structure of loans,
competition, reporting of their financial condition, operations from branches
and other locations and internal controls. See "Dividend Policy" and
"Business-- Regulatory Matters." Although management of the Company believes
that it can operate within the parameters defined by currently applicable law
and regulation, it is not possible to predict with certainty the extent or
nature of future changes to applicable law and regulation, government policies
or judicial interpretations, nor their impact, whether adverse or beneficial,
on the business operations, financial condition or prospects of the Company
and its subsidiaries.
ABSENCE OF TRADING HISTORY FOR THE COMMON STOCK
The Company Class A Common Stock will be listed and will trade on the NYSE
under the symbol "IFG." There has been no prior trading market for Company
Class A Common Stock and there can be no assurance as to the prices at which
Company Class A Common Stock will trade or the degree of volatility in the
trading price. The prices at which Company Class A Common Stock trades will be
determined in the public trading market and may be influenced by many factors,
including the depth and liquidity of the market for Company Class A Common
Stock, investor perceptions of the Company and its businesses, general
economic and market conditions and, at least in the short-term, the investment
preferences of Bancorp shareholders who will receive shares of Company Class A
Common Stock in the Distribution.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), Amended and Restated Bylaws (the "Bylaws")
and the DGCL contain certain provisions that may discourage other persons from
attempting to acquire control of the Company. These provisions include, but
are not limited to, a staggered Board of Directors, the authorization of the
Board to issue shares of undesignated preferred stock in one or more series
without the specific approval of the holders of Company Class A Common Stock,
the establishment of advance notice requirements for director nominations and
actions to be taken at annual meetings and the requirement that 80% of the
shareholder votes are required to approve any change to the Bylaws or certain
provisions of the Certificate of Incorporation. In addition, the Certificate
of Incorporation and the Bylaws permit special meetings of the shareholders to
be called only by the Chairman of the Board or Co-Chairman of the Board or
upon the request of a majority of the Board of Directors, and deny
shareholders the ability to call such meetings. In certain circumstances, the
fact that corporate devices are in place that will inhibit or discourage
takeover attempts could reduce the market value of Company Class A Common
Stock. See "Purposes and Effects of Certain Provisions of the Company's
Certificate of Incorporation, Bylaws and Delaware Law."
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Bancorp has received the Ruling from the IRS to the effect that, among other
things, the Distribution will qualify as a tax-free spin-off to Bancorp, the
Bank and Bancorp shareholders under Section 355 of the Internal Revenue Code
of 1986, as amended (the "Code"). The following is a summary of the material
federal income tax consequences to Bancorp, the Bank and Bancorp shareholders
expected to result from the Distribution:
(i) A Bancorp shareholder will not recognize any income, gain or loss as
a result of the Distribution except as described below, in connection with
the receipt of cash in lieu of fractional shares of Company Class A Common
Stock;
(ii) A Bancorp shareholder will be required to apportion the tax basis
for such shareholder's Bancorp Common Stock on which Company Class A Common
Stock is distributed between the Bancorp Common Stock and Company Class A
Common Stock received in the Distribution in proportion to the relative
fair market values of such Bancorp Common Stock and Company Class A Common
Stock on the Distribution Date;
(iii) A Bancorp shareholder's holding period for the Company Class A
Common Stock received in the Distribution will include the period during
which such shareholder held the Bancorp Common Stock on which Company Class
A Common Stock is distributed, provided that such Bancorp Common Stock is
held as a capital asset by such shareholder on the Distribution Date;
(iv) A Bancorp shareholder who receives cash in lieu of fractional shares
as a result of the sale of shares of Company Class A Common Stock by the
Distribution Agent will be treated as if such fractional share had been
received by such shareholder as part of the Distribution and then sold by
such shareholder. Accordingly, such shareholder will recognize gain or loss
equal to the difference between the cash so received and the portion of the
tax basis in Company Class A Common Stock that is allocable to such
fractional share. Such gain or loss will be capital gain or loss, provided
that such fractional share was held by such shareholder as a capital asset
at the time of the Distribution; and
(v) Neither Bancorp nor the Bank will recognize any income, gain or loss
as a result of the Distribution or the Contribution.
The continuing validity of the Ruling is subject to certain factual
representations and assumptions. Bancorp is not aware of any fact or
circumstance which would cause such representations and assumptions to be
untrue.
Current Treasury regulations require each Bancorp shareholder who receives
Company Class A Common Stock pursuant to the Distribution to attach to such
shareholder's federal income tax return for the year in which the Distribution
occurs a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Code to the
Distribution. Bancorp will provide the appropriate information to each
shareholder of record as of the Distribution Record Date.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO
RECEIVED THEIR SHARES OF BANCORP COMMON STOCK THROUGH THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL
TREATMENT UNDER THE CODE. ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES AS OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
22
<PAGE>
LISTING AND TRADING OF THE COMMON STOCK
Subject to official notice of issuance from the NYSE, the Company Class A
Common Stock will be listed on the NYSE and will trade under the symbol "IFG."
There is no current public trading market for the Company Class A Common
Stock, although it is expected that a "when-issued" trading market will
develop prior to the Distribution Date. The term "when-issued" means trading
in shares prior to the time certificates are actually available or issued. If
the conditions to the Distribution are not satisfied and the Distribution is
not paid, any such when-issued trading will become null and void. If the
conditions to the Distribution are satisfied and the Distribution is paid on
the Distribution Date, it is expected that regular way trading in the Company
Class A Common Stock on the NYSE will commence at 9:30 a.m. (New York time) on
October 2, 1998, subject to official notice of issuance.
Bancorp Common Stock will continue to be listed and traded on the NYSE after
the Distribution.
The Company Class A Common Stock issued to shareholders of Bancorp Common
Stock will be freely transferable, except for shares received by persons who
may be deemed to be "affiliates" of the Company under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of the Company after the Distribution generally include individuals
or entities that control, are controlled by, or are under common control with,
the Company and may include certain officers and directors of the Company.
Persons who are affiliates of the Company will be permitted to sell their
Company Class A Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by Section
4(1) of the Securities Act and Rule 144 thereunder.
For a discussion of certain uncertainties that should be considered in
trading in the Company Class A Common Stock, see "Risk Factors--Absence of
Trading History for the Common Stock."
23
<PAGE>
DISTRIBUTION CONDITIONS AND TERMINATION
The consummation of the Distribution is conditioned upon fulfillment of each
of the following conditions: (i) the Ruling not having been withdrawn or
modified in a manner adverse to Bancorp, the Bank or Bancorp's shareholders;
(ii) the Contribution (including transfers of certain assets and liabilities
to the Company contemplated by the Contribution Agreement) having been
consummated (see "Relationship and Agreements Among the Company, the Bank and
Bancorp After the Distribution--Contribution Agreement"); (iii) the Company
Class A Common Stock having been approved for listing on the NYSE subject to
official notice of issuance; (iv) the Registration Statement having been
declared effective by the Commission; (v) all authorizations, consents,
approvals and clearances from all federal and state governmental agencies
required to permit the valid consummation of the transactions contemplated by
the Contribution and the Distribution having been obtained, without any
conditions being imposed that would have a material adverse effect, and all
statutory requirements for such valid consummation having been fulfilled (see
"Business--Regulatory Matters"); (vi) Bancorp having provided the NYSE with
prior written notice of the Distribution Record Date as required by the
Exchange Act, and the rules and regulations of the NYSE; (vii) no preliminary
or permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a government, regulatory or administrative agency
or commission, and no statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, being in effect preventing the
payment of the Distribution; (viii) the Credit Facilities being in place, with
all conditions to borrowing thereunder being satisfied or waived; and (ix) the
Bancorp Board being satisfied that, after giving effect to the Contribution
and the Distribution, (A) neither Bancorp nor the Company will be insolvent or
will have unreasonably small capital with which to engage in its respective
business and (B) Bancorp and the Bank will be able to make the Distribution in
accordance with applicable law.
Any condition to the Distribution may be waived at any time prior to the
Distribution Date, for any reason, in the sole discretion of the Bancorp
Board. In addition, even if all the above conditions are satisfied, the
Contribution Agreement may be amended or terminated, and the Distribution may
be abandoned, at any time prior to the Distribution Date for any reason, in
the sole discretion of the Bancorp Board.
24
<PAGE>
REGULATORY APPROVALS AND CONSIDERATIONS
FEDERAL LAWS AND REGULATIONS
Federal Deposit Insurance of Accounts. CAB satisfied all conditions imposed
by the FDIC, and on June 2, 1998, the FDIC approved the Company's Application
for Federal Deposit Insurance for CAB. CAB thereby became a member of the FDIC
and its deposit accounts became insured by the Bank Insurance Fund of the
FDIC. See "Business--Regulatory Matters--CAB--Federal Law."
The Change in Bank Control Act. California-licensed industrial loan
companies are insured depository institutions under the Federal Deposit
Insurance Act. Accordingly, such industrial loan companies and their holding
companies are subject to the Change in Bank Control Act (the "Change in Bank
Control Act") and regulations promulgated by the FDIC thereunder. The Change
in Bank Control Act provides in part that no person, acting directly or
indirectly or through or in concert with one or more persons, may acquire
control of an insured depository institution through a purchase, assignment,
transfer, pledge or other disposition of voting stock unless the appropriate
Federal banking agency has been given 60 days' prior written notice of, and
has not issued a notice disapproving, the acquisition. The FDIC is the
appropriate federal banking agency administering the Change in Bank Control
Act with respect to industrial loan companies.
The Change in Bank Control Act defines control as the power, directly or
indirectly, to direct the management or policies of the insured depository
institution or to vote 25% of any class of its voting securities. The FDIC has
established regulations that provide that an acquisition which results in the
ownership or control of, or power to vote, 10% or more of a class of voting
securities will be presumed to result in an acquisition of control if the
insured depository institution has issued any class of securities subject to
the registration requirements of Section 12 of the Exchange Act or, if
immediately after the transaction, no other person will own a greater
proportion of that class of voting securities. After giving effect to the
Distribution the Company will have, and ICII currently has, a class of
securities subject to registration under Section 12 of the Exchange Act.
As a result of the Contribution, all of the issued and outstanding shares of
CAB will be acquired by the Company, constituting an acquisition of control of
CAB by the Company. Additionally, the Contribution contemplates that the
shares of common stock of ICII currently owned by the Bank, which represented
approximately 23.0% of the issued and outstanding shares of ICII as of June
30, 1998, will likewise be transferred to the Company, which transaction will
constitute a transfer of indirect control of Southern Pacific Bank, a wholly-
owned subsidiary of ICII ("SPB"). Accordingly, the contribution of 100% of the
issued and outstanding shares of common stock of CAB to the Company and the
contribution of the shares in ICII to the Company requires notice to, and
nondisapproval of, the FDIC under the Change in Bank Control Act. The FDIC has
given such approval provided such transactions constituting the Contribution
be effected no later than October 31, 1998.
Effectiveness of Divestiture of ICII Stock. Previously effective provisions
of the BHCA, and provisions of Regulation Y promulgated thereunder, required a
determination of the Federal Reserve Board upon the divestiture by a bank
holding company of a subsidiary engaged in nonbanking activities. These
provisions have been repealed, and the Company has been advised that the
effectiveness of a divestiture of the shares of a subsidiary engaged in
nonbanking activities is now customarily determined following a divestiture as
part of the bank holding company examination process. This involves a
determination of whether Bancorp would be deemed to control the Company under
the provisions of the BHCA after the Distribution. In order to avoid the
uncertainty inherent in such an after-the-fact determination, the Company and
Bancorp sought written confirmation from the Federal Reserve Board prior to
the Distribution that, after the divestiture by the Bank of its investment in
ICII in accordance with the Distribution, Bancorp would not be deemed to
control the Company. The Federal Reserve Board has issued its opinion that,
after the Distribution, Bancorp will not be deemed to control the Company
under the provisions of the BHCA.
Safety and Soundness Considerations. The Bank and the Company have formally
advised the FDIC and the California Department of Financial Institutions (the
"DFI") of the terms and conditions of the transfer of
25
<PAGE>
the assets of the Bank's small business lending division and LHO and of the
transfer of the investment in ICII. Both the FDIC and the DFI have
responsibility over the safety and soundness of the Bank and the adequacy of
the Bank's capital in light of its business activities. In order to minimize
any uncertainty about how each of these agencies would view the effect of
these transfers on the Bank in a subsequent examination, the Bank and the
Company have obtained the non-objection of each of the foregoing regulatory
agencies to such transfers.
SBA Lender Approvals. CAB has approvals from the SBA to originate SBA loans
under the Guaranteed Participant, Certified Lender and Preferred Lender
programs.
CALIFORNIA LAWS AND REGULATIONS
The California Industrial Loan Law. The Company determined that the business
of CAB should be conducted as a California industrial loan company operating
under the California Industrial Loan Law. On June 5, 1998, the DFI issued to
CAB a license to operate as an industrial loan company in California. See
"Business--Regulatory Matters--CAB--California Law."
The California Finance Lenders Law. The California Usury Law, Article XV of
the California Constitution (the "Usury Law"), generally limits the rates of
interest lenders may charge borrowers in California. It exempts, however,
certain licensed lenders from such interest rate limitations, including a
holder of a license under the California Finance Lenders Law (a "CFL
License"). On February 13, 1998, the DOC, the administrator of the California
Finance Lenders Law, issued a CFL License to the Company. Accordingly, the
Company is exempt from the Usury Law and the LHO division may conduct its
entertainment finance business free of the interest rate restrictions of the
Usury Law, subject to the terms of the California Finance Lenders Law. The CFL
License permits the LHO division of the Company to conduct its entertainment
and motion picture finance business from its office located at 1840 Century
Park East, 10th Floor, Los Angeles, California 90067. See "Business--LHO."
Change in Ownership. CAB and SPB, as industrial loan companies, are subject
to the California Industrial Loan Law, certain provisions of which are
applicable to holding companies of industrial loan companies. The California
Industrial Loan Law provides that no person may acquire in the aggregate 10%
or more of the capital stock of an industrial loan company without the written
consent of the DFI. In addition, the California Industrial Loan Law provides
that no person may acquire in the aggregate 10% or more of the capital stock
or other securities that have voting power or control over the management of a
holding company of an industrial loan company such as ICII (or the Company
after the Contribution), without the written consent of the DFI. Accordingly,
the contribution of all of the issued and outstanding shares of common stock
of CAB to the Company requires the written consent of the DFI under the
California Industrial Loan Law. In addition, because the investment of the
Bank in ICII shares is likely to be considered by the DFI as possessing voting
power or control over the management of ICII, the acquisition of such shares
by the Company also requires the written consent of the DFI under the
California Industrial Loan Law. The DFI granted such consents provided that
such change in control occurs no later than October 31, 1998.
The California Acquisition of Control Law. ITC is considered a bank for
purposes of, and as a result is subject to, Sections 700 et seq. of the
California Financial Code (the "California Acquisition of Control Law"). The
California Acquisition of Control Law provides that no person may acquire
control of a bank organized under the laws of the state of California, or a
person who directly or indirectly controls a bank organized under the laws of
the state of California, without the approval of the DFI. Control is defined
for purposes of the California Acquisition of Control Law as the possession,
direct or indirect, of the power to vote 25% or more of any class of voting
securities or to direct or cause the direction of the management and policies
of a person, whether through the ownership of voting securities, by contract
(other than a commercial contract for goods or nonmanagement services) or
otherwise. The California Acquisition of Control Law further provides that a
person who, directly or indirectly, owns, controls, holds with power to vote,
or holds proxies representing, 10% or more of the then outstanding voting
securities issued by another person is presumed to control such other person.
The DFI has granted its approval for the change in control of ITC provided
that same occur no later than October 31, 1998.
26
<PAGE>
Restrictions on Dividends. The provisions of the California Financial Code
which are applicable to California-chartered banks, such as the Bank, restrict
its ability to make distributions to its shareholders. Generally, a
California-chartered bank may not make any distribution to the shareholder of
such bank in an amount which exceeds the lesser of (i) the retained earnings
of the bank or (ii) the net income of the bank for its last three fiscal
years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the DFI, make a
distribution to its shareholder in an amount not exceeding the greatest of (i)
the retained earnings of the bank, (ii) the net income of the bank for its
last fiscal year or (iii) the current income of the bank for its current
fiscal year. It is a condition to the Distribution that the DFI approve the
Distribution. See "Distribution Conditions and Termination."
27
<PAGE>
RELATIONSHIP AND AGREEMENTS AMONG THE COMPANY,
THE BANK AND BANCORP AFTER THE DISTRIBUTION
GENERAL
In connection with the Distribution, the Company, Bancorp, the Bank and
certain subsidiaries of the Company will enter into prior to the Distribution
Date agreements for the purpose of giving effect to certain transactions
necessary for the Distribution and defining their ongoing relationship.
Certain of these agreements will not be the result of arm's-length
negotiations. The Company, Bancorp and the Bank, however, intend to negotiate
such agreements on terms at least as favorable to the Company or to Bancorp as
could have been obtained from unaffiliated third parties.
Following the Distribution, additional or modified agreements, arrangements
and transactions may be entered into by the Company, Bancorp and/or their
respective subsidiaries. Any such future agreements, arrangements and
transactions will be determined, at such time, through arm's-length
negotiations between the parties.
The following is a summary of certain agreements, arrangements and
transactions to be entered into as of the Distribution Date among the Company,
Bancorp, the Bank and certain subsidiaries of the Company. Certain of these
agreements have been filed as exhibits to the Registration Statement and,
although the following descriptions address all of the material aspects of the
exhibits, they do not purport to be complete and are qualified in their
entirety by reference to such exhibits.
CONTRIBUTION AGREEMENT
Bancorp, the Bank, the Company and CAB will enter into the Contribution
Agreement providing for, among other things, certain corporate transactions
required to effect the Contribution, the Distribution and other arrangements
between Bancorp and the Company subsequent to the Distribution as described
below.
The Contribution Agreement provides that prior to the Distribution, the Bank
will contribute to the Company the IFG Business. The Bank will contribute to
the Company (i) all of the assets relating to the LHO division (and the
Company will assume all liabilities relating thereto), (ii) all of the
outstanding capital stock of CAB and ITC and (iii) all of the common stock of
ICII owned by the Bank. In consideration for transferring the IFG Business,
the Company will assume (or cause to be assumed) all liabilities, whether
arising prior to, on or after the Distribution Date, relating to such assets.
See "Risk Factors--Assumed Liabilities and Obligations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
assets will be transferred without any representation or warranty, "as is",
"with all faults." Bancorp, the Bank and the Company each will agree to
execute and deliver such further assignments, documents of transfer, deeds and
instruments as may be necessary for the more effective implementation of such
transfers.
The Contribution Agreement also will provide that the Bank will retain
certain loans secured by mortgages on single family residential properties
(and the Company will not assume the liabilities relating thereto) which were
retained by the Bank in connection with the formation of ICII in 1992. See
"Unaudited Pro Forma Combined Financial Data." In addition, the Company will
assume the Bank's obligations under a consulting agreement with a company
wholly owned by G. Louis Graziadio, III. See "Executive Compensation--
Employment Arrangements."
The Contribution Agreement also will provide for the consummation of certain
corporate transactions required to effect the Distribution after completion of
the Contribution. These transactions will include effecting a dividend of all
of the Company Class A Common Stock from the Bank to Bancorp, and then from
Bancorp to the Bancorp shareholders as of the Distribution Record Date. In
addition, the Contribution Agreement assigns between Bancorp and the Company
responsibility for and rights to control any litigation pending as of the
Distribution Date. The Distribution is subject to a number of conditions. See
"Distribution Conditions and Termination."
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<PAGE>
The Company and the Bank will each make certain representations and
warranties in the Contribution Agreement with respect to, among other things,
the authority of such entities to consummate the transactions contemplated
thereby and the consents and approvals necessary to consummate such
transactions. These representations and warranties will survive after the
Distribution. The Bank and the Company also will agree in the Contribution
Agreement that the IFG Business will have a net book value, as described
therein, as of the Distribution Date of approximately $27 million plus the
after-tax book value of the ICII stock held by the Company. Immediately
following the Distribution, the Company will accrue an after tax charge of
approximately $1.3 million to reflect the termination of an obligation under a
consulting agreement that will be assumed by the Company as part of the
Distribution conditioned upon the consummation of the Distribution. As such,
following the Distribution, the net book value of the Company will be reduced
by approximately $1.3 million (see "Executive Compensation--Employment
Arrangements").
The balances that exist as of the Distribution Date under the benefit plans
established for those Bancorp employees who are becoming Company employees in
connection with the Distribution (the "Transferred Employees") will be
transferred to the Company pursuant to the Contribution Agreement. The Company
intends to establish benefit plans for the Transferred Employees that will
mirror the benefit plans such employees had as Bancorp employees. See
"Executive Compensation--Treatment of Bancorp Options and Other Benefits
Following the Distribution."
Each of the Company and the Bank will agree in the Contribution Agreement to
pay its own expenses in connection with consummating the transactions
contemplated thereby.
TAX SHARING AGREEMENT
Bancorp and the Company will enter into a tax sharing agreement (the "Tax
Sharing Agreement") that will govern the allocation between Bancorp and the
Company of federal, state, local and foreign tax liabilities for taxable
periods before and after the Distribution, and related matters such as the
preparation and filing of tax returns and the conduct of audits and other tax
proceedings. Generally, the Tax Sharing Agreement will provide that the
Company will be responsible for, and will indemnify Bancorp against, tax
liabilities relating to the IFG Business for taxable periods commencing after
the Distribution and Bancorp will be responsible for, and will indemnify the
Company against, tax liabilities relating to the IFG Business for taxable
periods prior to Distribution and for transaction taxes resulting from the
Contribution and the Distribution.
In addition, the Tax Sharing Agreement will provide that if, as a result of
any event that is within the control of the Company or any of its subsidiaries
or any other event related to the acquisition of the Company Class A Common
Stock, any taxes or other liability, costs or expenses are imposed on Bancorp
or any of its subsidiaries (other than the Company or its subsidiaries) which
in either case, arises from the Distribution or transactions related to the
Distribution, then the Company will be obligated to indemnify and hold
harmless, on an after-tax basis, Bancorp and its subsidiaries with respect to
any such taxes or other liability, costs or expenses. The Tax Sharing
Agreement also will provide that if, as a result of any event that is within
the control of the Bank, Bancorp or any of their subsidiaries (other than the
Company or its subsidiaries) or any other event related to the acquisition of
Bancorp Common Stock, any taxes or other liability, costs or expenses are
imposed on the Company or any of its subsidiaries which arise from the
Distribution or transactions related to the Distribution then the Bank and
Bancorp will be obligated to indemnify and hold harmless, on an after-tax
basis, the Company and its subsidiaries with respect to any such taxes or
other liability, costs or expenses.
OTHER AGREEMENTS
The Bank and the Company will enter into an interim services agreement under
which the Bank will provide certain services to the Company for specified fees
for a one year term beginning on the Distribution Date. The agreement will
automatically renew for an additional one-year term unless either party
delivers written notice to the other party of its intention not to renew
within 60 days prior to the first anniversary of the date of the agreement.
The principal services to be provided by the Bank to the Company will include
human resources
29
<PAGE>
support in payroll, record keeping, recruiting and other employee benefit
areas, audit services, loan review and security services. The Company will
have the right to terminate the agreement or any service provided thereunder
upon 60 days written notice to the Bank. In addition, the Company expects to
enter into certain subleases with the Bank for the use of certain of its
facilities after the Distribution Date.
RELATIONSHIP AMONG THE COMPANY, THE BANK AND BANCORP AFTER THE DISTRIBUTION
After the Contribution and Distribution, the Company and Bancorp will
operate independently of each other as separate public companies, and will
compete against each other in certain businesses. See "Risk Factors--
Competition and Conflicts of Interest Between the Company and the Bank."
Neither the Company nor Bancorp will have any beneficial stock ownership
interest in the other (although employee benefit plan trusts sponsored by the
Company and Bancorp and/or certain of their respective subsidiaries will hold
certain of the other company's shares). Each of Bancorp and the Company has an
independent Board of Directors and management with no overlaps except George
L. Graziadio, Jr., the chairman, president and chief executive officer of
Bancorp, who serves as the chairman of the Company Board; G. Louis Graziadio,
III, a director of Bancorp, who serves as chief executive officer of the
Company and as co-chairman of the Company Board; and Lee E. Mikles and Paul A.
Novelly, each of whom serves on the boards of Bancorp and/or the Bank and
serves on the Company Board. The service by directors and officers of Bancorp
and the Bank as directors and/or officers of the Company could create
conflicts of interest when those directors and officers are faced with
decisions that could have different implications for Bancorp and the Company.
The Company has not instituted any formal plan or arrangement to address
potential conflicts of interest that may arise between Bancorp and the
Company. However, under Delaware corporate law, officers and directors of the
Company owe fiduciary duties to the Company and its stockholders.
DIVIDEND POLICY
It is currently contemplated that the Company will not pay cash dividends on
Company Class A Common Stock for the immediately foreseeable future following
the Distribution. The payment and amount of future dividends will be at the
discretion of the Company Board and will depend upon the Company's future
earnings, financial condition, capital requirements and other factors,
including any limitations under then existing credit facilities. The Credit
Facilities will contain restrictions on the Company's ability to pay
dividends. See "Credit Facilities." In addition, CAB and ITC are restricted in
their ability to make dividends to the Company by applicable California law.
See "Regulatory Approvals and Considerations" and "Business--Regulatory
Matters--Federal Law--Prompt Corrective Action Requirements."
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<PAGE>
CAPITALIZATION
The following table, which is unaudited, sets forth, as of June 30, 1998,
the capitalization of the Company, as adjusted to reflect the Distribution and
the incurrence by the Company of approximately $95 million of indebtedness
under the Credit Facilities, the repayment of borrowings from the Bank and the
adjusted net book value of the Company in accordance with the Contribution
Agreement, as if such transactions occurred as of that date. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
notes thereto of the Company included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS (2) AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Time deposits............................ $ 37,480 -- $ 37,480
Credit Facilities........................ -- 95,231 95,231
Borrowings from Imperial Bank............ 47,225 (47,225) --
-------- -------- --------
Total borrowings....................... 84,705 48,006 132,711
-------- -------- --------
Stockholder's equity
Class A common stock, par value $0.01
per share, 50 million shares
authorized, approximately 19,878,335
shares issued and outstanding (as
adjusted)(1).......................... -- 199 199
Class B common stock, par value $0.01
per share, 10 million shares
authorized, no shares issued and
outstanding(1) ....................... -- -- --
Contribution by Imperial Bank.......... 11,597 (199) 11,398
Unrealized gain on securities available
for sale, net of taxes................ (187) -- (187)
Retained earnings...................... 115,306 (49,835) 65,471
-------- -------- --------
Total stockholder's equity........... 126,716 (49,835) 76,881
-------- -------- --------
Total capitalization................. $211,421 $ (1,829) $209,592
======== ======== ========
</TABLE>
- --------
(1) See "Description of Capital Stock--Authorized Capital Stock."
(2) Reflects borrowings under the proposed Credit Facilities and repayment of
borrowings from the Bank. Reduction in retained earnings represents the
amount of net book value of the IFG business reflected in the Company's
historical financial statements in excess of the Company's net book value
as of June 30, 1998 in accordance with the Contribution Agreement. See
"Relationship and Agreements Among the Company, the Bank and Bancorp After
the Distribution" and "Credit Facilities."
31
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined income statement data for the years ended December 31,
1995, 1996 and 1997 and selected combined balance sheet data as of December
31, 1996 and 1997 have been derived from the Company's audited combined
financial statements included herein. The selected combined income statement
data for the year ended December 31, 1994 and selected combined balance sheet
data as of December 31, 1995 have been derived from the Company's audited
combined financial statements not included herein. The selected combined
income statement data for the year ended December 31, 1993 and the selected
combined balance sheet data at December 31, 1993 and 1994 have been derived
from the unaudited combined financial statements of the Company not included
herein. The selected combined income statement data for the six months ended
June 30, 1997 and 1998 and the selected combined balance sheet data as of June
30, 1998 have been derived from the unaudited combined financial statements of
the Company included herein and include all adjustments, consisting solely of
normal recurring accruals, which management considers necessary for a fair
presentation of such financial information for those periods. Historical
combined financial information may not be indicative of the Company's future
performance as an independent company. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Interest on loans.... $ 4,408 $ 4,228 $ 6,726 $ 10,629 $ 14,355 $ 6,319 $ 8,955
Other interest
income.............. 102 131 153 158 235 84 187
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest
income............ 4,510 4,359 6,879 10,787 14,590 6,403 9,142
Interest expense .... 1,195 256 1,287 1,973 3,277 769 2,831
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest
income............ 3,315 4,103 5,592 8,814 11,313 5,634 6,311
Provision for loan
losses.............. 633 -- 1,492 1,781 2,558 1,512 736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision
for loan losses... 2,682 4,103 4,100 7,033 8,755 4,122 5,575
---------- ---------- ---------- ---------- ---------- ---------- ----------
Trust fees........... 5,667 6,857 8,385 7,744 7,967 3,844 4,302
Gain on sale of SBA
loans............... 411 1,724 1,813 3,561 3,944 2,019 2,537
Equity in net income
of ICII ............ 7,898 2,388 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock .............. 14,538 -- -- 25,650 4,977 -- --
Gain from sale of
stock by ICII....... -- -- -- 10,761 -- -- --
Other income......... 471 430 677 4,958 5,443 4,163 1,223
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue...... 31,667 15,502 20,627 81,151 51,346 19,153 20,336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Personnel expense.... 3,388 4,338 4,827 6,153 9,315 4,623 6,296
Other expenses....... 4,357 4,515 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..... 7,745 8,853 10,395 16,833 27,449 12,560 11,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes and
extraordinary
item.............. 23,922 6,649 10,232 64,318 23,897 6,593 8,468
Income taxes......... 10,129 2,821 4,313 25,674 8,737 2,423 3,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary item.. 13,793 3,828 5,919 38,644 15,160 4,170 4,896
---------- ---------- ---------- ---------- ---------- ---------- ----------
Extraordinary item--
gain on
extinguishment of
ICII debt, net of
taxes............... -- 370 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......... 13,793 4,198 5,919 38,644 15,160 4,170 4,896
Other comprehensive
income(1)........... -- (40) 38 2 228 74 (418)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive
income............ $ 13,793 $ 4,158 $ 5,957 $ 38,646 $ 15,388 $ 4,244 $ 4,478
========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(2):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted.............. 17,391,309 17,738,940 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share(3):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78 $ 0.22 $ 0.25
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
</TABLE>
- -------
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130 "Reporting Comprehensive Income as of January 1, 1998.
(2) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
(3) Based on the Company's historical net income and weighted average shares
as if the Transactions occurred at the beginning of each of the periods
presented.
32
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------ AT JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 1,002 $ 1,896 $ 2,272 $ 5,245 $ 2,813 $ 10,448
Securities available
for sale, at fair
value................. 2,005 1,753 1,437 1,179 6,027 3,507
Receivable from
Imperial Bank......... -- 2,236 -- -- -- --
Loans held for sale.... 2,579 1,648 2,648 5,531 3,763 8,441
Loans held for
investment, net....... 36,847 26,369 75,518 72,528 134,407 139,210
Investment in stock of
ICII ................. 27,445 30,934 36,126 57,736 75,001 81,700
Other assets........... 5,578 4,814 7,029 7,129 5,972 7,310
------- ------- -------- -------- -------- --------
Total assets.......... $75,456 $69,650 $125,030 $149,348 $227,983 $250,616
======= ======= ======== ======== ======== ========
Time deposits.......... $ -- $ -- $ -- $ -- $ -- $ 37,480
Borrowings from
Imperial Bank......... 13,889 -- 49,897 6,184 77,934 47,225
Income taxes payable... 7,722 9,996 12,876 40,340 29,837 29,962
Other liabilities...... 3,759 5,410 4,056 5,978 7,974 9,233
------- ------- -------- -------- -------- --------
Total liabilities..... 25,370 15,406 66,829 52,502 115,745 123,900
Stockholder's equity... 50,086 54,244 58,201 96,846 112,238 126,716
------- ------- -------- -------- -------- --------
Total liabilities and
stockholder's equity.. $75,456 $69,650 $125,030 $149,348 $227,983 $250,616
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA:
Loans originated:
LHO.................. $40,206 $25,857 $70,224 $55,951 $ 97,854 $49,139 $35,321
SBA and companion
loans............... 11,164 21,204 21,533 38,792 49,092 27,831 29,642
------- ------- ------- ------- -------- ------- -------
Total.............. $51,370 $47,061 $91,757 $94,743 $146,946 $76,970 $64,963
======= ======= ======= ======= ======== ======= =======
Trust assets under
administration (in
millions)............. $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716 $ 8,386 $ 9,534
======= ======= ======= ======= ======== ======= =======
SELECTED RATIOS:
Average equity to
average assets........ 16.56% 70.74% 63.37% 56.02% 54.00% 61.05% 48.30%
Return on average
common equity......... 30.00 8.02 10.32 49.51 14.66 8.47 8.50
Return on average
assets................ 4.97 5.67 6.54 27.74 7.92 5.17 4.10
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 4.30% 3.27% 2.96% 3.42% 2.30% 1.77% 2.33%
Allowance for loan
losses as a
percentage of non-
accrual loans......... 37.48 47.79 56.89 53.42 102.54 153.77 103.65
Net charge-offs as a
percentage of average
loans held for
investment............ 0.62 0.26 1.21 0.87 0.66 0.53 0.26
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
In connection with the Distribution, the Bank will contribute to the Company
(i) all of the assets and liabilities relating to LHO, a division of the Bank
that provides motion picture and television financing, (ii) all of the common
stock of CAB, a newly formed thrift and loan company that conducts, among
other businesses, the small business lending operations previously conducted
by the Bank, (iii) all of the common stock of ITC, a California licensed trust
company that offers a wide range of trust and investment management services,
and (iv) all of the common stock owned by the Bank (representing approximately
23.0% of all outstanding common stock as of June 30, 1998) in ICII, a publicly
traded, diversified specialty finance company. In addition, on August 3, 1998,
the Company entered into the ICII Shareholders Agreement granting the Company
the right to vote an additional 1.2 million shares of ICII common stock (or
3.0% of the outstanding ICII stock as of August 15, 1998) and providing the
Company with an option to purchase these shares. Accordingly, as of August 15,
1998, the Company beneficially owned approximately 26.0% of the outstanding
common stock of ICII. See "Business--Imperial Credit Industries, Inc."
No cash will be paid to Bancorp in connection with the Transactions.
The unaudited pro forma combined statements of income reflect the
Transactions as if they occurred at the beginning of each of the periods
presented. The unaudited pro forma combined balance sheets reflect the
Transactions as if they occurred at the dates indicated. The unaudited pro
forma combined financial data reflect the expected capitalization of the
Company as a result of the Distribution, the incurrence of debt by the Company
under the Credit Facilities (which is identified below as "Line of Credit"),
an assumed interest expense relating to such borrowings, amortization of
capitalized costs incurred in connection with the Credit Facilities and
retention of certain assets and liabilities by Bancorp. This pro forma
information does not necessarily reflect the results of operations or
financial position of the Company which would have been achieved had the
Transactions actually been consummated as of such dates. Also, this pro forma
financial information is not indicative of the future results of operations or
future financial position of the Company. See "Capitalization."
34
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
----------------------------------- -----------------------------------
ADJUST- ADJUST-
ACTUAL MENTS PRO FORMA ACTUAL MENTS PRO FORMA
---------- ------- ---------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on
loans............ $ 6,726 $(749)(1) $ 5,977 $ 10,629 $(868)(1) $ 9,761
Other interest
income........... 153 -- 153 158 -- 158
---------- ----- ---------- ---------- ----- ----------
Total interest
income......... 6,879 (749) 6,130 10,787 (868) 9,919
Interest expense.. 1,287 (649)(1)(2) 638 1,973 (436)(1)(2) 1,537
---------- ----- ---------- ---------- ----- ----------
Net interest
income......... 5,592 (100) 5,492 8,814 (432) 8,382
Provision for
loan losses...... 1,492 (444)(1) 1,048 1,781 (574)(1) 1,207
---------- ----- ---------- ---------- ----- ----------
Net interest
income after
provision for
loan losses.... 4,100 344 4,444 7,033 142 7,175
---------- ----- ---------- ---------- ----- ----------
Trust fees........ 8,385 -- 8,385 7,744 -- 7,744
Gain on sale of
SBA loans........ 1,813 -- 1,813 3,561 -- 3,561
Equity in net
income of ICII... 5,652 -- 5,652 21,444 -- 21,444
Gain on sale of
ICII stock ...... -- -- -- 25,650 -- 25,650
Gain from sale of
stock by ICII.... -- -- -- 10,761 -- 10,761
Other income...... 677 -- 677 4,958 -- 4,958
---------- ----- ---------- ---------- ----- ----------
Total other
income......... 16,527 -- 16,527 74,118 -- 74,118
---------- ----- ---------- ---------- ----- ----------
Total revenue... 20,627 344 20,971 81,151 142 81,293
---------- ----- ---------- ---------- ----- ----------
EXPENSE
Personnel
expense.......... 4,827 -- 4,827 6,153 -- 6,153
Other expenses.... 5,568 -- 5,568 10,680 -- 10,680
---------- ----- ---------- ---------- ----- ----------
Total expenses.. 10,395 -- 10,395 16,833 -- 16,833
---------- ----- ---------- ---------- ----- ----------
Income before
income taxes... 10,232 344 10,576 64,318 142 64,460
Income taxes...... 4,313 145(3) 4,458 25,674 60(3) 25,734
---------- ----- ---------- ---------- ----- ----------
Net income...... $ 5,919 $ 199 $ 6,118 $ 38,644 $ 82 $ 38,726
========== ===== ========== ========== ===== ==========
Weighted average
number of shares
outstanding(9):
Basic............. 18,224,024 18,224,024 18,782,675 18,782,675
Diluted........... 18,319,842 18,319,842 18,914,783 18,914,783
Pro forma earnings
per share:
Basic............. $ 0.32 $ 0.34(10) $ 2.06 $ 2.06(10)
========== ========== ========== ==========
Diluted........... $ 0.32 $ 0.33(10) $ 2.04 $ 2.05(10)
========== ========== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
ADJUST-
ACTUAL MENTS PRO FORMA
---------- -------------- --------------
<S> <C> <C> <C>
REVENUE
Interest on
loans............ $ 14,355 $ (582)(1) $ 13,773
Other interest
income........... 235 -- 235
---------- -------------- --------------
Total interest
income......... 14,590 (582) 14,008
Interest expense.. 3,277 2,099 (1)(2) 5,376
---------- -------------- --------------
Net interest
income......... 11,313 (2,681) 8,632
Provision for
loan losses...... 2,558 (315)(1) 2,243
---------- -------------- --------------
Net interest
income after
provision for
loan losses.... 8,755 (2,366) 6,389
---------- -------------- --------------
Trust fees........ 7,967 -- 7,967
Gain on sale of
SBA loans........ 3,944 -- 3,944
Equity in net
income of ICII... 20,260 -- 20,260
Gain on sale of
ICII stock ...... 4,977 -- 4,977
Gain from sale of
stock by ICII.... -- -- --
Other income...... 5,443 (3) 5,440
---------- -------------- --------------
Total other
income......... 42,591 (3) 42,588
---------- -------------- --------------
Total revenue... 51,346 (2,369) 48,977
---------- -------------- --------------
EXPENSE
Personnel
expense.......... 9,315 -- 9,315
Other expenses.... 18,134 -- 18,134
---------- -------------- --------------
Total expenses.. 27,449 -- 27,449
---------- -------------- --------------
Income before
income taxes... 23,897 (2,369) 21,528
Income taxes...... 8,737 (995)(3) 7,742
---------- -------------- --------------
Net income...... $ 15,160 $(1,374) $ 13,786
========== ============== ==============
Weighted average
number of shares
outstanding(9):
Basic............. 19,398,542 19,398,542
Diluted........... 19,791,712 19,791,712
Pro forma earnings
per share:
Basic............. $ 0.78 $ 0.71(10)
========== ==============
Diluted........... $ 0.77 $ 0.70(10)
========== ==============
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
35
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
-------------------------------------- --------------------------------------
PRO
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS FORMA
---------- ----------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on loans...... $ 6,319 $ (387)(1) $ 5,932 $ 8,955 $ (256)(1) $ 8,699
Other interest income.. 84 -- 84 187 -- 187
---------- ------ ---------- ---------- ------- ----------
Total interest
income.............. 6,403 (387) 6,016 9,142 (256) 8,886
Interest expense....... 769 903 (1)(2) 1,672 2,831 1,344 (1)(2) 4,175
---------- ------ ---------- ---------- ------- ----------
Net interest income.. 5,634 (1,290) 4,344 6,311 (1,600) 4,711
Provision for loan
losses................ 1,512 (134)(1) 1,378 736 (40)(1) 696
---------- ------ ---------- ---------- ------- ----------
Net interest income
after provision for
loan losses......... 4,122 (1,156) 2,966 5,575 (1,560) 4,015
---------- ------ ---------- ---------- ------- ----------
Trust fees............. 3,844 -- 3,844 4,302 -- 4,302
Gain on sale of SBA
loans................. 2,019 -- 2,019 2,537 -- 2,537
Equity in net income
of ICII............... 5,005 -- 5,005 6,699 -- 6,699
Gain on sale of ICII
stock ................ -- -- -- -- -- --
Gain from sale of
stock by ICII......... -- -- -- -- -- --
Other income........... 4,163 -- 4,163 1,223 -- 1,223
---------- ------ ---------- ---------- ------- ----------
Total other income... 15,031 -- 15,031 14,761 -- 14,761
---------- ------ ---------- ---------- ------- ----------
Total revenue........ 19,153 (1,156) 17,997 20,336 (1,560) 18,776
---------- ------ ---------- ---------- ------- ----------
EXPENSE
Personnel expense...... 4,623 -- 4,623 6,296 458 (4) 6,754
Other expenses......... 7,937 -- 7,937 5,572 -- 5,572
---------- ------ ---------- ---------- ------- ----------
Total expenses....... 12,560 -- 12,560 11,868 458 12,326
---------- ------ ---------- ---------- ------- ----------
Income before income
taxes............... 6,593 (1,156) 5,437 8,468 (2,018) 6,450
Income taxes........... 2,423 (485)(3) 1,938 3,572 (847)(3) 2,725
---------- ------ ---------- ---------- ------- ----------
Net income........... 4,170 $ (671) $ 3,499 $ 4,896 $(1,171) $ 3,725
========== ====== ========== ========== ======= ==========
Weighted average number
of shares
outstanding(8):
Basic.................. 19,286,025 19,286,025 19,767,698 19,767,698
Diluted................ 19,673,291 19,673,291 20,906,698 20,906,698
Pro forma earnings per
share:
Basic.................. $ 0.22 $ 0.18(9) $ 0.25 $ 0.19(9)
========== ========== ========== ==========
Diluted................ $ 0.21 $ 0.18(9) $ 0.23 $ 0.18(9)
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
36
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997 AT JUNE 30, 1998
-------------------------------- --------------------------------- ----------------------------
PRO PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS
-------- ----------- -------- -------- ----------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents......... $ 5,245 $ -- $ 5,245 $ 2,813 $ -- $ 2,813 $ 10,448 --
Securities available
for sale, at fair
value............... 1,179 -- 1,179 6,027 -- 6,027 3,507 --
Loans held for sale.. 5,531 -- 5,531 3,763 -- 3,763 8,441 --
Loans held for
investment, net..... 72,528 (9,224)(5) 63,304 134,407 (5,793)(5) 128,614 139,210 (4,934)(5)
Investment in stock
of ICII............. 57,736 -- 57,736 75,001 -- 75,001 81,700 --
Premises and
equipment, net...... 306 -- 306 551 -- 551 1,442 --
Excess servicing fees
receivable.......... 3,294 -- 3,294 -- -- -- -- --
Loan servicing
rights.............. -- -- -- 1,914 -- 1,914 2,046 --
Other assets......... 3,529 (244)(5) 3,285 3,507 (239)(5) 3,268 3,822 1,631 (5)
-------- ------- -------- -------- -------- -------- -------- --------
Total assets........ $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951 $250,616 $ (3,303)
======== ======= ======== ======== ======== ======== ======== ========
LIABILITIES
Time deposits under
$100,000............ $ -- $ -- $ -- $ -- $ -- $ -- $ 32,581 $ --
Time deposits
$100,000 and over... -- -- -- -- -- -- 4,899 --
Line of credit....... -- 35,382 (6) 35,382 -- 113,512 (6) 113,512 -- 95,231 (6)
Borrowings from
Imperial Bank....... 6,184 (6,184)(6) -- 77,934 (77,934)(6) -- 47,225 (47,225)(6)
Income taxes payable. 40,340 (612)(5) 39,728 29,837 147 (5) 29,984 29,962 10 (5)
Other liabilities.... 5,978 -- 5,978 7,974 (12)(5) 7,962 9,233 (1,484)(11)(4)
-------- ------- -------- -------- -------- -------- -------- --------
Total liabilities... 52,502 28,586 81,088 115,745 35,713 151,458 123,900 46,532
STOCKHOLDER'S EQUITY
Common stock......... -- 187 187 -- 196 (10) 196 -- 199 (10)
Contribution by
Imperial Bank....... 1,597 (187) 1,410 1,597 (196)(10) 1,401 11,597 (199)(10)
Unrealized gain on
securities available
for sale, net of
taxes............... (1) -- (1) 231 -- 231 (187) --
Retained earnings.... 95,250 (38,054)(7) 57,196 110,410 (41,745)(7) 68,665 115,306 (49,835)(7)(11)
-------- ------- -------- -------- -------- -------- -------- --------
Total stockholder's
equity............. 96,846 (38,054) 58,792 112,238 (41,745) 70,493 126,716 (49,835)
-------- ------- -------- -------- -------- -------- -------- --------
Total liabilities
and stockholder's
equity............. $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951 $250,616 $ (3,303)
======== ======= ======== ======== ======== ======== ======== ========
<CAPTION>
PRO
FORMA
---------
<S> <C>
ASSETS
Cash and cash
equivalents......... $ 10,448
Securities available
for sale, at fair
value............... 3,507
Loans held for sale.. 8,441
Loans held for
investment, net..... 134,276
Investment in stock
of ICII............. 81,700
Premises and
equipment, net...... 1,442
Excess servicing fees
receivable.......... --
Loan servicing
rights.............. 2,046
Other assets......... 5,453
---------
Total assets........ $247,313
=========
LIABILITIES
Time deposits under
$100,000............ $ 32,581
Time deposits
$100,000 and over... 4,899
Line of credit....... 95,231
Borrowings from
Imperial Bank....... --
Income taxes payable. 29,972
Other liabilities.... 7,749
---------
Total liabilities... 170,432
STOCKHOLDER'S EQUITY
Common stock......... 199
Contribution by
Imperial Bank....... 11,398
Unrealized gain on
securities available
for sale, net of
taxes............... (187)
Retained earnings.... 65,471
---------
Total stockholder's
equity............. 76,881
---------
Total liabilities
and stockholder's
equity............. $247,313
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined financial data presented reflect the
elimination of certain assets and liabilities and the related revenues and
expenses which will be retained by the Bank after the Distribution and to
which the Company will have no future rights to, or receive economic benefit
from, and to reflect an increase in interest expense as if the Company had
operated using its proposed Credit Facilities during all periods presented.
(1) Reflects the retention of ICII related mortgage loans by the Bank pursuant
to the Contribution Agreement and the impact on interest income, interest
expense and the provision for loan losses. See "Relationship and
Agreements Among the Company, the Bank and Bancorp After the
Distribution--Contribution Agreement."
(2) Reflects the inclusion of estimated additional interest expense related to
the additional borrowings and interest expense which would have been
incurred had the Company financed its borrowings on the terms of the
Credit Facilities and CAB's actual certificate of deposit rates rather
than the Bank's average 90 day certificate of deposit rate plus 100 basis
points. Assumes that the Credit Facilities will provide for an interest
rate of LIBOR (as defined herein) plus 145 basis points plus loan and
other fees. The estimated effective weighted average interest rate for the
years ended December 31, 1995, 1996 and 1997 and the six months ended June
30, 1997 and 1998 was 7.60%, 7.23%, 7.41%, 7.26% and 7.67%, respectively,
as compared to 6.93%, 6.46%, 6.48%, 6.38% and 6.52% reflected in the
historical combined financial statements for the same periods.
(3) Reflects the tax impact of pro forma adjustments to income before taxes.
(4) Reflects the establishment of miscellaneous accruals resulting from the
Distribution.
(5) Reflects the retention of certain assets, including ICII related mortgage
loans, and liabilities by the Bank pursuant to the Contribution Agreement.
See "Relationship and Agreements Among the Company, the Bank and Bancorp
After the Distribution--Contribution Agreement." At June 30, 1998 also
reflects the cost capitalized related to the ICII Shareholders Agreement.
See "Business--Imperial Credit Industries, Inc."
(6) Reflects borrowings under the proposed Credit Facilities and repayment of
borrowings from the Bank. See "Credit Facilities."
(7) Represents the amount of net book value of the IFG Business reflected in
the Company's historical financial statements in excess of the Company's
net book value as of June 30, 1998, December 31, 1997 and December 31,
1996 in accordance with the Contribution Agreement. See "Relationship and
Agreements Among the Company, the Bank and Bancorp After the
Distribution--Contribution Agreement" and "Credit Facilities."
(8) Represents the weighted average number of shares of Bancorp Common Stock
outstanding during the period and includes retroactive adjustments to
reflect the February 6, 1998 Bancorp three-for-two stock split and the
distribution ratio of one share of Company Class A Common Stock for every
two shares of outstanding Bancorp Common Stock.
(9) Reflects the Company's pro forma net income and weighted average shares as
if the Transactions occurred at the beginning of each of the years
presented.
(10) Reflects issuance of 19,878,335 shares (based on 39,756,670 shares of
Bancorp Common Stock outstanding at June 30, 1998) on the date of the
Distribution.
(11) Includes the after tax charge of approximately $1.3 million upon the
termination of an obligation under a consulting agreement that will be
assumed by the Company as part of the Distribution. See "Executive
Compensation--Employment Arrangements."
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes in trends related to
the financial condition of the Company and its results of operations. It
should be read in conjunction with the Company's Combined Financial Statements
and Notes thereto included elsewhere in this Information Statement.
The Combined Financial Statements and Notes thereto reflect the historical
operation of the Company together with all of its assets and liabilities as if
the Company existed as a stand alone entity during the periods presented.
These historical operations of the Company have been adjusted to reflect the
Company as a stand-alone company, including the adjustments to reflect the
borrowings, equity, taxes, various overhead costs related to the Company and
necessary deconsolidating entries.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Total revenues for the six months ended June 30, 1998 increased 6% to $20.3
million as compared to $19.2 million for the same period of the previous year.
Expenses for the six months ended June 30, 1998 decreased 6% to $11.9 million
as compared to $12.6 million for the same period of the previous year. Net
income for the six months ended June 30, 1998 increased 17% to $4.9 million as
compared to $4.2 million for the same period of the previous year. Net income
increased primarily due to increases in net interest income, equity in the net
income of ICII, and the gain on sale of SBA loans, and a decrease in the net
impact of donated ICII stock for the six months ended June 30, 1998 as
compared to that recorded during the six months ended June 30, 1997.
Net income for the six months ended June 30, 1998, excluding (i) gains from
the sale of ICII stock, (ii) income and expense associated with the
appreciation in value of ICII stock subsequently donated to not-for-profit
organizations and (iii) settlement of a consulting agreement ("core net
income"), decreased 1% to $4.9 million from $5.0 million for the same period
of the previous year.
The annualized return on average stockholder's equity for the six months
ended June 30, 1998 was 8.52%, an increase from 8.47% for the same period of
the previous year. The annualized return on average total assets was 4.11% for
the six months ended June 30, 1998, a decrease from 5.17% for the same period
of the previous year. Annualized core net income as a percentage of average
stockholder's equity for the six months ended June 30, 1998 was 8.52%, a
decrease from 10.13% for the same period of the previous year. Annualized core
net income as a percentage of average assets for the six months ended June 30,
1998 was 4.11%, a decrease from 6.18% for the same period of the previous
year.
The increase in interest income for the six months ended June 30, 1998 to
$9.1 million from $6.4 million for the same period of 1997 resulted primarily
from the $56 million, or 59% increase, in average loans for 1998 from 1997.
The increase in interest expense to $2.8 million in 1998 from $0.8 million in
1997 was primarily attributable to a $57 million increase in average
borrowings from the Bank in 1998.
Net interest income amounted to $6.3 million for the six months ended June
30, 1998, up from $5.6 million for the same period of 1997, an increase of
12%. This increase was primarily due to the growth in average interest-earning
assets from $96.9 million at June 30, 1997 to $155.6 million at June 30, 1998.
The Company's net interest margin for the six months ended June 30, 1998 and
1997 was 8.24% and 11.72%, respectively. The decrease in the net interest
margin was mainly due to lower yields earned on the Company's loans held for
investment portfolio during the six months ended June 30, 1998. The yield on
loans held for investment decreased from 13.84% for the six months ended June
30, 1997 to 12.22% for the same period of 1998 primarily due to increased
competition. The decrease in the net interest margin was also impacted by an
increase in the cost of borrowings from 6.38% for the six months ended June
30, 1997 to 6.63% for the six months ended June 30, 1998 and an increase in
average interest earning assets from $96.9 million at June 30, 1997 to
$155.6 million at June 30, 1998.
39
<PAGE>
The provision for loan losses for the six months ended June 30, 1998 was
$0.7 million as compared to $1.5 million for the same period of 1997. At June
30, 1998 and 1997, the allowance for loan losses as a percentage of total
loans held for investment was 3.37% and 3.22%, respectively. The allowance for
loan losses as a percentage of non-accrual loans at June 30, 1998 and 1997 was
103.65% and 153.77%, respectively.
Trust fee income amounted to $4.3 million and $3.8 million for the six
months ended June 30, 1998 and 1997, respectively, while trust assets under
administration increased 14% to $9.5 billion at June 30, 1998 from $8.4
billion at June 30, 1997. In late 1994, ITC purchased from the Federal Deposit
Insurance Corporation, in its capacity as receiver of CommerceBank, the
custody of approximately $193 million in certificates of deposit. The fees
related to the custody of these deposits have decreased since the purchase as
the certificates of deposit have matured. These fees decreased from $377,000
for the six months ended June 30, 1997 to $50,000 for the six months ended
June 30, 1998. Trust fees as a percentage of average trust assets under
administration were 0.09% and 0.10% for the six months ended June 30, 1998 and
1997, respectively.
Gain on sale of SBA loans increased 26% to $2.5 million for the six months
ended June 30, 1998 as compared to $2.0 million for the same period of the
previous year. Gain on sale of SBA loans primarily consists of the cash gains
recorded from the sale of the guaranteed portion of SBA loans and the present
value of future cash flows of loans sold over a base fee. The increase for the
six months ended June 30, 1998 compared to the same period of the previous
year was due to an increase in the volume of loans sold. During the six months
ended June 30, 1998, the Company sold $16 million of loans compared to $21
million of loans sold during the six months ended June 30, 1997.
The Company's equity in the net income of ICII for the six months ended June
30, 1998 increased to $6.7 million from $5.0 million for the six months ended
June 30, 1997. The increase in ICII's net income for the six months ended June
30, 1998 as compared to the same period of the previous year was primarily
attributable to an increase in net interest income, loan servicing income,
investment banking fees and equity in the earnings of Franchise Mortgage
Acceptance Company. These factors were partially offset by an increase in
personnel and data processing expenses.
On June 30, 1998, the fair value of ICII common stock was $23.50 per share,
representing a pre-tax unrealized gain on the Company's investment of over
$128 million. The Company currently has no plans to realize such gains in the
future.
The Company recognized $2.8 million in appreciation of donated ICII stock
for the six months ended June 30, 1997. The appreciation represents the
difference between the market value and book value of the ICII shares on the
date they were donated. The Company recorded a corresponding charitable
donation expense of $3.6 million for the six months ended June 30, 1997. There
were no such donations during the six months ended June 30, 1998.
Total expenses decreased 6% to $11.9 million for the six months ended June
30, 1998, from $12.6 million for the six months ended June 30, 1997. The table
below shows the major components of expenses for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Personnel...................................... $ 4,623 $ 6,296
Occupancy, net................................. 583 936
Data processing................................ 318 443
Donation of ICII stock......................... 3,632 --
Consulting expense............................. 716 266
Other.......................................... 2,688 3,927
------- -------
Total.......................................... $12,560 $11,868
======= =======
</TABLE>
40
<PAGE>
The primary factor for the decrease in total expenses for the six months
ended June 30, 1998 was the $3.6 million donation of ICII stock that took
place during the six months ended June 30, 1997. Excluding this donation,
total expenses for the six months ended June 30, 1998 increased by 33% from
$8.9 million for the same period of the previous year to $11.9 million.
Personnel expense increased 36% to $6.3 million for the six months ended June
30, 1998 from $4.6 million for the same period of 1997. The growth in the
number of employees to 125 at June 30, 1998 from 103 at June 30, 1997 was the
primary reason for the increase in personnel expense.
Consulting expense decreased 63% to $0.3 million for the six months ended
June 30, 1998 from $0.7 million for the same period of the previous year. The
primary reason for the decrease was due to satisfaction of the obligation
under the consulting agreement with an executive of the Bank in the fourth
quarter of 1997. As such, only the obligation related to the consulting
agreement with Second Southern Corp., an entity wholly-owned by the chief
executive officer of the Company ("Second Southern") remains with the Company
as of June 30, 1998. See "Executive Compensation--Employment Arrangements."
This agreement requires the Company to pay commissions upon the sale of ICII
shares to Second Southern equal to 2.5% of the realized pre-tax gains received
by the Company, when and if realized, from the disposition of the remaining
ICII shares held by the Company. If such sale by the Company has not occurred
prior to certain specified dates, the agreement requires that the Company will
be deemed to have sold an amount equal to 20% of any such security as of
January 1 of each year from 1997 through 2001, at a price equal to the
arithmetic average of the daily average stock price of ICII common stock as
reported by NASD during the preceding year. The agreement is being accrued
over these vesting periods and is remeasured quarterly for changes in the
average market price of ICII stock. Based on the daily average market price
for the six months ended June 30, 1998 of $22.22 per share, less Second
Southern's basis of $0.88 per share as of June 30, 1998, as adjusted for stock
splits and dividends, the total liability to be accrued for over the vesting
period approximated $4.9 million, of which $3.2 million had been accrued for
at June 30, 1998.
Other expense increased 46% to $3.9 million for the six months ended June
30, 1998, from $2.7 million for the same period of 1997, primarily due to
Distribution-related expenses. Total expenses related to the Distribution for
the six months ended June 30, 1998 were approximately $1.6 million. Of this
amount, the Bank has incurred $0.5 million and the remaining $1.1 million was
incurred by the Company.
The Company recorded income tax expense of $3.6 million for the six months
ended June 30, 1998, representing an effective tax rate of approximately
42.2%, compared to tax expense of $2.4 million for the six months ended June
30, 1997, representing an effective tax rate of approximately 36.8%. The
increase in the effective tax rate was primarily due to the exclusion of the
$2.8 million appreciation of donated stock from taxable income for the six
months ended June 30, 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 decreased 37% to $51.3
million as compared to $81.2 million for the same period of the previous year.
Expenses for the year ended December 31, 1997 increased 63% to $27.4 million
as compared to $16.8 million for the same period of the previous year. Net
income for the year ended December 31, 1997 decreased 61% to $15.2 million as
compared to $38.6 million for the same period of the previous year. Total
revenues and net income decreased primarily due to a reduction in the level of
gains and income associated with the Company's stock ownership of ICII as
compared to that recorded during the year ended December 31, 1996. Partially
offsetting the decrease were increased revenues from net interest income and
gain on sale of SBA loans. Net income decreased primarily due to the
aforementioned decrease in total revenues in addition to increases in
personnel expense, consulting expense and the provision for loan losses.
Net income, excluding (i) gains from the sale of ICII stock, (ii) income
associated with the appreciation in value of ICII stock subsequently donated
to not-for-profit organizations and (iii) settlement of a consulting agreement
("core net income") for the year ended December 31, 1997 decreased to $11.4
million from $23.1 million for the same period of the previous year.
41
<PAGE>
The return on average stockholder's equity for the year ended December 31,
1997 was 14.66%, a decrease from 49.51% for the same period of the previous
year. The return on average total assets was 7.92% for the year ended December
31, 1997, a decrease from 27.74% for the same period of the previous year.
Core net income as a percentage of average stockholder's equity for the year
ended December 31, 1997 was 11.06%, a decrease from 29.58% for the same period
of the previous year. Core net income as a percentage of average assets for
the year ended December 31, 1997 was 5.97%, a decrease from 16.57% for the
same period of the previous year.
The increase in interest income for the year ended December 31, 1997 to
$14.6 million from $10.8 million for the same period of 1996 resulted
primarily from the $28.5 million, or 34% increase in average loans for 1997
from 1996. The increase in interest expense to $3.3 million in 1997 from $2.0
million in 1996 was directly related to a $20.1 million increase in average
borrowings from the Bank in 1997.
Net interest income amounted to $11.3 million for the year ended December
31, 1997, up from $8.8 million for the same period in 1996, an increase of
28%. The Company's interest rate margin for the year ended December 31, 1997
and 1996 was 9.61% and 10.11%, respectively, reflecting the Company's
relatively low level of interest-bearing liabilities compared to interest-
earning assets.
The provision for loan losses for the year ended December 31, 1997 was $2.6
million as compared to $1.8 million for the same period of 1996. The increase
in the provision for loan losses was primarily related to the growth in the
Company's loan portfolio, an increased concentration of LHO Gap Loans and an
increase in the level of criticized loans, charge-offs and delinquencies. At
December 31, 1997 and 1996, the allowance for loan losses as a percentage of
total loans held for investment was 3.23% and 3.50%, respectively. The
allowance for loan losses as a percentage of non-accrual loans at December 31,
1997 and 1996 was 102.54% and 53.42%, respectively. This increase was mainly
due to a 11% decrease in non-accrual loans from $4.9 million at December 31,
1996 to $4.4 million at December 31, 1997.
Trust fee income amounted to $8.0 million and $7.7 million for the years
ended December 31, 1997 and 1996, respectively, while trust assets under
administration increased 16% to $8.7 billion at December 31, 1997 from
$7.5 billion at December 31, 1996. Trust fees, as a percent of average
fiduciary assets under administration, were 0.10% for each of the years ended
December 31, 1997 and 1996.
Gain on sale of SBA loans increased 11% to $3.9 million for the year ended
December 31, 1997 as compared to $3.6 million for the same period of the
previous year. Gain on sale of SBA loans primarily consists of the cash gains
recorded from the sale of the guaranteed portion of SBA loans and the present
value of future cash flows of loans sold over a base fee. The increase for the
year ended December 31, 1997 compared to the same period of the previous year
was due to an increase in the volume of SBA loans sold.
The Company's equity in the net income of ICII for the year ended December
31, 1997, decreased to $20.3 million from $21.4 million for the same period of
the previous year. In the fourth quarter of 1997, Franchise Mortgage
Acceptance Company ("FMC"), a subsidiary of ICII, completed an initial public
offering of its common stock. ICII sold into FMC's initial public offering
approximately 3.6 million shares and generated a gain of $48.9 million. The
Company's net equity in this pre-tax gain realized by ICII approximated
$12.3 million and is included in the Combined Statement of Income as a
component of "Equity in net income of ICII." In 1996, ICII sold approximately
2.3 million shares of its subsidiary, Southern Pacific Funding Corporation
("SPFC"), in connection with SPFC's initial public offering. The Company's net
equity in this pretax gain realized by ICII approximated $11.8 million and is
included in the Combined Statement of Income as a component of "Equity in net
income of ICII."
During 1997, the Company sold 320,000 shares of ICII stock. A percentage of
the proceeds from the sale of certain of these shares was paid to a senior
executive of the Bank in satisfaction of the Company's obligation pursuant to
the terms of a consulting agreement with the senior executive. The sale of the
320,000 shares resulted in a gain of $5.0 million. The Company recorded a
corresponding consulting expense of $5.0 million. In April 1996, the Company
sold 1.5 million shares of ICII as a part of an offering which included the
sale of
42
<PAGE>
approximately 2.2 million new ICII shares by ICII to the public. An additional
500,000 shares were sold by ICII to the public in May 1996. The Company
recorded a $25.6 million pre-tax gain on the sale of its ICII shares. After
the sales of ICII shares, the book value of ICII common stock approximated
$8.72 per share. As such, the Company recorded a $10.8 million pre-tax gain
which approximated the excess of ICII's book value per share over the book
value of the Company's remaining investment in ICII. For further information
on ICII, see Note 8 of the Notes to the Company's Combined Financial
Statements.
The Company recognized $2.8 million in appreciation of donated ICII stock
for the year ended December 31, 1997 compared to $3.7 million for the same
period the previous year. The appreciation represents the difference between
the market value and book value of the ICII shares on the date they were
donated. The Company recorded a corresponding charitable donation expense of
$3.6 million for the year ended December 31, 1997 compared to $4.9 million for
the same period the previous year.
Total expenses increased 63% to $27.4 million for the year ended December
31, 1997, from $16.8 million for year ended December 31, 1996. The table below
shows the major components of expenses at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Personnel.......................................... $ 6,153 $ 9,315
Occupancy, net..................................... 1,024 1,198
Data processing.................................... 562 642
Donation of ICII stock............................. 4,866 3,632
Consulting expense................................. 914 6,224
Other.............................................. 3,314 6,438
------- -------
Total.............................................. $16,833 $27,449
======= =======
</TABLE>
The primary factors for the increase in total expenses for the year ended
December 31, 1997 were increased personnel and consulting expenses. Personnel
expense rose 51% to $9.3 million for the year ended December 31, 1997 from
$6.2 million for the same period of 1996. The number of employees increased
18% to 113 at the December 31, 1997 from 96 at December 31, 1996. In addition,
the Company entered into a new employment agreement with Lewis Horwitz,
president and chief executive officer of the LHO division, effective January
1, 1997, which contributed to the increase in personnel expenses. Also, the
cost of the Company's deferred compensation plans increased 453% to $1.4
million for the year ended December 31, 1997 from $0.2 million for the same
period of the previous year.
Consulting expense increased 581% to $6.2 million for the year ended
December 31, 1997 from $0.9 million for the same period of the previous year
due to the agreements described below.
In accordance with two consulting agreements, one with a senior executive of
the Bank and the second with Second Southern, the Company was obligated to pay
commissions upon the sale of ICII shares. Each consultant was entitled
thereunder to receive an incentive fee of 2.5% of the realized pre-tax gains
received by the Company, when and if realized, from the disposition of the
remaining ICII shares held by the Company. If such sale by the Company did not
occur prior to certain specified dates, the agreements required that the
Company would be considered to have sold an amount equal to 20% of any such
security as of January 1 of each year from 1997 through 2001, at a price equal
to the arithmetic average of the daily average stock price of ICII common
stock as reported by NASD during the preceding year. These agreements have
been accrued for over the vesting periods and were remeasured quarterly for
changes in the average market price of ICII stock.
In satisfaction of the Company's obligation related to the consulting
agreement with the senior executive of the Bank, the Company agreed to pay to
the executive a portion of the proceeds received from selling
43
<PAGE>
231,528 shares of ICII stock in the third and fourth quarters of 1997. As a
result of these sales and the sale of an additional 88,472 shares of ICII
stock during 1997 (for total sales of 320,000 shares during 1997), the Company
recorded gains of $5.0 million in "Gain on sale of ICII stock." Offsetting the
gain on sale was a $5.0 million consulting charge recorded in "Consulting
expense" which represented full satisfaction of the senior executive's
consulting agreement. During the year ended December 31, 1996, the Company
recorded an expense of $0.4 million relating to this agreement.
The Second Southern consulting agreement remained an obligation of the
Company as of December 31, 1997. See "Executive Compensation--Employment
Arrangements." Based on the daily average market price for the year ended
December 31, 1997 of $21.34 per share, less Second Southern's basis of $0.88
per share as of December 31, 1997, as adjusted for stock splits and dividends,
the total liability to be accrued for over the vesting period approximated
$4.7 million, of which $2.8 million had been accrued for at December 31, 1997.
The expense relating to this remaining consulting agreement is being accrued
over the vesting period and will be remeasured quarterly for changes in the
average market price. During the years ended December 31, 1997 and 1996, the
Company recorded an expense relating to this remaining agreement of $1.0
million and $0.5 million, respectively, to its combined statements of income
for this agreement.
Other expense increased 94% to $6.4 million for the year ended December 31,
1997 from $3.3 million for the same period for 1996 primarily due to
Distribution-related expenses and increased business development and allocated
expenses.
The Company recorded income tax expense of $8.7 million for the year ended
December 31, 1997 representing an effective tax rate of approximately 36.6%,
compared to tax expense of $25.7 million for the year ended December 31, 1996
representing an effective tax rate of approximately 40.0%. The decrease in the
effective tax rate was primarily due to an increase in the relative impact of
income from appreciation of donated ICII stock as a percentage of taxable
income for the year ended December 31, 1997.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 increased 293% to $81.2
million, compared to $20.6 million for the same period of the previous year.
Expenses for the year ended December 31, 1996 increased 62% to $16.8 million,
compared to $10.4 million for the same period of the previous year. Net income
for the year ended December 31, 1996 increased 553% from $5.9 million in 1995
to $38.6 million for 1996. Net income increased primarily due to increased
revenues from net interest income, gain on sale of loans, and gains related to
the Company's stock ownership of ICII, partially offset by lower trust fee
income and increased total expenses.
Core net income for the year ended December 31, 1996 increased 290% to $23.1
million from $5.9 million for the same period of the previous year.
The return on average stockholder's equity for the year ended December 31,
1996 was 49.51%, an increase from 10.32% for the same period of the previous
year. The return on average total assets was 27.74% for the year ended
December 31, 1996, an increase from 6.54% for the same period of the previous
year. Core net income as a percentage of average stockholder's equity for the
year ended December 31, 1996 was 29.58%, an increase from 10.32% for the same
period of the previous year. Core net income as a percentage of average assets
for the year ended December 31, 1996 was 16.57%, an increase from 6.54% for
the same period of the previous year.
The increase in interest income for the year ended December 31, 1996 to
$10.8 million from $6.9 million for the same period of 1995 primarily resulted
from the $34 million, or 66% increase, in average loans, for 1996 from 1995
and was partially offset by the decline in the yield on interest-earning
assets to 12.38% in 1996 from 12.85% in 1995. The increase in interest income
was partially offset by an increase in interest expense for 1996. The increase
in interest expense from $1.3 million in 1995 to $2.0 million in 1996 was due
to a $12 million increase in average borrowings from the Bank in 1996 and was
offset by the decline in the cost of borrowings from the Bank to 6.46% for
1996 from 6.93% for 1995.
44
<PAGE>
Net interest income amounted to $8.8 million for the year ended December 31,
1996, up from $5.6 million for the same period of 1995, an increase of 58%.
The Company's net interest rate margin for the years ended December 31, 1996
and 1995 was 10.11% and 10.45%, respectively.
The provision for loan losses for the year ended December 31, 1996 was $1.8
million, compared to $1.5 million for the same period of 1995. The increase in
the loan loss provision was mainly due to an increase in nonaccrual loans to
$4.9 million at December 31, 1996, compared to $2.7 million at December 31,
1995. At December 31, 1995 and 1996, the allowance for loan losses as a
percentage of total loans held for investment was 1.99% and 3.50%,
respectively.
Trust fee income decreased 8% from $8.4 million for the year ended December
31, 1995 to $7.7 million for the year ended December 31, 1996, while trust
assets under administration increased 10% from $6.8 billion to $7.5 billion at
December 31, 1995 and 1996, respectively. The primary reasons for the decline
in trust fee income while trust assets under administration increased were a
decline in ITC's certificate of deposit custodial balances and a reduction in
fees to offer more competitive pricing. In late 1994, ITC purchased from the
Federal Deposit Insurance Corporation, in its capacity as Receiver of
CommerceBank, the custody of approximately $193 million in certificates of
deposit. The fees related to the custody of these deposits have decreased
since the purchase as the related certificates of deposit matured. These fees
decreased from $1.5 million in 1995 to $0.8 million for 1996. Trust fees, as a
percentage of average fiduciary assets managed for the year ended December 31,
1996, were 0.10% compared to 0.13% for the same period of the previous year.
Gain on sale of SBA loans increased 96% to $3.6 million for the year ended
December 31, 1996, compared to $1.8 million for the same period of the
previous year. The increase was a result of the growth in the volume of SBA
loans sold. 111 SBA loans were sold during 1996 as compared to 90 loans during
1995.
The Company realized a significant increase in equity in the net income of
ICII in 1996. In June 1996, ICII sold 2.3 million shares of SPFC in connection
with SPFC's initial public offering of 5.7 million shares. In the fourth
quarter of 1996, ICII sold an additional 1.0 million shares of SPFC to the
public. ICII's sale of its SPFC stock resulted in a pre-tax gain to ICII of
$82.7 million. The Company's net equity in this pre-tax gain realized by ICII
approximated $11.8 million and is included in the Combined Statement of Income
as "Equity in net income of Imperial Credit Industries, Inc." Excluding gains
from the SPFC transaction, the equity in net income of ICII increased $4.4
million in 1996 despite the reduction in ownership percentage to approximately
24.5%. The improvement was due to ICII's greater volume and higher
profitability on loan sales executed through securitization transactions as
well as a full year of income realized by ICII from new businesses acquired by
ICII in 1995.
In April 1996, the Company sold 1.5 million shares of ICII as a part of an
offering which included the sale of approximately 2.2 million new ICII shares
by ICII to the public. An additional 500,000 shares were sold by ICII to the
public in May 1996. The Company recorded a $25.6 million pre-tax gain on the
sale of its ICII shares. After the sales of ICII shares, the book value of
ICII common stock approximated $8.72 per share. As such, the Company recorded
a $10.8 million pre-tax gain which approximated the excess of ICII's book
value per share over the book value of the Company's remaining investment in
ICII.
The principal reason for the increase in other income for the year ended
December 31, 1996 was $3.7 million in appreciation of ICII stock which was
donated to not-for-profit organizations. The appreciation represents the
difference between the fair value and book value of the ICII shares on the
date they were donated. The Company recorded a corresponding charitable
donation expense of $4.9 million which is included in total expenses.
Excluding the gain on sale of ICII stock and the appreciation of donated
ICII stock, total revenues for the Company increased from $20.6 million for
the year ended December 31, 1995 to $51.8 million for the same period of 1996,
an increase of 151%.
45
<PAGE>
Total expenses increased 62% to $16.8 million for the year ended December
31, 1996, compared to $10.4 million for the year ended December 31, 1995. The
table below shows the major components of expenses:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Personnel.................................................... $ 4,827 $ 6,153
Occupancy, net............................................... 887 1,024
Data processing.............................................. 518 562
Donation of ICII stock....................................... -- 4,866
Other........................................................ 4,163 4,228
------- -------
Total........................................................ $10,395 $16,833
======= =======
</TABLE>
The primary reason for the increase in total expenses for the year ended
December 31, 1996 was the donation of ICII stock to not-for-profit
organizations. Excluding the donation of ICII stock, total expenses for the
year ended December 31, 1996 increased 15% as compared to the same period of
the previous year, mainly due to increased personnel expenses. Personnel
expenses rose 27% to $6.2 million for the year ended December 31, 1996 from
$4.8 million for the same period of 1995. In addition to expanding its SBA
operations from four lending offices in 1995 to eight lending offices in 1996,
which caused net occupancy expense to increase 15% in 1996, the Company's
focus on growth has centered around an investment in its people. The number of
employees increased 12% from 86 at the end of 1995 to 96 at the end of 1996.
Also, the cost of the Company's profit sharing plan, employee stock ownership
plan, 401(k) plan and deferred compensation plans increased 109% from $0.2
million for the year ended December 31, 1995 to $0.5 million for the year
ended December 31, 1996.
Other expense, including supplies, professional services and business
development expenses, was $4.2 million for both the year ended December 31,
1996 and the year ended December 31, 1995.
The Company recorded income tax expense of $25.7 million for the year ended
December 31, 1996 representing an effective tax rate of approximately 40.0%,
compared to tax expense of $4.3 million for the year ended December 31, 1995,
representing an effective tax rate of approximately 42.1%. The decrease in the
effective tax rate was primarily due to an increase in the relative impact of
income from appreciation of donated ICII stock as a percentage of taxable
income for the year ended December 31, 1996.
46
<PAGE>
SEGMENT REPORTING
The Company operates in three principal business segments: the origination
and sale of SBA loans (CAB), the origination of entertainment loans (LHO) and
the provision of trust services (ITC). Certain financial information with
respect to these business segments, as well as such financial information
related to other operations of the Company, primarily ICII (ICII and Other),
are summarized in the following tables:
<TABLE>
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1995 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 870 $ 2,821 $ 144 $ 1,757 $ 5,592
Provision for loan losses.......... (281) (767) -- (444) (1,492)
Noninterest income................. 1,932 379 8,680 5,536 16,527
------- ------- ------ ------- --------
Total revenue..................... 2,521 2,433 8,824 6,849 20,627
Noninterest expense................ 1,862 696 5,769 2,068 10,395
------- ------- ------ ------- --------
Income before income taxes........ 659 1,737 3,055 4,781 10,232
Income tax expense................. 279 736 1,302 1,996 4,313
------- ------- ------ ------- --------
Net income........................ $ 380 $ 1,001 $1,753 $ 2,785 $ 5,919
======= ======= ====== ======= ========
Average assets..................... $16,895 $24,235 $6,846 $42,551 $ 90,527
------- ------- ------ ------- --------
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1996 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 1,488 $ 4,086 $ 138 $ 3,102 $ 8,814
Provision for loan losses.......... (348) (859) -- (574) (1,781)
Noninterest income................. 3,844 746 7,975 61,553 74,118
------- ------- ------ ------- --------
Total revenue..................... 4,984 3,973 8,113 64,081 81,151
Noninterest expense................ 2,851 1,776 6,258 5,948 16,833
------- ------- ------ ------- --------
Income before income taxes........ 2,133 2,197 1,855 58,133 64,318
Income tax expense................. 903 930 790 23,051 25,674
------- ------- ------ ------- --------
Net income........................ $ 1,230 $ 1,267 $1,065 $35,082 $ 38,644
======= ======= ====== ======= ========
Average assets..................... $27,593 $47,122 $7,034 $57,571 $139,320
------- ------- ------ ------- --------
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1997 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 1,804 $ 5,816 $ 235 $ 3,458 $ 11,313
Provision for loan losses.......... (415) (1,828) -- (315) (2,558)
Noninterest income................. 4,665 1,694 8,175 28,057 42,591
------- ------- ------ ------- --------
Total revenue..................... 6,054 5,682 8,410 31,200 51,346
Noninterest expense................ 4,749 3,467 6,765 12,468 27,449
------- ------- ------ ------- --------
Income before income taxes........ 1,305 2,215 1,645 18,732 23,897
Income tax expense................. 549 932 687 6,569 8,737
------- ------- ------ ------- --------
Net income........................ $ 756 $ 1,283 $ 958 $12,163 $ 15,160
======= ======= ====== ======= ========
Average assets..................... $39,391 $67,400 $8,498 $76,228 $191,517
------- ------- ------ ------- --------
<CAPTION>
ICII AND
CAB LHO ITC OTHER COMBINED
------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30,
1997
Net interest income................ $ 895 $ 2,643 $ 85 $ 2,011 $ 5,634
Provision for loan losses.......... (330) (1,049) -- (133) (1,512)
Noninterest income................. 2,359 852 3,996 7,824 15,031
------- ------- ------ ------- --------
Total revenue..................... 2,924 2,446 4,081 9,702 19,153
Noninterest expense................ 2,530 2,129 3,316 4,585 12,560
------- ------- ------ ------- --------
Income before income taxes........ 394 317 765 5,117 6,593
Income tax expense ................ 166 133 324 1,800 2,423
------- ------- ------ ------- --------
Net income ....................... $ 228 $ 184 $ 441 $ 3,317 $ 4,170
======= ======= ====== ======= ========
Average assets..................... $34,657 $51,513 $8,093 $67,070 $161,333
------- ------- ------ ------- --------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
ICII AND
CAB LHO ITC OTHER COMBINED
------- -------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30,
1998
Net interest income............... $ 1,079 $ 3,272 $ 164 $ 1,796 $ 6,311
Provision for loan losses......... (279) (417) -- (40) (736)
Noninterest income................ 3,199 561 4,302 6,699 14,761
------- -------- ------ ------- --------
Total revenue.................... 3,999 3,416 4,466 8,455 20,336
Noninterest expense............... 3,687 1,734 3,480 2,967 11,868
------- -------- ------ ------- --------
Income before income taxes....... 312 1,682 986 5,488 8,468
Income tax expense................ 131 707 421 2,313 3,572
------- -------- ------ ------- --------
Net income....................... $ 181 $ 975 $ 565 $ 3,175 $ 4,896
======= ======== ====== ======= ========
Average assets.................... $44,093 $102,885 $8,514 $84,388 $239,880
------- -------- ------ ------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
General
The table below summarizes cash flows generated by and used in operating
activities:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING CASH INCOME
Interest received............. $ 6,553 $ 10,781 $ 14,714 $ 6,393 $ 9,352
Trust fees received........... 7,937 7,856 8,114 4,107 4,258
Other income.................. 655 1,371 4,305 5,410 975
-------- -------- -------- -------- -------
Total......................... 15,145 20,008 27,133 15,910 14,585
-------- -------- -------- -------- -------
OPERATING CASH EXPENSE
Cash operating expenses....... 10,219 11,803 23,793 8,855 11,702
Taxes paid.................... 680 -- 2,446 1,100 --
-------- -------- -------- -------- -------
Total......................... 10,899 11,803 26,239 9,955 11,702
-------- -------- -------- -------- -------
Net operating cash flow....... 4,246 8,205 894 5,955 2,883
Cash (used in) provided by
other payables and
receivables.................. (3,105) 4,918 (16,994) (20,146) 266
Cash (used in) provided by
loans held for sale.......... (1,000) (2,883) 1,768 (1,554) (4,678)
-------- -------- -------- -------- -------
Net cash provided by (used in)
operating activities......... $ 141 $ 10,240 $(14,332) $(15,745) $(1,529)
======== ======== ======== ======== =======
Net cash (used in) provided by
investing activities......... $(50,358) $ 36,446 $(59,850) $(38,098) $(4,781)
======== ======== ======== ======== =======
Net cash provided by (used in)
financing activities......... $ 50,593 $(43,713) $ 71,750 $ 54,242 $13,945
======== ======== ======== ======== =======
</TABLE>
The Company's ownership of ICII stock has not been a source of cash flow
other than through the sale of such stock. ICII has not paid any cash
dividends on shares owned by the Company and there can be no assurance that
ICII will pay cash dividends in the future.
Net operating cash flow does not include income taxes or interest paid from
divisions of the Bank which were not required to pay certain income taxes or
interest on borrowings. Interest and income taxes due to the Bank were
included in borrowings from the Bank. If the Company had been required to make
interest payments on its borrowings and pay all taxes, net operating cash flow
used would have been $5.5 million for the six months ended June 30, 1998.
After the Distribution, the Company will make tax and interest payments which
will affect its operating cash flow.
48
<PAGE>
For the six months ended June 30, 1998, the Company experienced a net cash
outflow in operating activities of $1.5 million. The Company experienced a net
cash outflow in investing activities of $4.8 million primarily to fund its
lending activity. The net outflow from operating and investing activities was
offset by the $13.9 million inflow in financing activities consisting of
borrowings from the Bank.
For the six months ended June 30, 1997, the Company experienced a net cash
outflow in operating activities of $15.7 million. The Company experienced a
net cash outflow in investing activities of $38.1 million primarily to fund
its lending activity. The net outflow from operating and investing activities
was offset by the $54.2 million inflow in financing activities consisting of
borrowings from the Bank.
For the year ended December 31, 1997, the Company experienced a net cash
outflow in operating activities of $14.3 million. The Company experienced a
net cash outflow in investing activities of $59.9 million mainly to fund its
lending activity. The net outflow in operating and investing activities was
partially offset by the $71.8 million inflow in financing activities
consisting of borrowings from the Bank.
For the year ended December 31, 1996, the Company experienced a net cash
inflow in operating activities of $10.2 million. The Company experienced a net
cash inflow in investing activities of $36.4 million, primarily due to the
proceeds from the sale of ICII stock. The net inflow in operating and
investing activities was partially offset by the $43.7 million outflow in
financing activities to reduce borrowings from the Bank.
For the year ended December 31, 1995, the Company experienced a net cash
inflow in operating activities of $0.1 million. The Company experienced a net
cash outflow in investing activities of $50.4 million, primarily to fund its
lending activity. The net outflow in operating and investing activities was
offset by the $50.6 million inflow in financing activities consisting mainly
of borrowings from the Bank.
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
lending activity increases. The Company's primary cash requirements include
(i) the funding of loans held for investment and loans held pending their
sale, (ii) ongoing administrative and other operating expenses and (iii) the
cost of funds borrowed. Prior to the Distribution, the Company has financed
its activities exclusively through borrowings from the Bank and operating and
investing cash flows. The Company believes that the availability of borrowings
of the Credit Facilities and proceeds from a future public or private offering
of stock will be sufficient to fund the Company's liquidity requirements for
the foreseeable future. However, there can be no assurance that the Company
will have access to the capital markets in the future or that financing will
be available to satisfy the Company's operating and debt service requirements
or to fund its future growth.
Credit Facilities
On August 19, 1998, the Company entered into a credit agreement with a
syndicate of banks to provide credit facilities (the "Credit Facilities") to
finance the Company's operations other than CAB. The syndicate consists of
third party financial institutions not affiliated with the Bank. The Bank will
be the initial borrower under the Credit Facilities but immediately upon the
consummation of the Contribution the Company will assume the obligations of
the borrower and the Bank will be completely released therefrom. The Credit
Facilities provide for borrowings on a revolving basis of up to $135 million
outstanding at any one time based on a borrowing base calculation measured by
the value of the Company collateral pledged thereunder. Included within the
Credit Facilities is a sub-facility for the issuance of standby and commercial
letters of credit of up to $45 million. The Credit Facilities have an initial
term of two years and provide for an earlier termination under certain
circumstances described below. The lenders under the Credit Facilities are
granted, among other things, a first priority security interest in (a) all of
the common stock of the Company's subsidiaries, (b) the common stock of ICII
owned by the Company and (c) the LHO loans. The borrowing base will be
comprised of the sum of (x) 50% of the current market value of the Company's
investment in ICII stock up to a maximum of $100 million and (y) 85% of
eligible LHO loans. The Credit Facilities will bear interest at an annual rate
equal to 1.45% over LIBOR or at an alternative base rate which will be the
greater of the lead lender's prime rate and the Federal funds rate plus 1.45%.
The Company also will be charged loan and other fees under the Credit
Facilities.
49
<PAGE>
The commitments of the banks party to the Credit Facilities will terminate
90 days after the first to occur of the following events if such events are
not cured or otherwise cease to exist within such 90 day period: (i) the
Company fails to beneficially own at least 25% of the outstanding common stock
of ICII; (ii) the termination, amendment, alteration or assignment of the ICII
Shareholders Agreement by any party thereto without the prior approval of the
administrative agent of the Credit Facilities; (iii) any party to the ICII
Shareholders Agreement becomes the subject of a voluntary or involuntary
bankruptcy proceeding; (iv) ICII fails to comply with its obligations under a
letter agreement with the Company, dated June 11, 1998 (the "Letter
Agreement") (see "Business--Imperial Credit Industries, Inc.") or gives notice
of a dilution event that may result in the Company failing to meet the
requirements of clause (i) above; (v) there is an increase in the percentage
beneficial ownership of voting securities of ICII required to be owned or
controlled by the Company to entitle the Company to the presumption of control
under Section 2(a) (9) of the Investment Company Act of 1940 and the Company
fails to own or control such increased percentage of ICII voting securities;
(vi) either the Company or ICII is required to register as an "investment
company" within the meaning of the Investment Company Act of 1940; or (vii)
the Commission notifies the Company or ICII that it is challenging or
instituting any action to challenge the exemption from registration under the
Investment Company Act of 1940 of the Company, ICII or any subsidiary of the
Company or ICII or otherwise asserts that the Company, ICII or any such
subsidiary is not in compliance with the Investment Company Act.
The Credit Facilities also include financial covenants such as maintenance
of a minimum tangible net worth, minimum adjusted tangible net worth and
minimum interest coverage ratio, and limitations on the maximum leverage ratio
for the Company, the maximum exposure under "gap" loans made by LHO and the
maximum exposure to distributors whose contracts and undertakings support the
eligible LHO loans. The Credit Facilities also require the Company to make
customary representations and warranties as of the initial funding date and
prior to each borrowing and include customary affirmative and negative
operating covenants such as a limitation on the incurrence of debt and liens
and on investments and limitations on the Company's ability to engage in
additional lines of business. Customary events of default include a change
under certain circumstances in ownership of more than 20% of the Company's
outstanding shares and in the composition of the Company's board of directors.
See "Credit Facilities."
Prior to the Distribution, the Bank will borrow approximately $95 million
(as determined at June 30, 1998) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO. In
connection with the Contribution, these loans, along with the other assets of
the IFG Business, will be transferred to the Company, the Bank will be
released from all liabilities under the Credit Facilities and the Company will
remain responsible for all liabilities under the Credit Facilities.
Sales of Loans
The Company currently sells all of the guaranteed portion of loans
originated by CAB to institutional investors while retaining the unguaranteed
portion for investment. CAB then services the loans on behalf of the
institutional investors, passing on principal and interest received from the
borrowers less a servicing fee. Accordingly, adverse changes in the market for
these loans or the ability to obtain the SBA guarantees could impair the
Company's ability to originate and sell loans on a favorable or timely basis.
Any such impairment could have an adverse effect upon the Company's business
and results of operations. Also, any delay in the sale of loans could cause
the Company's earnings to fluctuate from quarter to quarter. Finally, the
Company may be required to repurchase loans that do not conform to the
representations and warranties made by the Company in loan sale or servicing
agreements entered into with institutional investors. See "Risk Factors--CAB
Lending" and "--Dependence of Small Business Lending Operations on SBA
Programs."
The Company recognizes loan servicing rights receivable and interest only
strips as a result of the sale of SBA loans. Loan servicing rights receivable
on the sale of SBA loans are determined by computing the present value of the
excess of the portion of the contractually specified servicing fee that
exceeds the fee that a substitute servicer would demand to assume the
servicing. The present value of any cash flow expected to be received in
excess of the contractually specified servicing fees is recorded as an
interest only strip.
50
<PAGE>
INFLATION
The Combined Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. Inflation affects the Company as follows:
(i) The impact of inflation is reflected in the increased cost of the
Company's operations.
(ii) To the extent that inflation influences the stock and bond markets,
ITC's trust fees are based, in part, on the market values of its customers'
accounts under administration. Normally, the stock market values and bond
values decrease during periods of high inflation and increase during
periods of low inflation.
(iii) Most of the Company's assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on their
performance than do the effects of general levels of inflation. However,
inflation affects the Company and its LHO and SBA lending operations, as
well as its ownership of ICII, through its effect on interest rates, since
interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. During periods of high inflation,
higher interest rate costs may dissuade borrowers from obtaining new loans,
reducing loan production and positively impacting the value of any loan
servicing assets. During periods of low inflation more borrowers can afford
to borrow and refinance higher cost debt, increasing loan production and
negatively impacting the value of any loan servicing assets.
51
<PAGE>
ASSET QUALITY
Loans Held for Investment. Loans held for investment generally have included
loans originated by LHO, the unguaranteed portions of loans originated and
sold by CAB (CAB sells the guaranteed portion of its originations while
retaining the unguaranteed portion for investment), and ICII related mortgage
loans. As part of the Contribution Agreement, the Bank will retain the ICII
related mortgage loans. The amounts outstanding and related allowances for
loan losses by type are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
-------------------------- JUNE 30,
1995 1996 1997 1998
------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans held for investment by type:
LHO.................................... $47,691 $44,906 $ 98,313 $107,135
CAB.................................... 18,259 20,277 34,032 31,251
ICII related mortgage loans (1)........ 11,104 9,974 6,548 5,679
------- ------- -------- --------
Total (2)............................ 77,054 75,157 138,893 144,065
------- ------- -------- --------
Allowance for loan losses by type:
LHO.................................... (727) (1,163) (2,656) (3,098)
CAB.................................... (420) (716) (1,075) (1,012)
ICII related mortgage loans (1)........ (389) (750) (755) (745)
------- ------- -------- --------
Total................................ (1,536) (2,629) (4,486) (4,855)
------- ------- -------- --------
Net loans held for investment by type:
LHO.................................... 46,964 43,743 95,657 104,037
CAB.................................... 17,839 19,561 32,957 30,239
ICII related mortgage loans (1)........ 10,715 9,224 5,793 4,934
------- ------- -------- --------
Net loans held for investment........ $75,518 $72,528 $134,407 $139,210
======= ======= ======== ========
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
(2) Amounts are net of deferred loan fees and costs.
Although the Company generally evaluates the adequacy of its allowance on an
overall basis rather than by specific categories of loans, the following table
reflects the Company's allocation of the allowance for loan losses by loan
category and the ratio of each loan category to total loans for the periods
presented.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------- JUNE 30,
1995 1996 1997 1998
---------- ---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Entertainment loans..... $ 727 62% $1,163 60% $2,656 71% $3,098 74%
Small business loans.... 420 24 716 27 1,075 24 1,012 22
Residential mortgage
loans(1)............... 389 14 750 13 755 5 745 4
------ --- ------ --- ------ --- ------ ---
Total................. $1,536 100% $2,629 100% $4,486 100% $4,855 100%
====== === ====== === ====== === ====== ===
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
52
<PAGE>
The following table presents the contractual maturities of the Company's
loan portfolio as of December 31, 1997, including SBA loans held for sale.
Expected maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations without prepayment penalties. As of
December 31, 1997, substantially all of the Company's loans with a maturity of
more than one year were tied to interest rate indices (e.g., Prime or LIBOR).
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS
------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Entertainment loans......................... $ 98,622 $1,032 $ --
Small business loans........................ 2,539 69 33,347
ICII related mortgage loans (1)............. 363 96 6,089
-------- ------ -------
Total..................................... $101,524 $1,197 $39,436
======== ====== =======
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreements. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2)
the observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to the
provision for loan losses.
At June 30, 1998, the recorded investment in loans which were deemed to be
impaired totaled $4.7 million, all of which was on nonaccrual status. The
impaired loans were secured by real estate and film distribution rights. The
$4.7 million of impaired loans did not require a specific allowance for
potential losses. Impaired loans averaged $4.9 million for the six months
ended June 30, 1998.
At December 31, 1997, the recorded investment in loans which were deemed to
be impaired totaled $4.4 million, all of which was on nonaccrual status. All
of the impaired loans were secured by real estate. The $4.4 million of
impaired loans did not require a specific allowance for potential losses.
Impaired loans averaged $3.0 million in 1997.
At December 31, 1996, the recorded investment in loans which were deemed to
be impaired totaled $4.9 million, all of which was on nonaccrual status. $3.7
million of the impaired loans were secured by real estate. Of the $4.9 million
of impaired loans, $1.0 million required a specific allowance of $175,000.
Impaired loans averaged $3.6 million in 1996.
During the six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995, approximately $95,000, $37,000, $167,000,
$203,000 and $56,000 of interest income, respectively, was recognized on
impaired loans.
At June 30, 1998 and December 31, 1997 and 1996, there were no restructured
loans.
Nonaccrual loans totaled $4.7 million, $4.4 million and $4.9 million at June
30, 1998 and December 31, 1997 and 1996, respectively. There was no recorded
interest receivable on nonaccrual loans at June 30, 1998, December 31, 1997
and 1996. Interest income foregone on nonaccrual loans approximated $152,000,
$68,000, $296,000 and $375,000 for the six months ended June 30, 1998 and 1997
and the years ended December 31, 1997 and 1996, respectively.
At June 30, 1998 and December 31, 1997 and 1996, approximately 74%, 71% and
60%, respectively, of the Company's loan portfolio was issued to customers in
the movie production industry.
53
<PAGE>
At June 30, 1998 and December 31, 1997 and 1996, a majority of the Company's
loan portfolio consisted of borrowers geographically located in California.
Detailed information regarding nonaccrual loans and real estate and other
assets owned, net is presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------- JUNE 30,
1995 1996 1997 1998
------ ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans:
LHO......................................... $ 488 $1,193 $ -- $1,400
CAB......................................... -- 914 3,571 2,585
ICII related mortgage loans (1)............. 2,212 2,814 804 699
------ ------ ------ ------
Total nonaccrual loans.................... 2,700 4,921 4,375 4,684
------ ------ ------ ------
Real estate and other assets owned:
LHO......................................... -- -- 666 539
CAB......................................... 57 -- 45 556
ICII related mortgage loans (1)............. 1,083 187 162 59
------ ------ ------ ------
Less: valuation allowance..................... (145) -- -- --
------ ------ ------ ------
Real estate and other assets owned, net....... 995 187 873 1,154
------ ------ ------ ------
Total nonperforming assets.................... $3,695 $5,108 $5,248 $5,838
====== ====== ====== ======
Allowance for loan losses as a percentage of
total nonaccrual loans....................... 56.89% 53.42% 102.54% 103.65%
Total nonaccrual loans as a percentage of
loans held for investment.................... 3.50 6.55 3.15 3.25
Total nonperforming assets as a percentage of
total assets................................. 2.96 3.42 2.30 2.33
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
The allowance for loan losses is maintained at a level considered
appropriate by management and is based on an ongoing assessment of the risks
inherent in the loan portfolio. The allowance for loan losses is increased by
the provision for loan losses which is charged against current period
operating results, and is decreased by the amount of net charge-offs during
the period. The Company's determination of the level of the allowance for loan
losses and, correspondingly, the provision for loan losses, rests upon various
judgments and assumptions, including general economic conditions (especially
in California), loan portfolio composition and concentrations, prior loan loss
experience, collateral value, identification of problem and potential problem
loans and other relevant data to identify the risks in the loan portfolio.
While management believes that the allowance for loan losses is adequate at
June 30, 1998, future additions to the allowance will be subject to continuing
evaluation of inherent risk in the loan portfolio.
54
<PAGE>
The following table summarizes changes in the allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED JUNE
DECEMBER 31, 30,
---------------------- --------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year............. $ 626 $1,536 $2,629 $2,629 $4,486
Loans charged off:
LHO.................................. 209 561 359 359 --
CAB.................................. -- 60 132 69 352
ICII related mortgage loans (1)...... 404 212 359 151 50
------ ------ ------ ------ ------
Total loans charged off............ 613 833 850 579 402
------ ------ ------ ------ ------
Recoveries of loans previously charged
off:
LHO.................................. 8 137 25 -- 26
CAB.................................. 1 8 75 50 9
ICII related mortgage loans (1)...... 22 -- 49 35 --
------ ------ ------ ------ ------
Total loan recoveries.............. 31 145 149 85 35
------ ------ ------ ------ ------
Net loans charged off.................. 582 688 701 494 367
------ ------ ------ ------ ------
Provision for loan losses:
LHO.................................. 767 859 1,828 1,049 417
CAB.................................. 281 348 415 330 279
ICII related mortgage loans (1)...... 444 574 315 133 40
------ ------ ------ ------ ------
Total provision for loan losses.... 1,492 1,781 2,558 1,512 736
------ ------ ------ ------ ------
Balance, end of year................... $1,536 $2,629 $4,486 $3,647 $4,855
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans held for investment............. 1.21% 0.87% 0.66% 0.53% 0.26%
Ratio of allowance for loan losses to
loans held for investment............. 1.99 3.50 3.23 3.22 3.37
Ratio of provision for loan losses to
net charge-offs....................... 256.36 258.87 364.91 306.07 200.41
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
Loans Held for Sale. Loans held for sale are carried at the lower of
aggregate cost or fair value. The amount of loans held for sale at June 30,
1998 and December 31, 1997 and 1996 was $8.4 million, $3.8 million and $5.5
million, respectively.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, the net earnings of an institution with a
positive gap theoretically may be adversely affected due to its interest-
earning assets repricing to a greater extent than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than that at which its interest-bearing
liabilities reprice.
55
<PAGE>
The primary objective of the asset/liability management process is to manage
the Company's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies which attempt to limit the
change in pretax net interest income assuming various interest rate scenarios.
This is accomplished by adjusting the repricing characteristics of the
Company's assets and liabilities as interest rates fluctuate. The Company's
Asset/Liability Committee chooses strategies in conformance with its policies
to achieve an appropriate trade off between interest rate sensitivity and the
volatility of pretax net interest income and net interest margin. Each month,
the Company assesses its overall exposure to potential changes in interest
rates and the impact such changes may have on net interest income and net
interest margin.
The Company has managed interest rate risk through the marketing and funding
of primarily adjustable rate loans generally indexed to the Prime Rate. Since
the Company's borrowing costs have been tied to the Bank's 90-day certificate
of deposit rate plus 1%, an adjustable borrowing cost, the Company's interest-
earning asset pricing generally matches the increases and decreases in the
pricing of its borrowing costs and therefore maintains a positive gap
position. However, there can be no assurances that the Company will be able to
maintain its positive gap position or that its strategies will not result in a
negative gap position in the future. The level of the movement of interest
rates, up or down, is an uncertainty and could have a negative impact on the
earnings of the Company. The Company expects that its future funding costs
will be tied to LIBOR. See "Credit Facilities."
Hedging. The SBA loans originated and held for sale and loans held for
investment are primarily adjustable rate loans indexed to the Prime Rate. As
such, there is minimal risk of increasing or decreasing interest rates between
the time the Company commits to fund a loan and the time the loan is sold or
paid-off. Therefore, the Company does not enter into interest rate hedging
vehicles or speculative trading activities, such as forward commitments,
options, futures, derivatives or synthetic instruments.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending activities. The Company's net interest margin is
sensitive to sudden changes in interest rates. In addition, the Company's
interest-earnings assets, primarily its loans, are tied to the Prime Rate, an
index which tends to react more slowly to changes in market rates than other
money market indices such as LIBOR. The rates paid for the Company's interest-
bearing liabilities correlate with LIBOR. This mismatch creates a spread
relationship risk between the Company's Prime based assets and LIBOR
correlated liabilities.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The
Company continually evaluates interest rate risk management opportunities,
including the possible use of derivative financial instruments.
56
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE DECEMBER 31,
---------------------------------------------------- FAIR
1998 1999 2000 2001 2002 THEREAFTER BALANCE VALUE
-------- ------ ------ ------ ------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST SENSITIVE
ASSETS:
U.S. Treasury and
federal agency
securities............. $ 2,249 $1,083 $ -- $ -- $ -- $ -- $ 3,332 $ 3,338
Average interest rate.. 5.47% 6.26% -- -- -- -- 5.73%
Servicing assets........ 257 471 619 738 896 1,230 4,211 4,603
Average interest
rate(1)............... -- -- -- -- -- -- 11.16%
Loans:
SBA companion.......... 3,826 588 621 701 1,368 10,638 17,742 18,809
Average interest rate.. 10.32% 10.42% 10.53% 10.73% 10.54% 10.73% 10.42%
SBA.................... 1,297 2,287 3,076 3,756 4,373 7,187 21,976 22,407
Average interest rate.. 11.16% 11.15% 11.18% 11.18% 11.14% 11.14% 11.16%
LHO.................... 99,654 -- -- -- -- -- 99,654 97,122
Average interest rate.. 13.90% -- -- -- -- -- 13.90%
ICII related(2)........ 735 680 895 1,163 1,295 1,780 6,548 5,793
Average interest
rate(2)............... 9.98% 9.37% 9.69% 9.16% 9.37% 9.45% 9.51%
-------- ------ ------ ------ ------ ------- -------- --------
Total interest-earning
assets................. $108,018 $5,109 $5,211 $6,358 $7,932 $20,835 $153,463 $152,072
======== ====== ====== ====== ====== ======= ======== ========
INTEREST SENSITIVE
LIABILITIES:
Borrowings from
Imperial Bank......... $ 77,934 $ -- $ -- $ -- $ -- $ -- $ 77,934 $ 77,934
Average interest rate.. 6.48% -- -- -- -- -- 6.48%
-------- ------ ------ ------ ------ ------- -------- --------
Total interest-bearing
liabilities............ $ 77,394 $ -- $ -- $ -- $ -- $ -- $ 77,934 $ 77,934
======== ====== ====== ====== ====== ======= ======== ========
</TABLE>
- --------
(1) Represents the discount rate used to calculate the fair value of the
asset.
(2) Loans will be retained by the Bank pursuant to the Contribution Agreement.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair value and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Company's historical
experience. The borrowings from the Bank will be paid off in 1998 and the ICII
related mortgage loans will be retained by the Bank pursuant to the
Contribution Agreement.
At June 30, 1998, as compared to December 31, 1997, there have been no
significant changes in the relative composition of the Company's financial
instruments that are sensitive to changes in interest rates.
57
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the years ended December 31, 1995, 1996 and 1997. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented for
any of these periods. The average balance of loans receivable includes loans
on which the Company has discontinued accruing interest. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------- ---------------------------- ----------------------------
INTEREST YIELD/ INTEREST YIELD/ INTEREST YIELD/
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST
------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans held for
investment(2)......... $48,118 $6,459(1) 13.42% $ 79,202 $10,116(1) 12.77% $106,084 $13,657(1) 12.87%
Loans held for sale.... 2,316 267 11.53 4,708 513 10.90 6,339 698 11.01
Securities available
for sale.............. 3,084 153 4.96 3,229 158 4.89 5,330 235 4.41
------- ------ ------ -------- ------- ------ -------- ------- ------
Total interest-
earning assets...... 53,518 6,879 12.85 87,139 10,787 12.38 117,753 14,590 12.39
------- ------ ------ -------- ------- ------ -------- ------- ------
Non-interest-earning
assets................. 37,009 52,181 73,764
------- -------- --------
Total assets......... $90,527 $139,320 $191,517
======= ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY:
Interest-bearing
liabilities:
Borrowings from
Imperial Bank......... 18,571 1,287 6.93 30,542 1,973 6.46 50,603 3,277 6.48
------- ------ ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing liabilities. 18,571 1,287 6.93 30,542 1,973 6.46 50,603 3,277 6.48
------- ------ ------ -------- ------- ------ -------- ------- ------
Non-interest-bearing
liabilities............ 14,591 30,728 37,488
Stockholder's equity.... 57,365 78,050 103,426
------- -------- --------
Total liabilities and
stockholder's
equity.............. $90,527 $139,320 $191,517
======= ======== ========
Net interest rate
spread................. $5,592 5.92 $ 8,814 5.92 $11,313 5.91
====== ======= =======
Net interest margin..... 10.45 10.11 9.61
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 288.18 285.31 232.70
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
--------------------------- ---------------------------
INTEREST YIELD/ INTEREST YIELD/
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE COST BALANCE EXPENSE COST
-------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans held for
investment............ $ 86,737 $5,954(1) 13.84% $141,565 $8,577(1) 12.22%
Loans held for sale.... 6,823 365 10.79 7,558 401 10.71
Securities available
for sale.............. 3,362 84 5.04 6,440 164 5.14
-------- ------ ------ -------- ------ ------
Total interest-
earning assets...... 96,922 6,403 13.32 155,563 9,142 11.85
-------- ------ ------ -------- ------ ------
Non-interest-earning
assets................. 64,411 85,069
-------- --------
Total assets......... $161,333 $240,632
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY:
Interest-bearing
liabilities:
Time deposits.......... -- -- -- 3,142 92 5.90
Line of credit--CAB.... -- -- -- 2,149 121 11.35
Borrowings from
Imperial Bank......... 24,121 769 6.38 80,788 2,618 6.52
-------- ------ ------ -------- ------ ------
Total interest-
bearing liabilities. 24,121 769 6.38 86,079 2,831 6.63
-------- ------ ------ -------- ------ ------
Non-interest-bearing
liabilities............ 38,720 38,700
Stockholder's equity.... 98,492 115,853
-------- --------
Total liabilities and
stockholder's
equity.............. $161,333 $240,632
======== ========
Net interest rate
spread................. $5,634 6.94 $6,311 5.22
====== ======
Net interest margin..... 11.72 8.18
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 401.82 180.72
</TABLE>
- --------
(1) Includes amortization of net loan fees amounting to $1.3 million, $1.6
million, $2.6 million, $0.5 million and $1.5 million for the years ended
December 31, 1995, 1996, and 1997, and for the six months ended June 30,
1997 and 1998, respectively.
(2) Average balance includes nonaccrual loans.
RECENT ACCOUNTING PRONOUNCEMENTS
For recent accounting pronouncements, please refer to Note 4 of the notes to
the combined financial statements.
YEAR 2000
To fulfill the Company's fiduciary responsibility and ensure compliance with
regulatory requirements, the Company has established a year 2000 project team
(the "Team"). The Team has conducted a comprehensive review of the Company's
computer systems and has developed a plan to ensure that date-sensitive data
continues to be processed correctly. The plan provides for the conversion
efforts to be completed by the end of 1998. The year 2000 issue is the result
of computer programs being written using two digits rather than four to define
the applicable year. The total cost of the project is estimated to be $100,000
and is being funded through operating cash flows. The Company is expensing all
costs associated with these system changes as the costs are incurred.
59
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The following description, unless otherwise
provided, assumes the completion of the Contribution. 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 Information Statement. See "Summary
of Certain Information--Forward-Looking Statements."
GENERAL
The Company is a diversified financial services company primarily engaged in
three business segments: (i) motion picture and television production finance,
through the Company's division, The Lewis Horwitz Organization ("LHO"), (ii)
small business lending, primarily in conjunction with SBA sponsored programs,
through the Company's subsidiary, Crown American Bank ("CAB"), a recently
formed industrial loan company, and (iii) a wide range of trust and investment
management services, through the Company's subsidiary, Imperial Trust Company
("ITC"), a California licensed trust company. In addition, the Company owned,
as of June 30, 1998, approximately 23.0% of the common stock of Imperial
Credit Industries, Inc. ("ICII"). The Company beneficially owns an additional
1.2 million shares (or 3.0% of the outstanding ICII common stock as of August
15, 1998) pursuant to the ICII Shareholders Agreement, which grants the
Company the right to vote all of such shares and provides the Company with an
option to purchase these shares. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "--Imperial Credit Industries, Inc."
For the six months ended June 30, 1998 and 1997, and the year ended December
31, 1997, LHO originated $35 million, $49 million and $98 million in loans,
respectively. During the six months ended June 30, 1998 and 1997, LHO, through
the Bank, issued letters of credit totalling $2.4 million and $14.0 million,
respectively. During the year ended December 31, 1997, LHO issued $19 million
of letters of credit. For the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997, CAB originated $30 million, $28 million and $49
million in loans, respectively; and at June 30, 1998 and December 31, 1997,
ITC had trust assets under administration of $9.5 billion and $8.7 billion,
respectively.
The Company's business strategy emphasizes (i) opportunistic expansion of
businesses in niche segments of the financial services industry, (ii) hiring
management experienced in a wide array of financial services businesses to
operate and grow the Company's businesses, (iii) conservative and disciplined
underwriting and credit risk management, (iv) sale in secondary markets of
Company SBA loans where the Company expects to receive a premium over the
principal amount of the loan and (v) maintaining business and financial
flexibility to take advantage of changing market conditions with respect to
specific financial services businesses.
LHO
GENERAL
The Company's LHO division, formed in 1980 by Lewis P. Horwitz, the
division's President and Chief Executive Officer, was acquired by the Bank in
1989. The LHO division is a leading provider of senior, secured financing for
independent motion picture and television production. As of June 30, 1998 and
1997, and December 31, 1997, the aggregate principal amount of the Company's
LHO loans was approximately $108 million, $73 million, and $100 million,
respectively. During the six months ended June 30, 1998 and 1997, the LHO
division originated 18 loans and 28 loans, respectively, in an aggregate
principal amount of approximately $35 million and $49 million, respectively.
During the year ended December 31, 1997, the LHO division originated 59 loans
in an aggregate principal amount of approximately $98 million. During the six
months ended June 30, 1998 and 1997, the LHO division, through Imperial Bank,
issued letters of credit totalling approximately $2.4 million and $14.0
million, respectively. During the year ended December 31, 1997, the LHO
division issued $19 million of letters of credit. Total revenue for the LHO
division for the six months ended
60
<PAGE>
June 30, 1998 and 1997, and the year ended December 31, 1997 was $3.4 million,
$2.5 million and $5.7 million, respectively, representing 16.8%, 12.8% and
11.1%, respectively, of the Company's total revenue for such periods. Net
income for the LHO division for the six months ended June 30, 1998 and 1997,
and the year ended December 31, 1997 was $1.0 million, $0.2 million and $1.3
million, respectively, representing 19.9%, 4.4% and 8.5%, respectively, of the
Company's net income for such periods.
The Company seeks to provide loans (with a typical term of 12 to 18 months)
and letters of credit for the production of motion pictures and television
shows or series that have a predictable market worldwide, and therefore, a
predictable level of payments arising from selling the production distribution
rights. The LHO division is guided by Mr. Horwitz, a widely-recognized leader
in film financing with nearly 30 years of experience. Each of LHO's lending
officers has at least five years of entertainment financing experience,
including LHO's Executive Vice President Arthur Stribley, who has over 25
years of experience. The Company believes that its experience has enabled it
to have a competitive advantage due to its extensive worldwide contacts among
sales agents, distributors and independent producers in an industry where name
recognition and personal contacts are crucial to success. The Company also
believes that this experience has allowed it to rapidly adapt to changing
industry standards in order to maintain its competitive position. See "--Loan
Types" below.
The Company lends to "independent" producers of film and television, the
majority of which are located in California. The Company considers
"independent" producers to be those producers that do not have captive
distribution outlets for their product and need outside financing. Large film
and television studios generally maintain their own distribution outlets and
finance their projects with internally generated financing.
Several risks are inherent in the type of lending conducted by LHO,
including the noncompletion of the production, poor box office appeal of the
finished product, failure to perform on the part of the distributors and
political and currency risks. The Company attempts to mitigate these risks in
various ways. To hedge against the risk of film incompletion, the Company
obtains completion bonds from established completion bonding companies for
each loan and insists on direct recourse to the re-insurers, who are major
insurance companies, in the event the completion bonding company defaults
under its obligation. See "--Completion Bonds." In order to avoid incurring
risk as a result of poor box office receipts, the Company bases its credit
decisions on the credit-worthiness of the distributors who have signed pre-
sold contracts. In the event existing pre-sales do not cover the amount of the
loan (see "--Loan Types"), the Company considers the sales, the reputation of
the cast, the director, the genre and the overall budget of the film in
question. See "--Underwriting." LHO maintains credit and other information on
most distributors in the major worldwide territories, and this information is
supplemented by credit reports obtained through the American Film Marketing
Association, an association of 120 Sales Agents (defined below) throughout the
world that license film and television rights ("AFMA"). Should a distributor
fail to perform its obligations, it would be prohibited from participating in
future AFMA events, where most new releases are exhibited and sold. See "--
Underwriting." In the event of non-performance by the distributor, the
borrower has the right to replace the distributor and make another sale in
that territory. In addition, the initial distributor would forfeit its deposit
(generally 20% of the contract price). The Company attempts to lessen
political risk by only relying on distribution contracts from politically
stable territories. See "--Loan Types." With regards to currency risk, all
international contracts are made in U.S. dollars, and most of the distributors
do not hedge this risk. As a result, if the local currency falls in value in
relation to the dollar, the actual price of the film to the distributor at
time of delivery is higher than such distributor had anticipated. This
situation has occurred recently in South Korea and Thailand, where both
currencies have undergone devaluations, and it could continue to be a threat
throughout much of Asia. As a result, the Company has removed South Korea from
its list of "primary" territories, and has discounted the value of contracts
emanating from other Asian countries which the Company deems to have unstable
currency. See "Risk Factors--Risks Particular to Company's Loan Portfolio."
Distribution Revenue. The revenue received by independent producers from
licensing distribution rights are critical to the financial success of a
production and can include licensing rights relating to any form of
distribution of the product, including film, television and video
distribution. Producers engage a sales agent ("Sales Agent") to arrange for
the distribution of their product throughout the world by various
distributors.
61
<PAGE>
The Sales Agent receives from the producer a commission for their services,
customarily ranging from 5-25% of the revenues generated from distribution.
Distributors generally are independent, privately-held entities and, in some
territories (principally with respect to television production), may have
affiliations with the local government. Under the contract entered into with
producers, distributors agree to provide a producer with a minimum guarantee
on the revenue anticipated to be generated by distributing the production. In
many instances, distributors provide downpayments of 20% of this minimum
guarantee to the producer at the time of execution of the contract entered
into with respect to such distribution and the balance of the minimum
guarantee is paid upon notice to the distributor that the production is
available for delivery to the distributor. The Company's loans are secured by,
among other assets, a first priority lien on the revenue received by the
producers from the global distribution of the production by its distributors.
Completion Bonds. It is customary in the entertainment industry for bonding
companies to issue to the production lender a completion guaranty to ensure
the completion and delivery of a television show or series or motion picture.
A completion guaranty ensures that the film or television show or series will
be completed and delivered based on a pre-approved script, with, in certain
instances, specific actors, and by a certain date, and that the film will be
suitable for worldwide distribution by industry technical standards. The
completion bond does not guarantee the repayment of the Company's loan but
rather it guarantees the delivery of the film, on time, on budget and pursuant
to the production's distribution contracts. The bond is not effective until a
lender, such as the Company, funds the entire loan. Bonding companies
customarily employ experts in film and television production to audit the cost
reports they receive and receive a fee based on the approved budget of the
production. The bonding company closely monitors production and is entitled,
under the terms of most bonding guaranties, to take corrective action where
the film goes over budget or falls behind schedule, including replacing
personnel and taking over production. The bonding guaranty provides that the
lender of the production will receive notice of any such action. If the
bonding company elects to abandon production, it will reimburse the lender for
its outstanding loan. The Company has made only one claim against a bonding
company in its history as a result of termination of production and the loan
relating to such claim was repaid in full by the bonding company.
STRATEGY
The Company's growth strategy in the entertainment lending industry is based
on the following key elements:
Expansion of borrower base. The Company believes that significant expansion
in the independent film industry within the United States and abroad will
allow the Company to expand its borrower base. According to data gathered by
AFMA, worldwide sales of independent film productions, other than in the
United States, rose from approximately $375 million in 1984 to approximately
$1.6 billion in 1996. The Company has developed significant contacts in
California with independent producers and Sales Agents, and plans to continue
its expansion within the state. The Company also intends to expand its
presence in New York City, the second largest U.S. metropolitan area in terms
of revenue for film and television production, and in Canada and England. The
Company believes that the expertise and contacts it has developed in
entertainment lending in California will be invaluable in soliciting clients
in these other markets. In order to implement this strategy, the Company
intends to open additional sales offices in these areas and, with respect to
its expansion in England, seek strategic alliances with European lenders that
have developed a local presence in the independent film and television
production industry.
Increase loans to television producers. Although the Company historically
has provided the majority of its loans to motion picture producers, it intends
to actively seek to expand its lending to additional television producers. The
television production industry, previously predominantly located in the United
States and other well-developed industrialized countries, has changed
dramatically in recent years. Television recently has become more prevalent in
several countries not previously exposed to it on a country-wide basis. In
addition, the advent of digital programming and the rapidly expanding cable
industry in the United States has resulted in a significant increase in the
number of channels, which results in a significant increase in programming
needs for
62
<PAGE>
these new channels. As a result, the Company anticipates that the demand for
new television shows and series will increase, which will result in a
corresponding need for television financing. The Company has participated in
several recent television festivals, increased its efforts to locate top Sales
Agents in television production and increased advertising in television trade
publications.
Entertainment fund. The Company intends to diversify its presence in
entertainment finance by forming a limited partnership fund that will provide
equity or debt financing of a type not historically provided by LHO. The
Company believes this will increase its margins and add a new client base to
grow LHO's business. These transactions may include:
. ""Pay or Play" financings, where an actor is advanced monies for
performance prior to the financing of the production, the borrowed funds
are attributed to the production entity and the Company receives a fee
or a portion of gross distribution proceeds of the production, or both;
. Super GapSM transactions, which involve lending against the "gap" in
unsold distribution rights at a level in excess of LHO's lending
policies; and
. library purchases, where rights to copyright and distribute a film in
all territories are acquired.
It is contemplated that the fund would initially raise $1 to $5 million on a
private placement basis. If the fund is satisfied with its financial results
after a period of time following this initial capital infusion, the fund
intends to increase the fund's capital to $100 million. The Company
anticipates that a subsidiary would manage the fund, receive a management fee
therefor, and retain a carried equity interest of approximately 20% of the
fund's profits.
Strategic acquisitions. The Company intends to make selective acquisitions
of businesses that would be complementary to LHO's business. The Company has
no current agreement to effect such an acquisition and there can be no
assurance that suitable acquisition candidates will be located or that the
Company will be able to finance such acquisitions.
LOAN TYPES
The Company believes that its significant experience in the entertainment
lending industry has enabled it to provide superior customer service through
the creation of flexible lending products designed to meet the changing needs
of the industry. The Company currently provides two different types of loans,
traditional ("Traditional Loans") and gap ("Gap Loans"). With Traditional
Loans, the Company requires that the anticipated revenue to be received under
existing contracts from approved distributors in "primary" territories ("Pre-
sold Primary Contracts") at the time of funding exceed the entire amount of
the loan (net of withholding taxes), including loan fees, interest charges and
legal costs. "Primary" territories include countries such as the United
States, Canada, Germany, France and the United Kingdom. Distribution contracts
from outside the Primary Territories ("Pre-sold Secondary Contracts" and,
collectively, with Pre-sold Primary Contracts, "Pre-sold Contracts"), which
generally represent between 15% and 20% of a production's total distribution
revenues, are not considered by the Company in determining whether to provide
the loan, but do serve as additional collateral underlying the loan.
The primary distinction between Traditional Loans and GAP Loans is the
amount of the Pre-sold Primary Contracts required by the Company to have been
sold prior to the funding of the loan. Gap Loans have become a popular method
of lending in today's competitive financing environment. With Gap Loans, the
amount of revenue to be received from the Pre-sold Primary Contracts at the
time of funding is less than 100% of the entire loan amount. The difference
between the amount of Pre-sold Primary Contracts and the loan amount is the
"gap" that future sales of distribution rights must fill in order for the loan
to become fully collateralized. From a producer's perspective, Gap Loans have
an advantage over Traditional Loans because a producer can arrange financing
prior to licensing all of the production's distribution rights. This has
allowed producers to determine the time to commence production with more
precision and, if the production is perceived favorably after
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<PAGE>
completion but prior to distribution, the producer may be able to generate
higher distribution revenues. In connection with evaluating Gap Loans, the
Company, after consulting with the applicable Sales Agent, determines what it
believes to be the conservative value of the unsold distribution rights in
Primary Territories, which generally must exceed the amount of the Gap Loans
by 175-200%. As with Traditional Loans, Pre-sold Secondary Contracts relating
to Gap Loans are not given any credit by the Company in determining whether to
provide a loan, but are used to provide additional collateral.
The average principal amount of loans made through LHO during the six months
ended June 30, 1998 and the year ended December 31, 1997 was approximately
$1.96 million and $1.66 million, respectively.
In addition to the Company's traditional entertainment lending, the Company
also enters into a joint lending agreement in certain instances with a large
European bank. In a typical transaction of this type, the Company agrees to
provide the loan to a borrower, but the European bank agrees to participate in
50% of the loan, and provides the full amount of the loan at funding. The
Company agrees with this bank to buy back 50% of the loan at its maturity and
arrange for the issuance of a letter of credit to the bank to support the
Company's obligation. The lending bank remits a standby commitment fee to the
Company, as well as a percentage of the loan origination fees, interest
received on the loan and other fees relating to the Company's 50% interest in
the loan.
The Company also arranges in certain instances for the issuance of letters
of credit to third-party lenders located outside the United States. Such
letters of credit are secured by, among other assets, rights under the
borrowers' Pre-sold Contracts and any unsold distribution rights. The Company
receives letter of credit fees and other fees in these transactions. Prior to
the Distribution, the Bank issued these letters of credit on behalf of LHO.
After the Distribution, these letters of credit are expected to be issued
under the Credit Facilities.
The following sets forth by type of loan the number of loans made by, and
letters of credits issued on behalf of, the Company, the aggregate principal
amount of such loans at origination and the percentage of gap at origination
for such loans, in LHO's portfolio during the years ended December 31, 1996
and December 31, 1997 and the six months ended June 30, 1997 and June 30,
1998.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
PRINCIPAL GAP AT
NUMBER AMOUNT ORIGINATION
OF LOANS AT ORIGINATION DATE
-------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Traditional Loans
Year ended December 31, 1996........... 18 $20,216 N/A
Year ended December 31, 1997........... 23 24,830 N/A
Six months ended June 30, 1997......... 9 12,225 N/A
Six months ended June 30, 1998......... 4 9,635 N/A
Gap Loans
Year ended December 31, 1996........... 21 $35,735 35.7%
Year ended December 31, 1997........... 36 73,024 45.7
Six months ended June 30, 1997......... 19 36,914 44.9
Six months ended June 30, 1998......... 14 25,686 46.1
Letters of Credit for Traditional Loans
Year ended December 31, 1996........... 4 $ 2,194 N/A
Year ended December 31, 1997........... 1 1,254 N/A
Six months ended June 30, 1997......... 1 1,254 N/A
Six months ended June 30, 1998......... -- -- N/A
Letters of Credit for Gap Loans
Year ended December 31, 1996........... 9 $36,965 30.2%
Year ended December 31, 1997........... 8 17,816 39.5
Six months ended June 30, 1997......... 5 12,708 28.5
Six months ended June 30, 1998......... 2 2,350 45.5
</TABLE>
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<PAGE>
The interest rate charged on most loans made through LHO are variable rates
tied to published prime rates. The Company generally does not impose different
interest rates for Traditional Loans and Gap Loans. See "--Fees" below. In
certain instances at the request of a borrower, the interest rate is fixed.
The average yield on outstanding loans originated through LHO for the years
ended December 31, 1996 and 1997 and the six months ended June 30, 1998 was
14.2%, 14.2% and 12.2%, respectively.
FEES
At the time of closing of a loan, the Company is paid a fee by the borrower
based on the amount of the loan. For the year ended December 31, 1997, the
average origination fee on Traditional Loans and Gap Loans was 2.2% and 4.7%,
respectively, of the aggregate principal amount of such loans. For the six
months ended June 30, 1998, the average origination fee on Traditional Loans
and Gap Loans was 1.1% and 4.4%, respectively, of the aggregate principal
amount of such loans. In certain transactions where extraordinary effort or
special creative expertise is required, additional fees are collected from the
borrower based on all revenues generated by the particular film or television
series. For accounting purposes, fees, net of direct origination costs, are
deferred and the resulting revenue is recorded over the life of the loan.
Where a transaction includes the issuance of a letter of credit, the borrower
is charged an additional fee.
UNDERWRITING
The Company's Traditional Loans are based on Pre-sold Primary Contracts from
approved distributors in Primary Territories. Primary Territories are
principally North American and European industrialized countries, where
distributors in such countries have historically complied with the terms of
the Pre-sold Primary Contracts. The Company generally lends against 100% of
the value of the Pre-sold Primary Contracts and none of the value from Pre-
sold Secondary Contracts. Each distributor is also rated on a primary and
secondary basis based upon the same criteria used for determining territory
status. With respect to Gap Loans, the Company also evaluates the ability of
the Sales Agent to sell the borrower's production to distributors.
The Company's five loan officers, with an aggregate of approximately 65
years of experience in entertainment lending, utilize a variety of criteria to
determine whether to make a loan to a potential borrower. The Company does not
consider the anticipated success of the production or, for the reasons
described below, the creditworthiness of the borrower. Its officers primarily
evaluate the risks relating to the ability of the Sales Agent to sell the
borrower's product to distributors and the ability of distributors to pay the
minimum guarantees relating to distribution rights. The success of the Sales
Agents' marketing efforts will ultimately determine the value of the
distribution rights through arranging for the execution of the Pre-sold
Primary Contracts and the Pre-sold Secondary Contracts. Accordingly, the Sales
Agents have a significant influence on the amount of revenue generated from
licensing the production and it is this cash flow stream that the Company
primarily focuses on when making its lending decision. Sales Agents are
particularly important for Gap Loans because Sales Agents work in conjunction
with the Company to determine the value of unsold distribution rights. Sales
Agents provide the Company with the Pre-sold Primary Contracts prior to
execution of loan documentation. The Company's officers examine these
contracts in order to ensure that the contract will be sufficient to grant to
the Company a first priority security interest with respect to the borrower's
rights thereunder, review the payment history to the Company of distributors
identified, review the Credit Watch publication of AFMA and its own databases
to confirm creditworthiness of the distributor and discuss the selection of
the distributors with other Sales Agents. In order to encourage Sales Agents
to continue to provide marketing efforts until completion of distribution and
to protect the value of the Company's collateral, the Company's loan
documentation typically prohibits the payment of any commissions or
reimbursements of expenses to the Sales Agents until the Company's loan is
repaid in full.
The Company requires each borrower to produce certain information in
determining whether to make a loan. The borrower is typically required to
provide the Company, among other things, with (i) a budget identifying all
known expenses and costs necessary for production, including salaries of
production executives and actors and the cost of the completion bond (which
ensures completion of production and licensing rights), (ii) the name of
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<PAGE>
the bonding company, (iii) a drawdown schedule, which describes the
production's monetary needs on a weekly basis from pre-production through
principal photography, post-production and delivery of the completed product,
(iv) the name of the Sales Agent, (v) copies of all existing domestic and
international Pre-sold Primary Contracts and Pre-sold Secondary Contracts,
(vi) with respect to Gap Loans, the Sales Agent's estimates for all unsold
rights and the names of the actors, directors and genre of the production in
order to help determine the salability of the production and (vii) the
organizational documents of the borrower. The Company typically requires that
a borrower be a newly formed corporation established for the sole purpose of
producing and distributing a single production in order to limit the potential
existing liabilities of such entity and mitigate the circumstances under which
the borrower's assets could be combined with an affiliate's assets in the
event of a bankruptcy of such other entity. Prior to funding of any loan, the
Company requires that a completion guaranty be issued in its favor by the
bonding company. See "--General--Completion Bonds."
The Company does not obtain financial information of the borrower because,
as described above, the borrower is a special purpose entity created for
production of a particular project. In addition, except with respect to
certain U.S. distributors and publicly traded distributors, consistent with
customary industry practice, no financial information is obtained with respect
to the distributors. The Company attempts to minimize the risk relating to the
financial stability of the distributor by providing in its loan documentation
that rights to distribute a production are not granted in favor of a
distributor until the rights are fully paid for. Accordingly, if a distributor
fails to pay to LHO on behalf of the borrower the minimum guarantee of the
distribution revenue, any down-payment made by the distributor may be retained
by the Company as a loan repayment and the production may be licensed to
another distributor approved by the Company in the same territory. In
addition, if the distributor defaults on payment and the Company obtains an
arbitration ruling to that effect, the distributor will not be allowed to
participate in the American Film Market for two years, one of the largest
sales markets for motion pictures in the world.
The Company generally approves loans within 75 days from initial contact
with the borrower. All potential loans in excess of $250,000 are submitted to
the Loan Administration Committee of the Company for final approval. Loans are
initially funded after the loan is approved in approximately one month
following completion of loan documentation. Thereafter, loans are funded
pursuant to agreed-upon schedules.
COLLATERAL
As security for the loan, the borrower grants the Company, among other
rights, a first priority security interest in and to the copyright and
distribution rights to the film or television production, all rights and
property pertaining thereto, all trademarks and trade names, all accounts
relating to the production, all cash and cash equivalents derived from or
relating to the production and all general intangibles, including all rights
under the account receivables on global distributions rights to Primary
Territories and Secondary Territories, whether under Pre-sold Contracts or
unsold distribution rights. If the Company determines that such collateral is
insufficient, the Company may also require additional collateral such as
certificates of deposit or require that a letter of credit be issued in its
favor. The Company also requires third-party guarantees in limited instances.
In certain jurisdictions, in lieu of a loan, the Company arranges for the
issuance of a letter of credit in favor of a third-party lender. This letter
of credit is similarly secured by, among other assets, Pre-sold Contracts.
Security interests are perfected by, among other actions, (i) recording with
the U.S. Copyright Office and any applicable international jurisdiction
mortgages of Copyright and Security Agreements with respect to the underlying
literary, musical and dramatic material upon which the production is based
and, upon completion of production, the production itself, (ii) filing
financing statements in the appropriate jurisdiction, (iii) obtaining notices
of assignment and acceptance from account debtors and licensees of the
production, including distributors, and (iv) taking possession of certain
collateral, such as letters of credit or money.
All loans are made pursuant to written loan and security agreements. The
typical loan and security agreement includes covenants with respect to (i) the
establishment of certain reserves for payments to be made to the borrower or
third parties, such as the completion bonding company, (ii) restrictions on
the use of loan
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<PAGE>
proceeds, (iii) the grant of first priority security interest in and to the
assets described above, (iv) the grant to the Company of the right to take
over the production of the film or television production and renegotiate
distribution agreements upon the occurrence of an event of default, (v)
obtaining by a specified date subsequent distribution agreements with
acceptable distributors, (vi) restrictions on asset sales, (vii) maintaining
proper books and records and (viii) providing the Company with notice of
litigation or claims against the borrower.
If the borrower has debt from other third-party lenders, the Company enters
into an intercreditor agreement with such lender which sets forth the relative
priority of the lenders to the borrower's assets under certain circumstances
and the priority of loan repayment.
Pursuant to the collective bargaining agreements of the Screen Actors Guild
and Directors Guild of America, security interests in the film and its
proceeds are customarily granted in the guild's favor to secure the employer's
obligations thereunder, including the obligation to make residual payments
based on film revenues derived from the designated media. The guilds typically
agree to subordinate their liens to the security interests granted to the
Company. In addition, if the borrower has pre-existing obligations to third-
party creditors which are secured by the assets of the borrower that are being
pledged to the Company, the Company obtains a subordination agreement pursuant
to which the third-party creditor agrees to subordinate its rights and
security interests in the shared collateral to the Company's rights and to not
take any action that would interfere with the rights of the Company.
LOAN SERVICING AND MONITORING
The Company's lending officers generally review every advance requested on a
weekly basis to ensure that the Company is not advancing ahead of the agreed-
upon cash flow schedule. The bonding company generally reviews and approves
every advance as well. The applicable lending officer also periodically speaks
with the producer, bonding company and Sales Agent regarding the progress of
the film. The Company's loan documents provide that the Company is not
obligated to fund if agreed upon progress on the production has not been
achieved by the borrower.
The Company's officers perform extensive follow-up on every Gap Loan to
ensure that the gap is filled (i.e., distribution contracts are generated by
the Sales Agent) prior to delivery of the film or television production.
Generally, a lending officer will speak to the Sales Agent at least monthly
regarding the agent's progress on covering the gap. The loan documentation
grants the Company the right to impose certain penalties on the borrower and
exercise certain other rights, including replacing the Sales Agent, if sales
are not consummated within the appropriate time.
Loans are repaid principally from revenue received from distribution
contracts. In many instances, the distribution contracts provide for multiple
payments payable at certain milestones (such as execution of contract,
commencement of principal photography or completion of principal photography).
The maturity date of the loan generally is three to four months after
production in order to permit all payments from distributors to be received
within the maturity of the loan. Delivery of the completed production is made
to the various distributors that provide minimum guarantees within a short
period of time after completion of the production but only after the minimum
guarantees have been paid in full.
MARKETING
In addition to Mr. Horwitz, five other lending officers of the Company seek
new business opportunities. The Company primarily markets its services by
soliciting Sales Agents and responding to inquiries from Sales Agents and
producers. A significant source of business has been generated from attending
film festivals, including three major festivals--the Cannes Film Festival, the
Milan Film Festival and the American Film Market, a sales conference sponsored
by the AFMA. Representatives of the Company have attended these festivals for
the last 16 years. The Company also obtains business from referrals from
accountants, lawyers and other professionals in the entertainment industry,
advertisement in trade publications and calls to producers and Sales Agents.
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<PAGE>
COMPETITION
The Company faces significant competition in the business of originating
entertainment production loans. A significant competitor of the Company's LHO
division is the Bank's Entertainment Industries Group. No agreement between
the Bank and the Company will exist that restricts the activities of the
Bank's Entertainment Industries Group and the Company following the
Distribution. In addition, the Bank and the Company will not be prohibited
from using confidential information of the other party for its own internal
purposes that may have been obtained prior to the Distribution. Several
international banks, including Paribas, Films Limited and Coutts Bank, also
compete against the Company. Many of these competitors are substantially
larger and have considerably greater financial resources than the Company.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest
rates.
DELINQUENCY AND LOSS
Loans made through LHO typically provide for periodic repayment at specified
intervals throughout the life of a loan. A principal source of repayment is
the amounts received under the Pre-sold Contracts, and, as a result, the
Company periodically monitors the status of each Pre-sold Contract prior to
the maturity of the loan.
The Company maintains a standard procedure for the collection of the amounts
under Pre-sold Contracts. Each lending officer is required to keep a separate
file with the standard credit file containing information regarding each Pre-
sold Contract, correspondence thereto and any other information necessary for
follow-up on the contract's status. Two employees assigned to assist the
lending officer use this information to send notices and make telephone calls
to obtain payment. If a payment from a particular Pre-sold Contract is late, a
lending officer contacts the distributor. If the Company remains in dispute
with the distributor, it is subrogated to the rights of the borrower to
receive distribution payments and can arbitrate the dispute. If the Company
receives a favorable judgment, as mentioned above in "--Underwriting," the
distributor would not be permitted to participate at the American Film Market
for a period of two years. If necessary for collection, an action to enforce
an arbitrator's judgment is to be brought in the country in which the
distributor resides.
The following table sets forth information relating to delinquency levels,
charge-off experience and loan loss allowances of LHO with respect to its loan
portfolio for the periods indicated below:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED AS OF AND FOR THE
DECEMBER 31, SIX MONTHS
------------------------- ENDED JUNE 30,
1995 1996 1997 1998
------- ------- ------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
30-59 days past due............ $ -- $ 538 $ 747 $ 617
60-89 days past due............ 10 -- -- 1,400
90 or more days past due....... 488 1,193 -- --
Gross loans outstanding at pe-
riod end...................... 48,461 45,608 99,654 108,140
Average loans outstanding for
the period.................... 24,469 47,716 69,594 105,675
Loans charged-off (recoveries),
net........................... 201 424 334 (26)
Allowance for loan losses...... 727 1,163 2,656 3,098
Ratio of loans charged-off
(recoveries), net, to average
loans outstanding............. 0.82% 0.89% 0.48% (0.02%)
Ratio of allowance for loan
losses to gross loans
outstanding at period end..... 1.50% 2.55% 2.67% 2.86%
</TABLE>
The amount of delinquent loans as of June 30, 1998 increased to $2.0 million
from $0.7 million as of December 31, 1997. This increase was primarily
attributable to four loans becoming past due as of June 30, 1998. Of these
four loans, the past due amounts for two loans became current in July 1998 and
the remaining loans were placed on nonaccrual in June 1998.
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Until 1995, the Company made no Gap Loans. During the year ended December
31, 1997 and the six months ended June 30, 1998, approximately 75% and 73%,
respectively, of loans made by the Company were Gap Loans. As a result of this
continuing change in the type of loan primarily made by the LHO division of
the Company, the above historical information may not be indicative of future
loan loss experience. See "Risk Factors--LHO Lending."
CAB
GENERAL
The Company is a provider of secured small business loans, the majority of
which are guaranteed in part by the Small Business Administration (the "SBA").
The Company offers small business loans to a wide variety of businesses
located in California, Nevada and Arizona, including hotels, residential care
facilities, beauty salons and restaurants. The Company's small business
lending activities are conducted through CAB, a recently formed industrial
loan company. As of June 30, 1998 and December 31, 1997, the aggregate
outstanding principal amount of the Company's small business loans was
approximately $42 million and $40 million, respectively. The aggregate
principal amount of loans originated for the six months ended June 30, 1998
and 1997, and the year ended December 31, 1997 was approximately $30 million,
$28 million and $49 million, respectively. CAB's lending activities were
previously conducted through the Small Business Lending Division of the Bank,
which division began operating in 1993. See "--The SBA Guaranteed Loan
Program" below.
Total revenue for CAB for the six months ended June 30, 1998 and 1997, and
the year ended December 31, 1997 was $4.0 million, $2.9 million and $6.1
million, respectively, representing 19.6%, 15.3% and 11.8%, respectively, of
the Company's total revenue for such periods. Net income for CAB for the six
months ended June 30, 1998 and 1997, and the year ended December 31, 1997 was
$0.2 million, $0.2 million and $0.8 million, respectively, representing 3.7%,
5.5% and 5.0%, respectively, of the Company's net income for such periods.
Of loans originated by the Company during the six months ended June 30,
1998, $20.4 million in aggregate principal amount (69%) consisted of loans
guaranteed by the SBA that have been or will be sold in the secondary market,
and $9.2 million in aggregate principal amount (31%) consisted of the
unguaranteed portion of loans maintained by CAB for its own account. Of these
unguaranteed portions, $2.4 million are "companion loans." "Companion loans"
are loans made by CAB in conjunction with SBA loans. The companion loans are
secured by a first lien on the borrower's assets while the SBA-guaranteed
portion of the loan is secured by a second lien on the borrower's assets. As
of June 30, 1998, a substantial majority of the Company's SBA and companion
loans are secured by a first or second mortgage on the real property relating
to such loans. Similar to SBA loans, there is an active market for companion
loans and, from time to time, the Company sells its companion loans for a
premium in those markets. For the six months ended June 30, 1998, the
principal amount of loans originated by CAB ranged from $60,000 to $1,250,000,
the average principal amount was approximately $430,000, and the maturities
ranged from 6 months to 25 years. The interest rates of these loans are
typically adjustable at some fixed percentage over the prime rate. The
annualized weighted average yield for CAB's loans for the six months ended
June 30, 1998 was 12.44%. The increase in the annualized weighted average
yield for the six months ended June 30, 1998, as compared to 11.79% for the
year ended December 31, 1997 was mainly due to the collection and income
recognition of approximately $170,000 of past due interest on nonaccrual loans
and the receipt of a $47,000 prepayment penalty during the six months ended
June 30, 1998.
Of loans originated by the Company during the year ended December 31, 1997,
$29.7 million in aggregate principal amount (61%) consisted of the loans
guaranteed by the SBA that have been sold in the secondary market, and $19.4
million in aggregate principal amount (39%) consisted of the unguaranteed
portion of loans maintained by CAB for its own account. Of these unguaranteed
portions of loans, $10.8 million are companion loans. For the year ended
December 31, 1997, the principal amount of loans originated by CAB ranged from
$30,000 to $1,460,000, the average principal amount was approximately
$425,000, and the maturities ranged from seven years to 25 years. The weighted
average yield of CAB's loans for the year ended December 31, 1997 was 11.79%.
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STRATEGY
The principal element in the Company's small business lending strategy is to
increase the amount of loan originations by continuing to market itself as a
leading provider of SBA loans on an expedited basis. The Company also plans to
expand its SBA lending business outside of the three states in which it
currently operates
to additional states with growing economies by establishing additional lending
offices in these new states. The Company seeks to notify small business
borrowers of its lending decision within two days of receipt of a completed
loan application. The Company believes that, in a highly competitive small
business lending industry, its efficient and expedited approval process will
distinguish the Company from some of its competitors and has attracted
referrals from mortgage brokers and others that participate in this industry.
Despite its expedited review process, the Company maintains strict
underwriting guidelines designed to ensure that potential borrowers are
eligible under SBA guidelines and meet the Company's credit approval
guidelines. See "--Underwriting."
The Company also believes that significant cross-marketing opportunities
exist with clients of ITC and intends to build a private banking business with
these clients. The Company intends to offer investment products and expand its
non-SBA lending business by offering loans and equity lines to clients of ITC
(typically high net worth individuals) secured by the equity in their
residences or secured by certain securities held in custody by ITC.
COMPETITION
The small business lending business is highly competitive and CAB competes
with a variety of banks and non-bank lending institutions, many of which are
larger than the Company and have greater financial and other resources, and
many of which also participate in SBA-sponsored programs. These other banks
and non-bank lending institutions maintain larger marketing and sales staff
and use a wide variety of marketing strategies, some of which may be too
expensive for the Company to conduct. These banks and non-bank lending
institutions also compete by offering lower interest rates than CAB and by
offering additional credit facilities to small business borrowers, which
tactics the Company may not be able to use. CAB will also face significant
competition in its private banking business, which may impede its ability to
profitably engage in such activities.
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LOAN INFORMATION
The following table sets forth certain information relating to small
business and companion loans originated by the Company during the years ended
December 31, 1996 and December 31, 1997 and the six months ended June 30, 1997
and June 30, 1998:
<TABLE>
<CAPTION>
AVERAGE
AGGREGATE AMOUNT
NUMBER PRINCIPAL PER
OF LOANS AMOUNT LOAN
-------- --------- -------
(IN THOUSANDS EXCEPT
FOR NUMBER OF LOANS)
<S> <C> <C> <C>
SBA Loans:
"7A" Loans (1)
Year ended December 31, 1996.................... 110 $30,280 $275
Year ended December 31, 1997.................... 97 36,696 378
Six months ended June 30, 1997.................. 53 20,608 389
Six months ended June 30, 1998.................. 66 27,258 413
"504" Loans (1)
Year ended December 31, 1996.................... 1 $ 700 $700
Year ended December 31, 1997.................... 3 1,588 529
Six months ended June 30, 1997.................. -- -- --
Six months ended June 30, 1998.................. -- -- --
Companion Loans
Year ended December 31, 1996.................... 10 $ 7,812 $781
Year ended December 31, 1997.................... 16 10,808 676
Six months ended June 30, 1997.................. 9 7,223 803
Six months ended June 30, 1998.................. 3 2,384 795
</TABLE>
- --------
(1) See "--The SBA Guaranteed Loan Program" below for a description of "7A"
and "504" Loans.
SALES IN THE SECONDARY MARKET
CAB sells the guaranteed portion of all of its SBA loans to financial
institutions or broker-dealers for their investment or resale. CAB generally
retains the unguaranteed portion of the SBA loans, including its companion
loans. SBA guidelines also require that the Company maintain at least 10% in
aggregate principal amount of SBA loans, although, with SBA approval, the
Company may be permitted to maintain 5% of the aggregate principal amount of
SBA Loans. During 1996, 1997 and 1998, of the SBA loans sold, the Company sold
100% of the guaranteed portion of such loans. Investors in the guaranteed and
unguaranteed portions of SBA loans and CAB (with respect to the unguaranteed
portion retained) share ratably in all principal collected from the borrowers
with respect to the loans. In order to facilitate the sale of the guaranteed
portions of the SBA loans, the SBA has contracted with Colson Services Corp.
to serve as the exclusive Fiscal and Transfer Agent (the "FTA") for the
guaranteed portion of SBA Loans sold in the secondary market. The guaranteed
portions of SBA loans are converted by the FTA to registered government-
guaranteed certificates and the certificates are sold by CAB to investors to
yield a variable rate that adjusts relative to the prime rate. CAB collects
payments from borrowers and remits to the FTA amounts due to investors. The
FTA then remits such amounts to the investors and administers the transfer of
SBA-guaranteed interests of SBA Loans from one investor to another.
CAB is generally able to sell the SBA-guaranteed portions of its loans at a
premium due to the term of the underlying loan and the normally superior rate
of return as compared to other investment paper backed by the full faith and
credit of the United States Government. The amount of the premium obtained by
CAB is based upon the interest rate and term of the loan, and the service fee
to be received by CAB from the purchaser. Because CAB typically charges
different interest rates based on competitive market forces and the quality of
the borrower and, historically, has received a 1% servicing fee, the amount of
the premium obtained by CAB can vary significantly. The secondary market for
the SBA-guaranteed portion of loans is active and provides an
71
<PAGE>
immediate source of funding for CAB's loan origination activities. Normally,
within 30 days of closing and fully funding a loan, CAB solicits bids from
several investors who create and maintain the secondary market. There are
numerous investors in this market and CAB's ability to sell in the secondary
market is not dependent on any one or several of such investors. The SBA-
guaranteed portions of CAB's loans are generally sold within 30 days following
the closing of a loan. For the six months ended June 30, 1998 and the year
ended December 31, 1997, CAB has obtained an average premium of approximately
9% upon the sale of the SBA-guaranteed portion of their loans. CAB is required
under the SBA guidelines to pay to the SBA one-half of any premium in excess
of 10% upon the sale of the SBA-guaranteed portion of the loans. The premium
received in connection with the sale of loans is deemed completely earned once
the borrower has made its first three monthly payments. Subsequent default
and/or liquidation of the loan would not require CAB to return to the
purchaser any premium paid. The premium paid on loans that default or prepay
prior to the third monthly payment must be repaid to the purchaser of the loan
and cannot be recouped from the liquidation proceeds of the defaulted loan.
After CAB sells the SBA-guaranteed portion of the loan in the secondary
market, CAB generally services the SBA-guaranteed portion of the loan for an
annual fee. Although the fee is subject to negotiation, the typical fee
received by CAB for servicing these loans is equal to 1% of the principal
amount of the SBA-guaranteed portion of the loan. CAB is required to pay to
the SBA, until such time as it sells a loan, a portion of the servicing fee it
receives equal to 50 basis points of the guaranteed portion of the loan.
FUNDING
The primary source of funding for CAB's lending operations and any other
investments is expected to be CAB investment certificates, which are insured
by the FDIC to the extent permitted by law, and are hereinafter referred to as
"deposits." CAB intends to obtain the majority of its deposits in the form of
term investment certificates (functionally equivalent to certificates of
deposit) that pay fixed rates of interest for periods ranging from three
months to five years. CAB intends to emphasize certificates with terms of
three months to one year as part of its asset liability management efforts.
The rates a depository institution must pay for the acquisition of deposit
accounts generally are affected by prevailing interest rates and economic
conditions, and by competitive forces applicable to banks and other depository
institutions as well as nondepository financial institutions such as stock
brokerage firms. Deposit accounts reprice on a frequent basis; however,
certificates of deposit, because they are issued for a fixed term, reprice
less frequently than many other deposit accounts. Nevertheless, the
certificates of deposit and other deposit accounts issued by the Company
through CAB may be more interest-rate sensitive than the Company's assets.
Because of the high level of competition between banks and other depository
institutions for deposit accounts, including certificates of deposit, these
funding sources are considered volatile funding sources. When interest-bearing
liabilities such as deposit accounts reprice more quickly than interest-
earning assets, a significant increase in market rates of interest could
result in a corresponding decline in the Company's net interest income. CAB
will also offer variable rate savings accounts. CAB's strategy with all
deposit accounts will be to offer rates above those customarily offered by
competing banks and savings and loans. CAB expects to initially build its
deposit base by participating in deposit rate surveys which list the higher
rate paying insured institutions, periodically advertising in various local
market newspapers and other media, and selectively using a limited network of
deposit brokers. In addition to these strategies, CAB expects to maintain and
expand its deposits by relying on renewals of term accounts by existing
depositors as it builds its deposit base. CAB intends to open few branches and
will not provide demand checking accounts, ATM service, safe deposit boxes,
money orders, trust services and various other retail banking services. CAB
believes that the higher cost associated with increased interest rates on its
products will be offset by the reduced staffing and overhead costs resulting
from maintaining fewer branches and offering fewer products and services than
the majority of competing depository institutions. CAB believes that
implementation of this deposit-gathering strategy will produce a stable and
reliable funding source, and that the costs of funds resulting from CAB's
deposit-gathering strategy will be comparable to those of other industrial
loan companies pursuing a similar strategy. CAB expects, however, to compete
for deposits primarily on the basis of rates and, accordingly, CAB could
experience difficulties in attracting deposits if it could not continue to
offer deposit rates at levels above those of competing banks and savings
institutions.
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<PAGE>
CAB also expects to use advances from the Federal Home Loan Bank of San
Francisco ("FHLB") and other lines of credit as funding sources. CAB is a
member of the FHLB System and is approved to borrow from the FHLB pursuant to
a secured line of credit subject to FHLB regulations.
UNDERWRITING
The lending process typically includes five stages: (i) CAB analyzes and
approves or denies a loan application, (ii) if the loan is to be made under
the SBA's Certified Lender program, the loan application is forwarded by CAB
to the SBA, (iii) the loan is closed, (iv) with respect to SBA loans, the SBA-
guaranteed portion of the loan is sold in the secondary market by CAB while
the unguaranteed portion of the loan generally is retained by CAB and (v) CAB
services the loan for its stated duration unless the loan is paid in full or
foreclosed at an earlier date.
CAB's business is generally developed through the individual marketing
efforts of its personnel and referrals from mortgage brokers and real estate
agents. Generally, the loan application process begins with an initial
telephone call or meeting between the potential borrower and a CAB officer.
The potential borrower is preliminarily screened for eligibility and
creditworthiness. If the loan officer determines that the potential borrower
possesses certain minimum criteria, a detailed application is submitted by the
applicant and reviewed on an expedited basis by CAB. In most instances, the
applicant is informed of the lending decision within two days of receipt of
the application. The Company believes that this expedited review process
provides it with a competitive advantage over other SBA lenders. After
acceptance of the application, a loan officer is assigned to perform an
underwriting analysis of the loan and a field visit is arranged. Depending on
the size of the loan, it may then be reviewed by a second loan officer for
approval. If approved, a commitment letter is issued to the applicant. If the
loan is made under the SBA's Preferred Lender program, CAB does not need to
seek SBA approval. If the loan is made under the SBA's Certified Lender
program, the potential loan is forwarded to the SBA for its approval. A loan
guaranty authorization and certain closing documents, including the form of
note and SBA guaranty, are forwarded to the SBA by CAB for their review prior
to funding.
After the SBA has issued its loan guaranty authorization, relevant loan
materials are prepared and the closing is scheduled. Loan documents include
all appropriate security instruments, including deeds of trusts, and contain
affirmative covenants that require submission to CAB of periodic financial
information of the borrower and negative covenants that impose limitations on
certain activities of the borrower (i.e., asset sales, debt incurrence,
dividends).
SERVICING
CAB services all of the SBA loans it originates. Servicing includes
collecting payments from borrowers, conducting site visits, tracking
insurance, financial statements and other required documents and remitting
payments to investors including, with respect to the guaranteed interests, to
the FTA (after deducting applicable servicing fees), accounting for principal
and interest, contacting delinquent borrowers and supervising loan
liquidations. CAB's loan operation center in Inglewood, California processes
all loan collections. CAB's quality control staff members review loan files to
confirm that the loans are originated and maintained in accordance with its
requirements and applicable SBA regulations.
Prior to an SBA-guaranteed loan becoming more than 120 days past due, CAB
typically will repurchase such loan. Otherwise, the FTA, on behalf of the
purchasers of the SBA-guaranteed portion of the loan, serves notice on the SBA
to purchase from the holders the SBA-guaranteed portion of such loan.
Thereafter, the SBA may elect to service the loan for its own account or, more
typically, will elect to continue to retain CAB to service the loan, usually
at a service fee less than that received by CAB from the purchaser in the
secondary market. If CAB repurchases the loan, it will continue servicing the
loan and will develop a plan of collection that will be sent to the SBA. Upon
receiving the approval of the SBA, CAB will continue to work out the loan
through the final collection process.
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<PAGE>
The following table sets forth certain information relating to SBA loans
serviced by CAB:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------ AT JUNE 30,
1995 1996 1997 1998
------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of loans serviced............... 198 293 384 405
Total principal amount of Company's
loan portfolio........................ $22,563 $28,084 $ 39,718 $ 29,779
Total principal amount of loans sold... $36,005 $57,362 $ 81,109 $ 16,006
Total principal amount of loans serv-
iced.................................. $58,568 $85,446 $120,964 $122,604
</TABLE>
DELINQUENCY, LOSS AND PREPAYMENTS
If payment is not received within ten days of the due date, the Company
sends a delinquency notice. Servicing personnel begin contacting delinquent
borrowers approximately 30 days after the due date, depending on the size, age
and past history of the loan. Loans that are chronically delinquent receive
additional attention, either with multiple telephone calls or in-person
communication. When the loan becomes approximately 60 days past due, the
Company sends a demand notice requiring payment in full within ten days of the
date of such notice. When the loan becomes 90 days past due or prior to that
time if loan officers so determine, the loan file is transferred to a loan
collection/workout specialist. This specialist reviews the Company's
collateral and updates appraisals, credit reports and property profiles to
determine, among other things, if there are lenders junior to the Company and
to prepare a workout strategy. If possible, this specialist will work out a
payment program with the borrower and/or restructure the loan. The workout
plan is reviewed by the SBA prior to proceeding. Prior to the loan becoming
120 days past due, CAB purchases the guaranteed portion back from the
investor. The Company commences foreclosure proceedings as a last resort. In
these proceedings, collateral is repossessed and sold, and a claim is made to
the SBA for any shortfall.
The SBA will pay the guaranteed portion of the principal balance, together
with accrued interest covering a period generally not to exceed 120 days. The
liquidation of a defaulted loan is governed by an agreement among the SBA, CAB
and the borrower. The proceeds of any liquidation of collateral securing the
loan or other collections made on the loan are shared by the SBA and CAB in
accordance with their respective interest in the loan. With the approval of
the SBA, CAB normally proceeds to liquidate the loan, and the SBA and CAB bear
the costs of collection efforts in accordance with their respective interests
in the loan.
The following table sets forth information relating to delinquency levels,
charge-off experience and loan loss allowance of CAB with respect to its loans
held for investment for the periods indicated (1):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS AS OF AND FOR
ENDED DECEMBER 31, THE SIX MONTHS
-------------------------- ENDED JUNE 30,
1995 1996 1997 1998
------- ------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
30-59 days past due............. $ 1,731 $ 1,369 $ 413 $ 933
60-89 days past due............. 336 350 168 73
90-119 days past due (2)........ 223 -- 151 621
120 days or more past due (2)... -- 914 3,571 2,585
Gross loans held for investment
at year end.................... 19,915 22,553 35,955 33,829
Average loans held for invest-
ment........................... 13,649 21,632 31,018 32,906
Allowance for loan losses....... 420 716 1,075 1,012
Loans charged-off (recoveries),
net............................ (1) 52 57 343
Ratio of net charge-offs to
average loans held for
investment..................... (0.01)% 0.24% 0.18% 1.04%
Ratio of allowance for loan
losses to gross loans held for
investment at period end ...... 2.11 % 3.17% 2.99% 2.99%
</TABLE>
- --------
(1) Because the Company's small business lending segment commenced operations
within the Bank in 1993, many of the loans in the Company's small business
loan portfolio have not been outstanding for a sufficient
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<PAGE>
period of time to determine whether there are material adverse credit,
delinquency, loss, prepayment or other issues associated with these loans.
See "Risk Factors--CAB Lending."
(2) The Company discontinues accruing interest on loans, other than SBA
guaranteed loans, whenever the payment of interest or principal thereof is
90 days past due or earlier if such interest is deemed uncollectible. The
Company discontinues accruing interest on SBA guaranteed loans whenever
the payment of interest or principal thereof is 120 days past due or
earlier if such interest is deemed uncollectible.
Loans that were 30-59 days past due increased to $0.9 million at June 30,
1998 from $0.4 million at December 31, 1997. The increase was primarily
attributable to five SBA loans becoming past due at June 30, 1998.
Loans that were 90-119 days past due increased to $0.6 million at June 30,
1998 from $0.2 million at December 31, 1997. The increase was primarily due to
one companion loan becoming past due during the six months ended June 30,
1998.
Loans that were 120 days or more past due decreased to $2.6 million at
June 30, 1998 from $3.6 million at December 31, 1997. The decrease was
primarily due to two loans made to the same borrower totaling approximately $2
million that became current and were placed on accrual status during the six
months ended June 30, 1998. The borrower sold its business to a buyer who has
assumed the borrower's indebtedness to the Company and has paid all past due
interest on both loans.
Due to a variety of circumstances relating to the borrower's business or
personal matters, certain loans made by CAB are repaid, in part or in their
entirety, on an accelerated basis. These prepayments generally arise from
refinancing at lower interest rates, excess cash generated by the borrower's
operations, cash from the proceeds of the sale of the borrower's business or
personal real estate or the liquidation of other business assets. During the
six months ended June 30, 1998 and the year ended December 31, 1997, CAB
collected approximately $5.3 million and $7.3 million respectively, in partial
or complete loan prepayments, which approximates the normal rate of historical
prepayments that CAB has experienced in recent years.
THE SBA GUARANTEED LOAN PROGRAM
The SBA, headquartered in Washington, D.C. and operating through 10 regions
throughout the United States, offers financial assistance to eligible small
businesses in the form of partial government guarantees on loans made to such
businesses by qualified participating lenders such as CAB under the SBA's
guaranteed loan program. In order to be eligible for an SBA loan, a business
generally must be operated for profit and, depending on the industry of the
potential borrower, must maintain specified limitations on numbers of
employees or annual revenues.
The SBA administers three levels of lender participation in its general
business loan program, pursuant to Section 7(a) of the Small Business Act of
1953, as amended, and the rules and regulations promulgated thereunder. Under
the first level of "Section 7(a)" lender participation, commonly known as the
Guaranteed Participant Program, the lender gathers and processes data from
applicants and forwards it, along with its request for the SBA's guaranty, to
the local SBA office. The SBA then completes an independent analysis, and
makes its decision on the loan application. SBA turnaround time on such
applications can vary greatly, depending on its backlog of loan applications.
Under the second level of lender participation, known as the Certified
Lender Program, the "Certified Lender" gathers and processes the application
and makes its request to the SBA, as in the Guaranteed Participant Program
procedure. The SBA then performs a review of the lender's credit analysis on
an expedited basis, which review is generally completed within three working
days. The SBA generally requires that lenders originate loans meeting certain
portfolio quality and volume criteria before authorizing lenders to
participate as Certified Lenders. Authorization is granted on an SBA district-
by-district basis.
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<PAGE>
Under the third level of lender participation, known as the Preferred Lender
Program, the lender has the authority to approve a loan and to obligate the
SBA to guarantee the loan without submitting an application to the SBA for
credit review. The lender is required to notify the SBA of the approved loan,
along with the submission of pertinent SBA documents. The standards
established for participants in the Preferred Lender Program, the SBA's
highest designation, are more stringent than those for participants in the
Certified Lender Program. CAB has been named a Preferred Lender by the SBA in
all of the SBA loan markets in which it competes. Most of CAB's SBA Loans are
currently originated under the Preferred Lender Program. The Company, however,
is required by SBA guidelines to originate loans made to certain borrowers,
including loans being used to finance a nursing home, under the Certified
Lender program.
With respect to loans made prior to October 12, 1995, under the Guaranteed
Participant and the Certified Lender Programs, the SBA guaranteed loans of
$155,000 or less up to 90%, and loans in excess of $155,000 with terms of less
than 10 years up to 85%. For loans in excess of $155,000 with terms greater
than 10 years, the maximum guaranty was 75%. Under the Preferred Lender
Program, the maximum guaranty was 70%. With respect to loans made on or after
October 12, 1995, under the Guaranteed Participant and the Certified Lender
Programs, the SBA guarantees loans of $100,000 or less up to 80% and all other
loans have a maximum guaranty of 75%. The SBA's maximum guaranty per borrower
under all three programs is $750,000, with certain exceptions. In the event of
a default by the borrower, any losses resulting therefrom are shared pari
passu between CAB and the SBA. If the SBA establishes that any resulting loss
is attributable to substantial deficiencies in the manner in which the loan
was originated, documented or funded by CAB, the SBA may seek recovery of
funds from CAB.
Approximately 100% and 97%, respectively, of SBA loans originated by CAB
during the six months ended June 30, 1998 and the year ended December 31, 1997
were "7A" loans for purposes of the SBA programs described above. The
remaining SBA loans made by CAB were "504" loans for purposes of SBA
guidelines. "504" loans are loans made for fixed-asset projects, such as
purchasing land and improvements, construction, modernizing or converting
existing facilities and purchasing machinery and equipment. Loans under this
program cannot be used for working capital or inventory or repaying debt. The
borrower must provide at least 10% of the equity for the financing. Under a
typical "504" loan, CAB makes a loan for 50% of the principal amount, which is
secured by, among other assets, a first priority mortgage on the underlying
property (the "Base Loan") and the remaining amount of the loan is provided by
CAB as a short-term loan with a maturity of up to 90 days (the "Bridge Loan").
The Bridge Loan is typically repaid by the borrower with proceeds received
from a bond issuance by a certified development company, a not-for-profit
corporation established to create and issue debt securities that are fully
guaranteed by the SBA. The debt securities are sold to institutional
investors. CAB generally sells Base Loans to institutional investors in
private transactions. Those loans may be sold in their entirety with servicing
released, or they may be sold with servicing retained by CAB.
SBA loans are written at variable rates of interest which generally are
limited by SBA guidelines. With respect to loans with maturities under seven
years, the maximum rate is 225 basis points over the lowest prime lending rate
published in The Wall Street Journal, and with respect to loans with
maturities in excess of seven years, the maximum rate is 275 basis points over
the lowest prime lending rate published in The Wall Street Journal, in each
case as adjusted on the first day of each calendar quarter. In general, SBA
loans made by CAB adjust on a quarterly basis.
GOVERNMENT REGULATIONS
The level of SBA funding for the Guaranteed Loan Program is subject to the
Federal budgeting process for each fiscal year ending September 30 ("Federal
Fiscal Year"). Accordingly, the availability of funds for SBA guarantees could
increase or decrease each year. The actual usage of funds for the fiscal year
ended September 30, 1997 was $9.5 billion for the Preferred Lender Program in
which CAB principally participates as compared to $7.3 billion and $7.8
billion of actual usage of funds for the Federal Fiscal Years ended September
30, 1996 and 1995, respectively. In 1995, SBA funding was temporarily halted
after Congress failed to approve a new federal budget. See "Risk Factors--
Dependence of Small Business Lending Operations on SBA Programs."
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<PAGE>
The qualification of a lender to participate in the SBA Preferred Lender
Program is subject to termination by the SBA based on objective criteria, at
its election, on ten days' notice. Management of CAB has no reason to believe
that its license to participate in the program will be terminated.
See "--Regulatory Matters" below for additional information relating to
state and federal regulations applicable to CAB's operations.
TRUST SERVICES
GENERAL
The Company, through ITC, provides a full array of investment management and
fiduciary services to individual investors, corporations, benefit plans and
foundations. These services include investment management, personal trust
services, custody services and trust administration of employee benefit plans.
At June 30, 1998 and at December 31, 1997, the Company maintained total assets
under administration of approximately $9.5 billion and $8.7 billion,
respectively. ITC was the fifteenth largest licensed trust company in
California at March 31, 1998 based on assets under administration. ITC is
headquartered in Los Angeles and maintains branch offices in Costa Mesa,
Century City, and San Francisco. Total revenue for ITC for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $4.5
million, $4.1 million and $8.4 million, respectively, representing 22.0%,
21.3% and 16.3%, respectively, of the Company's total revenue for such
periods. Net income for the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997 was $0.6 million, $0.4 million and $1.0 million,
respectively, representing 11.5%, 10.6% and 6.3%, respectively, of the
Company's net income for such periods.
The Bank purchased ITC's trust business in 1981 and formerly operated under
the name "Trust Company of California." Since 1986, the Company's assets under
administration have increased from $790 million at December 31, 1986 to $9.5
billion at June 30, 1998. The Company's growth has been derived primarily from
the development of long-term relationships with clients and increasing
referrals from attorneys and financial advisors specializing in trust
services, as well as selective acquisitions.
The following table sets forth certain financial and asset information
relating to ITC's trust businesses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
GROSS REVENUE GROSS REVENUE % GROSS REVENUE GROSS REVENUE %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $ 3,069 39% $ 1,750 41%
Multi-Employer.......... 1,475 19 870 20
Employee Benefit........ 1,506 19 884 21
Personal Trusts......... 1,213 16 748 17
CD Custodial............ 704 7 50 1
---------- --- ---------- ---
Total................... $ 7,967 100% $ 4,302 100%
========== === ========== ===
<CAPTION>
AT DECEMBER 31, 1997 AT JUNE 30, 1998
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
ASSETS UNDER ASSETS UNDER
ADMINISTRATION ASSET % ADMINISTRATION ASSET %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $3,521,000 41% $4,108,000 43%
Multi-Employer.......... 4,013,000 46 3,926,000 41
Employee Benefit........ 687,000 8 974,000 10
Personal Trusts......... 473,000 5 506,000 5
CD Custodial............ 22,000 -- 20,000 1
---------- --- ---------- ---
Total................... $8,716,000 100% $9,534,000 100%
========== === ========== ===
</TABLE>
77
<PAGE>
STRATEGY
The principal element of the Company's growth strategy for its trust
business is to increase market share by identifying and developing
competencies in market niches, such as targeting "middle market" money
managers that manage assets in the $50 million to $1 billion range. The
Company believes that its size relative to some of its larger competitors
allows it to provide a high level of customer service by tailoring accounts to
individual needs, and this added flexibility allows it to readily adapt to new
market niches. In addition, this high level of customer service has enabled it
to develop strong, long-term relationships with its clients.
The Company typically solicits clients who fall in a "middle-market"
category. The Company believes the assets of these clients generally are too
small to be serviced properly by the large trust companies, but too large for
mutual funds and other providers of limited investment services. The Company
also intends to develop business by targeting potential clients that
frequently require an independent third party, such as clients that use escrow
agents and shareholder recordkeeping services.
The Company also intends to expand significantly its personal trust area,
which provides private banking and trust services to high net-worth
individuals in rapidly growing areas of wealth concentration. The Company
believes that there is a significant untapped market among aging baby boomers
and their parents who, following significant wealth-accumulation during the
1990's, are in need of estate planning and asset management services. The
Company intends to solicit these potential clients by organizing a new
California chartered trust company to be named the Crown Private Trust Company
("CPT") that will act principally as a marketing arm to develop trust
accounts. The Company intends to have the staff members of CPT develop
relationships by actively soliciting potential clients and their advisors,
such as attorneys and accountants. The Company expects that CPT will employ
asset managers that will provide asset management services for a fee based on
the amount of assets managed. The Company also intends to offer CPT's clients
private banking services in conjunction with CAB.
In addition to internal growth as described above, the Company intends to
make selective acquisitions that would complement the Company's existing trust
services and provide additional profit opportunities and support services. The
Company has no current arrangements for such an acquisition and there can be
no assurance that suitable acquisition candidates will be located or that
financing for such acquisitions will be available.
CUSTODIAL SERVICES AND EMPLOYEE BENEFIT TRUST SERVICES
The Company provides custodial services to individual clients of money
managers by holding their securities and cash and performing administrative
services relating thereto, including wire transfer and settlement procedures
for securities transactions. Most of the Company's clients are located in
California and include trustees of personal trusts, foundations, IRA holders
and escrow parties. These clients are typically referred to the Company by
money management institutions whose assets range from less than $100 million
to over $2.5 billion in assets under management. Due to regulatory
constraints, money managers typically do not maintain custody of their
client's securities. The Company and the money manager each generate separate
periodic reports to the client.
The Company also provides trust and custody services to labor unions and
employee stock ownership plans ("ESOPs") and employee benefit plans. Account
sizes of these clients are typically larger than individual clients. The
average account size for union clients and employee benefit plan clients as of
June 30, 1998 was approximately $27 million and $2.3 million, respectively.
Although the margin for custodial services to labor unions is lower than the
margin for custodial services for individuals, the Company's operating and
processing systems are well-suited for handling larger-sized accounts at a
small incremental cost, which allows the Company to profitably compete for
this business. In addition to the services described above, services provided
to employee benefit plans include issuing checks to employees representing
distributions from the plan accounts and acting as fiduciaries for ESOPs.
The Company typically charges custodial service clients annual fees based on
the market value of the assets under administration and a fee per security
transaction processed on their behalf. These fees generally are
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<PAGE>
deducted from the client's account on a quarterly basis. Union clients
generally receive a guarantee from the Company not to raise its fees for a
specified period of years.
The Company also provides certificate of deposit ("CD") custody services for
a variety of clients of CD brokers. The Company purchased this business under
very favorable terms in 1994 from the FDIC. A CD broker acts on behalf of
credit unions, trustees of IRAs and individuals and attempts to locate the
most favorable CD interest rates then available at financial institutions
throughout the United States. A CD broker then aggregates monies invested by
its clients and purchases a jumbo CD on their behalf. The Company receives a
fee of between 1% and 2% of the return on the CD. The Company does not intend
to expand this line of business and does not accept new accounts.
The Company believes that its processing systems enable it to provide a high
quality and extremely reliable product. The Company uses a processing system
and several additional optional modules that have been customized by SEI
Investments for the Company's trust services business. The system interfaces
include the Depository Trust Company, a securities clearing agency,
correspondent banks for foreign securities settlements and several pricing
vendors and portfolio management systems.
PERSONAL TRUST SERVICES
The Company's personal trust business includes general trust services,
private banking, estate administration and asset management. The Company also
provides certain other demand services to its clients, such as the preparation
of trust tax returns. Clients typically engage the Company as trustee for an
inter vivos (living) trust, as agent for managing their individual portfolios,
as executor of estates or as escrow agent. In addition, the Company may be
engaged as trustee or asset manager for various types of assets, including
real estate and life insurance policies.
The Company offers a variety of accounts tailored to the needs of its
clients. These accounts include managed account services, which are full
service trust accounts with investment discretion, directed trust accounts,
where the Company has no investment discretion and acts only upon the
direction of the client, investment management agency accounts, where the
Company acts only in agency capacity, and distribution trust accounts, where
the Company distributes assets of inter vivos trusts to beneficiaries upon the
death of the grantor of the trust. For each of the accounts, the Company
charges annual fees based on the amount of assets under administration. For
its real estate management services, the Company receives a monthly fee. The
Company also charges a fee for certain ancillary services, including
securities transactions, purchases of insurance and wire transfers.
MARKETING
The Company generates most of ITC's business through referrals from existing
clients, attorneys, money managers, investment consultants and personnel of
the Bank. The Company pays a referral fee to the Bank and to other referral
sources based on a percentage of the new client's fees to ITC.
COMPETITION
There are a significant number of competitors in each of the principal trust
service areas engaged in by the Company. Competitors include regional and
national banks and brokerage houses, many of which are larger organizations
than the Company and have greater resources. As described above, the Company
attempts to gain a competitive advantage over its larger competitors by
providing high-quality customer service and customizing services for
individual relationships.
IMPERIAL CREDIT INDUSTRIES, INC.
As of August 15, 1998, the Company beneficially owned approximately 26.0% of
the common stock of ICII, a diversified specialty finance company whose
businesses complement those of the Company. ICII offers,
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principally through its subsidiaries, financial products such as non-
conforming residential mortgage banking (non-conforming single family mortgage
loans), commercial mortgage banking (franchise loans and income property
loans), business lending (equipment leasing, asset-based financing and loan
participations) and consumer loans (sub-prime auto loans, home improvement
loans and other consumer credit). The majority of ICII's loans and leases are
sold in the secondary market through securitizations and whole loan sales.
During the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997, ICII generated total revenues of $103.1 million,
$97.8 million and $309.6 million, respectively. Total revenue related to the
Company's ownership of ICII stock for the six months ended June 30, 1998 and
1997, and the year ended December 31, 1997 was $6.7 million, $7.8 million and
$28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $3.7 million,
$2.2 million and $11.5 million, respectively, representing 76.0%, 52.7% and
76.2%, respectively, of the Company's net income for such periods.
ICII was capitalized in January 1992 when the Bank contributed to ICII the
assets and certain liabilities of its mortgage banking division and all of the
outstanding stock of Southern Pacific Bank ("SPB"), formerly known as Southern
Pacific Thrift and Loan Association. In May 1992, ICII completed an initial
public offering of its common stock, thereby reducing the Bank's ownership of
ICII common stock from 100% to 72.4%. As a result of public and private
dispositions of ICII common stock by the Bank, an underwritten primary
offering by ICII of additional shares of its common stock and the exercise of
ICII employee stock options, the Bank's ownership interest in ICII was reduced
to approximately 23.0% of the outstanding ICII common stock as of June 30,
1998. In addition, the Company additionally owned approximately 3.0% (or 1.2
million shares of ICII common stock as of August 15, 1998 (the "Shares"))
pursuant to the ICII Shareholders Agreement. The ICII Shareholders Agreement,
among other things, grants the Company the right to direct the voting of, and
provides the Company with an irrevocable proxy to vote, the Shares until the
earliest of (a) the written instructions of the Company and the administrative
agent for the Credit Facilities, (b) February 7, 2001, (c) the date of
settlement of the purchase of the Shares by the Company following the exercise
of its option to purchase the Shares as described below and (d) upon the
written instructions of Bear, Stearns & Co. Inc. after (I) approval by the
ICII shareholders of a merger or similar business combination resulting in a
cancellation, reclassification or similar change with respect to all shares of
ICII common stock or (II) the date beginning five trading days prior to the
scheduled expiration date of a tender offer or similar offer by any person to
purchase more than 10% of Company's liquidity and its ability to conduct its
businesses. See "Credit Facilities", "Risk Factors--Negative Impact on
Earnings Should Ownership Level of ICII Stock Be Reduced; Substantial
Dependence on ICII-Related Revenue" and Note 8 to the Company's Historical
Combined Financial Statements included elsewhere in this Information
Statement. According to ICII's 1998 proxy statement, no other shareholder
beneficially owns in excess of 11.3% of the ICII common stock.
Three members of the Company Board are also officers and/or directors of
ICII and, as such, are in a position to significantly influence the management
and policies of ICII. H. Wayne Snavely is the Chairman of the Board, President
and Chief Executive Officer of ICII. Mr. Snavely was associated with Bancorp
and the Bank from 1975 through 1992 in a variety of senior management
positions and served as a director of the Bank and Bancorp until February
1998. G. Louis Graziadio, III, the Co-Chairman of the Company Board, Chief
Executive Officer of the Company and a director of Bancorp, and Perry Lerner
have been directors of ICII since 1992. See "Management."
The Company acquired its ownership interest in ICII as a capital
contribution from the Bank. The Bank contributed the ICII stock to the Company
in order to address concerns expressed by the Federal Reserve Board with
respect to the permissibility of Bancorp's continued ownership of such stock
under the BHCA (see "--Regulatory Matters" and "The Transactions--Background
and Reasons for the Distribution") and to provide the Company with financing
flexibility for its ongoing operations. The Company believes its ownership of
the ICII common stock will provide the Company with financing flexibility by
enabling the Company to obtain financing at attractive rates that would not
otherwise be available to the Company. The Company intends to pledge its ICII
shares as collateral for margin loans under the Credit Facilities. The Company
intends to use the
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proceeds of such loans for working capital purposes. See "Credit Facilities"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
ICII has not historically paid, and has publicly reported that it does not
anticipate paying, cash dividends on ICII common stock. Accordingly, the
Company does not, and does not expect to, derive any dividend income from its
ownership interest in ICII.
Potential Applicability of the Bank Holding Company Act. ICII has advised
the Company that the business operations of SPB are such that it is not a bank
for purposes of the BHCA. The Company, however, does not control the business
operations of SPB. In the event of changes in the business operations of SPB,
such as the issuance by SPB of demand deposit accounts, the Company could
become a bank holding company subject to the BHCA. In the event the Company
were determined to be a bank holding company, it would be prohibited by the
BHCA, except in certain statutorily prescribed instances, from retaining or
acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company, and from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks or furnishing services to its
subsidiaries. The Company, subject to the prior approval of the Federal
Reserve Board, would be permitted to engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be
a proper incident thereto. In making any such determination, the Federal
Reserve Board would be required to consider whether the performance of such
activities by the Company or its affiliate could reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve Board
is also empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
The Federal Reserve Board may require that a bank holding company terminate
an activity or terminate control of or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate certain provisions of certain
bank holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
would be required to file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities. Further,
the Company would be required by the Federal Reserve Board to maintain certain
levels of capital.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiaries,
including, when necessary, the use of its resources to assist its subsidiary
banks, and may not conduct its operations in an unsafe or unsound manner. A
bank holding company's failure to meet the foregoing obligations may be
considered an unsafe and unsound banking practice or a violation of the
Federal Reserve Board's regulations or both.
REGULATORY MATTERS
LHO
The California Usury Law. The Usury Law limits the rate of interest at which
loans may be made. However, the Usury Law also identifies a number of persons
who, by virtue of licensing by federal or state authorities, are exempt from
its interest rate limitations. Such exempt lenders include, among others,
commercial banks, industrial loan companies and certain other licensed persons
designated by state law. The CFL Law expressly states that it is the intent of
the legislature that CFL licensees be included within the class of lenders
exempt from the Usury Law. As a CFL licensee, the Company, acting through the
LHO division, is exempt from the application of the Usury Law, subject to the
CFL Law.
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California Finance Lender License. CFL licensees are lenders who are
commonly known as "finance companies." Their sources of funds to conduct
lending activities generally come from their own capital and earnings and from
lines of credit and other borrowings. CFL licensees do not take deposits or
sell or issue insured or guaranteed debt instruments, such as certificates of
deposit or thrift certificates.
Under the CFL Law, "charges" include the aggregate interest, fees, bonuses,
commissions, brokerage, discounts, expenses and other forms of costs charged,
contracted for, or received by a CFL licensee or any other person in
connection with the investigating, arranging, negotiating, procuring,
guaranteeing, making, servicing, collecting and enforcing of a loan. The CFL
Law imposes no limits on the "charges" that a licensee may receive on
commercial purpose loans, provided that the loan is in the amount of $5,000 or
more and further provided that the terms of the loan are not otherwise
unconscionable. All of the loans made through LHO will be commercial purpose
loans in excess of $5,000 and the Company expects that all of such loans will
be made at interest rates and on terms which are competitive and permissible
under the CFL Law. The CFL Law does not attempt to restrict or regulate the
structure or terms of commercial loans, such as rate of amortization, duration
or term of the loan, interest rates, loan fees or collateral. The CFL Law
provides that commercial loans may be secured by either real or personal
property, or both, or they may be unsecured. Moreover, because the loans made
through LHO are commercial purpose loans in excess of $5,000, several
provisions of the CFL Law and the regulations of the DOC thereunder will not
be applicable to the lending operations of LHO. Commercial purpose loans are
not subject to many consumer-protection oriented laws and regulations, such as
the federal Truth in Lending Act and Regulation Z of the Federal Reserve Board
promulgated thereunder.
CFL licensees are expressly permitted to sell the loans they make and any
loans they may purchase from other CFL licensees to institutional investors,
which include governmental entities and instrumentalities, banks, trust
companies, savings and loan associations, industrial loan companies, finance
companies, insurance companies, pension and profit-sharing funds, any
corporation with outstanding securities registered under Section 12 of the
Exchange Act or any wholly owned subsidiary thereof and any syndication or
combination of the foregoing organized to purchase such loans. Any of such
institutional investors may also establish a trust or other business entity
for the purpose of issuing undivided interests in, the right to receive
payments from, or that are payable primarily from, a pool of financial assets
held by the trust, subject to certain requirements.
Pursuant to broad regulatory powers granted under the CFL Law, the DOC
periodically conducts on-site examinations of CFL licensees' books, records
and operations to insure continuing compliance with the CFL Law and
regulations. The DOC also has powers to investigate possible violations of the
CFL Law and enforcement powers to ensure compliance with the CFL Law,
including the power to revoke or suspend licenses, issue cease and desist
orders and take other remedial actions against CFL licensees and others
violating the CFL Law. Certain proposed changes subsequent to the issuance of
the CFL license, such as changes in management personnel and ownership, may
require the prior consent of or notice to the DOC. The cost of regular or
special examinations by the DOC are charged to the licensee. The overall costs
of the DOC to administer the CFL Law are charged to the industry through an
annual assessment which is proportionally charged to each licensee based on
volume of business.
CAB
GENERAL
CAB is subject to supervision and regulation by the DFI and, as a federally
insured depository institution, by the FDIC. CAB is not regulated or
supervised by the Office of Thrift Supervision, which regulates savings and
loan institutions, the Office of the Comptroller of the Currency, which
regulates national banks, or the Federal Reserve Board, which regulates member
banks of the Federal Reserve System and bank holding companies.
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CALIFORNIA LAW
The thrift and loan business conducted by CAB is governed by the California
Industrial Loan Law and the rules and regulations of the DFI which, among
other things, regulate the issuance of certain thrift deposits as well as the
collateral requirements, maximum maturities and other loan terms of the
various type of loans that are permitted to be made by California-chartered
industrial loan companies (also known as "thrift and loan companies").
Subject to restrictions imposed by applicable California law, CAB is
permitted to make secured and unsecured business and consumer loans. The
maximum term for repayment for loans made by thrift and loan companies ranges
up to 40 years and 30 days depending upon the type of collateral and priority
of secured position, if any. Although nonconsumer secured loans of fewer than
10 years may generally be repaid in unequal periodic payments, consumer loans
must generally be repaid in substantially equal periodic payments. California
law limits lending activities outside of California by thrift and loan
companies to no more than 20% of total assets, or up to 40% of total assets
with DFI approval. CAB has been granted permission to hold up to 40% of its
total assets in obligations from non-residents.
California law contains extensive requirements for the diversification of
the loan portfolios of thrift and loan companies. A thrift and loan company
with outstanding investment certificates may not, among other things, place
more than 25% of its loans or other obligations in loans or obligations which
are secured only partially, but not primarily, by real property; may not make
any one loan secured primarily by improved real property which exceeds 20% of
its paid-up and unimpaired capital stock and surplus not available for
dividends (5% for unimproved property); may not lend an amount in excess of 5%
of its paid-up and unimpaired capital stock and surplus not available for
dividends upon the security of the stock of any one corporation; may not make
loans to, or hold the obligations of, any one person as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends (50% if the loans are
unsecured); may not have outstanding leases which exceed 20% of the thrift's
aggregate receivables; and may have no more than 70% of its total assets in
loans which have remaining terms to maturity in excess of seven years and are
secured solely or primarily by real property. CAB currently satisfies all of
such requirements. Management believes that CAB will be able to maintain
compliance with such regulatory requirements by managing the mix of its assets
and loans without any material adverse impact on earnings or liquidity.
A thrift and loan company generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DFL. A thrift and loan company also may not make any loan
to, or hold any obligation of, any of its shareholders or any shareholder of
its holding company or affiliates, except that this prohibition does not apply
to persons who own less than 10% of the stock of a holding company or
affiliates which are listed on a national securities exchange. A thrift and
loan company may not make a loan to, or hold any obligation of, any person in
which any of its directors, officers or shareholders has a financial interest,
directly or indirectly. Any person who wishes to acquire 10% or more of the
capital stock or capital of a California thrift and loan company or 10% or
more of the voting capital stock or other securities giving control over
management of its parent company must obtain the prior written approval of the
DFI.
Under the Industrial Loan Law, a thrift and loan company is subject to
certain leverage limitations which are different than those applicable to
commercial banks or savings and loan associations. In particular, thrift and
loan companies may not have outstanding at any time investment certificates
that exceed 20 times their paid-up and unimpaired capital and surplus. Under
California law, thrift and loan companies that desire to increase their
leverage (or deposit-to-capital ratio) must meet specified minimum standards
for liquidity reserves in cash, loan loss reserves, minimum capital stock
levels and minimum unimpaired paid-in surplus levels. For example, in order
for a thrift and loan company to increase its deposits to more than 15 times
the aggregate amount of its paid-up and unimpaired capital and unimpaired
surplus not available for dividends, the thrift must, among other things,
maintain a liquidity reserve in cash or cash equivalents equal to 12% of its
total deposits outstanding and maintain a special allowance for losses as
required by the DFI.
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As a newly chartered thrift and loan company, CAB is not permitted to
operate immediately at such levels of leverage on its capital and surplus. The
Industrial Loan Law permits newly chartered companies to accept up to six
times their capital and surplus during the first 12 months of operations.
Subject to DFI approval, after 12 months and for the next 12 months of
operation, a thrift and loan company may accept thrift deposits in amounts up
to eight times its capital and surplus. After 24 months of operation and for
the next 24 months, thrift and loan companies may increase their acceptance of
deposits to amounts up to 12 times their capital and surplus, again subject to
DFI approval. However, after 36 months of operation, a thrift and loan company
may apply to the DFI for permission to have its leverage requirements governed
by the FDIC capital-adequacy requirements. As a practical matter, although the
Industrial Loan Law permits thrift and loan companies to leverage their
deposits in amounts of up to 15-20 times capital and surplus, the concurrent
requirements of the FDIC capital-adequacy regulations discourage, if not
prohibit in some circumstances, leveraging to such an extent. See "--Federal
Law--Regulatory Capital Requirements."
Thrift and loan companies are not permitted to borrow, except by the sale of
investment or thrift certificates, in an amount exceeding 300% of tangible net
worth, surplus and undivided profits, without the DFI's prior consent. All
sums borrowed in excess of 150% of tangible net worth, surplus and undivided
profits must be unsecured borrowings or, if secured, approved in advance by
the DFI, and be included as investment or thrift certificates for purposes of
computing the maximum amount of certificates a thrift and loan may issue.
However, collateralized Federal Home Loan Bank advances are excluded for this
test of secured borrowings and are not specifically limited by California law.
Thrift and loan companies are generally limited to investments, other than
loans, that are legal investments for commercial banks. California commercial
banks are prohibited from investing an amount exceeding 15% of shareholders'
equity in the securities of any one issuer, except for specified obligations
of the United States, California, and local governments and agencies thereof.
A thrift and loan company may acquire real property only in satisfaction of
debts previously contracted, pursuant to certain foreclosure transactions or
as may be necessary for the transaction of its business, in which case such
investment is limited to one-third of a thrift and loan's paid-in capital
stock and surplus not available for dividends. CAB is in compliance with these
requirements.
The California Industrial Loan Law allows a thrift and loan company to
increase its secondary capital by issuing interest bearing capital notes in
the form of subordinated notes and debentures. Such notes are not deposits and
are not insured by the FDIC or any other governmental agency, generally are
required to have a maturity of at least seven years, and are subordinated to
deposit holders, general creditors and secured creditors of the issuing thrift
and loan company.
Although investment authority and other activities that may be engaged in by
CAB generally are prescribed under the California Industrial Loan Law, certain
provisions of the FDIA may limit CAB's ability to engage in certain activities
that otherwise are authorized under the California Industrial Loan Law. See
"--Federal Law--Restrictions on CAB's Activities and Investments."
A thrift and loan company is not permitted to declare dividends with respect
to its capital stock unless it has at least $750,000 of unimpaired capital
plus additional capital of $50,000 for each branch office maintained. In
addition, as with all California corporations, no distribution of dividends is
permitted unless: (i) such distribution would not exceed a thrift and loan
company's retained earnings, or (ii) in the alternative, after giving effect
to the distributions the sum of a thrift and loan company's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would not be less than 125% of its liabilities (net of deferred taxes, income
and other credits).
A thrift and loan company is likewise prohibited from paying dividends from
that portion of capital that has been restricted for dividend payment purposes
by its bylaws or by resolution of its board of directors. The amount of
restricted capital maintained by a thrift and loan company provides the basis
for establishing the maximum amount that a thrift and loan company may lend to
one single borrower and the aggregate volume of thrift
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deposits that may be accepted. Accordingly, a thrift and loan company
typically restricts as much capital as necessary to achieve its desired loan
to one borrower limit and its maximum leverage ratio, which in turn restricts
the funds available for the payment of dividends. CAB's bylaws contain a
provision restricting all of its capital, paid-in surplus, earned surplus and
retained earnings for dividend payment purposes, subject to a resolution of
the board releasing a specific amount of capital for the payment of dividends.
DFI regulations require that a thrift and loan company set aside loan loss
reserves and other reserves in accordance with GAAP.
Industrial loan companies are permitted to establish one or more branch
offices within California, subject to approval of the DFI and the FDIC. In
determining whether to approve an application for a branch, the DFI evaluates
whether the proposed branch makes banking more convenient for the public and
any other public advantage served by such proposed branch, whether the
applicant has the additional $50,000 in paid-in capital as required by the
Industrial Loan Law, whether the applicant has acceptable branch operational
controls and whether the overall financial condition of the applicant
justifies the branch office. CAB operates from two branches: the main branch
located at 2121 Rosecrans Avenue, Suite 1350, El Segundo, California, and an
additional branch located at 9920 South La Cienega, Fifth Floor, Inglewood,
California 90301. CAB may exercise all powers available to it as an industrial
loan company from each of its branches.
In addition to branches, thrift and loan companies may, subject to
regulatory approval, open and operate loan production offices ("LPOs"). LPOs
are limited service locations, which may be located in California and outside
of California, from which licensees may solicit and make loans and acquire
receivable obligations. However, a licensee may not accept deposits at an LPO,
nor may a licensee pay on instruments, such as checks, at an LPO. In order to
establish an LPO, a licensee must submit an application disclosing the address
of the LPO, the plan of business for such LPO, the identity and qualifications
of the management to be located at the LPO and, if the LPO is located outside
of California, certain information regarding the laws, regulations and state
agency regulating the LPO in such jurisdiction. CAB operates with LPOs located
in Phoenix, Arizona, Sacramento, California, Costa Mesa, California,
Emeryville, California, Encino, California, Stockton, California, Riverside,
California and Carlsbad, California.
FEDERAL LAW
CAB's deposits are insured by the Bank Insurance Fund (the "BIF") of the
FDIC, to the full extent permissible by law and in the same manner as
commercial banks. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions to which it provides deposit insurance. The
FDIC is also the federal agency charged with regulating state-chartered banks
that are not members of the Federal Reserve System. For this purpose, CAB is
considered to be a state-chartered nonmember bank. CAB is subject to the rules
and regulations of the FDIC to the same extent as FDIC-insured state-chartered
commercial banks. The approval of the FDIC is required prior to any merger,
consolidation or acquisition of control of CAB, and prior to the establishment
or relocation of a branch office facility of CAB. An acquiror may be deemed to
control CAB if it holds, directly or indirectly or acting in concert with
others, 25% or more of a class of voting stock of CAB. This supervision and
regulation is intended primarily for the protection of depositors. Any person
who wishes to acquire such control must obtain the consent of the FDIC.
Regulatory Capital Requirements. Federally insured, state-chartered
depository institutions, including thrift and loan companies such as CAB, will
be required to maintain minimum levels of regulatory capital. The FDIC also is
authorized to impose capital requirements in excess of these standards on
individual banks on a case-by-case basis.
CAB is required to comply with three separate minimum capital requirements:
a "Tier 1 capital ratio" or Leverage Ratio and two "risk-based" capital
requirements. "Tier 1 capital" generally includes common shareholders' equity
(including retained earnings), qualifying noncumulative perpetual preferred
stock and any related surplus, and minority interest in the equity accounts of
fully consolidated subsidiaries, minus intangible assets, other than properly
valued purchased loan servicing rights up to certain specified limits and
minus net deferred tax assets in excess of certain specified limits.
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Tier 1 Capital Ratio (Leverage Ratio). FDIC regulations establish a minimum
3.0% ratio of Tier 1 capital to total average quarterly assets for the most
highly-rated state-chartered, FDIC-supervised banks, with an additional
cushion of at least 100 to 200 basis points for all other state-chartered,
FDIC-supervised banks, which effectively imposes a minimum Tier 1 capital
ratio for such other banks of between 4.0% to 5.0%. Under FDIC regulations,
highly-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity and
good earnings. CAB's Leverage Ratio as of June 30, 1998 was 18.29%.
Risk-Based Capital Requirements. The risk-based capital requirements
contained in FDIC regulations generally require CAB to maintain a ratio of
Tier 1 capital to risk-weighted assets ("Tier 1 Risk-Based Ratio") of at least
4.00% and a ratio of total risk-based capital to risk-weighted assets ("Total
Capital Ratio") of at least 8.00%. To calculate the amount of capital
required, assets are placed in one of four categories and given a percentage
weight (0%, 20%, 50% or 100%) based on the relative risk of the category. For
example, U.S. Treasury Bills and GNMA securities are placed in the 0% risk
category. FNMA and FHLMC securities are placed in the 20% risk category, loans
secured by one-to-four family residential properties and certain privately
issued mortgage-backed securities are generally placed in the 50% risk
category, and commercial and consumer loans and other assets are generally
placed in the 100% risk category. In addition, certain off-balance sheet items
are converted to balance sheet credit equivalent amounts and each amount is
then assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital" means
Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount of
supplementary or Tier 2 capital that is used to satisfy the requirement does
not exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital
includes, among other things, so-called permanent capital instruments
(cumulative or other perpetual preferred stock, mandatory convertible
subordinated debt and perpetual subordinated debt), so-called maturing capital
instruments (mandatory redeemable preferred stock, intermediate-term preferred
stock, mandatory convertible subordinated debt and subordinated debt), and the
allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.
The federal banking agencies also adopted final regulations specifying that
the agencies will include, in their evaluations of a bank's capital adequacy,
an assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The final regulations, however, do
not include a measurement framework for assessing the level of a bank's
exposure to interest rate risk, which is the subject of a policy statement
issued by the federal banking agencies in June 1996. This policy statement
suggests that management measure interest rate risk in relation to the effect
of a probable range of potential interest rate changes on the economic value
of the bank. Banks with high levels of exposure or weak management systems
generally will be required to hold additional capital for interest rate risk.
The specific amount of capital that may be needed and the adequacy of a bank's
interest rate risk management program will be determined on a case-by-base
basis by the examiner and the appropriate federal banking agency. CAB
currently is unable to predict the impact of the policy statement on CAB
because of the number of variables which may be considered by a bank examiner.
The FDIC and the other federal banking agencies have also promulgated final
amendments to their respective risk-based capital requirements which would
explicitly identify concentration of credit risk and certain risks arising
from nontraditional activities, and the management of such risk, as important
factors to consider in assessing an institution's overall capital adequacy.
The FDIC may now require higher minimum capital ratios based on certain
circumstances, including where the institution has significant risks from
concentration of credit or certain risks arising from nontraditional
activities.
The federal banking agencies have adopted for regulatory purposes Statement
of Financial Accounting Standards No. 115, which among other things, generally
adds a new element to shareholders' equity under GAAP by including net
unrealized gains and losses on certain securities. In December 1994, the FDIC
issued final amendments to its regulatory capital requirements which require
that the net amount of unrealized losses from available for sale equity
securities with readily determinable fair values be deducted for purposes of
calculating the Tier 1 capital ratio. All other net unrealized holding gains
(losses) on available for sale securities are excluded from the definition of
Tier 1 capital. CAB does not have available for sale any equity securities in
its investment portfolio.
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Prompt Corrective Action Requirements. The FDIC has implemented a system
requiring regulatory sanctions against state-chartered banks that are not
adequately capitalized, with the sanctions growing more severe depending the
institution's reduced capital. The FDIC has established specific capital
ratios for five separate capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized".
An institution is treated as well capitalized if its ratio of Total Capital
Ratio is 10.0% or more, its Tier 1 Risk-Based Ratio is 6.0% or more, its
Leverage Ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. An institution will be
undercapitalized if its Total Capital Ratio is less than 8.0%, Tier 1 Risk-
Based Ratio is less than 4.0%, or if its Leverage Ratio is less than 4.0%
(3.0% if the institution receives the highest rating on the MACRO financial
institutions rating system). An institution whose capital falls between the
well capitalized and undercapitalized levels will be treated as adequately
capitalized. An institution will be treated as significantly undercapitalized
if the above capital ratios are less than 6.0%, 3.0%, or 3.0%, respectively.
An institution will be treated as critically undercapitalized if its ratio of
tangible equity (Tier 1 capital plus cumulative preferred stock minus
intangible assets other than purchased loan servicing rights) to adjusted
total assets is equal to or less than 2.0%. CAB's capital qualified it for the
well capitalized category as of June 30, 1998.
The FDIC is authorized and, under certain circumstances required, to take
certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized institution". Any such institution must
submit a capital restoration plan and until such plan is approved by the FDIC
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The FDIC is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any institution that fails to comply with its capital plan or is
"significantly undercapitalized" must be made subject to one or more of
additional specified actions and operating restrictions which may cover all
aspects of its operations and include a forced merger or acquisition of the
institution. A "critically undercapitalized" institution is subject to further
mandatory restrictions on its activities in addition to those applicable to
significantly undercapitalized associations. In addition, the FDIC must
appoint a receiver or conservator for an institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the FDIC, including the appointment of a conservator or a
receiver.
The FDIC is also generally authorized to reclassify a supervised institution
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the FDIC of any of these prompt corrective action measures
on an insured institution, if and when warranted, may have a substantial
adverse effect on such insured institution's operations and profitability.
Safety and Soundness Standards. On August 9, 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured depository institutions before capital becomes impaired.
If an institution fails to comply with a safety and soundness standard, the
appropriate
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federal banking agency may require the institution to submit a compliance
plan. Failure to submit a compliance plan or to implement an accepted plan may
result in enforcement action.
Internal Controls Adequacy. Each depository institution with assets greater
than $500 million must prepare an annual report, signed by the chief executive
officer and the chief financial officer, on the effectiveness of the
institution's internal control structures and procedures for financial
reporting, and on the institution's compliance with laws and regulations
relating to safety and soundness. The institution's independent auditors must
attest to, and report separately on, management's assertions in the annual
report. The report and the attestation, along with financial statements and
such other disclosure requirements as the FDIC may prescribe, must be
submitted to the FDIC and will be available to the public. Every such
institution must also have an audit committee of its Board of Directors made
up entirely of directors who are independent of the management of the
institution. CAB complies with substantially all of such requirements.
FDIC Insurance Assessments. The FDIC assesses deposit insurance premiums
under a risk-based assessment system, which is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Under the risk-based assessment system, a BIF member
institution such as CAB is categorized into one of three capital categories
(well capitalized, adequately capitalized, and undercapitalized) and one of
three categories based on supervisory evaluations by its primary federal
regulator (in CAB's case, the FDIC).
As long as the BIF's reserve ratio is less than a specified "designated
reserve ratio," 1.25%, the total amount raised from BIF members by the risk-
based assessment system may not be less than the amount that would be raised
if the assessment rate for all BIF members were 0.23% of deposits. The FDIC
determined that the designated reserve ratio of 1.25% was achieved as of May
31, 1995. Accordingly, on August 16, 1995, the FDIC published final
regulations adopting an assessment rate schedule for BIF members of four to 31
basis points that became effective as of June 1, 1995. In addition, effective
January 1996, the schedule was further revised to provide a range of zero to
27 basis points with a minimum annual assessment of $2,000. As a result of
these changes, CAB's assessment is expected to be the minimum.
Restrictions on CAB's Activities and Investments. Under the FDIA, a state-
chartered bank (which includes CAB) and its subsidiaries may not engage as
principal in any activities that are not permissible for national banks and
their subsidiaries unless (1) the bank meets the applicable FDIC capital
standards described above, and (2) the FDIC has determined that the activity
would pose no significant risk to the BIF. With limited exceptions, the FDIC
may not use this authority to permit a state-chartered bank to engage in
equity investments (other than investments in subsidiaries to the extent
permissible under California law) or in insurance underwriting. CAB's
projected activities, including business finance and real property lending,
have been stated by the Office of the Comptroller of the Currency to be
permissible activities for national banks.
The FDIC regulations which implement the FDIA limitation on state bank
activities require a state bank to abide by any conditions or restrictions
applicable to national banks if the state bank wishes to conduct the activity
without first obtaining the FDIC's consent. These regulations could limit
CAB's ability to expand into new activities that might otherwise be available
under California law, or to invest in equity securities of corporations, which
is permissible under certain circumstances for California-chartered commercial
banks but not for national banks.
CAB will be prohibited from engaging in certain tying arrangements in
connection with an extension of credit, sale or lease of property or provision
of services. For example, with certain exceptions, CAB may not require a
customer to obtain other services provided by CAB, and may not require the
customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit or reduced consideration for credit to the
customer.
In addition, federal law imposes restrictions on transactions between CAB
and its affiliates. All such transactions, including leases and service
contracts, must be on terms and under circumstances that are
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substantially the same, or at least as favorable to CAB, as those prevailing
at the time for comparable transactions involving nonaffiliated companies. In
the absence of comparable transactions, the affiliate transaction must be on
terms and under circumstances that in good faith would be offered by CAB to
nonaffiliated companies. Extensions of credit by CAB to an affiliate must be
fully collateralized or over collateralized, depending on the type of
collateral. CAB may not extend credit to any one affiliate in an amount that
exceeds 10% of its capital (20% for all affiliates in the aggregate). Any
purchase of assets by CAB from an affiliate is also subject to these limits,
as are certain other transactions, including any guarantee of an affiliate's
obligations or any investment in securities issued by an affiliate. As
discussed above, the California Industrial Loan Law also applies certain
restrictions on transactions with affiliates, including CAB's directors,
officers and shareholders. Moreover, federal law also places limitations on
loans by CAB to its directors, officers and controlling persons. Among other
things, such loans, if and when permitted, generally must be made on terms
substantially the same as for loans to unaffiliated persons.
The FDIC has enforcement authority over CAB with respect to the restrictions
on tying arrangements and affiliate transactions but the FRB, as well as the
FDIC, has interpretive and exemptive authority.
Limitations on Dividends. In policy statements, the FDIC has advised insured
institutions that the payment of cash dividends in excess of current earnings
from operations is inappropriate and may be cause for supervisory action. As a
result of this policy, CAB may find it difficult to pay dividends out of
retained earnings from historical periods prior to the most recent fiscal year
or to take advantage of earnings generated by extraordinary items. The FDIC
has authority to prohibit financial institutions from engaging in business
practices which are considered to be unsafe or unsound. It is possible,
depending upon the financial condition of CAB and other factors, that such
regulators could in some circumstances assert that the payment of dividends
constitutes an unsafe or unsound practice and could prohibit payment of
dividends even though such payment is otherwise permissible. In addition,
federal law prohibits any insured institution from paying dividends if after
such payment the institution would be undercapitalized. CAB currently expects
to retain its earnings and not to make dividends to the Company. See "--Prompt
Corrective Action Requirements."
Community Reinvestment Act and Fair Lending Developments. CAB is subject to
certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act ("CRA") activities.
The CRA generally requires the federal banking agencies to evaluate the record
of financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities. CAB is in compliance with its CRA requirements due to the
nature of its projected lending activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will
use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment and evidence of disparate impact.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as CAB and their affiliates, may be
subject to potential enforcement actions by the FDIC and the DFI for unsafe or
unsound practices in conducting their business or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of
deposits, the imposition of civil
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money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties, and the imposition of
restrictions and sanctions under the FDIC's prompt corrective action
provisions. Management knows of no pending or threatened enforcement actions
against or relating to CAB.
HOLDING COMPANY REGULATION
The BHCA generally provides that companies which own or control banks must
register as bank holding companies. Bank holding companies are subject to
regulation by the Federal Reserve Board and to limitations on their operating
activities and holdings. While the Competitive Equality Banking Act of 1987
("CEBA") subjected certain types of previously unregulated companies to the
BHCA, it also contained a specific exemption from the definition of "bank" for
industrial loan companies which meet certain criteria relating to size, the
offering of demand deposits, the nature of activities conducted and the
occurrence of a change of control.
Based on its size and the activities to be conducted, upon its licensing as
an industrial loan company, CAB will be exempt from the definition of "bank"
and therefore the Company will not be a bank holding company subject to the
BHCA. CAB has no plans to operate in any way that would cause it to lose the
exemption from the definition of "bank" under CEBA or the current rules,
regulations and interpretations thereunder of the Federal Reserve Board.
Although the Company is not aware of any proposed changes to or amendment of
such law, rules and regulations and interpretations, changes or amendments may
occur in the future and CAB and the Company may be limited in their ability to
influence the extent or nature of any such changes or amendments. Even though
the Company will not be subject to the BHCA, the Company and its affiliates
will be subject to certain Federal Reserve Board regulations and federal law
by virtue of CAB being a federally insured depository institution, including
Sections 23A and 23B of the Federal Reserve Act, governing transactions with
affiliates, and Section 4(h) of the BHCA relating to anti-tying restrictions.
ITC
Regulation of ITC. ITC operates as a trust company under a charter granted
by the DFI pursuant to authority of the California Financial Code. As such,
ITC is subject to regulation and supervision by the DFI. ITC does not issue
insured deposits, and therefore it is not considered an insured bank and
accordingly will not be regulated by the Federal Deposit Insurance Corporation
or the Federal Reserve Board.
Examination and Reporting. California-chartered trust companies are subject
to examination by the DFI. Applicable law requires that the DFI must examine a
California trust company's court trust business every two years and must
examine such company's private trust fund business as often as the DFI deems
necessary.
Every California-chartered trust company must make and file with the DFI
periodic reports showing the trust company's financial condition and such
other information as the DFI requires. Periodic reports are required to be
filed at least three times per year. In addition, the DFI may require a trust
company to file special reports with the DFI from time to time. At the time of
the filing of each periodic report, each trust company is required to publish
a condensed financial statement in a newspaper of record at least one time.
Minimum Capital Requirements. California-chartered trust companies must
adhere to minimum capital requirements established by the DFI. The DFI is
empowered to determine the required minimum capital for a California trust
company based on various considerations, including the following: (1) the
nature and volume of its business; (2) the amount, nature, quality and
liquidity of its assets; (3) the amount and nature of its liabilities
(including but not limited to any capital notes or debentures in any
contingent liabilities); (4) the amount and nature of its fixed charges; (5)
the history of, and prospects for, the trust company to earn and retain
income; (6) the quality of its operations; (7) the quality of its management;
and (8) the nature and quality of its ownership.
As a California-chartered trust company, ITC may not make any distributions
to its shareholder in any amount that exceeds the lesser of (i) its retained
earnings, or (ii) its net income for its last three fiscal years, less the
amount of any distributions made by ITC or any majority-owned subsidiary of
ITC to its shareholder during
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such period. A California-chartered trust company may, however, with the
approval of the DFI, make a distribution to its shareholder in an amount not
exceeding the greatest of (i) its retained earnings, (ii) its net income for
its last fiscal year or (iii) its income for its current fiscal year.
Whenever it appears that the capital of a California-chartered trust company
is impaired, the DFI is required to order the company to correct such
impairment within 60 days. The trust company to which such an order is issued
is required to levy and collect an assessment upon its common shares as
permitted under the California Corporations Code, unless the deficiency is
otherwise corrected.
Permitted Investments. The California Banking Law provides for certain
limitations on investments of contributed capital by California-chartered
trust companies. Generally, trust companies are limited to investment in
securities and loans in which a California-chartered commercial bank is
permitted to invest. In addition, California-chartered trust companies are
permitted to invest in certain other investments which are permitted
investments for trusts under the California Probate Code. Notwithstanding the
foregoing, California trust companies are permitted to deposit funds awaiting
investment with a state or national bank which is independent of the trust
company.
Deposit with State Treasurer. California-chartered trust companies are
required to deposit with the California State Treasurer money or securities in
a minimum amount of $100,000 if the trust company maintains any court trusts,
and an additional $100,000 if the trust company maintains private trusts. In
addition, if the trust company receives trust funds or property, other than
real property, for court trusts in excess of $1,000,000, the trust company is
required to provide 30 days written notice to the DFI and must, within a
specified time thereafter, deposit an additional $50,000 of money and/or
securities. Each additional $500,000 of deposits requires a similar notice and
the deposit with the California State Treasurer of an additional $25,000 of
money and/or securities until the total deposit value reaches $500,000.
The types of securities permitted to be deposited include notes or
obligations of the United States or those for which the full faith and credit
of the United States is pledged for the payment of principal and interest,
bonds of the state of California or those for which the faith and credit of
the State of California is pledged for the payment the principal and interest
thereof, bonds and revenue securities of political subdivisions of the State
of California, bonds of any state of the United States that are legal
investments for commercial banks, and loans secured by first liens on real
estate that are permitted investments for California-chartered commercial
banks, as well as certain other similar obligations.
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation. From time
to time, however, the Company is involved in routine litigation incidental to
its business.
EMPLOYEES
As of June 30, 1998, the Company employed 125 full-time employees. Of these
employees, approximately 12 were employed by LHO, 56 were employed by ITC, 9
were employed at the Corporate headquarters and 48 were employed by CAB. The
Company believes that its relations with its employees are good.
PROPERTIES
The Company does not own any of its facilities. The Company leases its
principal executive offices at 1840 Century Park East, Los Angeles,
California, currently consisting of 9,210 square feet. The initial lease term
expires in November 2002 with one five-year extension at the Company's option.
The Company's offices devoted to the LHO division are located at the Company's
executive offices. CAB's administrative offices are at 9920 South La Cienega,
Fifth Floor, Inglewood, California 90301. The lease is on a month-to-month
basis. CAB's initial deposit branch is located at 2121 Rosecrans Avenue, El
Segundo, California, and consists of 671 square feet. The lease expires August
31, 2007, with two five-year extensions at the Company's option. CAB
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also operates eight business development offices for its SBA lending business
in Sacramento, California; Stockton, California; Costa Mesa, California;
Emeryville, California; Encino, California; Riverside, California; Carlsbad,
California; and Phoenix, Arizona, all of which are leased. ITC's principal
office is located at 201 N. Figueroa Street, Los Angeles, California, and
occupies 13,462 square feet. The lease expires October 31, 2007, with one
five-year Company option to extend. ITC also has branch offices in Costa Mesa,
California, Century City, California and San Francisco, California, all of
which are leased. The principal office of ICII is located in Torrance,
California, and is leased.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company Board consists of nine persons. Upon completion of the
Distribution, the members will be divided into three equal classes with each
class serving a three-year term after an initial transitional period. The
following table sets forth information as to the directors and executive
officers of the Company.
<TABLE>
<CAPTION>
INITIAL
TERM
NAME AGE EXPIRES POSITION
---- --- ------- --------
<C> <C> <C> <S>
George L. Graziadio, Jr. 78 1999 Chairman of the Board of Directors
G. Louis Graziadio, III 48 2001 Co-Chairman of the Board of Directors and
Chief Executive Officer
Lee E. Mikles 42 1999 Director
Paul A. Novelly 54 1999 Director
H. Wayne Snavely 57 2001 Director
Robert M. Franko 50 2001 President and Director
Perry A. Lerner 54 2000 Director
Robert L. Harris II 39 2000 Director
Lewis P. Horwitz 62 2000 President and Chief Executive Officer of
LHO and Director
Brian W. Nocco 46 N/A Executive Vice President and Chief
Financial Officer
Clinton W. Bliss 63 N/A Senior Vice President and Chief Credit
Officer
John Getzelman 55 N/A President of CAB
</TABLE>
George L. Graziadio, Jr. Mr. Graziadio is chairman of the Company Board. Mr.
Graziadio is also chairman of the board, president and chief executive officer
of Bancorp and has been a member of the Bancorp Board since 1969. Mr.
Graziadio is also chairman of the board of the Bank and a director of various
other subsidiaries of Bancorp. In addition, he is engaged as an owner or
partner in many other business activities, primarily in the real estate
industry. He is also a director of Coastcast Corp., a company manufacturing
metal-casted products. Mr. Graziadio is the father of G. Louis Graziadio, III
and the uncle of Lee E. Mikles.
G. Louis Graziadio, III. Mr. Graziadio is co-chairman of the Company Board
and has been chief executive officer since October 1997. Mr. Graziadio is also
a director of Bancorp, ITC and ICII. He has been a member of the Bancorp Board
since 1984. Mr. Graziadio is president of Ginarra Holdings, Inc. and its
subsidiaries, a California corporation engaged in investments. He is also
chairman of the board of Lynx Golf, Inc., a golf club manufacturer, which on
July 27, 1998 filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court for the
Southern District of California. He is also the chairman of the board of Vista
2000, Inc., a manufacturer of gloves, balloons and pet products and a director
of Franchise Mortgage Acceptance Company, a specialty lender to franchise
businesses. He has been engaged in and has extensive experience with real
estate development and construction, with which he has been involved since
1972. He is the son of George L. Graziadio, Jr., chairman of the Company
Board.
Lee E. Mikles. Mr. Mikles is a director of the Company. Mr. Mikles has been
a director of Bancorp since 1996 and of the Bank since 1994. Mr. Mikles is a
principal of Mikles/Miller Management Inc., an investment advisor. He is also
a director of Coastcast Corp. and Vista 2000, Inc. Mr. Mikles is the nephew of
George L. Graziadio, Jr., chairman of the Company Board.
Paul A. Novelly. Mr. Novelly is a director of the Company and has been a
director of the Bank since April 1996. Since 1979, Mr. Novelly has been the
president and chief executive officer of Apex Holding Co. and its
subsidiaries, a wholesale marketer and storer of petroleum products. Mr.
Novelly is a director and/or officer of numerous other corporations, including
Coastcast Corp. and Vista 2000, Inc.
H. Wayne Snavely. Mr. Snavely is a director of the Company. He is also
chairman, chief executive officer and a director of ICII. Mr. Snavely also
serves as a director of Franchise Mortgage Acceptance Company, Impac
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Mortgage Holdings, a real estate investment trust, Southern Pacific Funding
Corporation, a mortgage lender, and Imperial Credit Commercial Mortgage
Investment Corporation, a real estate investment trust.
Robert M. Franko. Mr. Franko has been president of the Company since its
formation and is also a director of the Company. From 1995 and until April
1997, Mr. Franko was an executive vice president and chief financial officer
of Bancorp. Before joining Bancorp in 1995, he was president and chief
executive officer of Springfield Bank & Trust Limited, a commercial bank. Mr.
Franko is also chairman of the board of ITC, a principal of Imperial
Securities Corporation, an NASD-registered broker/dealer, and a director of
Monarch Mutual Funds, a registered investment company.
Perry A. Lerner. Mr. Lerner is a director of the Company and has been a
director of ICII since 1992. He is also a principal in Crown Capital Group,
Inc., an investment firm. Mr. Lerner was associated with the law firm of
O'Melveny & Myers from 1982 through 1996. Mr. Lerner was an Attorney-Advisor
of the International Tax Counsel of the United States Treasury Department from
1973 to 1976. Mr. Lerner is also a director of Vista 2000, Inc., and Franchise
Mortgage Acceptance Company.
Robert L. Harris II. Mr. Harris is a director of the Company. Since
September 1992, Mr. Harris has been the senior vice president, International
Business Development, for AMC Entertainment Inc., an operator of motion
picture theaters. He is also the president and a director of Entertainment
Properties Trust, a publicly traded real estate investment trust. Mr. Harris
is also a member of the American Film Institute.
Lewis P. Horwitz. Mr. Horwitz is a director of the Company and has been the
president and chief executive officer of the LHO division of the Company since
the Bank acquired LHO in 1989. Mr. Horwitz founded The Lewis Horwitz
Organization in 1980. Mr. Horwitz has over 38 years of banking experience and
27 years of experience in entertainment-related finance. He is a member of the
Board of Directors of AFMA, the Chairman of The Affiliated Financial
Institutions Committee of AFMA, a past member of the Independent Film Industry
Export Finance Task Force, an advisor to Banco Popular (Puerto Rico) on film
production loans and an adviser to the Film Fund Management Corporation.
Brian W. Nocco. Mr. Nocco has been executive vice president and chief
financial officer of the Company since May 1998. Prior to joining the Company,
Mr. Nocco was a Senior Vice President of The Chubb Corporation since November
1994. Prior to joining The Chubb Corporation, Mr. Nocco was Treasurer of
Continental Bank Corporation in Chicago, Illinois, where he began his career
as a commercial lender. From 1983 to 1986, Mr. Nocco held positions of
Treasurer of CFS Continental, Inc. and Assistant Treasurer of Staley
Continental, Inc.
Clinton W. Bliss. Mr. Bliss has been a senior vice president and chief
credit officer of the Company since April 1997. He is also chief credit
officer of CAB. Prior to April 1997, he was a senior vice president and
manager for Commercial Loan Administration for the Bank and was employed in
various positions by the Bank since 1980. Prior to joining the Bank, Mr. Bliss
was a vice president and commercial loan officer for Union Bank and he held a
variety of management positions with Morris Plan Co. of California, which was
an industrial loan company.
John Getzelman. Mr. Getzelman has been president of CAB since August 1998.
Prior to joining the Company, he was the president and chief executive officer
of Community Bank in Pasadena, California since 1992. Prior to 1992, he was
employed for over 21 years in various positions by Security Pacific Bank,
including as president and chief executive officer of Rainier National Bank in
Seattle, Washington, chairman and chief executive officer of Security Pacific
Bancorporation Northwest and head of operations for the Asia/Australia
Territory of Security Pacific Bank's banking operations. He is also a director
of Aames Financial Corporation, a mortgage origination company based in Los
Angeles.
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DIRECTORS' MEETINGS, COMMITTEES AND FEES
The Company Board has established a Compensation Committee and, following
the Distribution, the Company Board is also expected to maintain an Audit
Committee. Directors who are also officers or employees of the Company will
not be permitted to serve on any of these committees. The current members of
the Compensation Committee are Messrs. Mikles and Lerner. The functions of
these committees will be as follows:
AUDIT COMMITTEE. The Audit Committee will assist the Company Board in
fulfilling its responsibilities concerning the Company's accounting and
financial reporting practices and the ethical conduct of the Company and
its employees. This committee will make recommendations to the Company
Board regarding the selection, retention or termination of the Company's
independent accountants and review the professional services, proposed fees
and independence of such accountants. This committee also will review with
management and the independent accountants both the controls established to
protect the integrity of the quarterly reporting process and the Company's
annual financial statements.
COMPENSATION COMMITTEE. The Compensation Committee will assist the
Company Board in the establishment of appropriate compensation and benefits
for the Company's directors, officers and employees. This committee's
general responsibilities will include advising the Company Board on certain
compensation matters, evaluating and approving the chief executive
officer's compensation, reporting to shareholders on executive
compensation, and evaluating new and existing executive compensation and
benefit programs. This committee will also review and make recommendations
concerning outside director compensation and administer annual incentives
for key employees and the Company's long-term incentive plans. All of the
members of the Compensation Committee are, and after the Distribution will
be, "disinterested" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Code.
DIRECTOR COMPENSATION
Each director of the Company, other than those directors that are also
executive officers, receives annual compensation of $12,000 and is paid $1,000
for each meeting attended. Each member of a committee of the Board receives
additional annual compensation of $3,000 and is paid $500 per meeting
attended. Directors who are also executive officers receive no additional
compensation for being a director of the Company.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK
The following table sets forth the projected beneficial ownership of Company
Class A Common Stock immediately following the Distribution Date by (i) each
of the Company's directors, (ii) the Company's chief executive officer and
other officers identified under "Executive Compensation" below, (iii) all
directors and executive officers as a group and (iv) those persons that will
own more than 5% of the Company Class A Common Stock, in each case based upon
information available to Bancorp concerning ownership of shares of Bancorp
Common Stock at June 30, 1998 and after giving effect to the February 6, 1998
Bancorp three-for-two stock split. The projections do not take into account
any shares of Company Common Stock (as defined herein) that may be issued
pursuant to the exercise of options granted under the Imperial Financial
Group, Inc. 1997 Share Incentive Plan or the 1998 Imperial Financial Group,
Inc. Stock Option Plan or otherwise. The information regarding the projected
5% owners has been obtained by Bancorp's records and reviews of statements
filed with the Commission pursuant to Sections 13(d) and 13(g) of the Exchange
Act. See "Executive Compensation."
<TABLE>
<CAPTION>
NUMBER OF SHARES PROJECTED % OF SHARES
NAME(1) TO BE BENEFICIALLY OWNED(4) OUTSTANDING
- ------- --------------------------- -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(3)
George L. Graziadio, Jr. 2,236,405 (2)(6)(7) 11.25
G. Louis Graziadio, III 252,522 (5)(6)(7) 1.27
Robert M. Franko 3,828 *
Robert L. Harris II 0 --
Perry A. Lerner 0 --
Lee E. Mikles 33,625 (2) *
Paul A. Novelly 142,698 *
H. Wayne Snavely 1,002 *
Clinton W. Bliss 16,606 *
Lewis P. Horwitz 10,036 *
Brian W. Nocco 0 --
John Getzelman 0 --
--------- -----
All directors and executive officers
as a group (10 persons) 2,696,722 13.57
5% OWNERS
Imperial Trust Company, as trustee
for Bancorp Profit Sharing Plan,
Employee Stock Ownership Plan and
401(k) Plans 1,129,123 5.67%
Graziadio Family Trust 1,007,504 5.06%
</TABLE>
- -------
* Less than 1%.
(1) The address of each of the beneficial owners is c/o the Company, 1840
Century Park East, 10th Floor, Los Angeles, California 90067.
(2) George L. Graziadio, Jr. and Lee E. Mikles serve as members of Bancorp's
Salary Investment, Profit Sharing and Employee Stock Ownership Plans
Administrative Committee (the "Committee"), which is a committee of the
Bancorp Board. The Committee has the power, pursuant to Bancorp's Salary
Investment, Profit Sharing and Employee Stock Ownership Plans, to direct
the Plan Trustee as to the manner in which it shall vote the shares of
common stock held by the Trustee, other than allocated shares held in the
Employee Stock Ownership Plan. The Committee acts by a majority vote. The
Bancorp Board also has the right to act as a committee of the entirety.
The shares held by the Trustee for others are not included in the number
of shares shown to be beneficially held by each of Messrs. George L.
Graziadio, Jr. and Lee E. Mikles and each of them disclaims beneficial
ownership of the shares so held.
(3) Pursuant to California law, personal property held in the name of a
married person may be community property as to which either spouse has the
power and ability to manage and control in its entirety. The Company has
no information pertaining to whether these shares are or are not community
property or whether any arrangement exists between the spouses pertaining
to voting or disposing of these shares and has thus assumed that, in the
absence of information to the contrary, married persons share investment
and voting power with their spouse.
(4) Holdings attributable to multiple parties have been adjusted to avoid
duplications.
(5) Includes 51,820 shares held by G. Louis Graziadio, III, as
custodian/trustee for his children, which are reported in his total, as to
which Mr. Graziadio disclaims beneficial ownership.
(6) The Graziadio Investment Co. ("GIC") is a limited partnership of which the
Graziadio Investment Corp. ("GI Corp.") is the General Partner. George L.
Graziadio, Jr. is the controlling shareholder of GI Corp. and a Class A
Limited Partner of GIC. The other limited partners of GIC include the
George L. & Reva M. Graziadio Grandchildren's Trust No. 1 ("Trust No. 1")
and George & Reva Graziadio Trust (the "Trust"). G. Louis Graziadio, III
is a trustee of Trust No. 1 and trustee and beneficiary of the Trust and
disclaims beneficial ownership except as to his beneficial interest,
4.058% of GIC.
(7) Includes currently exercisable options to purchase 925,847 shares of
Bancorp Common Stock in the case of George L. Graziadio, Jr., and 41,230
shares of Bancorp Common Stock in the case of G. Louis Graziadio, III. If
not exercised prior to the Distribution, these options will not become
options to purchase shares of Company Class A Common Stock, but will
remain options to purchase shares of Bancorp Common Stock.
96
<PAGE>
EXECUTIVE COMPENSATION
HISTORICAL COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's chief executive officer and
the Company's other executive officers for fiscal 1997 and 1996. During the
periods presented, the individuals were compensated by and in accordance with
Bancorp's plans and policies, other than with respect to stock options in
1997. References in the following table to stock options in 1996 relate to
awards of options to purchase shares of Bancorp Common Stock. References in
the following table to stock options in 1997 relate to awards of options to
purchase shares of Company Class B Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- ----------------------------------
AWARDS PAYOUTS
------ -----------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1) AWARD(S) OPTIONS (#) PAYOUTS ($) COMPENSATION ($)(3)
- ------------------ ---- ---------- --------- ------------------ ---------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio,
III................ 1997 0 0 0 0 575,000 0 21,465
--Chief Executive
Officer 1996 0 0 0 0 11,000 0 966,814(2)
Robert M. Franko.... 1997 200,000 205,020 97,001 0 525,000 0 13,012
--President 1996 185,000 192,475 92,160 0 0 0 12,218
Clinton W. Bliss.... 1997 147,000 75,000 40,453 0 5,000 0 17,762
--Senior Vice 1996 140,000 60,000 37,484 0 8,250 0 15,770
President and Chief
Credit Officer
Lewis P. Horwitz.... 1997 250,000 504,614 129,764 0 600,000 0 17,762
--President, LHO 1996 250,607 295,328 49,146 0 11,550 0 16,968
</TABLE>
- --------
(1) Includes automobile allowances, life insurance, tax services, employer
contributions to deferred compensation plans and below market interest on
loans.
(2) Represents consulting fees paid to Second Southern Corp. under consulting
agreement with the Bank. See "--Employment Agreements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
(3) Except for Mr. Graziadio, these amounts represent contributions to
Bancorp's Profit Sharing Plan, 401(k) Plan and Employee Stock Ownership
Plan.
OPTION GRANTS IN FISCAL 1997
The following table sets forth information with respect to option grants to
purchase Company Class B Common Stock (other than for Mr. Bliss, who has
options to purchase Company Class A Common Stock) made during fiscal 1997 to
the individuals named in the Summary Compensation Table pursuant to the
Company's plans. The number of options granted and exercise prices have been
adjusted to reflect Bancorp's February 6, 1998 stock split and the
distribution ratio of one share of the Company's Common Stock for every two
shares of outstanding Bancorp Common Stock. No options to purchase Bancorp
Common Stock were granted to these individuals during fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF OPTIONS GRANTED EXERCISE OPTION TERM ($)
OPTIONS TO EMPLOYEES PRICE ---------------------
NAME GRANTED IN 1997 PER SHARE EXPIRATION DATE 5% 10%
- ---- --------- --------------- ----------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio,
III(1)................. 575,000 20.9% $6.48/$9.63 4/22/07 / 9/21/07 257,175 514,350
Robert M. Franko(1)..... 525,000 19.1% $6.48/$9.63 4/22/07 / 9/21/07 233,100 466,200
Clinton W. Bliss........ 5,000 0.2% $9.63 9/21/07 2,408 4,815
Lewis P. Horwitz........ 600,000 21.9% $5.18 4/22/07 974,400 1,168,800
</TABLE>
- --------
(1) Options granted in April 1997 have an exercise price of $6.48 and expire
in April 2007. Options granted in September 1997 have an exercise price of
$9.63 and expire in September 2007.
97
<PAGE>
OPTION EXERCISES IN FISCAL 1997
The following table sets forth the number of shares of Bancorp Common Stock
covered by both exercisable and unexercisable stock options held by each of
the individuals named in the Summary Compensation Table on December 31, 1997.
Also reported are the values for "in-the-money" options, calculated as the
excess of the value of shares of Bancorp Common Stock as of December 31, 1997
over the respective exercise prices of outstanding stock options. All of the
options described below are currently exercisable in whole or in part. The
options granted to G. Louis Graziadio, III expire five years from date of
grant. All other options described below expire 10 years from date of grant.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
BANCORP OPTIONS AT IN-THE-MONEY BANCORP
SHARES VALUE 12/31/97 (#) OPTIONS AT 12/31/97 ($)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio, III. 24,752 363,022 31,230 0 796,702 0
Robert M. Franko........ 55,499 927,977 630 56,130 17,905 1,595,287
Clinton W. Bliss........ 33,618 593,918 8,250 14,439 226,747 374,571
Lewis P. Horwitz........ 4,331 139,478 0 12,995 0 310,374
</TABLE>
No options to purchase Company Common Stock were available for exercise at
June 30, 1998 by the individuals included in the Summary Compensation Table.
COMPANY COMPENSATION AND BENEFIT PLANS
It is anticipated that total compensation for the Company's executive
officers after the Distribution will include base salary, annual incentives
and other benefits as described below. The Company's executive compensation
program is expected to be a performance and rewards compensation system that
pays executives for the achievement of levels of performance designed to
increase the shareholder value of the Company and that enables the Company to
hire, retain and motivate high-quality executives who meet the immediate
business challenges and improve the long-term performance of the Company. It
is anticipated that base salaries and total compensation opportunities will be
competitive as measured against industry norms.
Set forth below is a summary of the components of executive compensation
following the Distribution that will be made to those individuals who will be
executive officers or directors of the Company following the Distribution.
Base Salary. Each executive's performance will be evaluated annually, and it
is anticipated that any base salary adjustments will be based on an evaluation
of competitive market adjustments and the individual's performance and
contribution.
1997 Share Incentive Plan. The Company has adopted the Imperial Financial
Group, Inc. 1997 Share Incentive Plan (the "1997 Plan") in order to provide
incentives to attract, retain and motivate highly competent persons as
executive management, employees and directors of the Company and of any
affiliate thereof (other than Bancorp or the Bank). The 1997 Plan which is,
and will be after the Distribution, administered by the Compensation
Committee, provides such persons with opportunities to acquire shares of
Company Class A Common Stock or Company Class B Common Stock, or to receive
monetary payments based on the value of such shares pursuant to certain
Benefits (as defined below). Benefits under the 1997 Plan may be granted in
any one or a combination of stock options, stock appreciation rights, stock
awards, performance awards and stock units (collectively, the "Benefits"). The
Company has authorized 1 million shares of Company Class A Common Stock and
3.7 million shares of Company Class B Common Stock that may be granted under
the 1997 Plan, subject to certain adjustments under certain circumstances.
98
<PAGE>
1998 Stock Option Plan. The Company has adopted the 1998 Stock Option Plan
of Imperial Financial Group, Inc. (the "1998 Plan") in order to provide
incentives to attract, retain and motivate highly competent persons as
executive management, key employees and directors of the Company and of any
affiliate thereof (other than Bancorp or the Bank). The 1998 Plan, which is
and will be administered by the Company Board, provides such persons with
opportunities to acquire shares of Company Class A Common Stock or Company
Class B Common Stock, or to receive monetary payments in lieu of such shares.
The Company has authorized 500,000 shares of Company Common Stock that may be
granted under 1998 Plan, subject to certain adjustments under certain
circumstances.
Deferred Compensation Plan. The Company plans to adopt after the
Distribution a non-qualified deferred compensation plan for management and
highly compensated employees ("Deferred Compensation Plan") that will mirror
the 1996 Deferred Compensation Plan for Bancorp employees. Participation in
the Deferred Compensation Plan will be restricted to employees with the title
of Senior Vice President and above, and will be voluntary. Participants may
elect to defer up to 100% of their annual base salary and/or bonus. The
Company will match participant contributions to their plan. The matched amount
will depend on the Company's return on equity performance for that year and
the amount contributed by the participant. The matched amount will not exceed
20% of a participant's base salary and bonus. Participants are fully vested at
all times with respect to the amounts they have personally contributed and
interest thereon. Participants are vested with respect to Company
contributions at the end of the year after the year for which the Company
contribution was made.
Qualified Retirement Plans. The Company plans to establish after the
Distribution two qualified defined contribution retirement plans which will
mirror current retirement plans maintained by Bancorp. See "--Treatment of
Bancorp Options and Other Benefits Following the Distribution."
Other Compensation Arrangements. It is anticipated that the Company may from
time to time enter into employment contracts or other compensation
arrangements with executives when appropriate for competitive or other
business reasons, for example, in connection with attracting new executives.
See "--Employment Agreements."
TREATMENT OF BANCORP OPTIONS AND OTHER BENEFITS FOLLOWING THE DISTRIBUTION
Set forth below is a summary of adjustments of the compensation and benefit
plans of the Transferred Employees following the Distribution.
Stock Options.
Conversion of Bancorp Options. Upon consummation of the Distribution,
certain employees of the Bank will cease to be employees of the Bank and will
become employees of the Company. To the extent any of these Transferred
Employees hold nonqualified stock options or incentive stock options to
purchase Bancorp Common Stock immediately prior to the Distribution, all
options held by such Transferred Employees will be automatically converted
into options to purchase Company Class A Common Stock. In connection with this
conversion of options to purchase Bancorp Common Stock (the "Bancorp Options")
for options to purchase Company Class A Common Stock (the "Company Options"),
the number of shares that were formerly underlying the Bancorp Options and/or
the exercise price of such options will be appropriately adjusted to allow
Transferred Employees to retain an equivalent economic position in Company
Common Stock following the Distribution. The Company will attempt to establish
the terms of the Company Options of these Transferred Employees by applying
the following analyses: (i) the excess of (a) the aggregate fair market value
of Company Class A Common Stock subject to the Company Options (determined
immediately after the proposed transaction based on the average closing price
of Company Class A Common Stock for a period of five trading days after the
Distribution Date), over (b) the aggregate exercise price of such options,
will not be greater than the excess of (a) the aggregate fair market value of
Bancorp Common Stock subject to the Bancorp Options (determined immediately
before the proposed transaction based on the average closing price of Bancorp
Common Stock for a period of five trading days before and including the
Distribution Date), over (b) the aggregate exercise price of such options; and
(ii) the ratio of (A) the option exercise price of the Company Options
immediately following
99
<PAGE>
the exchange to (B) the fair market value of the Company Class A Common Stock
immediately following the Distribution will not be more favorable to the
optionee on a share by share comparison than the ratio of the option exercise
price of the Bancorp Options immediately prior to the exchange to the fair
market value of Bancorp Common Stock immediately preceding the Distribution.
Tax Consequences. The substitution of Company Options for Bancorp Options
for Transferred Employees will not result in the recognition of income, gain
or loss to the Company or to an optionee. The Company will be entitled to a
tax deduction upon the exercise of a non-qualified stock option to acquire
Company Class A Common Stock, or a disqualifying disposition of an incentive
stock option, in an amount equal to the amount of ordinary income recognized
by the optionee upon the exercise or disqualifying disposition, as applicable.
Deferred Compensation. The benefits of Transferred Employees in the deferred
compensation plans of Bancorp will not be transferred to any deferred
compensation plan adopted by the Company and will be paid in accordance with
the terms of the Bancorp plans.
Qualified Retirement Plans.
General. The Company will establish for its employees two qualified defined
contribution retirement plans (the "Company Qualified Plans"): (i) a 401(k)
plan and (ii) a profit sharing plan. See "--Plan Provisions." A portion of the
profit sharing plan will constitute an employee stock ownership plan. Both
plans will mirror the comparable plans currently maintained by the Bank. The
entire account balance of each Transferred Employee who is a participant in
the Bank qualified plans will be transferred to the respective Company
Qualified Plan. Within a reasonable period of time following the Distribution,
Bancorp Common Stock held by the Company Qualified Plans will be exchanged for
securities of an equivalent value (the "Exchange"), unless the participant has
separately elected to establish a self-directed brokerage account within the
Company Qualified Plans to hold Bancorp Common Stock.
Tax Consequences. No gain or loss will be recognized by any participant in
either of the Company Qualified Plans, and no gain or loss will be recognized
by either of the Company Qualified Plans in connection with the Exchange. The
Exchange will not adversely affect the status of the Company Qualified Plans
as qualified within the meaning of Section 401(a) of the Code and that part of
the Company profit sharing plan that is an employee stock ownership plan will
satisfy the requirements of Section 4975(e) of the Code.
Plan Provisions. The following is a current description of the material
terms of each plan. These provisions are subject to change at any time.
SALARY INVESTMENT PLAN OF IMPERIAL FINANCIAL GROUP. The Salary Investment
Plan of Imperial Financial Group (the "401(k) Plan") is a qualified defined
contribution plan with a cash or deferred arrangement under Section 401(k)
of the Code. The 401(k) Plan operates on a calendar year. Employees are
eligible to participate in the 401(k) Plan upon the completion of 183 days
(six months) of service. Entry into the plan will occur on the January 1 or
July 1 next following the date the eligibility requirements are first met
provided the participant is employed on such date. Generally, all Company
employees are eligible to participate in the plan other than employees
covered by a collective bargaining agreement and nonresident aliens. Under
the plan, a participant may elect to defer (in whole percentages) from 2%
to 14% of a portion of his or her compensation for each pay period. A
participant may cease deferrals as of any business day or may change the
amount of his deferral election as of the first day of any quarter. The
Company will make matching contributions to the 401(k) Plan equal to 50% of
the deferral made by a participant up to the first 8% of a participant's
deferral. Only active employees at December 31 of any given year are
eligible to receive matching contributions for the year. Employer matching
contributions will be invested in Company Class A Common Stock. At all
times, a participant's deferrals and employer matching contributions are
100% vested. A participant may self-direct the investment of his or her
account, except that all matching contributions will be invested in Company
Class A Common Stock. Changes in the investment elections may be made
daily. All distributions will be made in a single lump sum. Participant
loans and hardship withdrawals are permitted within the limits prescribed
by the Code. Additionally, in-service distributions upon the attainment of
age 59 1/2 are also permitted.
100
<PAGE>
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN OF IMPERIAL FINANCIAL
GROUP. The Profit Sharing Plan and Employee Stock Ownership Plan (the
"PSP/ESOP") combines two types of plans, a profit sharing plan and a stock
bonus plan. Employees may participate upon completion of 183 days (6
months) of service during the year. Entry to the PSP/ESOP occurs on the
January 1 following the date the eligibility requirements are first met
provided the participant is employed on such date. Profit sharing
contributions and ESOP contributions by the Company are determined by the
Company Board, in its sole discretion, on an annual basis. Contributions by
the Company under the PSP/ESOP are allocated to the individual profit
sharing or ESOP account of each participant who has completed 1,000 hours
of service and is an employee on the last day of the plan year and is
allocated in proportion to compensation. Both the profit sharing
contributions and the ESOP contributions are subject to a vesting schedule
which provides for full vesting upon the completion of five years of
service, the attainment of age 65, disability or death. A year of service
for vesting purposes will occur upon the completion of 1,000 hours of
service during a plan year. Unvested amounts are forfeited upon
distribution and the resulting forfeitures are reallocated to the remaining
plan participants who have completed 1,000 hours of service and are
employees on the last day of the plan year. A participant may direct that
his or her account balance, except contributions by the Company to the
participant's ESOP account, may be invested in only Company Class A Common
Stock. Permitted changes in the investment elections may be made daily.
EMPLOYMENT ARRANGEMENTS
Agreements with G. Louis Graziadio, III. The Company and G. Louis Graziadio,
III intend to enter into an offer letter (the "Graziadio Offer Letter"),
pursuant to which Mr. Graziadio will serve as co-chairman and chief executive
officer of the Company and the term of his employment will be "at will".
Pursuant to the Graziadio Offer Letter, Mr. Graziadio will receive annual base
compensation of $100,000 and will be entitled to an annual incentive bonus
based on the performance of the Company. As described above, Mr. Graziadio
previously was granted options to purchase 575,000 shares of Company Class B
Common Stock, which vest over a 10-year period. These stock options will
automatically vest upon a change of control of the Company. Mr. Graziadio is
also eligible to receive additional options on shares of Company Common Stock
if granted by the Compensation Committee. In addition, he receives a monthly
car allowance.
Pursuant to the Graziadio Offer Letter, upon Mr. Graziadio's involuntary
termination on or prior to the first anniversary of the date of the Graziadio
Offer Letter for any reason other than good cause, he will receive a severance
payment equal to 24 months of his base salary. Upon Mr. Graziadio's
involuntary termination at any time after the first anniversary of the date of
the Offer Letter for any reason other than good cause, he will receive a
severance payment equal to two months of his base salary for each month
employed by the Company. Upon the termination of Mr. Graziadio for good cause,
he will be paid salary and benefits through the date of termination. Upon Mr.
Graziadio's termination due to the Company's merger with or acquisition by a
third party, he will receive, among other things, a severance payment equal to
three years of his salary, which may be paid in a lump sum at termination
date, and three years of his current target bonus paid in a lump sum at
termination date.
Under that certain consulting agreement dated November 1, 1991 between the
Bank and Second Southern, a company wholly owned by G. Louis Graziadio, III,
Second Southern provided the Bank with an analysis of information, preparation
of marketing materials and coordination of appropriate professionals in
connection with possible securities offerings on behalf of the Bank. Second
Southern was entitled thereunder to receive an incentive fee of 2.5% of the
realized pre-tax gains received by the Company, when and if realized, from the
disposition of the remaining ICII shares held by the Company. The liability
relating to this consulting agreement approximated $4.9 million as of June 30,
1998, of which $3.2 million had been accrued for as of June 30, 1998.
The Bank, the Company and Second Southern have agreed that, in connection
with and prior to the Distribution, the consulting agreement will be amended
to provide that it will be assumed by the Company and the Bank will be
released from its obligations thereunder. In addition, the parties have agreed
that, immediately following the Distribution, the consulting agreement (and
the related rights and obligations thereunder) will be terminated and in
consideration therefor, the Company will issue to Second Southern a
combination of cash and
101
<PAGE>
warrants to acquire Company Class A Common Stock in an aggregate amount equal
to the total liability owed to Second Southern under the consulting agreement
at the time of such amendment. In accordance with the terms of the consulting
agreement, this liability will be approximately $5.4 million. The warrants
will not be exercisable for two years and the confirmation of the value of the
warrants at the time of issuance will be determined by an independent
appraiser selected by the Company. The settlement of the total liability owed
to Second Southern will result in a one-time after tax charge to the Company's
earnings immediately following the distribution of approximately $1.3 million.
See "Unaudited Pro Forma Combined Financial Data." The effectiveness of the
amendment of the consulting agreement is conditioned upon the consummation of
the Distribution.
In connection with the distribution, the Company will be assigned a lease of
office space located in Palos Verdes, California by Ginarra Holdings Inc.
("Ginarra"), a private investment and holding company of which G. Louis
Graziadio, III is chairman and chief executive officer. The Company intends to
sublease a portion of the space under such lease back to Ginarra on terms
substantially similar to those of the lease. The Company also intends to
reimburse Ginarra for approximately $135,000 of leasehold improvements made by
Ginarra to the space. The base rent for Ginarra will be $300 per month and the
terms of the lease and the sublease are scheduled to expire on April 14, 1999.
Agreement with Robert Franko. The Company and Robert Franko intend to enter
into a proposed offer letter (the "Franko Offer Letter"), pursuant to which
Mr. Franko will serve as president of the Company and the term of his
employment will be "at will". Pursuant to the Franko Offer Letter, Mr. Franko
will receive annual base compensation of $200,000 and will be entitled to an
annual incentive bonus of up to 100% of his annual base salary, or an
additional $200,000, based on the performance of the Company. As described
above, Mr. Franko previously was granted options to purchase 525,000 shares of
Company Class B Common Stock, which vest over a 10-year period. These stock
options will automatically vest upon a change of control of the Company and
will convert to options to purchase Company Class A Common Stock. Mr. Franko
is also eligible to receive additional options on shares of Class B Common
Stock if granted by the Compensation Committee. In addition, he receives a
monthly car allowance.
Pursuant to the Franko Offer Letter, upon Mr. Franko's involuntary
termination for any reason other than good cause on or prior to December 31,
1999, he will receive a severance payment equal to 12 months of his base
salary plus his target bonus pro-rated through the date of termination to the
extent performance goals have been attained. Upon Mr. Franko's involuntary
termination at any time after December 31, 1999 for any reason other than good
cause, he will receive a severance payment equal to six months of his base
salary plus his target bonus pro-rated through the date of termination to the
extent performance goals have been attained. Upon the termination of Mr.
Franko for good cause, he will be paid salary and benefits through the date of
termination. Upon Mr. Franko's termination due to the Company's merger with or
acquisition by a third party, he will receive, among other things, a severance
payment equal to three years of his salary, which may be paid in a lump sum at
termination date, and three years of his current target bonus paid in a lump
sum at termination date. Based on Mr. Franko's current base salary, this
amount could equal up to $1.2 million.
Agreement with Lewis Horwitz. The Bank and Lewis Horwitz entered into an
Employment Agreement, dated as of July 23, 1997 (the "Horwitz Agreement"),
which will be assigned from the Bank to the Company as part of the
Contribution, pursuant to which Mr. Horwitz serves as president and chief
executive officer of LHO. The initial term of the Horwitz Agreement expires on
December 31, 2001, subject to early termination at Mr. Horwitz's option after
December 31, 1999.
Pursuant to the Horwitz Agreement, Mr. Horwitz receives a base salary of
$250,000 and a guaranteed annual bonus of $500,000 and is entitled to an
annual incentive bonus based on the pre-tax earnings of LHO. Mr. Horwitz also
receives a monthly car allowance and is entitled to additional payments
aggregating $60,000 payable between 1997 and 2001. Mr. Horwitz was also
granted options to purchase up to three percent of the outstanding Company
Common Stock as of April 23, 1997 at an exercise price equal to 80% of the
fair value per share as determined in a report by NationsBanc Montgomery dated
as of April 23, 1997. Based on these terms, the Company will accrue
compensation expense of $194,000 per year over the vesting period. These
options vest after five years, subject to earlier vesting in certain
circumstances.
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<PAGE>
The Horwitz Agreement provides that Mr. Horwitz may be terminated for
permanent disability or cause. Upon such termination, he would be entitled to
receive all accrued compensation and bonuses described above, except that no
incentive bonus will be paid upon termination for cause. Mr. Horwitz is also
entitled to a severance payment on termination (in lieu of receiving a signing
bonus at the time of execution of the Horwitz Agreement) of up to $1,250,000,
which amount will be reduced annually by 50% of the guaranteed bonus paid
prior to such termination.
The Horwitz Agreement also provides that, following the initial term, Mr.
Horwitz will provide consulting services for the Company for an additional
three years for annual compensation of $200,000 (or an additional two years if
he retires prior to December 31, 2001). The Horwitz Agreement also contains a
non-compete provision that provides that during the term of employment and for
two years following termination, Mr. Horwitz will not solicit employees or
customers of the Company or any of its affiliates and he may not work in a
business directly or indirectly in competition with LHO.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under the Certificate of Incorporation that will be in effect on the
Distribution Date, the Company will have authority to issue a total of 70
million shares of all classes of stock, of which 10 million may be shares of
preferred stock ("Preferred Stock"), 50 million may be shares of Company Class
A Common Stock, and 10 million may be shares of Company Class B Common Stock.
Company Class A Common Stock and Company Class B Common Stock are collectively
referred to herein as "Company Common Stock."
Based on the number of shares of Bancorp Common Stock outstanding as of June
30, 1998 and the Distribution Ratio, it is expected that approximately
19,878,335 shares of Company Class A Common Stock will be distributed to
Bancorp Shareholders in the Distribution. All the shares of Company Class A
Common Stock to be distributed to Bancorp Shareholders in the Distribution
will be fully paid and non-assessable. The Company Class A Common Stock to be
distributed will constitute all the shares of capital stock of the Company
that will be outstanding immediately after the Distribution.
COMPANY CLASS A COMMON STOCK
Holders of Company Class A Common Stock are entitled to one vote for each
share on all matters voted on by shareholders. Holders of Company Class A
Common Stock do not have cumulative voting rights in the election of
directors. The first annual meeting of shareholders is expected to be held
during 1999.
Holders of Company Class A Common Stock do not have subscription, redemption
or conversion privileges. Subject to the preferences or other rights of any
Preferred Stock that may be issued from time to time, holders of Company Class
A Common Stock are entitled to participate ratably in dividends on the Company
Class A Common Stock as declared by the Company Board. Holders of Company
Class A Common Stock are entitled to share ratably in all assets available for
distribution to shareholders in the event of liquidation or dissolution of the
Company, subject to distribution of the preferential amount, if any, to be
distributed to holders of Preferred Stock.
COMPANY CLASS B COMMON STOCK
Company Class B Common Stock may only be issued pursuant to the terms of, or
upon the exercise of outstanding options granted under any of, the Company's
employee benefit plans as stock dividends to holders of Company Class B Common
Stock or in connection with shares issued to a third party in a transaction
approved by the Company Board. Holders of Company Class B Common Stock are
entitled to one-tenth of one vote for each share on all matters voted on by
stockholders and will vote together as a single class with holders of Company
Class A Common Stock.
Each share of Company Class B Common Stock will automatically be converted
into one share of Company Class A Common Stock, subject to customary anti-
dilution adjustments, on the earlier of the fifth anniversary of the
Distribution Date and a Change of Control (as defined in the Certificate of
Incorporation) (the "Conversion Date"). All shares of Company Class B Common
Stock that were transferred or assigned prior to the Conversion Date will
automatically convert into an equivalent number of shares of Company Class A
Common Stock on the Conversion Date. No holder of Company Class B Common Stock
has the right to convert his or her shares into Company Class A Common Stock
except in the event of an automatic conversion under the circumstances
described above.
In all other respects, the rights of the holders of Company Class B Common
Stock will be identical to the rights of holders of Company Class A Common
Stock.
PREFERRED STOCK
The Certificate of Incorporation that will be in effect on the Distribution
Date will authorize the Company Board, without any vote or action by the
holders of Company Class A Common Stock or Company Class B
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Common Stock, to issue up to 10 million shares of Preferred Stock from time to
time in one or more series. The Company Board is authorized to determine the
number of shares and designation of any series of Preferred Stock and the
dividend rights, dividend rate, conversion rights and terms, voting rights
(full or limited, if any), redemption rights and terms, liquidation
preferences and sinking fund terms of any series of Preferred Stock. Issuances
of Preferred Stock would be subject to the applicable rules of the NYSE or
other organizations on whose systems the stock of the Company may then be
quoted or listed. Depending upon the terms of Preferred Stock established by
the Company Board, any or all series of Preferred Stock could have preference
over the Company Class A Common Stock with respect to dividends and other
distributions and upon liquidation of the Company. Issuance of any such shares
with voting powers, or issuance of additional shares of Company Class A Common
Stock, would dilute the voting power of the outstanding Company Class A Common
Stock. The Company has no present plans to issue any Preferred Stock.
NO PREEMPTIVE RIGHTS
No holder of any capital stock of the Company authorized at the Distribution
Date will have any preemptive right to subscribe for or purchase any
securities of any class or kind of the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. will be the transfer agent and registrar
for the Company Class A Common Stock commencing upon the Distribution Date.
CREDIT FACILITIES
On August 19, 1998, the Company entered into a credit agreement with a
syndicate of banks to provide credit facilities (the "Credit Facilities") to
finance the Company's operations other than CAB. The syndicate consists of
third party financial institutions not affiliated with the Bank. The Bank will
be the initial borrower under the Credit Facilities but immediately upon the
consummation of the Contribution the Company will assume the obligations of
the borrower and the Bank will be completely released therefrom. The Credit
Facilities provide for borrowings on a revolving basis of up to $135 million
outstanding at any one time based on a borrowing base calculation measured by
the value of the Company's collateral pledged thereunder. Included within the
Credit Facilities is a sub-facility for the issuance of standby and commercial
letters of credit of up to $45 million. The Credit Facilities have an initial
term of two years and provide for an earlier termination under certain
circumstances described below. The lenders under the Credit Facilities are
granted, among other things, a first priority security interest in (a) all of
the common stock of the Company's subsidiaries, (b) the common stock of ICII
owned by the Company and (c) the LHO loans. The borrowing base will be
comprised of the sum of (x) 50% of the current market value of the Company's
investment in ICII stock up to a maximum of $100 million and (y) 85% of
eligible LHO loans. The Credit Facilities will bear interest at an annual rate
equal to 1.45% over LIBOR or at an alternative base rate which will be the
greater of the lead lender's prime rate and the Federal funds rate plus 1.45%.
The Company also will be charged loan and other fees under the Credit
Facilities.
The commitments of the banks party to the Credit Facilities will terminate
90 days after the first to occur of the following events if such events are
not cured or otherwise cease to exist within such 90 day period: (i) the
Company fails to beneficially own at least 25% of the outstanding common stock
of ICII; (ii) the termination, amendment, alteration or assignment of the ICII
Shareholders Agreement by any party thereto without the prior approval of the
administrative agent of the Credit Facilities; (iii) any party to the ICII
Shareholders Agreement becomes the subject of a voluntary or involuntary
bankruptcy proceeding; (iv) ICII fails to comply with its obligations under
the Letter Agreement or gives notice of a dilution event that may result in
the Company failing to meet the requirements of clause (i) above; (v) there is
an increase in the percentage beneficial ownership of voting securities of
ICII required to be owned or controlled by the Company to entitle the Company
to the presumption of control under Section 2(a) (9) of the Investment Company
Act of 1940 and the Company fails to own or control such increased percentage
of ICII voting securities; (vi) either the Company or ICII is required to
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<PAGE>
register as an "investment company" within the meaning of the Investment
Company Act of 1940; or (vii) the Commission notifies the Company or ICII that
it is challenging or instituting any action to challenge the exemption from
registration under the Investment Company Act of 1940 of the Company, ICII or
any subsidiary of the Company or ICII or otherwise asserts that the Company,
ICII or any such subsidiary is not in compliance with the Investment Company
Act.
The Credit Facilities also include financial covenants such as maintenance
of a minimum tangible net worth, minimum adjusted tangible net worth and
minimum interest coverage ratio, and limitations on the maximum leverage ratio
for the Company, the maximum exposure under "gap" loans made by LHO and the
maximum exposure to distributors whose contracts and undertakings support the
eligible LHO loans. The Credit Facilities also require the Company to make
customary representations and warranties as of the initial funding date and
prior to each borrowing and include customary affirmative and negative
operating covenants such as limitation on the incurrence of debt and liens and
on investments and limitations on the Company's ability to engage in
additional lines of business. Customary events of default include a change
under certain circumstances in ownership of more than 20% of the Company's
outstanding shares and in the composition of the Company's board of directors.
Prior to the Distribution, the Bank will borrow approximately $93 million
(as determined at June 30, 1998) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO. In
connection with the Contribution, these loans, along with the other assets of
the IFG Business, will be transferred to the Company, the Bank will be
released from all liabilities under the Credit Facilities and the Company will
remain responsible for all liabilities under the Credit Facilities.
For a description of all of the Company's financing arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
GENERAL
The provisions of the Certificate of Incorporation, the Company's Bylaws and
Delaware statutory law described in this section may delay or make more
difficult acquisitions or changes of control of the Company not approved by
the Company Board. Such provisions could have the effect of discouraging third
parties from making proposals involving an acquisition or change of control of
the Company, although such proposals, if made, might be considered desirable
by a majority of the Company's shareholders. Such provisions may also have the
effect of making it more difficult for third parties to cause the replacement
of the current management of the Company without the concurrence of the
Company Board. See "Relationship and Agreements Among the Company, the Bank
and Bancorp After the Distribution--Contribution Agreement."
Copies of the Certificate of Incorporation and Bylaws have been filed as
exhibits to the Registration Statement, of which this Information Statement is
a part. The following description of certain provisions of the Certificate of
Incorporation and the Bylaws does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Certificate of
Incorporation and the Bylaws.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation provides for the Company Board, effective
upon completion of the Distribution, to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Company Board will be elected each year. See "Management--
Directors and Executive Officers."
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The Company believes that a classified board will help to assure the
continuity and stability of the Company Board, and its business strategies and
policies as determined by the Company Board, because a majority of the
directors at any given time will have prior experience as directors of the
Company. This provision should also help to ensure that the Company Board, if
confronted with an unsolicited proposal from a third party that has acquired a
block of Company Class A Common Stock, will have sufficient time to review the
proposal, to consider appropriate alternatives and to seek the best available
result for all shareholders.
This provision could prevent a party who acquires control of a majority of
the outstanding Company Class A Common Stock from obtaining control of the
Company Board until the second annual stockholders' meeting following the date
the acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could thus increase the
likelihood that incumbent directors will retain their positions.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
The Certificate of Incorporation and the Bylaws provide that the number of
directors shall not be less than three and shall be determined from time to
time exclusively by a vote of a majority of the Company Board then in office.
The Certificate of Incorporation also provides that the Company Board shall
have the exclusive right to fill vacancies, including vacancies created by
expansion of the Company Board. Furthermore, except as may be provided in a
resolution or resolutions of the Company Board providing for any class or
series of Preferred Stock with respect to any directors elected by the holders
of such class or series, directors may be removed by shareholders for cause
and only by the affirmative vote of at least 80% of the voting power of all of
the shares of the Company's capital stock then entitled to vote generally in
the election of directors, voting together as a single class. These
provisions, in conjunction with the provision of the Certificate of
Incorporation authorizing the Company Board to fill vacant directorships,
could prevent shareholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation provides that, except as may be provided in
a resolution or resolutions of the Company Board providing for any class or
series of Preferred Stock, stockholder action can be taken only at an annual
or special meeting of shareholders and cannot be taken by written consent in
lieu of a meeting. The Certificate of Incorporation also provides that special
meetings of the shareholders can only be called pursuant to a resolution
approved by a majority of the Company Board then in office. Shareholders of
the Company are not permitted to call a special meeting of shareholders.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The Bylaws establish an advance notice procedure for stockholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an
annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Exchange Act, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Company Board, or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The
presiding officer at such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Company Board, or who are nominated by a stockholder who has given timely
written notice, in proper form, to the Secretary prior to a meeting at which
directors are to be elected will be eligible for election as directors of the
Company.
To be timely, notice of nominations or other business to be brought before
an annual meeting must be received by the Secretary of the Company at the
principal executive office of the Company no later than 90 days prior to the
date of such annual meeting. Similarly, notice of nominations or other
business to be brought before
107
<PAGE>
a special meeting must be delivered to the Secretary at the principal
executive office of the Company no later than the close of business on the
10th day following the day on which notice of the date of a special meeting of
shareholders was given.
The notice of any nomination for election as a director must set forth the
name, date of birth, business and residence address of the person or persons
to be nominated; the business experience during the past five years of such
person or persons; whether such person or persons are or have ever been at any
time directors, officers or owners of 5% or more of any class of capital
stock, partnership interest or other equity interest of any corporation,
partnership or other entity; any directorships held by such person or persons
in any company with a class of securities registered pursuant to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of such Act
or any company registered as an investment company under the Investment
Company Act of 1940, as amended; and whether in the last five years, such
person or persons are or have been convicted in a criminal proceeding or have
been subject to a judgment, order, finding or decree of any federal, state or
other governmental entity, concerning any violation of federal, state or other
law, or any proceeding in bankruptcy, which conviction, order, finding, decree
or proceeding may be material to an evaluation of the ability or integrity of
the nominee; and the consent of each such person to serve as a director if
elected. The person submitting the notice of nomination, and any person acting
in concert with such person, must provide their name and business addresses,
the name and address under which they appear on the Company's books (if they
so appear), and the class and number of shares of the Company's capital stock
that are beneficially owned by them.
AMENDMENTS TO BYLAWS
The Certificate of Incorporation provides that the Company Board or the
holders of at least 80% of the voting power of all shares of the Company's
capital stock then entitled to vote generally in the election of directors,
voting together as a single class, have the power to amend or repeal the
Company's Bylaws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of the
Certificate of Incorporation except as may be provided in a resolution or
resolutions of the Company Board providing for any class or series of
Preferred Stock and which relate to such class or series of Preferred Stock,
requires approval by the affirmative vote of both a majority of the members of
the Company Board then in office and a majority vote of the voting power of
all of the shares of the company's capital stock entitled to vote generally in
the election of directors, voting together as a single class. Notwithstanding
the foregoing, any proposal to amend, alter, change or repeal the provisions
of the Certificate of Incorporation relating to (i) the classification of the
Company Board, (ii) removal of Directors, (iii) the prohibition of stockholder
action by written consent or stockholder calls for special meetings, (iv)
amendment of Bylaws, or (v) amendment of the Certificate of Incorporation
requires approval by the affirmative vote of 80% of the voting power of all of
the shares of the Company's capital stock entitled to vote generally in the
election of directors, voting together as a single class.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under the Certificate of Incorporation, the Company Board will have the
authority to provide by Board resolution for the issuance of shares of one or
more series of Preferred Stock. The Company Board is authorized to fix by
resolution the terms and conditions of each such other series. See
"Description of Capital Stock--Preferred Stock."
The Company believes that the availability of the Company's Preferred Stock,
in each case issuable in series, and additional shares of Common Stock could
facilitate certain financings and acquisitions and provide a means for meeting
other corporate needs which might arise. The authorized shares of the
Company's Preferred Stock, as well as authorized but unissued shares of
Company Class A Common Stock and Company Class B Common Stock, will be
available for issuance without further action by the Company's stockholders,
unless stockholder action is required by applicable law or the rules of any
stock exchange on which any series of the Company's capital stock may then be
listed.
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These provisions give the Company Board the power to approve the issuance of
a series of Preferred Stock, or an additional series of Company Class A Common
Stock or Company Class B Common Stock, of the Company that could, depending on
its terms, either impede or facilitate the completion of a merger, tender
offer or other takeover attempt. For example, the issuance of new shares of
Preferred Stock might impede a business combination if the terms of those
shares include voting rights which would enable a holder to block business
combinations and the issuance of new shares might facilitate a business
combination if those shares have general voting rights sufficient to cause an
applicable percentage vote requirement to be satisfied.
DELAWARE TAKEOVER STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the time
that such stockholder becomes an interested stockholder unless (1) prior to
such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares), or (3) on or subsequent to such time, the business
combination is approved by the board of directors of the corporation and by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as specified in Section 203
of the DGCL, an interested stockholder is defined to include (a) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at
any time within three years immediately prior to the relevant date and (b) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
shareholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under Section 203 of the DGCL. It is anticipated that
the provisions of Section 203 of the DGCL may encourage companies interested
in acquiring the Company to negotiate in advance with the Company Board, since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested
stockholder.
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<PAGE>
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Certain provisions of the DGCL and the Company's Certificate of
Incorporation and Bylaws relate to the limitation of liability and
indemnification of directors and officers of the Company. These various
provisions are described below.
The Certificate of Incorporation provides that the Company's directors are
not personally liable to the Company or its shareholders for monetary damages
for breach of their fiduciary duties as a director to the fullest extent
permitted by Delaware law. Under existing Delaware law, directors would not be
personally liable to the Company or its shareholders for monetary damages for
breach of their fiduciary duties as a director, except for (i) any breach of
the director's duty of loyalty to the Company or its shareholders, (ii) acts
or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) any transaction from which the director
derived improper personal benefit or (iv) the unlawful payment of dividends or
unlawful stock repurchases or redemptions. This indemnification provision may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or the Company from
bringing a lawsuit against directors of the Company for breach of their
fiduciary duties as directors. However, the provision does not affect the
availability of equitable remedies such as an injunction or rescission.
The Certificate of Incorporation also provides that each person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed civil or criminal action or proceeding by reason of the fact that
such person is or was a director of the Company or is or was serving at the
request of the Company as a director of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified and held
harmless by the Corporation to the fullest extent permitted by Delaware law.
This right to indemnification shall also include the right to be paid by the
Company the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent authorized by Delaware
law. This right to indemnification shall be a contract right. The Company may,
by action of the Company Board, provide indemnification to such of the
officers, employees and agents of the Company to such extent and to such
effect as the Company Board determines to be appropriate and authorized by
Delaware law.
The Company's Bylaws authorize the Company to purchase insurance for
directors, officers and employees of the Company, and persons who serve at the
request of the Company as directors, officers, members, employees, fiduciaries
or agents of other enterprises, against any expense, liability or loss
incurred in such capacity, whether or not the Company would have the power to
indemnify such persons against such expense or liability under the Bylaws. The
Company intends to maintain insurance coverage for its officers and directors
as well as insurance coverage to reimburse the Company for potential costs of
its corporate indemnification of directors and officers.
110
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Exchange Act with respect to the Company Class A Common Stock being
received by the shareholders of Bancorp Common Stock in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto filed by the Company with the
Commission may be inspected at the public reference facilities of the
Commission listed below.
After the Distribution, the Company will be subject to the information
requirements of the Exchange Act, and in accordance therewith, will file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at its principal
offices at 450 Fifth Street, N.W., Washington, D.C. 10549, and at its regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
Application has been made to list the shares of Company Class A Common Stock
on the NYSE and, if and when such shares of Company Class A Common Stock
commence trading on the NYSE, such reports, proxy statements and other
information concerning the Company will be available for inspection at the
NYSE, 20 Broad Street, New York, New York 10005.
----------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by independent
accountants.
----------------
NO PERSON IS AUTHORIZED BY BANCORP, THE BANK OR THE COMPANY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
111
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INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Imperial Financial Group, Inc.
Independent Auditors' Report............................................. F-2
Combined Balance Sheets.................................................. F-3
Combined Statements of Income............................................ F-4
Combined Statements of Changes in Stockholder's Equity................... F-5
Combined Statements of Cash Flows........................................ F-6
Notes to Combined Financial Statements................................... F-7
Imperial Credit Industries, Inc.
Index to Consolidated Financial Statements of ICII as of and
for the Six Months Ended June 30, 1998 and 1997......................... F-33
Index to Consolidated Financial Statements of ICII as of and
for the Year Ended December 31, 1997.................................... F-70
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Financial Group, Inc.
We have audited the accompanying combined balance sheets of Imperial Financial
Group, Inc. as of December 31, 1996 and 1997, and the related combined
statements of income, changes in stockholder's equity and cash flows for each
of the years in the three-year period ended December 31, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Financial
Group, Inc. as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 6, 1998
F-2
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
DECEMBER 31, DECEMBER 31, 1998 1998
1996 1997 (UNAUDITED) (UNAUDITED)
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.... $ 5,245 $ 2,813 $ 10,448 $ 10,448
Securities available for
sale, at fair value......... 1,179 6,027 3,507 3,507
Loans held for sale.......... 5,531 3,763 8,441 8,441
Loans held for investment,
net......................... 72,528 134,407 139,210 134,276
Investment in stock of Impe-
rial Credit Industries, Inc.
("ICII").................... 57,736 75,001 81,700 81,700
Premises and equipment, net.. 306 551 1,442 1,442
Excess servicing fees receiv-
able........................ 3,294 -- -- --
Loan servicing rights........ -- 1,914 2,046 2,046
Other assets................. 3,529 3,507 3,822 5,453
-------- -------- -------- --------
$149,348 $227,983 $250,616 $247,313
======== ======== ======== ========
LIABILITIES
Time deposits under $100,000. $ -- $ -- $ 32,581 $ 32,581
Time deposits $100,000 and
over........................ -- -- 4,899 4,899
Borrowings from Imperial
Bank........................ 6,184 77,934 47,225 --
Line of credit............... -- -- -- 95,231
Income taxes payable......... 40,340 29,837 29,962 29,972
Other liabilities............ 5,978 7,974 9,233 7,749
-------- -------- -------- --------
52,502 115,745 123,900 170,432
-------- -------- -------- --------
STOCKHOLDER'S EQUITY
Class A common stock--$.01
par, 1,000 shares autho-
rized; 100 shares issued and
outstanding at June 30,
1998........................ -- -- -- 199
Contribution by Imperial
Bank........................ 1,597 1,597 11,597 11,398
Unrealized (loss) gain on se-
curities available for sale,
net of taxes................ (1) 231 (187) (187)
Retained earnings............ 95,250 110,410 115,306 65,471
-------- -------- -------- --------
Total stockholder's equity... 96,846 112,238 126,716 76,881
-------- -------- -------- --------
Total liabilities and stock-
holder's equity............. $149,348 $227,983 $250,616 $247,313
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA SIX MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
------------------------ 1997 1997 1998 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------- ------- ------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on loans....... $ 6,726 $10,629 $14,355 $13,773 $ 6,319 $ 8,955 $ 8,699
Other interest income... 153 158 235 235 84 187 187
------- ------- ------- ------- ------- ------- -------
Total interest income... 6,879 10,787 14,590 14,008 6,403 9,142 8,886
Interest expense........ 1,287 1,973 3,277 5,376 769 2,831 4,175
------- ------- ------- ------- ------- ------- -------
Net interest income..... 5,592 8,814 11,313 8,632 5,634 6,311 4,711
Provision for loan
losses................. 1,492 1,781 2,558 2,243 1,512 736 696
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 4,100 7,033 8,755 6,389 4,122 5,575 4,015
------- ------- ------- ------- ------- ------- -------
Trust fees.............. 8,385 7,744 7,967 7,967 3,844 4,302 4,302
Gain on sale of SBA
loans.................. 1,813 3,561 3,944 3,944 2,019 2,537 2,537
Equity in net income of
ICII................... 5,652 21,444 20,260 20,260 5,005 6,699 6,699
Gain on sale of ICII
stock.................. -- 25,650 4,977 4,977 -- -- --
Gain from sale of stock
by ICII................ -- 10,761 -- -- -- -- --
Appreciation on donated
ICII stock............. -- 3,698 2,816 2,816 2,816 -- --
Other income............ 677 1,260 2,627 2,624 1,347 1,223 1,223
------- ------- ------- ------- ------- ------- -------
TOTAL REVENUE........... 20,627 81,151 51,346 48,977 19,153 20,336 18,776
------- ------- ------- ------- ------- ------- -------
EXPENSES
Personnel............... 4,827 6,153 9,315 9,315 4,623 6,296 6,754
Occupancy, net.......... 887 1,024 1,198 1,198 583 936 936
Data processing......... 518 562 642 642 318 443 443
Other................... 3,748 3,325 5,381 5,381 2,688 2,806 2,806
------- ------- ------- ------- ------- ------- -------
TOTAL GENERAL AND
ADMINISTRATIVE
EXPENSES............... 9,980 11,064 16,536 16,536 8,212 10,481 10,939
Real estate owned
expenses (income), net. 129 (11) 138 138 -- (7) (7)
Donation of ICII stock.. -- 4,866 3,632 3,632 3,632 -- --
Distribution related
expenses............... -- -- 919 919 -- 1,128 1,128
Consulting expense...... 286 914 6,224 6,224 716 266 266
------- ------- ------- ------- ------- ------- -------
TOTAL EXPENSES.......... 10,395 16,833 27,449 27,449 12,560 11,868 12,326
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 10,232 64,318 23,897 21,528 6,593 8,468 6,450
Income taxes............ 4,313 25,674 8,737 7,742 2,423 3,572 2,725
------- ------- ------- ------- ------- ------- -------
NET INCOME.............. $ 5,919 $38,644 $15,160 $13,786 $ 4,170 $ 4,896 $ 3,725
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic................. $ 0.32 $ 2.06 $ 0.78 $ 0.71 $ 0.22 $ 0.25 $ 0.19
Diluted............... $ 0.32 $ 2.04 $ 0.77 $ 0.70 $ 0.21 $ 0.23 $ 0.18
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
SECURITIES
AVAILABLE
CONTRIBUTION FOR SALE, TOTAL
COMMON BY IMPERIAL NET OF RETAINED STOCKHOLDER'S
STOCK BANK TAXES EARNINGS EQUITY
------ ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ -- $ 1,597 $ (40) $ 52,687 $ 54,244
----- ------- ----- -------- --------
Net income, 1995........ -- -- -- 5,919 5,919
Dividend to Imperial
Bank................... -- -- -- (2,000) (2,000)
Net change in unrealized
loss on securities
available for sale, net
of taxes .............. -- -- 38 -- 38
----- ------- ----- -------- --------
Balance, December 31,
1995................... -- 1,597 (2) 56,606 58,201
----- ------- ----- -------- --------
Net income, 1996........ -- -- -- 38,644 38,644
Net change in unrealized
loss on securities
available for sale, net
of taxes .............. -- -- 1 -- 1
----- ------- ----- -------- --------
Balance, December 31,
1996................... -- 1,597 (1) 95,250 96,846
----- ------- ----- -------- --------
Net income, 1997........ -- -- -- 15,160 15,160
Net change in unrealized
gain on securities
available for sale, net
of taxes............... -- -- 232 -- 232
----- ------- ----- -------- --------
Balance, December 31,
1997................... $ -- $ 1,597 $ 231 $110,410 $112,238
----- ------- ----- -------- --------
Net income, six months
ended June 30, 1998
(unaudited)............ -- -- -- 4,896 4,896
Contribution by Imperial
Bank (unaudited)....... -- 10,000 -- -- 10,000
Net change in unrealized
loss on securities
available for sale, net
of taxes (unaudited)... -- -- (418) -- (418)
----- ------- ----- -------- --------
Balance, June 30, 1998
(unaudited)............ $ -- $11,597 $(187) $115,306 $126,716
===== ======= ===== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX SIX
YEAR ENDED DECEMBER 31, MONTHS ENDED MONTHS ENDED
---------------------------- JUNE 30, 1997 JUNE 30, 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income.............. $ 5,919 $ 38,644 $ 15,160 $ 4,170 $ 4,896
Adjustments for non-cash
items:
Depreciation and
amortization.......... 176 164 112 76 166
Accretion of discounts,
net................... (26) (9) (77) (3) --
Provision for loan
losses................ 1,492 1,781 2,558 1,512 736
Equity in net income of
ICII.................. (5,652) (21,444) (20,260) (5,005) (6,699)
Gains--ICII stock...... -- (36,411) (4,977) -- --
Appreciation of donated
ICII stock............ -- (3,698) (2,816) (2,816) --
Donated ICII stock..... -- 4,866 3,632 3,632 --
Provision for deferred
taxes................. 1,985 8,310 6,239 75 2,363
Net (increase) decrease
in loans held for
sale.................. (1,000) (2,883) 1,768 (1,554) (4,678)
Net increase (decrease)
in income taxes
payable............... 867 19,156 (16,742) (15,252) 875
Net (increase) decrease
in excess servicing
fees receivable....... (522) (1,887) 3,294 1,466 --
Net increase in loan
servicing rights...... -- -- (1,914) -- (132)
Net increase in other
assets................ (1,744) (2,843) (2,305) (181) (315)
Net (decrease) increase
in other liabilities.. (1,354) 6,494 1,996 (1,865) 1,259
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. 141 10,240 (14,332) (15,745) (1,529)
-------- -------- -------- -------- --------
Cash flows from
investing activities:
Proceeds from maturity
of securities
available for sale.... 408 800 1,873 478 2,000
Purchase of securities
available for sale.... -- (533) (4,051) -- --
Net increase in SBA
interest only strips.. -- -- -- -- (200)
Net (increase) decrease
in loans held for
investment............ (50,641) 1,209 (64,437) (38,426) (5,539)
Proceeds from sale of
ICII common stock..... -- 35,079 7,156 -- --
Purchase of premises
and equipment......... (125) (109) (391) (150) (1,042)
-------- -------- -------- -------- --------
Net cash (used in)
provided by investing
activities............. (50,358) 36,446 (59,850) (38,098) (4,781)
-------- -------- -------- -------- --------
Cash flow from financing
activities:
Net increase (decrease)
in borrowings from
Imperial Bank......... 52,593 (43,713) 71,750 54,242 (33,535)
Contribution from
Imperial Bank......... -- -- -- -- 10,000
Net increase in time
deposits.............. -- -- -- -- 37,480
Dividend to Imperial
Bank.................. (2,000) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............. 50,593 (43,713) 71,750 54,242 13,945
Net increase in cash and
cash equivalents....... 376 2,973 (2,432) 399 7,635
Cash and cash
equivalents at
beginning of period.... 1,896 2,272 5,245 5,245 2,813
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 2,272 $ 5,245 $ 2,813 $ 5,644 $ 10,448
======== ======== ======== ======== ========
Supplementary
Information:
Interest paid.......... $ -- $ -- $ -- $ -- $ --
Taxes paid............. 680 -- 2,446 1,100 --
Reclassification of
interest only strip to
securities available
for sale from other
assets................ -- -- 2,297 -- --
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997, AND JUNE 30, 1997 (UNAUDITED) AND 1998
(UNAUDITED)
NOTE 1. ORGANIZATION
Imperial Financial Group, Inc. (the "Company"), incorporated in the State of
Delaware in 1997, is a wholly-owned subsidiary of Imperial Bank (the "Bank"),
which is itself a wholly owned subsidiary of Imperial Bancorp, a diversified
financial services organization. On February 20, 1997, the Board of Directors
of Imperial Bancorp approved a plan to spin off to its shareholders in a tax-
free distribution the shares of the Company's Class A Common Stock (the
"Distribution"). After consummation of the Distribution, the Company will be
comprised of The Lewis Horwitz Organization ("LHO"), currently a division of
the Bank specializing in entertainment industry lending; Crown American Bank
("CAB"), a thrift and loan company that will be comprised of, among other
businesses, the Bank's small business lending group that specializes in
originating and selling Small Business Administration ("SBA") government
guaranteed loans; Imperial Trust Company ("ITC"), a wholly owned subsidiary of
the Bank, which is a California-licensed trust company and provides investment
management and fiduciary services to individual investors, corporations and
foundations; and its investment in Imperial Credit Industries, Inc. ("ICII"),
a diversified finance company which as of December 31, 1997 and June 30, 1998
(unaudited) totalled approximately 8.9 million shares of stock.
The Company, the Bank and Imperial Bancorp have entered into the
Contribution Agreement in connection with the Distribution, pursuant to which
the Bank will contribute to the Company (i) all of the assets and liabilities
relating to LHO, (ii) all of the common stock of ITC, (iii) all of the common
stock of CAB and (iv) all of the ICII common stock owned by the Bank
(representing approximately 23.0% of all outstanding common stock as of
December 31, 1997 and June 30, 1998 (unaudited) (the "Contribution"). The Bank
and the Company have agreed that the Company will have a net book value as of
the Distribution Date of approximately $27 million (unaudited) plus the after-
tax book value of the ICII stock of approximately $51 million (unaudited).
Immediately following the Distribution, the Company will accrue an after tax
charge of approximately $1.3 million (unaudited) to reflect the termination of
an obligation under a consulting agreement that will be assumed by the Company
as part of the Distribution conditioned upon the consummation of the
Distribution. As such, following the Distribution, the net book value of the
Company will be reduced by approximately $1.3 million (unaudited). See Note 8
to the Combined Financial Statements.
The Contribution Agreement also provides that the Bank will retain certain
loans secured by mortgages on single family residential properties (and the
Company will not assume the liabilities relating thereto) which were
transferred to the Bank in connection with the initial public offering of ICII
in 1992. In addition, the Company will assume the Bank's obligations under a
consulting agreement with an entity wholly-owned by the chief executive
officer of the Company.
The Company received a private letter ruling dated February 27, 1998 from
the Internal Revenue Service to the effect that the receipt of shares of
Company Class A Common Stock will be tax-free for federal income tax purposes
to Imperial Bancorp and to shareholders of Imperial Bancorp and that neither
Imperial Bancorp nor the Bank will recognize income, gain or loss as a result
of the Distribution. It is anticipated that the Distribution will occur in the
second half of 1998.
Total expenses related to the Distribution for the year ended December 31,
1997 and the six months ended June 30, 1998 (unaudited) were approximately
$1.6 million and $1.6 million, respectively. Of the cumulative total of $3.2
million, the Bank has incurred $1.2 million and the remaining $2.0 million was
incurred by the Company, and is included in "Other Expenses" on the
accompanying combined statements of income.
NOTE 2. BASIS OF PRESENTATION
The operations of the divisions, companies and investment that will make up
the Company after the Distribution have been combined in the accompanying
combined financial statements and notes, reflecting the historical operations
for those years presented as if the Company existed as a stand alone entity
during such years. All material intercompany transactions have been
eliminated. Certain adjustments, as described below, have been made to
historical operations in order to provide fair presentation of the financial
operations of the combined entity.
F-7
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The combined financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the combined financial
statements, management has made a number of estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of the
balance sheets and the results of operations for the years presented. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the allowance for loan losses. While management
believes that the allowance is currently adequate, future additions may be
necessary based on changes in economic conditions.
BORROWING COST
Historical operations of the Company have been adjusted to reflect the
funding of net assets by the Bank. The adjustments have been disclosed in the
accompanying combined financial statements as "Borrowings from Imperial Bank".
Additionally, the historical operations of the Company have been adjusted to
reflect the estimated interest charges on these borrowings. In order to
reflect all costs of doing business in the combined financial statements,
interest charges have been allocated to the Company in the accompanying
combined statements of income.
The interest charges allocated are based upon estimated average borrowing
balances and Imperial Bank's average interest rates for short-term
certificates of deposit plus one hundred basis points in order to approximate
the cost of funds management believes is representative of the cost the
Company would have had to pay in the past as a "stand alone" company. The
estimated average borrowings from the Bank and estimated interest rates used
to determine the estimated interest expense recorded for the periods indicated
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Estimated average borrowings....... $18,571 $30,542 $50,603 $24,121 $80,788
Estimated interest rate............ 6.93% 6.46% 6.48% 6.38% 6.52%
Estimated interest expense......... $ 1,287 $ 1,973 $ 3,277 $ 769 $ 2,618
</TABLE>
INCOME TAXES
The SBA and LHO divisions did not record income taxes in their historical
operations. Additionally, no income taxes have historically been recorded on
the Company's investment in ICII. Consistent with a tax sharing agreement with
Imperial Bancorp, the combined financial statements reflect income taxes for
the Company as if it had been a subsidiary of the Bank for all periods
presented.
NOTE 3. PRO FORMA INFORMATION (UNAUDITED)
The unaudited pro forma combined statements of income reflect the
Contribution and the Distribution as if they occurred at the beginning of the
period presented. The unaudited pro forma combined balance sheet reflects the
Contribution and the Distribution as if they occurred at June 30, 1998. The
unaudited pro forma information reflects the expected capitalization of the
Company as a result of the Distribution, the incurrence by the Company of
approximately $95 million of indebtedness under the Credit Facilities,
interest expense relating to such borrowings, amortization of capitalized
costs incurred in connection with the Credit Facilities and retention of
certain assets and liabilities by Imperial Bancorp. This unaudited pro forma
information does not necessarily reflect the results of operations or
financial position of the Company which would have been achieved had the
Contribution and Distribution actually been consummated as of such dates.
Also, this unaudited pro forma information is not indicative of the future
results of operations or future financial position of the Company.
F-8
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below.
(A) PRINCIPLES OF CONSOLIDATION
The combined financial statements include the accounts of the Company. All
material intercompany balances and transactions have been eliminated.
At December 31, 1996, December 31, 1997, and June 30, 1998 (unaudited)
respectively, the Company owned approximately 9.4 million, 8.9 million and 8.9
million shares of ICII at a book value per share of $6.16, $8.39 and $9.14
representing approximately 25%, 23%, and 23% of all outstanding ICII shares.
As of August 15, 1998 (unaudited), the Company entered into an agreement with
another shareholder of ICII, which provides the Company with beneficial
ownership of additional 3% of the outstanding common shares of ICII. The
Company exercises significant influence over the operating and financial
policies of ICII, and therefore, the results of ICII operations are accounted
for in the Company's combined financial statements as an equity investment.
The results of operations of ICII are reflected as "Equity in net income of
ICII" in the combined statements of income.
(B) CASH AND CASH EQUIVALENTS
For purposes of the combined statements of cash flows, the Company considers
all investments having a maturity of three months or less at the date of
purchase to be cash equivalents.
(C) SECURITIES AVAILABLE FOR SALE
The Company holds certain securities, primarily U.S. Treasury and federal
agency securities, to manage its overall liquidity. These securities are
carried at fair value. Unrealized gains and losses are excluded from income
and reported as a separate component of stockholder's equity, net of taxes.
Fair value impairment that is determined to be other than temporary is
recorded as an unrealized loss in the combined statements of income. Purchases
and sales of securities available for sale are recorded on the trade date.
Amortization of premiums and accretion of discounts are recognized in other
interest income in the combined statements of income using the interest
method. Realized gains and losses on securities available for sale are
computed using the specific identification method.
The Company also classifies, as securities available for sale, the interest
only strips recognized on the sale of SBA loans. The interest only strips are
determined by computing the present value of the future cash flows expected to
be received in excess of contractually specified servicing fees. Interest only
strips are amortized over the expected life of the associated loan using a
method that approximates the interest method. Prepayment assumptions are based
on market prepayment rates.
(D) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," ("FAS 125") which establishes accounting
for transfers and servicing of financial assets and extinguishment of
liabilities. FAS No. 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. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
F-9
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Small Business Administration lending group for CAB provides loans to
small businesses, sells the guaranteed portion of the loans, and retains the
servicing rights and interest-only strips relating to those loans. Under FAS
125, the portion of the contractually specified servicing fee that exceeds the
fee that a substitute servicer would demand to assume the servicing (which
industry practice has deemed to be 40 basis points based on a National
Association for Government Guaranteed Loans survey), on SBA loans sold after
January 1, 1997, should be recorded as a servicing asset and amortized in
proportion to and over the period of the servicing income. Any cash flow
expected to be received in excess of the contractually specified servicing
fees should be recorded as an interest-only strip receivable at its allocated
carrying amount and subsequently measured at fair value as an available for
sale security under SFAS No. 115. At January 1, 1997, as a result of the
adoption of SFAS 125, approximately $1.7 million representing the value of the
interest-only strip was reclassified from excess servicing fees receivable to
securities available for sale. Additionally, approximately $1.5 million was
reclassified as loan servicing rights on January 1, 1997.
Prior to the adoption of SFAS No. 125 on January 1, 1997, the Company
created excess servicing fees receivable as a result of the sale of SBA loans.
Excess servicing fees receivable on the sale of SBA loans are determined by
computing the present value of the future cash flows of loans sold over a base
fee (0.40%) for the servicing of the loan. The excess servicing fees
receivable is amortized over the expected life of the loan using an approach
that approximates the interest method. Prepayment assumptions are based on
market prepayment rates.
(E) LOANS HELD FOR SALE
The Company currently designates its SBA loans originated as held for sale.
These loans are carried at the lower of aggregate cost or fair value.
Origination fees on loans held for sale, net of certain costs of processing
and closing the loans, are deferred until the time of sale and are included in
the computation of the gain or loss from the sale of the related loans. The
gains or losses on the sale of SBA loans are recorded as "Gain on sale of SBA
loans" in the combined statements of income.
(F) LOANS HELD FOR INVESTMENT, NET
Loans held for investment are stated at the amount of principal outstanding.
Non-refundable loan fees and related direct costs associated with the
origination or purchase of loans are deferred and netted against outstanding
loan balances. The net deferred fees and costs are recognized into interest
income over the loan term using the interest method.
Interest income on loans is accrued as earned. Interest accruals on
commercial and real estate loans are generally discontinued whenever the
payment of interest or principal is 90 days past due. When a loan is placed on
nonaccrual status, the accrued and unpaid interest is charged against current
income and recognition of net deferred fees and costs into income is
discontinued. Future collections of interest are included in interest income
or applied to the loan balance based on an assessment of the likelihood that
the principal will be collected.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2)
the observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to the
provision for loan losses.
Loans deemed by management to be uncollectible are charged to the allowance
for loan losses. Recoveries on loans previously charged off are credited to
the allowance. Provisions for loan losses are charged to expense
F-10
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
and added to the allowance in amounts deemed appropriate by management. In
evaluating the adequacy of the allowance, management considers numerous
factors including economic conditions, loan portfolio composition and risk,
loan loss experience, ongoing review of specific loans and the review by the
Company's regulators. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in the aforementioned factors.
(G) PREMISES AND EQUIPMENT, NET
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation on equipment is calculated using the straight-line method over
the estimated useful lives of the assets (five to seven years). Leasehold
improvements are amortized using the straight-line method over the terms of
the respective leases or the estimated useful lives of the leasehold
improvements, whichever is shorter.
(H) INCOME TAXES
The Company is currently included in the consolidated tax returns of
Imperial Bancorp. The Company accounts for income taxes as though they file
taxes on a separate company basis using an 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 and operating loss and tax credit carryforwards. 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. 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.
(I) TRUST FEE INCOME
Trust fees include fees received for investment and management services,
custodial services, and trust services and are recognized on an accrual basis
as earned.
(J) SALE OF INVESTMENT IN EQUITY INVESTEE
The sale of shares of the Company's equity investment in ICII to the public
is recorded as "Gain on sale of ICII stock" in the combined statements of
income. This gain represents actual proceeds from the sale of stock reduced by
the Company's recorded investment in those shares and expenses related to the
stock sale.
(K) GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE
The impact on the Company's investment in ICII for the sales of previously
unissued stock by ICII to the public is recorded as "Gain from sale of stock
by ICII" in the combined statements of income. This gain results from ICII's
sales of previously unissued stock in a public offering at a per share
offering price that exceeds the Company's per share carrying amount for its
equity investment in the common stock of ICII.
(L) STOCK BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the
F-11
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
date of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in
SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
(M) EARNINGS PER SHARE
The Company adopted SFAS 128, "Earnings Per Share," ("SFAS 128") for the
fiscal year ended December 31, 1997. SFAS 128 simplifies the standards for
computing and presenting earnings per share as previously prescribed by APB
Opinion No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic
EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted from issuance of common stock that then share in earnings. SFAS
128 also requires dual presentation of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. All prior earnings per share amounts have been restated to
reflect the adoption of SFAS 128.
(N) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Comprehensive income for the six months
ended June 30, 1998 (unaudited) and 1997 (unaudited) totaled $4.5 million and
$4.2 million, respectively. The Company's other comprehensive income is
comprised of the unrealized (loss) gain on securities available for sale, net
for all periods reported. Accumulated other comprehensive income at June 30,
1998 (unaudited) and December 31, 1997 totaled $(0.2) million and $0.2 million
respectively.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 131--DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION--The FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries," to remove the special disclosure requirements
for previously unconsolidated subsidiaries.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
F-12
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose
financial statements. It requires that all public business enterprises report
information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets, and about major
customers regardless of whether that information is used in making operating
decisions. However, SFAS 131 does not require an enterprise to report
information that is not prepared for internal use if reporting it would be
impracticable.
SFAS 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
The Company operates in three principal business segments: the origination
and sale of small business loans (CAB), the origination of entertainment loans
(LHO) and the provision of trust services (ITC). The Company adopted SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information" as of
January 1, 1998. SFAS 131 is effective for the Company for its December 31,
1998 consolidated financial statements with comparative information for
earlier years to be restated. Management has determined that the
implementation of SFAS 131 will not have a material impact on the Company's
financial condition or results of operations.
SFAS 132--EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS--The FASB issued SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, "Employers Accounting for Pensions",
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", were issued. SFAS
132 suggests combined formats for presentation of pension and other
postretirement benefit disclosures.
The Company adopted SFAS 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits" as of January 1, 1998. SFAS 132 is effective
for the Company for its December 31, 1998 consolidated financial statements
with comparative information for earlier years to be restated.
SFAS 133--Accounting for Derivative Instruments and Hedging Activities--SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure
to variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency denominated forecasted transaction. The accounting for changes in
fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS 133 must be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must
F-13
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
be designated anew and documented pursuant to the provisions of SFAS 133. SFAS
133 is not to be applied retroactively to financial statements of prior
periods. Management does not believe that there will be a material adverse
impact on the financial position or results of operations of the Company upon
adoption of SFAS 133.
NOTE 5. SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996 U.S. Treasury securi-
ties................................... $1,180 $ 2 $ (3) $1,179
====== ==== ===== ======
December 31, 1997
U.S. Treasury and federal agency
securities........................... $3,332 $ 6 $ -- $3,338
SBA Interest only strips.............. 2,296 393 -- 2,689
------ ---- ----- ------
Total................................. $5,628 $399 $ -- $6,027
====== ==== ===== ======
June 30, 1998 (unaudited)
U.S. Treasury and federal agency
securities........................... $1,332 $ 4 $ -- $1,336
SBA Interest only strips.............. 2,497 -- (326) 2,171
------ ---- ----- ------
Total................................. $3,829 $ 4 $(326) $3,507
====== ==== ===== ======
</TABLE>
The Company is required to pledge money or securities for the California
State Treasurer for the faithful performance and execution of court and
private trusts accepted by the Company. The fair value amounts of the pledged
securities included in "Securities available for sale" are $336,000, $369,000
and $380,000 at December 31, 1996, December 31, 1997 and June 30, 1998
(unaudited), respectively. There were no gross realized gains or gross
realized losses for the years ended December 31, 1996, and 1997 or for the six
months ended June 30, 1997 (unaudited) and 1998 (unaudited).
The amortized cost and fair value of securities available for sale, by
contractual maturity, are shown below for the periods presented.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1998
1997 (UNAUDITED)
---------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less.................... $2,249 $2,249 $1,081 $1,085
Due in one year through five years......... 1,083 1,089 251 251
Due after five years....................... 2,296 2,689 2,497 2,171
------ ------ ------ ------
Total...................................... $5,628 $6,027 $3,829 $3,507
====== ====== ====== ======
</TABLE>
NOTE 6. LOANS HELD FOR INVESTMENT, NET
The carrying amount of loans, net of unearned income, deferred loan fees and
costs and the allowance for loan losses, consisted of the following:
<TABLE>
<CAPTION>
AT AT AT JUNE 30,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Entertainment loans................... $44,906 $ 98,313 $107,135
Small business loans.................. 20,277 34,032 31,251
Residential loans secured by real es-
tate................................. 9,974 6,548 5,679
------- -------- --------
Total loans........................... 75,157 138,893 144,065
Less allowance for loan losses........ (2,629) (4,486) (4,855)
------- -------- --------
Total loans held for investment,
net................................ $72,528 $134,407 $139,210
======= ======== ========
</TABLE>
F-14
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Net deferred loan fees and costs, included in total loans, approximated $0.7
million, $1.3 million and $1.5 million at December 31, 1996 and 1997 and June
30, 1998 (unaudited), respectively.
At December 31, 1996, the recorded investment in loans which were deemed to
be impaired totaled $4.9 million, all of which were on nonaccrual status. $3.7
million of the impaired loans were secured by real estate. Of the $4.9 million
of impaired loans, $1.0 million required a specific allowance of $175,000. At
December 31, 1997 the recorded investment in loans which were deemed to be
impaired totaled $4.4 million. All such loans were on nonaccrual status as of
that date. All of the impaired loans were secured by real estate. The
$4.4 million of impaired loans did not require a specific allowance for
impairment. At June 30, 1998 (unaudited), the recorded investment in loans
which were deemed to be impaired totaled $4.7 million. All such loans were on
nonaccrual status as of that date. All of the impaired loans were secured by
real estate. The $4.7 million of impaired loans did not require a specific
allowance for impairment. Impaired loans averaged $3.6 million, $3.0 million
and $4.9 million, respectively for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1998 (unaudited). During the years ended
December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1997
(unaudited) and 1998 (unaudited), approximately $56,000, $203,000, $167,000,
$37,000 and $95,000 of interest income, respectively, was recognized on the
impaired loans.
At December 31, 1996 and 1997 and June 30, 1998 (unaudited), there were no
restructured loans.
Nonaccrual loans totaled $4.9 million, $4.4 million and $4.7 million at
December 31, 1996, 1997 and June 30, 1998 (unaudited), respectively. During
the years ended December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1997 (unaudited) and 1998 (unaudited) approximately $56,000,
$203,000, $167,000, $37,000 and $95,000 of interest income, respectively, was
recognized on nonaccrual loans. Interest income foregone on nonaccrual loans
approximated $232,000, $375,000, $296,000, $68,000 and $152,000 for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended June 30,
1997 (unaudited) and 1998 (unaudited), respectively.
At December 31, 1996 and 1997, and June 30, 1998 (unaudited), approximately
60%, 71% and 74%, respectively, of the Company's loan portfolio were issued to
borrowers in the movie production industry.
At December 31, 1996 and 1997, and June 30, 1998 (unaudited), a majority of
the Company's loan portfolio consisted of customers geographically located in
California.
Total SBA loans serviced were $57.4 million, $81.1 million and
$135.2 million at December 31, 1996 and 1997, and June 30, 1998 (unaudited),
respectively.
Loans held for sale at December 31, 1996 and 1997, and June 30, 1998
(unaudited) consist of SBA loans originated for sale.
NOTE 7. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year....... $ 626 $ 1,536 $ 2,629 $2,629 $4,486
Loans charged off................ (613) (833) (850) (579) (402)
Recoveries on loans previously
charged off..................... 31 145 149 85 35
------- ------- ------- ------ ------
Net loans charged off............ (582) (688) (701) (494) (367)
Provision for loan losses........ 1,492 1,781 2,558 1,512 736
------- ------- ------- ------ ------
Balance, end of year............. $ 1,536 $ 2,629 $ 4,486 $3,647 $4,855
======= ======= ======= ====== ======
</TABLE>
F-15
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. INVESTMENT IN STOCK OF IMPERIAL CREDIT INDUSTRIES, INC.
The sale of shares of the Company's equity investment in ICII to the public
is recorded as "Gain on sale of ICII stock" in the combined statements of
income. The $25.6 million gain recorded for the year ended December 31, 1996
and the $5.0 million gain recorded for the year ended December 31, 1997
represent the proceeds from the sale of stock by the Company reduced by the
Company's recorded investment in those shares and expenses related to the
stock sale. The $10.8 million gain for the year ended December 31, 1996
resulted from ICII's sale of previously unissued stock in a public offering at
a per share offering price that exceeded the Company's per share carrying
amount for its equity investment in the common stock of ICII.
At December 31, 1997 and June 30, 1998 (unaudited), the Company owned
approximately 8.9 million shares of ICII at an equivalent book value of $8.39
and $9.14 per share, respectively, representing approximately 23.0% of all
outstanding ICII shares as of such dates. The following table illustrates the
changes in the Company's investment in ICII for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- JUNE 30, 1998
1996 1997 (UNAUDITED)
------------ ----------- ----------------
<S> <C> <C> <C>
Shares owned, beginning of year. 5,801,052 9,396,106 8,941,106
Stock splits and stock divi-
dends.......................... 5,281,658 -- --
Sale of shares.................. (1,500,000) (320,000) --
Charitable donation of shares... (186,604) (135,000) --
------------ ----------- ---------
Shares owned, end of year....... 9,396,106 8,941,106 8,941,106
============ =========== =========
</TABLE>
The following tables contain summarized financial information for ICII:
<TABLE>
<CAPTION>
AT AT AT JUNE 30,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets........................... $2,470,639 $2,102,094 $2,415,562
Total liabilities...................... 2,231,131 1,778,161 2,072,157
Shareholders' equity................... 239,508 323,933 343,405
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................ $129,482 $207,471 $227,937 $104,587 $113,503
Interest expense............... 95,728 135,036 126,594 60,056 57,446
Net interest income after pro-
vision for loan losses........ 28,304 62,662 62,392 35,925 48,757
Total revenue.................. 85,309 256,933 309,560 97,800 103,138
Total expenses................. 61,180 99,049 150,384 50,198 56,558
Income before extraordinary
item.......................... 14,193 75,984 89,916 25,105 29,162
Net income..................... 14,193 75,984 85,921 21,110 29,162
</TABLE>
In accordance with two consulting agreements, one with a senior executive of
the Bank, and the second with Second Southern Corp., an entity wholly-owned by
the chief executive officer of the Company ("Second Southern"), the Company is
obligated to pay commissions upon the sale of ICII shares. Each consultant is
entitled thereunder to receive an incentive fee of 2.5% of the realized pre-
tax gains received by the Company, when and if realized, from the disposition
of the remaining ICII shares held by the Company. If such sale by the Company
has not occurred by December 31 of each year from 1996 through 2000, the
agreements require that
F-16
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the Company will have considered to have sold an amount equal to 20% of any
such security as of January 1 of each year from 1997 through 2001, at a price
equal to the arithmetic average of the daily average stock price of ICII
common stock as reported by NASD during the preceding year. These agreements
have been accrued for over the vesting periods and remeasured quarterly for
changes in the average market price of ICII stock.
In satisfaction of the Company's obligation related to the consulting
agreement with the senior executive of the Bank, the Company agreed to pay to
the executive a portion of the proceeds received from selling 231,528 shares
of ICII stock in the third and fourth quarters of 1997. As a result of these
sales and the sale of an additional 88,472 shares of ICII stock during 1997
(for total sales of 320,000 shares during 1997) the Company recorded gains of
$5.0 million in "Gain on sale of ICII stock" in the Combined Statement of
Income. Offsetting the gain on sale was a $5.0 million consulting charge
recorded in "Consulting expense" which represented full satisfaction of the
senior executive's consulting agreement.
The Second Southern agreement remains an obligation of the Company as of
December 31, 1997 and June 30, 1998 (unaudited). Based on the daily average
market price for the year ended December 31, 1997 and the six months ended
June 30, 1998 (unaudited) of $21.34 and $22.22 per share, respectively, less
Second Southern's basis of $0.88 per share as of December 31, 1997 and June
30, 1998 (unaudited), as adjusted for stock splits and dividends, the total
liability to be accrued for over the vesting period approximated $4.7 million
and $4.9 million at December 31, 1997 and June 30, 1998 (unaudited),
respectively, of which $2.9 million and $3.2 million had been accrued for at
December 31, 1997 and June 30, 1998 (unaudited), respectively. The expense
relating to this remaining consulting agreement is being accrued over the
vesting period and will be remeasured quarterly for changes in the average
market price. During the years ended December 31, 1995, 1996 and 1997, and the
six months ended June 30, 1998 (unaudited), the Company recorded an expense of
$0.3 million, $0.9 million, $1.0 million and $0.3 million, respectively, to
its combined statements of income.
The Bank, the Company and Second Southern have agreed that, in connection
with and prior to the Distribution, the consulting agreement will be amended
to provide that it will be assumed by the Company and the Bank will be
released from its obligations thereunder. In addition, the parties have agreed
that, immediately following the Distribution, the consulting agreement (and
the related rights and obligations thereunder) will be terminated and in
consideration therefor, the Company will issue to Second Southern a
combination of cash and warrants to acquire Company Class A Common Stock in an
aggregate amount equal to the total liability owed to Second Southern under
the consulting agreement at the time of such amendment. In accordance with the
terms of the consulting agreement, this liability will be approximately $5.4
million (unaudited). The warrants will not be exercisable for two years and
the confirmation of the value of the warrants at the time of issuance will be
determined by an independent appraiser selected by the Company. The settlement
of the total liability owed to Second Southern will result in a one-time after
tax charge immediately following the Distribution to the Company's earnings of
approximately $1.3 million (unaudited). The effectiveness of the amendment of
the consulting agreement is conditioned upon the consummation of the
Distribution.
At December 31, 1996, 1997, and June 30, 1998 (unaudited), respectively, the
Company owned approximately 9.4 million, 8.9 million, and 8.9 million shares
of ICII at an equivalent book value per share of $6.16, $8.39 and $9.14,
representing approximately 25%, 23% and 23% of all outstanding ICII shares. On
June 30, 1998 (unaudited), the fair value of ICII common stock was $23.50,
representing a pre-tax unrealized gain on the Company's investment of over
$128 million. As of August 15, 1998 (unaudited), the Company beneficially
owned more than 25.0% of the outstanding common stock of ICII. Of the ICII
stock held by the Company, approximately 3.0% (or 1.2 million shares of ICII
common stock (the "Shares")) is beneficially owned by the Company pursuant to
the ICII Shareholders Agreement. The ICII Shareholders Agreement, among other
things, grants the Company the right to direct the voting of, and provide the
Company with an irrevocable proxy to vote, the Shares until the earliest of
(a) the written instructions of the Company and the administrative agent for
the Credit Facilities, (b) February 7, 2001, (c) the date of settlement of the
purchase of the Shares by the Company following the exercise of its option to
purchase the Shares and (d) upon the written instructions of
F-17
<PAGE>
Bear, Stearns & Co. Inc. after (I) approval by the ICII shareholders of a
merger or similar business combination resulting in a cancellation,
reclassification or similar change with respect to all shares of ICII common
stock or (II) the date beginning five trading days prior to the scheduled
expiration date of a tender offer or similar offer by any person to purchase
more than 10% of the outstanding common stock of ICII. The ICII Shareholders
Agreement also grants the Company, for the duration of the agreement, an
option to purchase all, but not a portion, of the Shares at a price equal to
the greater of (i) 110% of the average of the closing offer prices of ICII
common stock as reported on NASDAQ for the 20 consecutive trading days ending
on the second business day prior to the date the Company delivers notice of
its intent to exercise the option and (ii) the average of the closing offer
prices of ICII common stock as reported on NASDAQ for the 20 consecutive
trading days beginning the first trading day following the date on which the
Company delivers notice of its intent to exercise the option. In consideration
for entering into the ICII Shareholders Agreement, the Bank paid Bear, Stearns
& Co. Inc. approximately $1.8 million. If the agreement is terminated by the
Company prior to August 1, 2000, a portion of this fee will be refunded to the
Company. Entering into the ICII Shareholders Agreement (and its subsequent
ownership of in excess of 25% of the voting stock of ICII) was a condition to
the closing under the Credit Facilities.
In addition, pursuant to a letter agreement, dated June 11, 1998 (the
"Letter Agreement"), ICII has granted the Company preemptive rights to
purchase ICII common stock upon the public offering of ICII stock at the same
price and on the same terms in order to allow the Company to maintain its
percentage ownership in ICII prior to a public offering. Such rights do not
take effect if ICII repurchases its own stock, thereby increasing the
Company's percentage ownership of ICII, until ICII's proposed actions would
reduce the Company's percentage ownership to a level below that which the
Company would have held in the absence of such repurchasing. In addition, this
preemptive right does not exist with respect to shares of ICII common stock
issued upon the exercise of employee stock options.
NOTE 9. ACQUISITION
On September 30, 1994, the Company purchased from the Federal Deposit
Insurance Corporation, in its capacity as Receiver of CommerceBank, a
certificate of deposit custodial services business. The price paid, net of
assets acquired, amounted to $121,000. In return, the Company acquired custody
of $193 million in certificates of deposit and retained three employees who
were maintaining the certificates of deposit for the Receiver. The Company has
received $1,476,000, $788,000, $577,000, $377,000 and $50,000 in fees from
this business for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 (unaudited) and 1998 (unaudited), respectively.
These amounts are included in "Trust fees" in the combined statements of
income. The amortization expense for the goodwill related to the purchase
amounted to $61,000 and $38,000 for the years ended December 31, 1995 and
1996, respectively, and is included in "Other expense" in the combined
statements of income. There was no amortization expense for goodwill for the
year ended December 31, 1997 and the six months ended June 30, 1997
(unaudited) and 1998 (unaudited). The fees related to this business are
expected to diminish over time and correspond to the certificates of deposit
in the related custodial accounts. The amount of certificates of deposit
remaining at each year end after considering maturities, is summarized as
follows:
<TABLE>
<CAPTION>
AMOUNTS
--------------
(IN THOUSANDS)
<S> <C>
1997...................................................... 21,704
1998...................................................... 18,007
1999...................................................... 9,961
2000...................................................... 8,056
2001 and thereafter....................................... 4,965
</TABLE>
F-18
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES
The income tax provision in the combined statements of income is comprised
of the following current and deferred amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................. $ 1,809 $ 13,009 $ 1,943
State............................................... 547 4,356 723
------- -------- -------
Total............................................. 2,356 17,365 2,666
------- -------- -------
Deferred
Federal............................................. 1,391 5,814 4,849
State............................................... 594 2,496 1,390
------- -------- -------
Total............................................. 1,985 8,310 6,239
------- -------- -------
Total
Federal............................................. 3,200 18,823 6,792
State............................................... 1,141 6,852 2,113
------- -------- -------
Total............................................. $ 4,341 $ 25,675 $8,905
------- -------- -------
Taxes charged to stockholder's equity................. 28 1 168
------- -------- -------
Total............................................. $ 4,313 $ 25,674 $ 8,737
======= ======== =======
</TABLE>
The Company had current income taxes payable of $22.4 million and $5.7
million, at December 31, 1996 and 1997, respectively.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax
liability.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Deferred compensation....................................... $ (168) $ (768)
Bad debt deduction.......................................... (885) (1,728)
Unrealized loss on securities available for sale............ (1) --
Amortization of intangible assets........................... (65) (86)
State franchise taxes....................................... (3,424) (2,570)
Charitable contribution limitation.......................... (149) (1,223)
Valuation allowance......................................... -- --
------- -------
Total deferred tax asset, net of valuation allowance...... (4,692) (6,375)
------- -------
Components of the deferred tax liability:
Investment in Imperial Credit Industries, Inc............... 22,398 30,306
Unrealized gain on securities available for sale............ -- 167
Other....................................................... 8 23
------- -------
Total deferred tax liability.............................. 22,406 30,496
------- -------
Net deferred tax liability................................ $17,714 $24,121
======= =======
</TABLE>
The Company's total deferred tax asset, is supported by carryback and
carryforward provisions of tax laws as well as certain tax strategies which
create future taxable income.
F-19
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The total income tax provision differs from the amount computed by applying
the statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- --------------- --------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate...... $3,581 35.0% $22,511 35.0% $8,364 35.0%
Appreciation of donated ICII
stock............................ -- -- (1,294) (2.0) (986) (4.1)
State taxes, net of federal tax
benefit.......................... 725 7.1 4,454 7.0 1,292 5.4
Other, net........................ 7 0.0 3 0.0 67 0.3
------ ---- ------- ---- ------ ----
Total............................. $4,313 42.1% $25,674 40.0% $8,737 36.6%
====== ==== ======= ==== ====== ====
</TABLE>
NOTE 11. STOCKHOLDER'S EQUITY
On March 20, 1997, the Company authorized 1,000 shares of common stock of
which 100 shares were issued to the Bank.
Under the Certificate of Incorporation that will be in effect on the
Distribution Date, the Company will have authority to issue a total of 70
million shares of all classes of stock, of which 10 million may be shares of
preferred stock ("Preferred Stock"), 50 million may be shares of Company Class
A Common Stock, and 10 million may be shares of Company Class B Common Stock.
Company Class A Common Stock and Company Class B Common Stock are collectively
referred to herein as "Company Common Stock."
Based on the number of shares of Bancorp Common Stock outstanding as of June
30, 1998 (unaudited) and the Distribution Ratio, it is expected that
approximately 19,878,335 shares of Company Class A Common Stock will be
distributed to Bancorp Shareholders in the Distribution. The shares to be
distributed will constitute 100% of the outstanding shares of Company Class A
Common Stock. The Company's Amended and Restated Certificate of Incorporation
also authorizes preferred stock and Class B Common Stock, par value $.01 per
share (the "Company Class B Common Stock"). The Company Class B Common Stock
may only be issued pursuant to the terms of, or upon the exercise of,
outstanding options granted under any of the Company's employee benefit plans,
as stock dividends to holders of Company Class B Common Stock or in connection
with shares issued to a third party in a transaction approved by the Board of
Directors of the Company. Holders of Company Class B Common Stock are entitled
to one-tenth of one vote for each share on all matters voted on by
stockholders and will vote together as a single class with the holders of
Company Class A Common Stock. Each share of the Company Class B Common Stock
will convert into one share of Company Class A Common Stock on the earlier of
the fifth anniversary of the Distribution Date and a Change of Control (as
defined in the Certificate of Incorporation). No capital stock of the Company
other than the Company Class A Common Stock will be outstanding on the
Distribution Date.
F-20
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. PRO FORMA EARNINGS PER SHARE
The following table summarizes the calculation of the Company's pro forma
basic and diluted earnings per share for the periods presented:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------- -------------------------
PER- PER- PER-
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ---------- ------ ------- ---------- ------ ------- ---------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income...................... $5,919 18,224,024 $0.32 $38,644 18,782,675 $2.06 $15,160 19,398,542 $0.78
Effect of Dilutive Securities
Incremental shares from
outstanding common stock
options........................ 95,818 132,108 393,170
---------- ---------- ----------
Diluted EPS
Income available to shareholders:
Net income...................... $5,919 18,319,842 $0.32 $38,644 18,914,783 $2.04 $15,160 19,791,712 $0.77
====== ========== ===== ======= ========== ===== ======= ========== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
-------------------------------------------------
1997 1998
------------------------ ------------------------
PER- PER-
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ---------- ------ ------ ---------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income...................... $4,170 19,286,025 $0.22 $4,896 19,767,698 $0.25
Effect of Dilutive Securities
Incremental shares from
outstanding common stock
options........................ 387,266 1,139,000
---------- ----------
Diluted EPS
Income available to shareholders:
Net income...................... $4,170 19,673,291 $0.21 $4,896 20,906,698 $0.23
====== ========== ===== ====== ========== =====
</TABLE>
The number of shares used to compute basic and diluted earnings per share
was retroactively adjusted to reflect stock splits and dividends as
appropriate. On February 6, 1998, Imperial Bancorp split its common stock at
the ratio of one new share for every two shares outstanding. In the first
quarter of 1997, Imperial Bancorp declared and paid a 10% stock dividend. In
the first quarter of 1996, Imperial Bancorp declared and paid an 8% stock
dividend. In the fourth quarter of 1996, Imperial Bancorp split its common
stock at the ratio of one new share for every two shares outstanding. In 1995,
Imperial Bancorp declared and paid a 5% stock dividend.
NOTE 13. EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
The Company participates in the following Imperial Bancorp employee benefit
plans:
(A) IMPERIAL BANCORP PROFIT-SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company participates in Imperial Bancorp's Profit Sharing and Employee
Stock Ownership Plan. Effective December 31, 1996 the Employee Stock Ownership
Plan (ESOP) was merged with the Profit Sharing Plan and all assets of the ESOP
were transferred to the Profit Sharing Plan. The amounts allocated to eligible
employees included in "Personnel expense" in the accompanying combined
statements of income are $194,000, $252,000, $396,000, $176,000 and $186,000
for the years ended 1995, 1996 and 1997, and for the six months ended June 30,
1997 (unaudited) and 1998 (unaudited), respectively.
F-21
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(B) IMPERIAL BANCORP 401-K PLAN
Imperial Bancorp has a 401-K Plan in which all employees of the Company may
elect to enroll each January 1 or July 1 of every year provided that they have
been employed for at least six months prior to the semi-annual enrollment
date. Employees may contribute up to 14% of their salaries with Imperial
Bancorp matching 50% of any contribution, not to exceed 4% of the employee's
salary. The Company's 401-K matching expenses included in "Personnel expense"
in the accompanying combined statements of income are $50,000, $135,000,
$151,000, $70,000 and $90,000 for the years ended December 31, 1995, 1996 and
1997, and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited), respectively.
(C) DEFERRED COMPENSATION PLAN
Imperial Bancorp has two Deferred Compensation Plans in order to provide
specified benefits to certain key employees and directors. Participants are
allowed to defer portions of their compensation each plan year, subject to a
minimum and a maximum dollar amount of deferral. In any plan year, Imperial
Bancorp will make a matching contribution of not less than 10% or more than
50% of the participants' deferral for that year. The exact ratio will be
determined by a formula based on Imperial Bancorp's return on stockholder's
equity. The amounts allocated to eligible employees included in "Personnel
expense" in the accompanying combined statements of income are $72,000,
$248,000, $1,368,000, $684,000 and $588,000 for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 (unaudited)
and 1998 (unaudited), respectively. The deferred amounts are also included in
"Borrowings from Imperial Bank" in the accompanying combined balance sheets.
(D) EMPLOYMENT AGREEMENTS
Agreement with Lewis Horwitz. The Bank and Lewis Horwitz entered into an
Employment Agreement, dated as of July 23, 1997 (the "Horwitz Agreement"),
which will be assigned from the Bank to the Company as part of the
Contribution, pursuant to which Mr. Horwitz serves as president and chief
executive officer of LHO. The initial term of the Horwitz Agreement expires on
December 31, 2001, subject to early termination at Mr. Horwitz's option after
December 31, 1999.
Pursuant to the Horwitz Agreement, Mr. Horwitz receives a base salary of
$250,000 and a guaranteed annual bonus of $500,000 and is entitled to an
annual incentive bonus based on the pre-tax earnings of LHO. Mr. Horwitz also
receives a monthly car allowance and is entitled to additional payments
aggregating $60,000 payable between 1997 and 2001. Mr. Horwitz was also
granted options to purchase up to three percent of the outstanding Company
Common Stock as of April 23, 1997 at an exercise price which is equal to 80%
of the fair value per share as determined in a report by NationsBanc
Montgomery dated as of April 23, 1997. Based on these terms, the Company will
accrue compensation expense of $194,000 per year over the vesting period.
These options vest after five years, subject to earlier vesting in certain
circumstances.
The Horwitz Agreement provides that Mr. Horwitz may be terminated for
permanent disability or cause. Upon such termination, he would be entitled to
receive all accrued compensation and bonuses described above, except that no
incentive bonus will be paid upon termination for cause. Mr. Horwitz is also
entitled to a severance payment on termination (in lieu of receiving a signing
bonus at the time of execution of the Horwitz Agreement) of up to $1,250,000,
which amount will be reduced annually by 50% of the cumulative guaranteed
bonus paid prior to such termination.
The Horwitz Agreement also provides that, following the initial term, Mr.
Horwitz will provide consulting services for the Company for an additional
three years for annual compensation of $200,000 (or an additional two years if
he retires prior to December 31, 2001). The Horwitz Agreement also contains a
non-compete provision that provides that during the term of employment and for
two years following termination, Mr. Horwitz
F-22
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
will not solicit employees or customers of the Company or any of its
affiliates and he may not work in a business directly or indirectly in
competition with LHO.
NOTE 14. STOCK OPTION PLANS
(A) SHARE INCENTIVE PLAN
The Company has adopted the Imperial Financial Group, Inc. 1997 Share
Incentive Plan (the "Plan") in order to provide incentives to attract, retain
and motivate highly competent persons as executive management, employees and
directors of the Company and of any affiliate thereof (other than Imperial
Bancorp or the Bank). The Plan, which is, and will be after the Distribution,
administered by the Compensation Committee, provides such persons with
opportunities to acquire shares of Company Class A Common Stock or Company
Class B Common Stock, or to receive monetary payments based on the value of
such shares pursuant to certain Benefits (as defined below). Benefits under
the Plan may be granted in any one or a combination of stock options, stock
appreciation rights, stock awards, performance awards and stock units
(collectively, the "Benefits"). The Company has authorized 1.0 million shares
of Company Class A Common Stock and 3.7 million shares of Company Class B
Common Stock that may be granted under the Plan, subject to certain
adjustments under certain circumstances.
Incentive Stock Options
During the year ended December 31, 1997, certain employees and directors of
the Company were granted ten-year incentive stock options to purchase shares
of the Company's Class B common stock. The number of shares subject to option,
the grant dates, and the vesting schedule are as follows as of December 31,
1997 and June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
NUMBER
OF
OPTIONS
DATE OF GRANT GRANTED VESTING
------------- ------- ----------------------
<S> <C> <C>
April 23, 1997.............................. 125,000 Five Years
September 22, 1997.......................... 450,000 (see discussion below)
</TABLE>
There were no stock options granted to employees and directors during the
six months ended June 30, 1998 (unaudited).
Non-Qualified Stock Options
During the year ended December 31, 1997, certain employees and directors of
the Company were granted ten-year non-qualified stock options to purchase
shares of the Company's Class B common stock. The number of shares subject to
option, the grant dates, the weighted average exercise prices and the vesting
schedule are as follows as of December 31, 1997 and June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
DATE OF GRANT GRANTED VESTING
------------- --------- ----------------------
<S> <C> <C>
April 23, 1997............................ 1,369,900 Five Years
September 22, 1997........................ 800,000 (see discussion below)
</TABLE>
The stock options granted on September 22, 1997, are scheduled to vest as
noted below:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE BY WHICH STOCK PRICE
SHARES VESTED EXCEEDS EXERCISE PRICE
------------- -------------------------------
<S> <C>
25% 150%
25% 175%
50% 200%
</TABLE>
F-23
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Plan, and for purposes of determining the performance
vesting percentages noted above, the stock price shall mean the publicly
traded price of the stock on a national securities exchange. Moreover, the
shares will not vest until such stock price exceeds the exercise price (by at
least the percentages noted above) for a period of 20 consecutive days.
To the extent vesting has not occurred pursuant to the above schedule, 100%
of the shares granted on September 22, 1997 will vest after five years or
sooner upon a change of control of the Company (as defined in the Plan); upon
the death or disability of the optionee; or upon other such conditions as
provided in the Plan.
The options granted in April 1997 have exercise prices ranging from $5.18 to
$6.48 and expire in April 2007. The options granted in September 1997 have an
exercise price of $9.63 and expire in September 2007.
The exercise price for all incentive stock options granted was equal to the
estimated fair value of such shares on the date of grant. 744,900 of the 1.4
million non-qualified stock options granted had an exercise price equal to 80%
of the estimated fair value of the shares on the date of grant. The estimated
fair value of all shares granted was determined by an independent third party
source.
The Company is accruing compensation expense of approximately $194,000
annually over the vesting period (five years) on those options where the
estimated fair value of the options exceeds the exercise price on the grant
date.
During the six months ended June 30, 1998 (unaudited), no non-qualified
stock options were granted to employees and directors of IFG.
The following table summarizes activity for the Company's Share Incentive
Plan for 1997, and the six months ended June 30, 1998 (unaudited). There were
no options issued or outstanding during 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... -- -- 2,744,900 $7.56
Granted............................... 2,744,900 $7.56 -- --
Exercised............................. -- -- -- --
Forfeited............................. -- -- -- --
--------- ---------
Outstanding at end of year............ 2,744,900 $7.56 2,744,900 $7.56
========= =========
Weighted average fair value of options
granted during the year.............. $ 4.75 -- -- --
</TABLE>
The fair value of each option grant under the Share Incentive Plan is
estimated on the date of grant using the "Minimum Value Method." The "Minimum
Value Method" calculates the difference between the current stock price and
the present value of the exercise price, less the present value of expected
dividends, if any. The following assumptions were used for the Company's stock
options granted in 1997: expected stock option life of 7.5 years for each
grant date, dividend yield of 0% for each grant date, a risk free rate of
6.89% for the options granted on April 23, 1997 and 6.06% for the options
granted on September 22, 1997, and an estimated market price of $6.48 for the
options granted on April 23, 1997 and $9.63 for the options granted on
September 23, 1997.
F-24
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the Company's stock options
outstanding under the Share Incentive Plan at December 31, 1997 and June 30,
1998 (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 30, 1998
--------------------------------- ---------------------------------
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
--------------------------------- ---------------------------------
WEIGHTED- WEIGHTED-
AVE. WEIGHTED- AVE. WEIGHTED-
NUMBER REMAINING AVE. NUMBER REMAINING AVE.
OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 6/30/98 LIFE PRICE
- ------------------------ ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$5 to $6................ 744,900 9.3 $5.18 744,900 8.8 $5.18
$6 to $7................ 750,000 9.3 $6.48 750,000 8.8 $6.48
$9 to $10............... 1,250,000 9.7 $9.63 1,250,000 9.2 $9.63
--------- ---------
Total................... 2,744,900 9.5 $7.56 2,744,900 9.0 $7.56
========= =========
</TABLE>
There were no options exercisable under the Share Incentive Plan at December
31, 1997 and June 30, 1998 (unaudited).
(B) IMPERIAL BANCORP STOCK OPTION PLAN
Upon consummation of the Distribution, certain employees of the Bank will
cease to be employees of the Bank and will become employees of the Company. To
the extent any of these transferred employees holds nonqualified stock options
or incentive stock options to purchase Imperial Bancorp common stock
immediately prior to the Distribution, all such options will be automatically
converted into options to purchase Company Class A Common Stock. In connection
with this conversion of options, the number of shares that were formerly
underlying the Imperial Bancorp options and the exercise price of such options
will be appropriately adjusted to allow the transferred employees to retain an
equivalent economic position in the Company's common stock following the
Distribution. The Distribution will not be more favorable to the optionee on a
share by share comparison than the ratio of the option exercise price of the
Imperial Bancorp options immediately prior to the exchange to the fair value
of Imperial Bancorp common stock immediately preceding the Distribution. The
adjustment for the conversion will be calculated based on the five-day average
closing prices of Bancorp stock and the Company's stock before and after the
Distribution.
F-25
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity for the Imperial Bancorp Stock
Option Plan with respect to those stock options granted to the Company's
employees for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
1995 1996 1997 (UNAUDITED)
----------------- ----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 109,333 $3.04 211,588 $3.97 289,708 $5.77 118,614 $6.13
Granted................. 118,940 $4.66 98,996 $8.99 -- -- -- --
Exercised............... (16,685) $2.87 (20,876) $2.84 (111,692) $5.48 (32,407) $4.97
Forfeited............... -- -- -- -- (59,402) $8.99 (9,775) --
------- ------- -------- -------
Outstanding at end of
period................. 211,588 $3.97 289,708 $5.77 118,614 $6.13 76,432 $6.55
======= ======= ======== =======
Options exercisable at
period end............. 53,977 $2.96 75,724 $3.71 17,169 $6.45 22,379 $6.34
Weighted average fair
value of options
granted during the
period................. -- $2.29 -- $4.24 -- -- -- --
</TABLE>
The fair value of each option granted under the Bancorp Stock Option Plan
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1996
------ ------
<S> <C> <C>
Dividend yield............................................. 0% 0%
Expected life of options (years)........................... 6.5 6.5
Stock price volatility..................................... 44% 44%
</TABLE>
The risk-free interest rates used in the Black-Scholes option-pricing model
were equal to comparable U.S. Treasury rates at each respective grant date.
The following tables summarize information about Bancorp's stock options
outstanding at December 31, 1997 and June 30, 1998 (unaudited) with respect to
those stock options granted to the Company's employees:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3 to $4.............. 13,407 4.3 $3.23 6,703 $3.23
$4 to $5.............. 56,760 7.1 $4.45 630 $4.45
$8 to $9.............. 48,447 8.3 $8.90 9,836 $8.76
------- ------
Total................. 118,614 7.2 $6.13 17,169 $6.45
======= ======
</TABLE>
F-26
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 6/30/98 LIFE PRICE AT 6/30/98 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3 to $4.............. 10,314 3.8 $3.23 10,314 $3.23
$4 to $5.............. 28,065 6.6 $4.45 -- --
$8 to $9.............. 38,053 7.8 $8.99 12,065 $8.99
------ ------
Total................. 76,432 6.7 $6.55 22,379 $6.34
====== ======
</TABLE>
(C) PRO FORMA NET INCOME
The Company applies APB 25 in accounting for the Share Incentive Plan as
well as those options that will be converted in conjunction with the
Distribution under the Imperial Bancorp Stock Option Plan. Accordingly, no
compensation cost has been recognized in the combined financial statements for
the fair value of stock options granted. Had the Company determined
compensation cost based on the fair value at the grant date for such stock
options under SFAS 123, the Company's net income would have been reduced to
the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------------
1997 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
------- -------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income, as reported... $ 5,919 $ 38,644 $ 15,160 $4,170 $4,896
Net income, pro forma..... $ 5,886 $ 38,584 $ 14,422 $3,785 $4,091
Diluted earnings per
share, as reported....... $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
Diluted earnings per
share, pro forma......... $ 0.32 $ 2.03 $ 0.72 $ 0.20 $ 0.20
</TABLE>
Pro forma net income reflects only options granted in 1995, 1996, 1997 and
1998 if any. Therefore, the full impact of calculating compensation cost for
stock options may not be reflected in the pro forma amounts presented above
because compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
NOTE 15. DONATION
During the year ended December 31, 1997, the Company donated shares of ICII
stock with a fair value of $3.6 million to not-for-profit organizations.
Offsetting this expense, $2.8 million in appreciation gains were recognized
for the year ended December 31, 1997, on the donated stock at the time of the
donation. During 1996, the Company donated shares of ICII stock with a fair
value of $4.9 million to not-for-profit organizations. Offsetting this
expense, $3.7 million in appreciation gains were recognized on the donated
stock at the time of the donation. For the year ended December 31, 1995, there
were no donations of ICII stock.
NOTE 16. TRUST ASSETS
The Company has trust assets under administration amounting to $6.8 billion
representing 3,758 accounts, $7.5 billion representing 4,223 accounts, $8.7
billion representing 3,971 accounts, $9.5 billion representing 4,032 accounts,
at fair value, as of December 31, 1995, 1996 and 1997, and as of June 30, 1998
(unaudited) respectively. The amounts are not included in the accompanying
combined balance sheets.
F-27
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17. RELATED PARTY TRANSACTIONS
The Company and Imperial Bancorp provide each other services in the ordinary
course of business. Although these services are not conducted at "arm's
length," the Company and Imperial Bancorp attempt to negotiate market terms
for these services.
The Company provides trust services to Imperial Bancorp. The approximate
fair value of Imperial Bancorp's assets under administration and the
approximate fees received by the Company from Imperial Bancorp for trust
services are as follows:
<TABLE>
<CAPTION>
FAIR VALUE
OF ASSETS FEES
---------- ----
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1995 and for the year ended December 31, 1995.. $ 37,600 $118
At December 31, 1996 and for the year ended December 31, 1996.. 55,909 123
At December 31, 1997 and for the year ended December 31, 1997.. 105,096 121
At June 30, 1997 and for the six months ended June 30, 1997
(unaudited)................................................... 72,276 73
At June 30, 1998 and for the six months ended June 30, 1998
(unaudited)................................................... 93,354 43
</TABLE>
The Company receives fees for trust assets held in Monarch Funds (a family
of three money market mutual funds). As of September 1, 1995, each Monarch
Fund had invested substantially all of its assets in a corresponding portfolio
of Core Trust (Delaware) in an arrangement commonly known as a "master-feeder"
structure. Of the five trustees of the Monarch Funds, two are members of
Imperial Bancorp's management, one of whom is also a director of Imperial
Trust Company. As of December 31, 1996 and 1997, Imperial Bancorp's investment
in the Monarch Funds represented approximately 4.6% and 1.7%, respectively, of
the net asset value of all Monarch Funds. Trust assets under administration
invested in Monarch Funds and fees received by the Company from Monarch are as
follows:
<TABLE>
<CAPTION>
FAIR VALUE
OF ASSETS FEES
---------- ----
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1995 and for the year ended December 31, 1995.. $ 604,795 $475
At December 31, 1996 and for the year ended December 31, 1996.. 629,755 567
At December 31, 1997 and for the year ended December 31, 1997.. 973,812 740
At June 30, 1997 and for the six months ended June 30, 1997
(unaudited)................................................... 913,114 339
At June 30, 1998 and for the six months ended June 30, 1998
(unaudited)................................................... 1,353,793 450
</TABLE>
The Bank provides the Company banking services, human resource services,
employee benefit plans, insurance, accounting assistance, accounting software,
legal services, computer support, other office services, and subleases all
office space to the Company. The costs for these services are billed to the
Company on a specific identification basis or on an allocation based either on
the number of employees, square feet of occupancy, number of officers, or
estimates. The Bank also reimburses the Company for outside data processing
services. The amounts paid to the Bank and the amount received by the Company
are as follows:
<TABLE>
<CAPTION>
AMOUNTS
AMOUNTS RECEIVED
PAID TO FROM
IMPERIAL IMPERIAL
BANK BANK
-------- --------
(IN THOUSANDS)
<S> <C> <C>
For the year ended December 31, 1995.......................... $757 $481
For the year ended December 31, 1996.......................... 832 534
For the year ended December 31, 1997.......................... 913 546
For the three months ended June 30, 1997 (unaudited).......... 457 269
For the three months ended June 30, 1998 (unaudited).......... 430 235
</TABLE>
Management believes that the methods used to allocate cost and determine
billing for the services provided by the Bank are reasonable.
F-28
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Bank provides funds to the Company to fund its operations. The amounts
outstanding are shown as "Borrowings from Imperial Bank" in the accompanying
combined balance sheets. The Bank charges for the use of those funds based on
average balances outstanding and the average interest rate for short-term
certificates of deposit plus one hundred basis points. The average interest
rate charged by the Company for the years ended December 31, 1995, 1996, and
1997 and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited) was 6.93%, 6.46%, 6.48%, 6.38%, and 6.52% respectively. The costs
of the funds are recorded as "Interest expense" in the combined statements of
income.
NOTE 18. COMMITMENTS AND CONTINGENT LIABILITIES
(A) 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 to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit, which involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the combined balance sheet.
The contract amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
Commitments to extend credit only represent exposure to off-balance sheet
risk in the event the contract is drawn upon and the other party to the
contract defaults. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the counter party. The Company does not anticipate any material losses as a
result of these transactions.
The Company is party to interest rate swap transactions ("Swaps") which are
considered derivative financial instruments held for purposes other than
trading. Swaps generally involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying notional
amount. Because the credit exposure of these Swaps is limited to the potential
default of the Swap counterparty, the potential credit risks associated with
such Swaps are substantially less than the notional principal amounts of these
Swaps.
A summary of the contract or notional amounts of the Company's commitments
and contingent liabilities is as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
AT DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Commitments to extend credit................... $28,801 $11,635 $12,734
Standby letters of credit...................... 37,501 26,046 20,259
Interest rate swaps............................ -- -- 5,000
</TABLE>
In June 1998, Crown American Bank entered into two interest rate swap
transactions in which it was committed to pay three month LIBOR and receive a
fixed rate of 5.95%. The interest rate swaps had a combined notional value of
$5.0 million at June 30, 1998 and mature in June 1999. The Swaps are matched
with specific certificates of deposit and effectively convert the matched
fixed rate deposits into floating rate liabilities. Because the Swaps were
entered into for the purpose of converting the interest rate characteristics
of certain liabilities, "hedge accounting" rules apply and there is no
requirement to mark the value of the Swaps to market under generally accepted
accounting principles.
(B) LEGAL ACTION: The Company is a defendant in various lawsuits arising
from the normal course of business. Management believes, based upon the
opinion of legal counsel, that the ultimate resolution of the
F-29
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
pending litigation will not have a material effect upon the financial position
or future results of operations of the Company.
In the ordinary course of business the Company is subject to fiduciary
responsibilities relating to the trust assets. These duties are specifically
described in each trust agreement with the Company's customers. As a result,
the Company has a fiduciary responsibility to perform based on agreed
standards and to exercise prudent judgment. It is the opinion of management
that these duties have been met and no material contingent liability exists to
its knowledge.
(C) LEASE COMMITMENTS: The Company leases space for all its premises from
the Bank under noncancelable operating leases which expire in various years.
Lease payments charged to "Occupancy, net" in the accompanying combined
statements of income for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 (unaudited) and 1998 (unaudited) amounted
to $580,000, $769,000, $869,000, $470,000 and $403,000, respectively.
Aggregate minimum rental commitments under these leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 661
1999...................................................... 512
2000...................................................... 461
2001...................................................... 461
2002...................................................... 434
Thereafter................................................ 1,257
------
Total..................................................... $3,786
======
</TABLE>
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("FAS 107") requires disclosures of fair
value information about financial instruments, whether or not recognized in
the combined balance sheet, for which it is practical to estimate. Such
instruments include securities, loans receivable, borrowings and various off-
balance sheet items. Because no market exists for a significant portion of the
Company's loan portfolio, fair value estimates are based on judgments
regarding credit risk, investor expectations of future economic conditions,
normal cost of administration of these instruments and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
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. For example, the value of the Company's
fiduciary contracts for trust services are not considered financial
instruments; therefore, their values are not incorporated into the fair value
estimates.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
(A) CASH AND CASH EQUIVALENTS: The carrying values reported in the combined
balance sheet approximate fair values due to the short term nature of these
assets.
(B) SECURITIES AVAILABLE FOR SALE: Fair values are based on bid prices and
quotations published and/or received from securities dealers. Fair value on
interest only strips are based on discounted future cash flows using
F-30
<PAGE>
rates and prepayment speeds that an unaffiliated third-party purchaser would
require on instruments with similar terms and remaining maturities. For the
year ended December 31, 1996, the Company assumed a discount rate and
prepayment rate of 13.2% and 10.0%, respectively, to estimate the fair value
of the interest only strips. For the year ended December 31, 1997, the Company
assumed a discount rate and prepayment rate of 9.6% and 12.0%, respectively,
to estimate the fair value of the interest only strip.
(C) LOANS HELD FOR SALE: Fair value is based on quoted market prices and/or
forward delivery contracts.
(D) LOANS HELD FOR INVESTMENT: The fair value of the loan portfolio is
generally estimated by discounting expected future cash flows at an estimated
market rate of interest. A market rate of interest is estimated based on the
AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to
administer such instruments. Expected future cash flows are estimated using
maturity dates for performing loans, with cash flows on nonaccrual loans
estimated on an individual basis. For nonaccrual and potential problem loans
secured by real property, estimated fair value has been determined on an
individual basis, considering the value of the collateral as determined by a
current third party appraisal and estimated foreclosure, holding and selling
costs.
(E) EXCESS SERVICING FEES RECEIVABLE: The carrying value reported in the
combined balance sheet approximate fair values. The fair value was estimated
by discounting future cash flows using rates and prepayment speeds that an
unaffiliated third-party purchaser would require on instruments with similar
terms and remaining maturities.
(F) BORROWINGS FROM IMPERIAL BANK: The carrying amounts approximate their
fair values due to the short-term nature of the borrowings.
(G) OFF-BALANCE SHEET INSTRUMENTS: Fair values of commitments to extend
credit are based on fees currently charged to enter into similar agreements.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1996 1997
------------------ -------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents............. $ 5,245 $ 5,245 $ 2,813 $ 2,813
Securities available for sale, at fair
value................................ 1,179 1,179 6,027 6,027
Loans held for sale................... 5,531 6,058 3,763 4,102
Loans held for investment............. 72,528 67,424 134,407 140,029
Excess servicing fees receivable...... 3,294 3,294 -- --
FINANCIAL LIABILITIES:
Borrowings from the Bank.............. 6,184 6,184 77,934 77,934
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit.......... -- 721 -- 233
Standby letters of credit............. -- 750 -- 1,190
</TABLE>
F-31
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20. SEGMENT REPORTING
The Company operates in three principal business segments: the origination
and sale of small business loans (CAB), the origination of entertainment loans
(LHO) and the provision of trust services (ITC). Certain financial information
with respect to these business segments, as well as such financial information
related to other operations of the Company, primarily ICII (ICII and Other),
are summarized in the following tables:
<TABLE>
<CAPTION>
ICII
AND
CAB LHO ITC OTHERS COMBINED
------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
1995
Net interest income............... $ 870 $ 2,821 $ 144 $ 1,757 $ 5,592
Provision for loan losses......... (281) (767) -- (444) (1,492)
Noninterest income................ 1,932 379 8,680 5,536 16,527
------- -------- ------ ------- --------
Total revenue.................... 2,521 2,433 8,824 6,849 20,627
Noninterest expense............... 1,862 696 5,769 2,068 10,395
------- -------- ------ ------- --------
Income before income taxes....... 659 1,737 3,055 4,781 10,232
Income tax expense................ 279 736 1,302 1,996 4,313
------- -------- ------ ------- --------
Net income....................... $ 380 $ 1,001 $1,753 $ 2,785 $ 5,919
======= ======== ====== ======= ========
Average assets.................... $16,895 $ 24,235 $6,846 $42,551 $ 90,527
------- -------- ------ ------- --------
FOR THE YEAR ENDED DECEMBER 31,
1996
Net interest income............... $ 1,488 $ 4,086 $ 138 $ 3,102 $ 8,814
Provision for loan losses......... (348) (859) -- (574) (1,781)
Noninterest income................ 3,844 746 7,975 61,553 74,118
------- -------- ------ ------- --------
Total revenue.................... 4,984 3,973 8,113 64,081 81,151
Noninterest expense............... 2,851 1,776 6,258 5,948 16,833
------- -------- ------ ------- --------
Income before income taxes....... 2,133 2,197 1,855 58,133 64,318
Income tax expense................ 903 930 790 23,051 25,674
------- -------- ------ ------- --------
Net income....................... $ 1,230 $ 1,267 $1,065 $35,082 $ 38,644
======= ======== ====== ======= ========
Average assets.................... $27,593 $ 47,122 $7,034 $57,571 $139,320
------- -------- ------ ------- --------
FOR THE YEAR ENDED DECEMBER 31,
1997
Net interest income............... $ 1,804 $ 5,816 $ 235 $ 3,458 $ 11,313
Provision for loan losses......... (415) (1,828) -- (315) (2,558)
Noninterest income................ 4,665 1,694 8,175 28,057 42,591
------- -------- ------ ------- --------
Total revenue.................... 6,054 5,682 8,410 31,200 51,346
Noninterest expense............... 4,749 3,467 6,765 12,468 27,449
------- -------- ------ ------- --------
Income before income taxes....... 1,305 2,215 1,645 18,732 23,897
Income tax expense................ 549 932 687 6,569 8,737
------- -------- ------ ------- --------
Net income....................... $ 756 $ 1,283 $ 958 $12,163 $ 15,160
======= ======== ====== ======= ========
Average assets.................... $39,391 $ 67,400 $8,498 $76,228 $191,517
------- -------- ------ ------- --------
FOR THE SIX MONTHS ENDED JUNE 30,
1997 (UNAUDITED)
Net interest income............... $ 895 $ 2,643 $ 85 $ 2,011 $ 5,634
Provision for loan losses......... (330) (1,049) -- (133) (1,512)
Noninterest income................ 2,359 852 3,996 7,824 15,031
------- -------- ------ ------- --------
Total revenue.................... 2,924 2,446 4,081 9,702 19,153
Noninterest expense............... 2,530 2,129 3,316 4,585 12,560
------- -------- ------ ------- --------
Income before income taxes....... 394 317 765 5,117 6,593
Income tax expense ............... 166 133 324 1,800 2,423
------- -------- ------ ------- --------
Net income ...................... $ 228 $ 184 $ 441 $ 3,317 $ 4,170
======= ======== ====== ======= ========
Average assets.................... $34,657 $ 51,513 $8,093 $67,070 $161,333
------- -------- ------ ------- --------
FOR THE SIX MONTHS ENDED JUNE 30,
1998 (UNAUDITED)
Net interest income............... $ 1,079 $ 3,272 $ 164 $ 1,796 $ 6,311
Provision for loan losses......... (279) (417) -- (40) (736)
Noninterest income................ 3,199 561 4,302 6,699 14,761
------- -------- ------ ------- --------
Total revenue.................... 3,999 3,416 4,466 8,455 20,336
Noninterest expense............... 3,687 1,734 3,480 2,967 11,868
------- -------- ------ ------- --------
Income before income taxes....... 312 1,682 986 5,488 8,468
Income tax expense................ 131 707 421 2,313 3,572
------- -------- ------ ------- --------
Net income....................... $ 181 $ 975 $ 565 $ 3,175 $ 4,896
======= ======== ====== ======= ========
Average assets.................... $44,093 $102,885 $8,514 $84,388 $239,880
------- -------- ------ ------- --------
</TABLE>
F-32
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1.FINANCIAL STATEMENTS ----
<S> <C>
Consolidated Balance Sheets--June 30, 1998 and December 31, 1997........ F-34
Consolidated Statements of Income--Three and six months ended June 30,
1998 and 1997.......................................................... F-35
Consolidated Statements of Cash Flows--Six months ended June 30, 1998
and 1997............................................................... F-36
Consolidated Statement of Changes in Shareholders' Equity--Six months
ended
June 30, 1998.......................................................... F-37
Notes to Consolidated Financial Statements.............................. F-38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ F-47
PART II--OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS..................................................... F-66
ITEM 2.CHANGES IN SECURITIES................................................. F-66
ITEM 3.DEFAULTS IN SECURITIES................................................ F-66
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... F-66
ITEM 5.OTHER INFORMATION..................................................... F-67
ITEM 6.EXHIBIT--STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE........ F-68
SIGNATURES.............................................................. F-69
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
F-33
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Cash................................................. $ 155,306 $ 50,597
Interest bearing deposits............................ 13,931 103,738
Investment in Federal Home Loan Bank stock........... 4,795 5,646
Securities held for trading, at market............... 70,529 120,904
Securities available for sale, at market............. 111,242 107,727
Loans and leases held for sale....................... 178,860 162,571
Loans and leases held for investment, net............ 1,587,485 1,266,718
Purchased and originated servicing rights............ 5,114 4,731
Retained interest in loan and lease securitizations.. 53,216 43,105
Accrued interest receivable.......................... 13,009 9,132
Premises and equipment, net.......................... 9,693 9,513
Other real estate owned, net......................... 7,322 10,905
Goodwill............................................. 34,290 35,607
Investment in Southern Pacific Funding Corporation... 78,042 65,303
Investment in Franchise Mortgage Acceptance Company.. 59,685 53,099
Other assets......................................... 33,043 52,798
---------- ----------
Total assets....................................... $2,415,562 $2,102,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................. $1,514,805 $1,156,022
Borrowings from Federal Home Loan Bank............... 20,000 45,000
Other borrowings..................................... 119,253 144,841
Remarketed Par Securities............................ 70,000 70,000
Senior Notes......................................... 219,835 219,813
Accrued interest payable............................. 22,972 21,484
Accrued income taxes payable......................... 67,540 60,528
Minority interest in consolidated subsidiaries....... 2,928 3,174
Other liabilities.................................... 34,824 57,299
---------- ----------
Total liabilities.................................. 2,072,157 1,778,161
========== ==========
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding............................... -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,619,351 and 38,791,439 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively........................................ 142,169 147,109
Retained earnings.................................... 204,060 174,898
Accumulated other comprehensive income: unrealized
(loss) gain on securities available for sale, net... (2,824) 1,926
---------- ----------
Total shareholders' equity......................... 343,405 323,933
---------- ----------
Total liabilities and shareholders' equity......... $2,415,562 $2,102,094
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-34
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases............ $ 3,273 $28,558 $ 8,845 $37,224
------- ------- ------- -------
Interest on loans and leases................ 53,128 53,512 98,664 96,442
Interest on investments..................... 4,063 1,129 9,035 6,754
Interest on other finance activities........ 2,673 734 5,804 1,391
------- ------- ------- -------
Total interest income..................... 59,864 55,375 113,503 104,587
Interest on deposits........................ 19,911 17,082 38,198 34,084
Interest on other borrowings................ 2,385 8,486 4,139 15,104
Interest on long term debt.................. 7,555 6,084 15,109 10,868
------- ------- ------- -------
Total interest expense.................... 29,851 31,652 57,446 60,056
------- ------- ------- -------
Net interest income....................... 30,013 23,723 56,057 44,531
Provision for loan and lease losses......... 3,450 5,736 7,300 8,606
------- ------- ------- -------
Net interest income after provision for
loan and lease losses...................... 26,563 17,987 48,757 35,925
------- ------- ------- -------
Loan servicing income....................... 4,055 2,170 8,083 3,450
Gain (loss) on sale of securities........... 6 -- 6 (403)
Equity in net income of Southern Pacific
Funding Corporation........................ 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage
Acceptance Company......................... 3,817 -- 6,586 --
Investment banking fees..................... 6,433 -- 10,968 --
Asset management fees....................... 1,575 1,237 2,780 2,816
Gain on sale of Southern Pacific Funding
Corporation stock.......................... -- -- -- 4,306
Other income................................ 2,226 875 4,374 1,551
------- ------- ------- -------
Total other income........................ 24,876 10,960 45,536 24,651
------- ------- ------- -------
Total revenue............................... 54,712 57,505 103,138 97,800
======= ======= ======= =======
EXPENSES:
Personnel expense........................... 15,519 12,433 31,773 23,104
Amortization of servicing rights............ 360 206 701 225
Occupancy expense........................... 1,482 983 3,028 1,890
Data processing expense..................... 410 378 903 805
Net expense (income) of other real estate
owned...................................... 288 3,480 (71) 4,237
Professional services....................... 2,534 3,615 5,289 6,203
FDIC insurance premiums..................... 321 -- 321 --
Telephone and other communications.......... 867 754 1,624 1,183
Amortization of Goodwill.................... 654 897 1,317 1,497
General and administrative expense.......... 6,513 6,318 11,673 11,054
------- ------- ------- -------
Total expenses............................ 28,948 29,064 56,558 50,198
------- ------- ------- -------
Income before income taxes, minority inter-
est and extraordinary item................. 25,764 28,441 46,580 47,602
Income taxes................................ 9,360 9,866 17,184 17,843
Minority interest in income of consolidated
subsidiaries............................... 142 4,502 234 4,654
------- ------- ------- -------
Income before extraordinary item............ 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (3,995)
------- ------- ------- -------
Net income.................................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
BASIC INCOME PER SHARE:
Income before extraordinary item............ $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (0.10)
------- ------- ------- -------
Net Income per common share................. $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======= =======
DILUTED INCOME PER SHARE:
Income before extraordinary item............ $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (0.10)
------- ------- ------- -------
Net Income per common share................. $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-35
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 29,162 $ 21,110
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan and lease losses.................... 7,300 8,606
Depreciation........................................... 1,899 2,278
Amortization of goodwill............................... 1,317 1,497
Amortization of servicing rights....................... 701 225
Accretion of discount.................................. (5,804) (1,391)
Gain on sale of loans and leases....................... (8,845) (37,224)
Gains on sale of SPFC stock............................ -- (4,306)
Equity in net earnings of SPFC......................... (12,739) (12,931)
Equity in net earnings of FMC.......................... (6,586) --
Loss on sale of OREO................................... 1,217 3,384
(Recovery) writedowns on OREO.......................... (1,481) 147
Originations of loans held for sale.................... (349,400) (655,900)
Sales and collections on loans held for sale........... 341,956 1,059,255
Purchase of trading securities......................... (20,503) (15,786)
Sale of trading securities............................. 79,751 --
Net change in securities held for investment........... -- (2,647)
Net change in accrued interest receivable.............. (3,877) 358
Net change in retained interest in loan and lease
securitizations....................................... (4,307) (6,382)
Net change in other assets............................. 23,542 (11,264)
Net change in other liabilities........................ (24,507) 19,342
-------- ---------
Net cash provided by operating activities................ 48,796 368,371
-------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits................ 89,807 (237,916)
Proceeds from sale of other real estate owned.......... 4,109 1,027
Sales of securities available for sale................. -- 15,176
Net change in loans held for investment................ (328,329) (68,180)
Purchases of securities available for sale............. (10,327) --
Purchases of premises and equipment.................... (2,079) (3,130)
Proceeds from sale of SPFC stock....................... -- 6,151
Purchase of stock in Federal Home Loan Bank............ -- (1,985)
Redemption of stock in Federal Home Loan Bank.......... 1,000 10,900
Cash utilized for acquisitions......................... -- (750)
-------- ---------
Net cash (used in) provided by investing activities...... (245,819) (278,707)
-------- ---------
Cash flows from financing activities:
Net increase in deposits............................... 358,783 191,807
Advances from Federal Home Loan Bank................... 44,500 30,000
Repayments of advances from Federal Home Loan Bank..... (69,500) (170,500)
Net change in other borrowings......................... (25,588) (335,994)
Proceeds from issuance of Senior Notes due 2007........ -- 194,500
Proceeds from offering of Remarketed Par Securities.... -- 68,075
Repayments of Senior Notes due 2004.................... -- (73,241)
Retirement of common stock............................. (6,946) --
Net change in minority interest........................ (246) (48,888)
Proceeds from exercise of stock options................ 729 880
-------- ---------
Net cash provided by (used in) financing activities...... 301,732 (143,361)
-------- ---------
Net change in cash....................................... 104,709 (53,697)
Cash at beginning of period.............................. 50,597 74,247
-------- ---------
Cash at end of period.................................... $155,306 $ 20,550
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... 38,791 $147,109 $174,898 $ 1,926 $323,933
Exercise of stock op-
tions.................. 181 721 -- -- 721
Retirement of stock..... (353) (6,938) -- -- (6,938)
Tax benefit from
exercise of stock
options................ -- 1,277 -- -- 1,277
Decrease in unrealized
gain on securities
available for sale,
net.................... -- -- -- (4,750) (4,750)
Net income for the six
months ended June 30,
1998................... -- -- 29,162 -- 29,162
------ -------- -------- ------- --------
Balance, June 30, 1998.. 38,619 $142,169 $204,060 $(2,824) $343,405
====== ======== ======== ======= ========
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.1% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation, from which it has diversified beginning in 1995. The consolidated
financial statements include Imperial Credit Industries, Inc. ("ICII"), its
significant wholly-owned operating subsidiaries, significant majority-owned
operating subsidiaries and significant equity investments in two publicly
traded companies (collectively the "Company"). The significant wholly-owned
subsidiaries include Southern Pacific Bank ("SPB"), Imperial Business Credit
Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Imperial Credit
Commercial Asset Management Corporation, ("ICCAMC"), Auto Marketing Network,
Inc. ("AMN"), Imperial Credit Worldwide Ltd. ("ICW") and Statewide
Documentation, Inc. ("SDI"). The significant operating majority owned
consolidated subsidiary is Imperial Capital Group, LLC ("ICG") which is 60%
owned by the Company and 40% owned by ICG's management. The significant equity
investments in publicly traded companies are Southern Pacific Funding
Corporation ("SPFC") NYSE Symbol: SFC, and Franchise Mortgage Acceptance
Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former
consolidated subsidiaries of the Company. The Company manages through its
ICCAMC subsidiary, an 8.9% equity ownership interest in a commercial REIT,
Imperial Credit Commercial Mortgage Investment Corporation (Nasdaq: ICMI). The
Company also owns Imperial Credit Capital Trust I ("ICCT1"), a subsidiary of
the Company organized for the sole purpose of issuing the $70.0 million of
10.25% Remarketed Par securities. All material intercompany balances and
transactions with consolidated subsidiaries and unconsolidated subsidiaries
have been eliminated.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 1998 presentation.
3. NET INCOME PER SHARE INFORMATION
The following table reconciles the number of shares used in the computations
of basic and diluted income per share for the second quarter and year to date
periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS
QUARTER ENDED JUNE 30, PERIOD ENDED JUNE 30,
----------------------- ---------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted-average common
shares outstanding during
the year used to compute
basic income per share..... 38,752,018 38,508,484 38,747,417 38,463,568
Assumed common shares issued
on exercise of stock
options.................... 2,060,373 2,114,095 2,052,063 2,305,349
----------- ----------- ---------- ----------
Number of common shares used
to compute diluted income
per share.................. 40,812,391 40,622,579 40,799,480 40,768,917
=========== =========== ========== ==========
</TABLE>
F-38
<PAGE>
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company's comprehensive income is
comprised of net income plus the change in the unrealized gain (loss) on
securities available for sale, net for all periods reported. Comprehensive
income for the three and six months ended June 30, 1998 totaled $11.4 million
and $24.4 million, as compared to $15.9 million and $22.8 million for the same
periods last year, respectively. Accumulated other comprehensive income
(loss), consisting of the unrealized (loss) gain on securities available for
sale at June 30, 1998 and December 31, 1997 totaled ($2.8) million and $1.9
million respectively.
5. ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign-currency-denominated forecasted
transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management is in the process of determining the impact, if any, this
statement will have on the Company.
6. LOANS AND LEASES HELD FOR SALE
Loans and leases held for sale consisted of the following at June 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1998 1997
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.............................. $ 30,102 $ 13,169
Multi-family................................... 110,284 68,294
-------- --------
140,386 81,463
Automobile loans................................. 14,224 9,102
Leases........................................... 9,816 13,561
Commercial loans................................. 14,434 58,445
-------- --------
$178,860 $162,571
======== ========
</TABLE>
F-39
<PAGE>
7. LOAN AND LEASE COMMITMENTS
At June 30, 1998, the Company's consolidated lending commitments were as
follows:
<TABLE>
<CAPTION>
COMMITMENT
TYPE OF LENDING COMMITMENT AMOUNT
-------------------------- --------------
(IN THOUSANDS)
<S> <C>
Loan and unused line commitments.............................. $ 994,020
Standby letters of credit..................................... 3,184
Lease Financing............................................... 20,600
----------
$1,017,804
==========
</TABLE>
8. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS
The following represents summarized consolidating financial information as
of June 30, 1998 and December 31, 1997, and for the six months ended June 30,
1998 and 1997, with respect to the financial position, results of operations
and cash flows of the Company and its wholly-owned and majority-owned
subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875%
Senior Notes due 2007. As of June 30, 1998, the 9.875% Senior Notes are
guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, ICW and AMN (the "Guarantor Subsidiaries"). As of June 30, 1998, the
non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor
subsidiary through September 30, 1997. Each of the guarantees is full and
unconditional and joint and several. The summarized consolidated financial
information is presented in lieu of separate financial statements and other
related disclosures of the wholly-owned subsidiary guarantors as management
has determined that such information is not material to investors. None of the
subsidiary guarantors is restricted from making distributions to the Company.
F-40
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
Interest bearing
deposits............... 9,881 550 3,500 -- 13,931
Investment in Federal
Home Loan Bank stock... -- -- 4,795 -- 4,795
Securities available for
sale and trading....... 138,967 22,979 19,825 -- 181,771
Loans and leases held
for sale............... 12,252 41,890 124,718 -- 178,860
Loans and leases held
for investment, net.... 72,226 11,705 1,538,554 (35,000) 1,587,485
Investment in SPFC...... 78,042 -- -- -- 78,042
Investment in FMC....... 59,685 -- -- -- 59,685
Purchased and originated
servicing rights....... -- -- 5,114 -- 5,114
Retained interest in
loan and lease
securitizations........ -- 53,216 -- -- 53,216
Investment in
subsidiaries........... 312,771 -- -- (312,771) --
Goodwill................ -- 12,753 21,537 -- 34,290
Other assets............ 47,390 (5,660) 22,262 (925) 63,067
-------- -------- ---------- --------- ----------
Total assets.......... $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
---------------------
Deposits................ $ -- $ (33) $1,517,361 $ (2,523) $1,514,805
Other borrowings........ -- 23,253 152,925 (36,925) 139,253
Remarketed Par
Securities............. 72,165 (2,165) -- -- 70,000
Senior notes............ 219,835 -- -- -- 219,835
Minority interest in
consolidated
subsidiaries........... 946 (86) 167 1,901 2,928
Other liabilities....... 98,459 14,065 20,474 (7,662) 125,336
-------- -------- ---------- --------- ----------
Total liabilities..... 391,405 35,034 1,690,927 (45,209) 2,072,157
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 142,169 135,389 100,739 (236,128) 142,169
Retained earnings....... 204,060 (38,091) 95,973 (57,882) 204,060
Unrealized (loss) on
securities available
for sale............... (2,824) -- -- -- (2,824)
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 343,405 109,298 196,712 (306,010) 343,405
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
======== ======== ========== ========= ==========
</TABLE>
F-41
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
Interest bearing
deposits............... 31,390 1,149 71,199 -- 103,738
Investment in Federal
Home Loan Bank stock... -- -- 5,646 -- 5,646
Securities available for
sale and trading....... 107,671 21,031 99,929 -- 228,631
Loans and leases held
for sale............... 12,138 23,694 126,739 -- 162,571
Loans and leases held
for investment, net.... 78,922 44,941 1,197,430 (54,575) 1,266,718
Investment in SPFC...... 65,303 -- -- -- 65,303
Purchased and originated
servicing rights....... -- -- 4,731 -- 4,731
Investment in FMC....... 53,099 -- -- -- 53,099
Retained interest in
loan and lease
securitizations........ -- 43,105 -- -- 43,105
Investment in
subsidiaries........... 281,454 -- -- (281,454) --
Goodwill................ -- 13,229 22,378 -- 35,607
Other assets............ 59,911 (1,104) 26,473 (2,932) 82,348
-------- -------- ---------- --------- ----------
Total assets.......... $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings........ -- 30,250 196,528 (36,937) 189,841
Remarketed Par
Securities............. 72,165 -- (2,165) -- 70,000
Senior notes............ 219,813 -- -- -- 219,813
Minority interest in
consolidated
subsidiaries........... 946 20 111 2,097 3,174
Other liabilities....... 86,260 7,327 45,095 629 139,311
-------- -------- ---------- --------- ----------
Total liabilities..... 379,184 37,597 1,429,409 (68,029) 1,778,161
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 147,109 125,139 89,342 (214,481) 147,109
Retained earnings....... 174,898 (22,023) 79,092 (57,069) 174,898
Unrealized gain on
securities available
for sale............... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 323,933 115,116 168,434 (283,550) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
</TABLE>
F-42
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans
and leases............. $ 46 $ 3,072 $ 5,727 $ -- $ 8,845
------- ------- ------- -------- --------
Interest income......... 14,879 8,488 92,365 (2,229) 113,503
Interest expense........ 14,882 1,016 43,777 (2,229) 57,446
------- ------- ------- -------- --------
Net interest (expense)
income................. (3) 7,472 48,588 -- 56,057
Provision for loan and
lease losses........... -- 300 7,000 -- 7,300
------- ------- ------- -------- --------
Net interest (expense)
income after
provision for loan
and lease losses..... (3) 7,172 41,588 -- 48,757
------- ------- ------- -------- --------
Loan servicing (expense)
income................. (279) 5,011 3,351 -- 8,083
Investment banking fees. -- -- 10,968 -- 10,968
Asset management fees... -- 2,780 -- -- 2,780
Equity in net income of
SPFC................... 12,739 -- -- -- 12,739
Equity in net income of
FMC.................... 6,586 -- -- -- 6,586
Other (expense) income.. (424) 1,079 2,725 1,000 4,380
------- ------- ------- -------- --------
Total other income.... 18,622 8,870 17,044 1,000 45,536
------- ------- ------- -------- --------
Total revenues...... 18,665 19,114 64,359 1,000 103,138
------- ------- ------- -------- --------
EXPENSES:
Personnel expense....... 2,115 8,885 20,773 -- 31,773
Amortization of
servicing rights....... -- -- 701 -- 701
Occupancy expense....... 610 626 1,792 -- 3,028
Data processing expense. 251 142 510 -- 903
Net (income) expense of
other real estate
owned.................. (539) 791 (323) -- (71)
Professional services... 1,496 1,243 2,550 -- 5,289
Telephone and other
communications......... 156 713 755 -- 1,624
Amortization of
goodwill............... -- 475 842 -- 1,317
General, administrative
and other expense...... 1,149 2,976 7,869 -- 11,994
------- ------- ------- -------- --------
Total expenses........ 5,238 15,851 35,469 -- 56,558
------- ------- ------- -------- --------
Income before income
taxes, minority
interest and
extraordinary item..... 13,427 3,263 28,890 1,000 46,580
Income taxes............ 3,364 1,520 11,877 423 17,184
------- ------- ------- -------- --------
Income before minority
interest and
extraordinary item..... 10,063 1,743 17,013 577 29,396
Minority interest in
(loss) income of
consolidated
subsidiaries........... -- (106) 56 284 234
------- ------- ------- -------- --------
Income before equity in
undistributed income of
subsidiaries and
extraordinary item..... 10,063 1,849 16,957 293 29,162
Equity in undistributed
income of subsidiaries. 19,099 -- -- (19,099) --
------- ------- ------- -------- --------
Net income.............. $29,162 $ 1,849 $16,957 $(18,806) $ 29,162
======= ======= ======= ======== ========
</TABLE>
F-43
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of
loans and leases....... $(2,159) $6,402 $32,803 $ 178 $37,224
------- ------ ------- -------- -------
Interest income......... 11,271 13,017 84,517 (4,218) 104,587
Interest expense........ 10,971 4,512 48,791 (4,218) 60,056
------- ------ ------- -------- -------
Net interest income..... 300 8,505 35,726 -- 44,531
Provision for loan and
lease losses........... -- 2,981 5,625 -- 8,606
------- ------ ------- -------- -------
Net interest income
after Provision for
loan and lease
losses............... 300 5,524 30,101 -- 35,925
------- ------ ------- -------- -------
Loan servicing (expense)
income................. (1,756) 2,734 2,472 3,450
Asset management fees... -- 2,816 -- -- 2,816
Gain on sale of SPFC
stock.................. 4,306 -- -- -- 4,306
Equity in net income of
SPFC................... 12,931 -- -- -- 12,931
Other (expense) income.. (1,204) 955 1,800 (403) 1,148
------- ------ ------- -------- -------
Total other income.... 14,277 6,505 4,272 (403) 24,651
------- ------ ------- -------- -------
Total revenues...... 12,418 18,431 67,176 (225) 97,800
------- ------ ------- -------- -------
EXPENSES:
Personnel expense....... 1,216 6,740 15,148 -- 23,104
Amortization of
servicing rights....... -- 225 -- -- 225
Occupancy expense....... 510 281 1,099 -- 1,890
Data processing expense. 287 167 351 -- 805
Net expense of other
real estate owned...... 2,652 -- 1,585 -- 4,237
Professional services... 2,226 696 3,281 -- 6,203
Telephone and other
communications......... 110 418 655 -- 1,183
Amortization of
goodwill............... -- 772 725 -- 1,497
General, administrative
and other expense...... 2,564 3,855 4,860 (225) 11,054
------- ------ ------- -------- -------
Total expenses........ 9,565 13,154 27,704 (225) 50,198
------- ------ ------- -------- -------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 2,853 5,277 39,472 -- 47,602
Income taxes............ 4,848 2,236 10,759 -- 17,843
------- ------ ------- -------- -------
(Loss) income before
minority interest and
extraordinary item..... (1,995) 3,041 28,713 -- 29,759
Minority interest in
income of consolidated
subsidiaries........... -- -- -- 4,654 4,654
------- ------ ------- -------- -------
(Loss) income before
equity in undistributed
income of subsidiaries
and extraordinary item. (1,995) 3,041 28,713 (4,654) 25,105
Equity in undistributed
income of subsidiaries. 27,100 -- -- (27,100) --
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- (3,995)
------- ------ ------- -------- -------
Net (loss) income..... $21,110 $3,041 $28,713 $(31,754) $21,110
======= ====== ======= ======== =======
</TABLE>
F-44
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $ (8,541) $ (34,389) $ 99,993 $ (8,267) $ 48,796
-------- --------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 21,509 566 67,700 32 89,807
Purchase of securities
available for sale... (10,327) -- -- -- (10,327)
Proceeds from sale of
OREO................. 855 2,550 704 -- 4,109
Net change in loans
held for investment.. 6,434 19,156 (348,207) (5,712) (328,329)
Net change in
investment in
Subsidiaries......... (12,127) -- -- 12,127 --
Other, net............ (1,219) (123) (147) 410 (1,079)
-------- --------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 5,125 22,149 (279,950) 6,857 (245,819)
-------- --------- --------- -------- ---------
Cash flows from
financing activities:
Net increase in
deposits............. -- -- 327,520 31,263 358,783
Advances from Federal
Home Loan Bank....... -- -- 44,500 -- 44,500
Repayments of advances
from Federal Home
Loan Bank............ -- -- (69,500) -- (69,500)
Net change in other
borrowings........... -- 12,577 (18,603) (19,562) (25,588)
Retirement of common
stock................ (6,946) -- -- -- (6,946)
Other, net............ 729 (106) 56 (196) 483
-------- --------- --------- -------- ---------
Net cash (used in)
provided by financing
activities............. (6,217) 12,471 283,973 11,505 301,732
-------- --------- --------- -------- ---------
Net change in cash.... (9,633) 231 104,016 10,095 104,709
Cash at beginning of
period............... 13,229 6,668 43,318 (12,618) 50,597
-------- --------- --------- -------- ---------
Cash at end of period. $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
======== ========= ========= ======== =========
</TABLE>
F-45
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 13,552 $(141,381) $ 498,690 $ (2,490) $ 368,371
--------- --------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (112,354) (101) (125,559) 98 (237,916)
Net change in loans
held for investment.. (76,881) (16,140) (102,067) 126,908 (68,180)
Proceeds from sale
of SPFC stock........ 6,151 -- -- -- 6,151
Redemption of Federal
Home Loan Bank stock. -- -- 10,900 -- 10,900
Cash utilized for
acquisitions......... (750) -- -- -- (750)
Net change in
investment in
Subsidiaries......... 45,652 -- -- (45,652) --
Other, net............ (6,018) 81,049 17,925 (81,868) 11,088
--------- --------- --------- -------- ---------
Net cash (used in)
provided by investing
activities............. (144,200) 64,808 (198,801) (514) (278,707)
--------- --------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 194,331 (2,524) 191,807
Advances from Federal
Home Loan Bank....... -- -- 30,000 -- 30,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (170,500) -- (170,500)
Net change in other
borrowings........... (15,363) 72,809 (391,059) (2,381) (335,994)
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 19 ,500
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Proceeds from offering
of Remarketed Par
Securities........... 68,075 -- -- -- 68,075
Net change in minority
interest............. (44,400) -- -- (4,488) (48,888)
Other, net............ 880 750 (14,920) 14,170 880
--------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities............. 130,451 73,559 (352,148) 4,777 (143,361)
--------- --------- --------- -------- ---------
Net change in cash.... (197) (3,014) (52,259) 1,773 (53,697)
Cash at beginning of
period............... 5,213 7,973 64,755 (3,694) 74,247
--------- --------- --------- -------- ---------
Cash at end of period. $ 5,016 $ 4,959 $ 12,496 $ (1,921) $ 20,550
========= ========= ========= ======== =========
</TABLE>
F-46
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.4 billion as of June 30, 1998, is a diversified
commercial and consumer lending, financial services and investment holding
company, organized in 1986 with its headquarters located in Torrance,
California. Its principal business activities consist of the operation of five
significant wholly owned operating subsidiaries: Southern Pacific Bank
("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc.
("ICAI"), Imperial Credit Commercial Asset Management Corporation ("ICCAMC")
and Imperial Credit Worldwide, Ltd. ("ICW"), one significant majority owned
consolidated operating subsidiary, Imperial Capital Group, LLC ("ICG") and
significant equity investments in two publicly traded companies, Southern
Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage
Acceptance Company ("FMC") Nasdaq: Symbol: FMAX.
STRATEGIC FOCUS AND ACQUISITIONS
Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. In 1995, the Company began to diversify
away from the conforming residential mortgage lending business, and began to
focus on selected lending businesses, including non-conforming residential
mortgage banking, franchise mortgage lending, sub-prime mortgage banking, sub-
prime auto lending, commercial mortgage banking, business lending and consumer
lending. During 1996 and 1997, the Company successfully completed initial
public offerings of the sub-prime mortgage banking and franchise lending
subsidiaries into SPFC and FMC, respectively. As of June 30, 1998, the Company
owns 47.0% and 38.4%, respectively, of SPFC's and FMC's common stock as
investments accounted for under the equity method, respectively.
The Company's loans and leases by sector consist primarily of the following:
asset based lending, commercial mortgage banking and income producing property
loans; business lending--equipment leasing, asset-based lending, and
participation in syndicated commercial lending; consumer loans--sub-prime auto
loans and Title I home improvement loans. The Company solicits loans and
leases from brokers on a wholesale and portfolio basis and originates loans
directly from borrowers. The majority of the Company's loans and leases, other
than those held by SPB for investment, are sold in secondary markets through
securitizations and whole loan sales.
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis. The acquisition was recorded using the purchase
method of accounting. The purchase price was allocated to the net assets
acquired based on their fair value and goodwill of approximately $20.8 million
was recorded. Since the March 1997 acquisition date, AMN posted operating
losses and experienced significant increases in non-performing assets, loan
charge-offs and loan loss provisions. In December 1997, the Company developed
revised operating projections which indicated that the goodwill resulting from
the AMN acquisition was not recoverable. Accordingly, the remaining goodwill
balance of $20.1 million was written off during the fourth quarter of 1997.
See "--Subsequent Event"--describing AMN's discontinued operations disclosure.
In July 1997, the Company formed ICG, which, together with its subsidiaries
Imperial Capital, LLC ("IC") and Imperial Asset Management, LLC ("IAM"), to
offer individual and institutional investors financial products and services.
IC is a registered broker/dealer with the United States Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc. IC provides investment opportunities and research to individual
and institutional investors, raises private and public capital for middle
market companies, and trades debt, equity and asset backed securities. IAM is
an investment advisor registered with the United States Securities and
Exchange Commission, and provides investment management services to high net
worth individuals and institutional clients. ICG is a subsidiary which the
Company controls through its 60% voting and equity ownership interest.
F-47
<PAGE>
During the fourth quarter of 1997, the Company formed ICCAMC, a wholly-owned
subsidiary, to oversee the day to day operations of Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") (Nasdaq: ICMI), a real estate investment
trust investing primarily in performing multi-family and commercial real
estate loans, mortgage-backed securities and real property investments. In
October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997. As of June 30, 1998, the Company
owned 8.9% of the common stock of ICCMIC.
During the second quarter ended June 30, 1998, the Company formed and began
managing an investment hedge fund, Cambria Investment Partnership I, LP. At
June 30, 1998, Cambria had assets under management of $113.1 million.
The Company now operates as a diversified commercial and consumer lending,
financial services and investment holding company providing financial services
products in the following sectors: business finance lending, commercial
mortgage and consumer lending, investment products and asset management
services.
The Company's core business has remained consistent in that it originates
loans and leases funded primarily by deposits, warehouse lines of credit,
repurchase facilities, securitizations and whole loan sales in the secondary
market. The Company's business strategy emphasizes:
. Investing in and managing businesses in niche segments of the financial
services industry.
. Conservative, disciplined underwriting and credit risk management.
. Loan and lease originations, where possible, on a wholesale basis.
. Securitization or sale in the secondary market of substantially all of
the Company's loans and leases, other than those held by SPB for
investment.
. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
The Company diversified its business lines into investment products and
asset management services by focusing on the creation and acquisition of
additional businesses in the financial services industry in order to reduce
its dependency on residential and commercial mortgage lending. When acquiring
new businesses or targeting expansion opportunities, the Company seeks to
retain existing management and recruit additional experienced management to
increase growth and profitability and to reduce the risks associated with
operating the newly acquired entity. The Company intends to retain a
significant equity investment in acquired companies to provide a source of
future earnings and cash flow for the Company.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the "Year 2000" problem
concerning existing computer systems. The Year 2000 problem affects every
computer and subsystem the Company operates, both in-house and from
independent servicers and vendors. The issue is whether the Company's computer
systems will properly recognize the "00" date when the year changes to 2000.
Computer systems that do not properly recognize the "00" date could generate
erroneous data or cause a computer system to fail.
The Company is utilizing both internal and external resources to correct,
reprogram and test the computer systems for the Year 2000 compliance. It is
anticipated that all reprogramming changes will be completed and installed by
December 31, 1998, allowing adequate time for testing all data from the
Company's in-house, independent servicers and vendor computer systems through
March 31, 1999. Management has assessed the Year 2000 compliance costs and
does not believe such costs will have a material effect on the Company's
consolidated financial statements.
F-48
<PAGE>
BUSINESS FINANCE LENDING
COMMERCIAL EQUIPMENT LEASING
IBC's lease originations totaled $26.6 million and $61.7 million for the
three and six months ended June 30, 1998 as compared to $34.4 million and
$64.5 million for the same period last year. IBC securitized $31.2 million and
$66.7 million of leases during the three and six months ended June 30, 1998 as
compared to $17.6 million and $115.5 million of leases for the same periods
last year.
ASSET BASED LENDING
At June 30, 1998, the Coast Business Credit ("CBC") loan portfolio
represented lending relationships with approximately 165 customers, with an
average total loan per customer of $3.6 million. During 1997, CBC executed an
expansion plan which has increased its customer base outside of California.
CBC now operates four loan production centers in California and additional
loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland,
Detroit, Minneapolis, Phoenix, Portland, Providence, and Seattle. At June 30,
1998 and December 31, 1997, CBC had outstanding loans totaling $586.8 million
and $484.8 million, of which $184.2 million and $201.8 million were
outstanding to technology companies, respectively. CBC had open unused
commitments of $405.4 million at June 30, 1998. As of June 30, 1998, CBC had
total loan commitments of $992.2 million.
LOAN PARTICIPATION AND INVESTMENT GROUP ("LPIG")
At June 30, 1998, loan participations held by the LPIG division of SPB
ranged in size from approximately $420,000 to approximately $16 million, as
compared to approximately $800,000 to $17.5 million at June 30, 1997,
respectively. As of June 30, 1998, LPIG committed to fund approximately $674.0
million of senior secured loan participation commitments. Loans outstanding
under LPIG's participation commitments at June 30, 1998 totaled $292.5
million.
AUTO LEND GROUP
Auto Lend had $73.8 million of commitments and $17.4 million of loans
outstanding at June 30, 1998. SPB believes that Auto Lend's products offer
synergistic opportunities, when offered in connection with SPB's sub-prime
auto lending program, to provide car dealers a complete financing package. See
"Consumer Lending, Sub-prime Auto Lending."
COMMERCIAL MORTGAGE LENDING
INCOME PROPERTY LENDING DIVISION ("IPLD")
For the three months and six months ended June 30, 1998, the IPLD division
of SPB funded approximately $106.9 million and $171.6 million in loans, as
compared to $72.2 million and $148.1 million in loans for the same periods
last year, respectively.
CONSUMER LENDING
SUB-PRIME AUTO LENDING
SPB's Auto Lending Division originated $40.7 million and $73.2 million in
sub-prime auto loans during the three and six months ended June 30, 1998 as
compared to $23.4 million and $39.7 million, for the same periods last year,
respectively. The Company currently originates sub-prime auto loans through
three Northern California retail offices.
AMN originated $5.5 million and $8.1 million in sub-prime auto loans during
the three and six months ended June 30, 1998, as compared to $77.8 million and
$93.9 million, for the same periods last year, respectively.
F-49
<PAGE>
AMN had total assets of $61.7 million at June 30, 1998. Total revenues for the
three and six months ended June 30, 1998 were $2.9 million and $3.8 million as
compared to $3.3 million and $4.4 million for the three months ended June 30,
1997 and the period from the acquisition date of March 15, 1997 to June 30,
1997, respectively. For the three and six months ended June 30, 1998, AMN's
net losses were $142,000 and $1.8 million as compared to net losses of $1.1
million and $765,000 for the three months ended June 30, 1997 and the period
from the acquisition date of March 15, 1997 to June 30, 1997, respectively.
See "--Subsequent Event"--describing AMN's discontinued operations disclosure.
HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT
During the three and six months ended June 30, 1998, SPB's Consumer Credit
Division originated $12.5 million and $18.0 million in loans as compared to
$6.0 million and $10.0 million for the same periods last year, respectively.
PRINCAP MORTGAGE WAREHOUSE
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage
Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a
purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million. PrinCap's primary business is residential mortgage warehouse lending
to medium- sized brokers and mortgage bankers on a national basis. At June 30,
1998 and December 31, 1997, PrinCap had total commitments and outstanding
loans of $207.1 million and $175.0 million, and $124.6 million and $122.5
million, respectively.
ASSET MANAGEMENT, INVESTMENT PRODUCTS AND OTHER ACTIVITIES
The Company conducts asset management, investment and other advisory
services through its ICCAMC, ICG and ICAI subsidiaries and has substantial
equity investments in SPFC, a publicly traded sub-prime residential mortgage
lender, FMC, a publicly traded specialty commercial finance company, Imperial
Credit Commercial Mortgage Investment Corp. ("ICCMIC"), a publicly traded REIT
engaged in commercial mortgage lending activities, and ICW, a holding company
for international finance activities.
IMPERIAL CREDIT COMMERCIAL ASSET MANAGEMENT CORPORATION
ICCAMC was formed in the third quarter of 1997 to oversee the day-to-day
operations of ICCMIC pursuant to a management agreement. For the three months
and six months ended June 30, 1998, ICCAMC earned $1.3 million and $2.5
million, respectively, in management fees from ICCMIC.
The Company also earned management fees of $263,000 from the Cambria
Investment Partnership I, LP., a newly formed hedge fund managed by the
Company. At June 30, 1998, Cambria had assets under management of $113.1
million.
IMPERIAL CAPITAL GROUP, LLC
ICG is a subsidiary which the Company controls through its 60% voting and
equity ownership interest. ICG was formed in July 1997. ICG, together with its
subsidiaries IC and IAM, offer individual and institutional investors
financial products and services. IAM is an investment advisor registered with
the United States Securities and Exchange Commission, and provides investment
management services to high net worth individuals and institutional clients.
For the three and six months ended June 30, 1998, ICG generated $6.4 million
and $11.0 million in investment banking revenues as compared to none for the
same periods last year.
F-50
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
SPFC is a publicly traded sub-prime mortgage banking company which
originates, purchases and sells high yielding, single family sub-prime
mortgage loans. Substantially all of SPFC's loans are secured by first or
second mortgages on owner occupied single family residences. The majority of
the originated and purchased loans are made to borrowers who do not qualify
for or are unwilling to obtain financing from conventional mortgage sources.
As of June 30, 1998, ICII owned 9,742,500 shares of SPFC common stock,
representing 47.0% of the outstanding common stock of SPFC, which, commencing
with the three months ended March 31, 1997, is reflected on the Company's
consolidated balance sheet as "Investment in Southern Pacific Funding
Corporation" and is accounted for pursuant to the equity method of accounting.
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage.
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, the Company had no
loans outstanding to SPFC.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
FMC is a publicly traded specialty commercial finance company engaged in the
business of originating and servicing loans and equipment leases to small
businesses, with a primary focus on established national and regional
franchise concepts. More recently, FMC has expanded its focus to include
retail energy licensees (service stations, convenience stores, truck stops,
car washes and quick lube businesses), funeral homes, cemeteries and golf
operating businesses (golf courses and golf practice facilities). FMC
originates long-term fixed and variable rate loan and lease products and sells
such loans and leases either through securitizations or whole loan sales to
institutional purchasers on a servicing retained basis. FMC also periodically
makes equity investments or receives contingent equity compensation as part of
its core lending and leasing business. In March 1998, FMC purchased Bankers
Mutual, an originator of multifamily income property loans.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. As a
result of the Company's participation in the public offering, the Company's
percentage ownership of FMC was reduced to 38.4% from 66.7%.
Consequently, commencing with the quarter ended December 31, 1997, the
financial statements of FMC are no longer consolidated with those of ICII. As
of June 30, 1998, ICII owned 11,023,492 shares of FMC common stock. ICII's
investment in FMC is reflected on the Company's consolidated balance sheet as
"Investment in Franchise Mortgage Acceptance Company" and is accounted for
pursuant to the equity method of accounting. Equity in the net income of FMC
for the three and six months ended June 30, 1998 was $3.8 million and $6.6
million, respectively, as compared to none for the same periods last year.
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
In October 1997, the Company completed a public offering of the common stock
of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans, mortgage-backed securities and real property investments. The Company
owned 3,070,000 shares or 8.9% of the outstanding common stock of ICCMIC as of
June 30, 1998.
IMPAC MORTGAGE HOLDINGS, INC.
Pursuant to a termination agreement entered into in December of 1997,
related to the management agreement between ICAI and IMH, the Company received
2,009,310 shares of IMH common stock and certain
F-51
<PAGE>
securitization-related assets. Additionally, the Company agreed to cancel its
note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of
ICII which is now known as Impac Funding Corporation and is the origination
unit of IMH. The Company owned 8.4% of the outstanding common stock of IMH as
of June 30, 1998.
IMPERIAL CREDIT WORLDWIDE, LTD.
ICW is a holding company for the Company's international finance activities
and is a majority owner of Credito Imperial Argentina, a mortgage banking
company conducting residential mortgage business in Argentina. ICW originated
$10.1 million and $16.8 million in residential loans for the second quarter
and six months ended June 30, 1998, respectively, as compared to $0 for the
same periods last year.
IMPERIAL CREDIT ADVISORS, INC.
ICAI provides capital markets, portfolio management and research services to
the Company's subsidiaries and affiliates. Prior to December 1997, ICAI
oversaw the day-to-day operations of IMH pursuant to a management agreement.
The asset management fees earned of $1.2 million and $2.8 million, for the
three months and six months ended June 30, 1997, respectively, were solely
related to ICAI providing REIT management services for Impac Mortgage
Holdings, Inc. ("IMH"). For the three and six months ended June 30, 1998, ICAI
did not earn asset management fees. The asset management fees earned for the
prior periods were solely related to Imperial Credit Advisors, Inc ("ICAI")
which provided REIT management services for Impac Mortgage Holdings, Inc.
("IMH") until December 1997.
SECURITIZATION TRANSACTIONS AND LOAN SALES
During the quarter ended June 30, 1998, the Company sold $93.4 million of
commercial and multifamily loans to ICCMIC and securitized $31.2 million of
leases originated by Imperial Business Credit, Inc. ("IBC"), generating gains
of $1.9 million and $1.1 million, respectively.
During the quarter ended June 30, 1997, the Company securitized $379.3
million of loans and leases originated by SPB's income property division, FMC
and IBC. Excluding loans securitized by FMC, the Company securitized $220.7
million of loans and leases for the quarter ended June 30, 1997.
The decrease in securitization transactions is consistent with the Company's
objective of becoming less reliant on gain on sale as a source of revenue.
Gain on sale of loans and leases decreased to $3.3 million and $8.8 million
during the second quarter and six months ending June 30, 1998, respectively,
from $28.6 million and $37.2 million for the same periods last year. The
decrease in gain on sale of loans and leases was primarily attributable to the
deconsolidation of FMC. Gain on sale of loans and leases decreased to 6% and
9% of total revenues during the quarter and six months ended June 30, 1998, as
compared to 50% and 38% for the same periods last year, respectively.
During the six months ended June 30, 1998, the Company completed loan and
lease securitizations totaling $66.7 million as compared to $477.2 million for
the same periods last year. During the six months ended June 30, 1998, the
Company through its SPB subsidiary sold $190.0 million in multi family and
commercial mortgages to ICCMIC as compared to $0 for the same period last
year.
The Company has retained interests in loan and lease securitizations
representing the excess of the total amount of loans sold in the
securitization over the amounts represented by interests in the security sold
to investors. The retained interests in the loan and lease securitizations
were $53.2 million and $43.1 million at June 30, 1998 and December 31, 1997,
respectively. The increase in retained interests in the loan and lease
securitizations were primarily attributable to lease securitizations at IBC
during the six months ended June 30, 1998.
F-52
<PAGE>
FUNDING
LINES OF CREDIT
Until 1995, apart from equity and debt offerings in the capital markets, the
Company's primary sources of financing were warehouse lines of credit at ICII
and deposits with SPB. Typically, ICII would borrow funds under its warehouse
lines in connection with its wholesale loan originations and purchases, while
SPB used its deposits and borrowings from the Federal Home Loan Bank of San
Francisco ("FHLB") to finance its lending activities.
In connection with its diversification strategy, the Company believes that
lower cost financing is available through credit lines, repurchase facilities,
whole loan sales and securitization programs established by IBC and SPB.
The Company continues to rely on FDIC insured deposits generated by SPB and
third party warehouse lines of credit and securitizations. At June 30, 1998,
SPB had total deposits of approximately $1.5 billion (excluding deposits of
ICII maintained with SPB).
ICII and its subsidiaries had various revolving warehouse lines of credit
available at June 30, 1998, as follows:
<TABLE>
<CAPTION>
INTEREST INDEX EXPIRATION
RATE COMMITMENT OUTSTANDING (BASIS POINTS) DATE
-------- ---------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.00% $100,000 $ 15,997 Libor plus 135 March 9, 1999
Core States (IBC)....... 7.86% 30,000 7,256 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.16% 200,000 96,000 Libor plus 50 October 1, 1998
-------- --------
$330,000 $119,253
======== ========
</TABLE>
F-53
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1997
The Company's consolidated net income for the three and six months ended
June 30, 1998 increased to $16.3 million and $29.2 million or $0.40 and $0.71
diluted income per share as compared to $14.1 million and $21.1 million or
$0.35 and $0.52 diluted income per share for the same period last year. Net
income for the first six months of 1997 includes an extraordinary item of $4.0
million or $0.10 per diluted share representing a loss on the Company's early
retirement of debt. Basic consolidated net income per share for the three and
six months ended June 30, 1998 was $0.42 and $0.75 per basic share as compared
to $0.37 and $0.55 per basic share for the same period last year. The increase
in net income for the three months ending June 30, 1998 is primarily
attributable to an increase in net interest income, loan servicing income,
investment banking fees, partially offset by a decrease in the Company's
equity ownership in FMC's earnings. The Company's ownership in FMC's common
stock as of June 30, 1998 was 38.4% as compared to 66.7% for the same period
last year.
The increase in net income for the six months ending June 30, 1998 is
primarily attributable to an increase in net interest income, loan servicing
income, investment banking fees, equity in the earnings of FMC, and lower
provision for loan and lease losses, partially offset by increases in total
expenses related to continued growth and increased activities at the Company's
new business lines of Imperial Capital Group, LLC, and Imperial Credit
Commercial Asset Management Corporation.
RETURN ON EQUITY
Return on equity ("ROE") was 19.2% and 17.5% for the three months and six
months ending June 30, 1998, as compared to ROE of 22.0% and 20.1% for the
same periods last year. The Company's strong capital position provides it with
excellent opportunities to reduce risk and improve corporate performance and
profitability in the future through opportunistic acquisitions and future
capital redeployment opportunities.
DECONSOLIDATION OF FMC
During the fourth quarter of 1997, the Company reduced its ownership
percentage in FMC from 66.7% to 38.4% through an initial public offering of
FMC common stock. The income from FMC is accounted for by the equity method of
accounting beginning with the quarter ended December 31, 1997. For the three
and six months ended June 30, 1998, the equity in net income of FMC was $3.8
million and $6.6 million, respectively. As a result of the deconsolidation of
FMC, gain on sale of loans, net interest income, other income and, general and
administrative expenses are not comparable to the prior year. Therefore, the
following income statements present gain on sale of loans, net-interest
income, other income and general and administrative expenses for the Company
as if FMC had been accounted for as an equity investment for all periods
presented.
F-54
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases........... $ 3,273 $ 8,737 $ 8,845 $17,013
------- ------- ------- -------
Interest income............................ 59,864 49,421 113,503 95,291
Interest expense........................... 29,851 26,428 57,446 52,133
------- ------- ------- -------
Net interest income...................... 30,013 22,993 56,057 43,158
Provision for loan and lease losses.......... 3,450 5,736 7,300 8,606
------- ------- ------- -------
Net interest income after provision for loan
and lease losses............................ 26,563 17,257 48,757 34,552
------- ------- ------- -------
Other income:
Loan servicing income...................... 4,055 1,434 8,083 2,074
Equity in net income of Southern Pacific
Funding Corp.............................. 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage
Acceptance Company........................ 3,817 11,170 6,586 9,310
Investment banking fees.................... 6,433 -- 10,968 --
Management fees............................ 1,575 1,238 2,780 2,816
Gain on sale of Southern Pacific Funding
Corporation stock......................... -- -- -- 4,306
Other income............................... 2,232 874 4,380 1,550
------- ------- ------- -------
Total other income........................... 24,876 21,394 45,536 32,987
------- ------- ------- -------
Total revenue................................ 54,712 47,388 103,138 84,552
------- ------- ------- -------
EXPENSES:
Personnel expense.......................... 15,519 10,366 31,773 18,439
Amortization of servicing rights........... 360 206 701 225
Occupancy expense.......................... 1,482 822 3,028 1,613
Data processing expense.................... 410 342 903 762
Net (income) expenses of other real estate
owned..................................... 288 3,480 (71) 4,237
General, administrative and other expense.. 10,889 9,315 20,224 16,329
------- ------- ------- -------
Total expenses........................... 28,948 24,531 56,558 41,605
------- ------- ------- -------
Income before income taxes, minority
interest and extraordinary item........... 25,764 22,857 46,580 42,947
Income taxes............................... 9,360 8,784 17,184 17,842
Minority interest in income of consolidated
subsidiaries.............................. 142 -- 234 --
------- ------- ------- -------
Income before extraordinary item........... 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................... -- -- -- (3,995)
------- ------- ------- -------
Net income............................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
</TABLE>
F-55
<PAGE>
REVENUES
GENERAL
Total revenues for the Company during the second quarter ended June 30, 1998
were $54.7 million as compared to $57.5 million reported for the same period
in 1997. After adjusting the three months ended June 30, 1997 as if the
deconsolidation of FMC occurred on January 1, 1997, total revenues increased
by 15% to $54.7 million as compared to $47.4 million for the same period last
year.
Total revenues for the six months ended June 30, 1998 were $103.1 million,
as compared to $97.8 million for the same period last year. Excluding the
gains on the sale of SPFC stock for the six month periods ended June 30, 1997
and adjusting the six months ended June 30, 1997 as if the deconsolidation of
FMC occurred on January 1, 1997, total revenues increased by 29% to $103.1
million from $80.2 million, respectively.
GAIN ON SALE/LOAN & LEASE SECURITIZATION AND SALES
Consistent with the Company's objective of becoming less reliant on gain on
sale as a source of revenue, gain on sale of loans and leases decreased $25.3
million to $3.3 million during the second quarter of 1998 from $28.6 million
for the same period last year. Gain on sale of loans and leases consists
primarily of gains recorded upon the sale of loans and leases, net of
associated expenses, and to a lesser extent, fees received on the origination
of loans, and fees received for commitments to fund loans. Gain on sale of
loans decreased $28.4 million to $8.8 million for the six months ended June
30, 1997 from $37.2 million for the same period last year, primarily as a
result of the deconsolidation of FMC and lower volume of securitizations at
SPB.
During the three and six months ended June 30, 1998, the Company sold $93.4
million and $190.0 million of commercial and multifamily loans to ICCMIC, and
securitized $31.2 million and $66.7 million of leases originated by IBC,
generating gains of $1.9 million and $5.7 million, and $1.1 million and $2.7
million, respectively.
During the three and six months ended June 30, 1997, the Company securitized
$379.3 million and $477.2 million of loans and leases. Excluding loans
securitized by FMC, the Company securitized $220.7 million of loans and leases
for the quarter ended June 30, 1997.
TOTAL INTEREST INCOME
For the three and six months ended June 30, 1998, total interest income
increased to $59.9 million and $113.5 million, respectively, from $55.4
million and $104.6 million for the same periods last year. The increase in
total interest income is primarily attributable to increases in yield as well
as the outstanding average balance on interest-earning assets. The increase in
the average yield on interest-earning assets in 1998 is primarily attributable
to increases in the average yields on loans held for investment and sale
reflecting a more diversified and higher-yielding mix of loan products
relative to 1997. The comparison of total interest income for the three months
ended June 30, 1998 and 1997 is also impacted by the deconsolidation of FMC.
Excluding FMC's interest income for the three and six months ended June 30,
1997, total interest income would have been $49.4 million and $95.3 million as
compared to the consolidated interest income of $55.4 million and $104.6
million for the three and six months ended June 30, 1998, respectively.
TOTAL INTEREST EXPENSE
For the three months and six months ended June 30, 1998, total interest
expense decreased to $29.9 million and $57.4, respectively, million as
compared to $31.7 million and $60.1 million for the same periods last year.
The decrease in interest expense was attributable to a decrease in other
borrowings resulting from the deconsolidation of FMC, which was partially
offset by increases in interest on deposits and long term debt. The increase
in interest on deposits and long term debt was attributable to the increase in
deposits at SPB in 1998 and the interest expense related to the issuance of
$70 million of Remarketed Par Securities in June of 1997. Excluding FMC's
interest expense for the three and six months ended June 30, 1997, total
interest expense would have been $26.4 million and $52.1 million as compared
to the consolidated interest expense of $29.9 million and $57.4 million for
the three and six months ended June 30, 1998, respectively.
F-56
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $3.5 million and $7.3 million
for the three and six months ended June 30, 1998, respectively, as compared to
$5.7 million and $8.6 million for the same periods last year. The decrease in
the loan and lease loss provision for the three and six months ended June 30,
1998 was primarily the result of the decrease in both nonaccrual loans and net
charge-offs to average loans held for investment. At June 30, 1998, nonaccrual
loans declined to $63.9 million as compared to $70.6 million at December 31,
1997 or 3.9% and 5.4% of gross loans held for investment, respectively.
Additionally, excluding net charge-offs of $13.7 million and $102,000 at AMN
for the six months ended June 30, 1998 and 1997, net charge-offs were $4.3
million and $7.3 million, respectively.
LOAN SERVICING INCOME
Loan servicing income for the three and six months ended June 30, 1998 was
$4.1 million and $8.1 million, respectively, as compared to $2.2 million and
$3.5 million for the same periods last year. The increase in loan servicing
income was primarily attributable to a decrease in servicing related expenses
associated with the Company's former residential mortgage banking loan
portfolio and an increase in the average outstanding balance of loans and
leases serviced for others at SPB, IBC and AMN.
EQUITY IN NET INCOME OF SPFC
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage. At June 30, 1997 and 1998, the Company's ownership percentage in
SPFC was 47.0%. The Company accounts for its investment in SPFC using the
equity method.
EQUITY IN NET INCOME OF FMC
Equity in the net income of FMC for the three and six months ended June 30,
1998 was $3.8 million and $6.6 million, respectively, as compared to $0 for
the same periods last year, which represents the Company's share of FMC's net
income based on the Company's ownership percentage. The increase in the equity
in net income of FMC is due to the difference in accounting methods used for
the Company's investment in FMC at June 30, 1998 and 1997. At June 30, 1998,
the Company's ownership percentage in FMC was 38.4%, and accordingly, the
Company accounted for its investment in FMC using the equity method. During
the first quarter and six months ended June 30, 1997, FMC was a 66.67% owned
consolidated subsidiary of the Company, which contributed pre-tax earnings to
the Company of $11.2 million and $9.3 million, respectively.
INVESTMENT BANKING FEES
Investment banking fees were $6.4 million and $11.0 million for the three
and six months ended June 30, 1998, respectively, compared to $0 for the same
periods last year. During the fourth quarter of 1997, the Company capitalized
a new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. The investment banking fees consist of fees
related to equity, debt offerings and brokerage commissions.
GAIN ON SALE OF SPFC STOCK
During the three and six months ended June 30, 1998, the Company did not
sell any shares of its common stock ownership in SPFC. During the first
quarter of 1997, the Company sold 370,000 shares of SPFC common stock at
$16.63 per share generating net proceeds of $6.2 million and a gain of $4.3
million.
EXPENSES
Total expenses for the Company during the second quarter of 1998 were $28.9
million as compared to $29.1 million for the same period last year. For the
six months ending June 30, 1998 total expenses were $56.6 million as compared
to $50.2 million reported for the same period last year. Excluding the
expenses of the FMC deconsolidation, expenses for the three and six month
periods ended June 30, 1997 were $24.5 million and $41.6 million,
respectively.
F-57
<PAGE>
The increase in total expenses for the three and six months periods ended
June 30, 1998 was attributable to continued growth and increased activities at
the Company's new business lines including Imperial Capital Group, LLC, and
Imperial Credit Commercial Asset Management Corporation. Total expenses from
ICG and from the Company's other startup asset management operations were $5.3
million and $10.1 million for the three and six months ended June 30, 1998 as
compared to none for the same periods last year.
PERSONNEL EXPENSE
Personnel expense increased to $15.5 million and $31.8 million for the three
and six months ended June 30, 1998, respectively, as compared to $12.4 million
and $23.1 million for the same periods of the previous year. This increase was
primarily the result of growth and increased activities at the Company's new
business lines, including ICG, ICW and ICCAMC.
AMORTIZATION OF SERVICING RIGHTS
Amortization of servicing rights increased to $360,000 and $701,000 for the
three and six months ended June 30, 1998 as compared to $206,000 and $225,000
for the same periods last year. The increase was primarily the result of an
increased balance of servicing rights retained from recent loan sales and
securitizations at SPB.
OCCUPANCY EXPENSE
Occupancy expense increased to $1.5 million and $3.0 million for the three
and six months ended June 30, 1998, respectively, as compared to $983,000 and
$1.9 million for the same periods of the previous year. The increase is
primarily attributable to the Company's acquisition and expansion activities
throughout 1997 and during the first six months of 1998.
NET INCOME/EXPENSES OF OTHER REAL ESTATE OWNED
During the second quarter of 1998 expenses from OREO operations were
$288,000 as compared to $3.5 million for the same period last year. For the
six months ended June 30, 1998, the Company generated income of $71,000 as
compared to expenses of $4.2 million. The decrease in expenses primarily
resulted from a lower level of losses and write-downs related to the sale of
properties from the Company's former mortgage banking operations.
OTHER EXPENSES
All other expenses (including data processing, professional services, FDIC
insurance premiums, telephone and other communications, amortization of
goodwill and general and administrative expense) for the three and six months
ended June 30, 1998 totaled $11.3 million and $21.1 million, respectively, as
compared to $12.0 million and $20.7 million for the same periods last year.
The comparison of other expenses for the first quarter 1998 and 1997 is also
impacted by the deconsolidation of FMC. Excluding FMC's total other expenses
for the three and six months ended June 30, 1997, other expenses would have
been $9.7 million and $17.1 million, respectively, as compared to the
consolidated total expenses of $11.3 million and $21.1 million. This increase
reflects the Company's acquisition and expansion activities.
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES
The Company's minority interest in income of consolidated subsidiaries was
$142,000 and $234,000 for the three and six months ended June 30, 1998,
respectively, as compared to $4.5 million and $4.7 million for the same
periods last year. The minority interest in income of consolidated
subsidiaries for the three and six months ended June 30, 1998 is attributable
to the Company's 60% ownership in ICG. The minority interest in income of
consolidated subsidiaries for the same period last year was attributable to
the Company's 66.7% ownership in FMC. The comparison of the Company's minority
interest in income of consolidated subsidiaries for the three and six months
ended June 30, 1998 and 1997 is impacted by the deconsolidation of FMC.
Excluding the Company's minority interest in income of FMC for the three and
six months ended June 30, 1997, total minority interest in income of
consolidated subsidiaries would have been $0 when compared to $142,000 and
$234,000 for the current periods presented.
F-58
<PAGE>
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007. A portion of the
proceeds from the offering were used to repurchase $69.8 million of 9.75%
Senior Notes due 2004 for which the Company recorded an extraordinary after-
tax charge of $4.0 million.
The Company engaged in the new issuance in order to obtain a more favorable
debt covenant package and to raise new capital to support its growing
businesses.
ASSET QUALITY
LOAN LOSS PROVISION AND NONACCRUAL LOANS AND LEASES
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. The provision for loan and lease losses was $3.5 million and $7.3
million for the second quarter and six months ended June 30, 1998,
respectively, as compared to $5.7 million and $8.6 million for the same
periods last year. The decrease in the loan and lease loss provision for the
second quarter of 1998 was primarily the result of the decrease in nonaccrual
loans. Nonaccrual loans and leases as of June 30, 1998 decreased to $63.9
million from $70.6 million at December 31, 1997, or 3.9% and 5.4% of gross
loans held for investment, respectively.
The balance of nonaccrual loans relating to the former mortgage banking
operations included $5.9 million and $6.9 million of loans at June 30, 1998
and December 31, 1997, respectively. The Company periodically reviews the
allowance for loan and lease losses in connection with the overall loan and
lease portfolio. Based on the Company's charge-off experience and relatively
stable balance of nonaccrual loans, management believes the current balance of
the allowance for loan and lease losses is sufficient in relation to the
amount of risk in the loan and lease portfolio. The Company's activity in the
allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance as of December 31, 1997 and 1996.... $ 38,047 $ 19,999
Provision for loan and lease losses................... 7,300 8,606
Business acquisitions and bulk loan purchases......... -- 4,864
Sale of Leases........................................ -- (900)
Deconsolidation of ICIFC.............................. -- (687)
--------- ---------
45,347 31,882
--------- ---------
LOANS CHARGED OFF:
Mortgage.............................................. (1,157) (1,826)
Multifamily........................................... -- (420)
Commercial............................................ (28) (780)
Leases................................................ (830) (3,567)
AMN auto loans........................................ (13,716) (102)
Other consumer........................................ (3,635) (1,274)
--------- ---------
Total................................................ (19,366) (7,969)
--------- ---------
Recoveries on loans previously charged off:
Mortgage.............................................. 143 50
Multifamily........................................... 142 --
Commercial............................................ 36 --
Leases................................................ 648 425
Consumer.............................................. 321 132
--------- ---------
Total................................................ 1,290 607
--------- ---------
Net charge-offs....................................... (18,076) (7,362)
--------- ---------
Ending balance as of June 30, 1998 and 1997........... $ 27,271 $ 24,520
========= =========
</TABLE>
F-59
<PAGE>
Net charge-offs increased to $18.1 million for the six month period ended
June 30, 1998 as compared to $7.4 million for the same period last year. The
increase was primarily related to charge-offs of auto and consumer loans at
AMN and SPB. Excluding net charge-offs of AMN loans, total net charge-offs
decreased to $4.4 million for the six months ended June 30, 1998 as compared
to $7.3 million for the same period last year. See "--Subsequent Event--
describing AMN's discontinued operations disclosure.
Loans held for investment consisted of the following at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4............................ $ 169,325 $ 244,588
Multi-Family................................. 43,265 17,261
Commercial................................... 7,158 1,085
---------- ----------
219,748 262,934
Leases....................................... 4,446 7,745
Installment loans............................ 244,218 129,595
Auto Marketing Network, Inc. auto loans...... 14,883 25,324
Franchise loans.............................. 67,042 62,219
Asset based loans............................ 586,754 484,832
Loan participations.......................... 292,517 196,339
Mortgage warehouse lines..................... 174,953 122,488
Commercial................................... 32,244 26,055
---------- ----------
Total...................................... 1,636,805 1,317,531
Unearned income.............................. (13,322) (7,850)
Deferred loan fees........................... (8,727) (4,916)
---------- ----------
Total...................................... 1,614,756 1,304,765
Allowance for loan and lease losses.......... (27,271) (38,047)
---------- ----------
Total...................................... $1,587,485 $1,266,718
========== ==========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset based loans to
middle market companies mainly in California, participations in commercial
loan syndications and loans to experienced franchisees of nationally
recognized restaurant concepts. The increase in loans held for investment was
primarily attributable to loan originations at SPB's Coast Business Credit,
Loan Participation and Investment Group, and Consumer Credit divisions.
Additionally, SPB's acquisition of PrinCap Mortgage Warehouse Inc. during the
fourth quarter of 1997 contributed to the increase in loans held for
investment.
The Company's allowance for loan and lease losses decreased to $27.3 million
as compared to $38.0 million at December 31, 1997. The allowance for loan and
lease losses as a percentage to non-accruing loans was 42.7% at June 30, 1998
as compared to 53.9% at December 31, 1997. The decrease was primarily
attributable to net charge-offs of AMN loans and a decrease in non-accrual
loans during the six months ended June 30, 1998.
As a result, the loan portfolio has a high concentration in the same
geographic region. Although the Company has a diversified portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of California.
NONPERFORMING ASSETS ("NPA")
The Company's NPA's consist of non-accruing loans, OREO and repossessed
property. Total NPA's were $72.4 million as of June 30, 1998 as compared to
$90.5 million at December 31, 1997. Total NPA's as a percentage of loans, OREO
and repossessed assets were 3.97% at June 30, 1998, as compared to 6.04% at
December 31, 1997. The Company's NPA's as a percentage of loans, OREO and
repossessed assets at AMN,
F-60
<PAGE>
former mortgage banking operations and all other lending activities were
2.97%, 24.13% and 43.31% at June 30, 1998, as compared to 3.52%, 52.51% and
69.88% at December 31, 1997. The decrease in NPA's as a percentage of loans,
OREO and repossessed assets was mainly attributable to loan charges-offs and
sales of OREO properties during the six months ended June 30, 1998.
The following table sets forth the amount of non performing assets
attributable to the Company's other lending activities, former mortgage
banking operations and AMN.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------------------- ------------------------
FORMER AUTO FORMER AUTO
ALL OTHER MORTGAGE MARKETING ALL OTHER MORTGAGE MARKETING
LENDING BANKING NETWORK, INC LENDING BANKING NETWORK, INC.
ACTIVITIES OPERATIONS OPERATIONS ACTIVITIES OPERATIONS OPERATIONS
---------- ---------- ------------ ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... $ 24,897 $ 5,852 $ -- $ 27,573 $ 6,874 $ --
Commercial property.... 8,552 -- -- 5,058 -- --
Multi-family property.. 2,417 -- -- 1,837 -- --
Leases and installment. 10,196 -- 11,976 6,608 -- 22,681
---------- ------- ------- ---------- ------- -------
Total nonaccrual loans.. 46,062 5,852 11,976 41,076 6,874 22,681
---------- ------- ------- ---------- ------- -------
OREO:
One to four family..... 5,702 1,080 -- 2,552 5,774 --
Commercial property.... 540 -- -- 2,526 -- --
Multi-family property.. -- -- -- 53 -- --
---------- ------- ------- ---------- ------- -------
Total OREO.............. 6,242 1,080 -- 5,131 5,774 --
---------- ------- ------- ---------- ------- -------
Repossessed property:
Equipment held for
sale.................. 47 -- -- 4,437 -- --
Repossessed vehicles... -- -- 1,114 -- -- 4,563
---------- ------- ------- ---------- ------- -------
Total repossessed
property............... 47 -- -- 4,437 -- --
---------- ------- ------- ---------- ------- -------
Total NPAs.............. $ 52,351 $ 6,932 $13,090 $ 50,644 $12,648 $27,244
========== ======= ======= ========== ======= =======
Total loans, OREO and
repossessed property... $1,765,194 $28,733 $30,221 $1,436,932 $24,087 $38,989
Total NPA's as a
percentage of loans,
OREO and repossessed
property............... 2.97% 24.13% 43.31% 3.52% 52.51% 69.88%
</TABLE>
There are no loans over 90 days past due accruing interest at June 30, 1998
or December 31, 1997, respectively.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management
F-61
<PAGE>
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio.
Loans deemed by management to be uncollectible are charged to the allowance
for loan and lease losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by
management based upon its evaluation of the known and inherent risks in the
loan portfolio. Future additions to the allowance for loan and lease losses
may be necessary.
TOTAL RATE OF RETURN SWAPS
The Company has entered into total rate of return swap contracts for
investment purposes with various investment bank counterparties, the
provisions of which entitle the Company to receive the total return on various
commercial loans in exchange for a floating payment of one month LIBOR plus a
spread. As of June 30, 1998, the Company is party to total rate of return swap
contracts with a total notional amount of $292.7 million, under which the
Company was obligated to pay one month LIBOR plus a weighted average spread of
1.83%. The weighted average remaining life of these contracts was 36.1 months
as of June 30, 1998. These contracts are off-balance sheet instruments. For
the three and six months ended June 30, 1998, the Company recognized $1.1
million and $2.1 million, respectively, of interest income on total return
swaps as compared to $294,000 and $739,000 for the same periods last year.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting
Principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Inflation affects the Company primarily through its effect on
interest rates, since interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. During periods of
increasing interest rates, demand for loans and a borrower's ability to
qualify for mortgage financing in a purchase transaction may be adversely
affected. During periods of decreasing interest rates borrowers are more
likely to refinance their existing loans, which may negatively impact the
Company's investments in securitization related assets and interest-only
securities.
REGULATORY MATTERS
SPB'S CAPITAL RATIOS
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations and (iii) the FDIC Leverage ratio regulation as of June
30, 1998.
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- ------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- --------- -------
(IN THOUSANDS EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Lim-
itation................ $173,338 11.42% $75,868 5.00% $ -- -- %
Risk-based Capital...... 211,987 10.24% 165,490 8.00% 206,863 10.00%
Risk-based Tier 1 Capi-
tal.................... 153,247 7.40% 82,745 4.00% 124,118 6.00%
FDIC Leverage Ratio..... 153,247 9.09% 67,383 4.00% 84,229 5.00%
</TABLE>
F-62
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses and (vi) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions.
The Company has financed its activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB, dividends
from SPB, and securitizations. The Company believes that such sources will be
sufficient to fund the Company's liquidity requirements for the foreseeable
future. There can be no assurance that the Company will have access to the
capital markets in the future or that financing will be available to satisfy
the Company's operating and debt service requirements or to fund its future
growth. The ability of SPB to dividend funds to the Company is subject to
regulatory restrictions.
SPB obtains the necessary liquidity to fund its own lending activities
through deposits and, if necessary through borrowings from the FHLB. At June
30, 1998 and December 31, 1997, SPB had available lines of credit from the
FHLB equal to $23.0 million and $45.8 million, respectively. The FHLB advances
are secured by the investment in stock of FHLB and certain real estate loans
with a carrying value of $67.0 million and $228.5 million at June 30, 1998 and
December 31, 1997, respectively. The highest FHLB advance outstanding during
the quarter ending June 30, 1998 was $34.5 million, with an average
outstanding balance of $24.7 million. The outstanding balance of FHLB advances
was $20.0 million at June 30, 1998. Since December 31, 1991, SPB has increased
its deposits as necessary so that deposits, together with cash, liquid assets
and FHLB borrowings have been sufficient to provide the funding for its loans
held for sale and investment. SPB's deposit portfolio which consists mostly of
certificate accounts increased to $1.5 billion as of June 30, 1998 as compared
to $1.2 billion at December 31, 1997.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPB allow SPB to anticipate both funding
and sales and adjust deposit levels and short-term investments against the
demands of the Company's lending activities. SPB also has a $200.0 warehouse
line of credit available from Morgan Stanley, with a balance outstanding of
$96.0 million at June 30, 1998.
In addition to warehouse lines of credit and SPB borrowings, the Company has
also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share generating net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of
said notes. As of December 31, 1995, the Company was not in compliance with
certain debt covenants related to these notes. Subsequent to December 31,
1995, these defaults were corrected. In March 1996, the Company reissued the
$8.5 million of the notes which it purchased in October 1994. At December 31,
1996, $90.0 million of these notes were outstanding.
In January 1997, the Company issued $200.0 million principal amount of the
9.875% Senior Notes and used a portion of the proceeds to purchase
approximately $69.8 million of the 9.75% Senior Notes. The Company contributed
$35.0 million of the proceeds to SPB in the form of subordinated indebtedness.
F-63
<PAGE>
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which the Company was a selling shareholder. SPFC and the Company
received net proceeds from such offering of approximately $53.8 million and
$35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million
of convertible subordinated notes due 2006 and (ii) the Company sold 1.0
million shares of SPFC common stock held by the Company for net proceeds of
approximately $28.0 million.
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, resulting in a gain of $4.3 million, reducing its ownership of SPFC
from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the
results of SPFC operations are now accounted for in the Company's financial
statements under the equity method of accounting. During the third quarter
ending September 30, 1997, the Company sold an additional 500,000 shares of
SPFC common stock, generating net proceeds of $7.6 million and resulting in a
gain of $5.2 million, further reducing its ownership percentage to 47.0%. As
of December 31, 1997, the Company's ownership in SPFC common stock was 47.0%,
excluding shares issuable upon exercise of options granted or to be granted
pursuant to SPFC's stock option plans and shares issuable upon conversion of
the $75.0 million of convertible subordinated notes, mentioned above.
During the second quarter of 1997, ICII issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. FMC and
ICII and another selling stockholder received net proceeds from such offering
of approximately $114.3 million, $59.7 million and $18.5 million,
respectively. As of December 31, 1997, the Company's ownership percentage in
FMC was 38.4%.
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, there were no loans
outstanding to SPFC.
SUBSEQUENT EVENTS
On July 31, 1998, the Company announced AMN's decision to discontinue its
auto lending operations. As of June 30, 1998, AMN's operations reflected a net
loss of $1.8 million. AMN's near term activities will be limited to the
disposition of the remaining loans and residual interests in securitizations
effected with previously originated loans. Effective as of August 1, 1998, AMN
and ICII retained an unrelated third party to perform all of the AMN auto loan
servicing and collection obligations. Management anticipates that the bulk of
the discontinued assets, consisting of the loans and residual interests in
securitizations, will be sold within one year.
The Company will take an after-tax charge of $7.1 million for the quarter
ending September 30, 1998 related to the discontinuation of AMN's operations.
Additionally, AMN will be recording a $1.5 million net operating loss for the
month of July 1998.
AMN's revenue, expenses, and net income (loss) were as follows: (In
thousands)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue..................................... $ 2,908 $ 3,345 $ 3,845 $ 4,424
Expenses.................................... 3,190 4,979 6,865 5,740
Net income (loss)........................... (142) (1,084) (1,843) (766)
</TABLE>
F-64
<PAGE>
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation, Inc.
("SDI"), a company providing loan documentation preparation, loan closing,
notary and recording services and marketing of insurance products, for 236,302
shares of ICII common stock.
The Company granted the former holders of the SDI capital stock certain
registration rights covering the ICII Shares. The acquisition will be recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $4.7 million will be recorded. In connection with this
transaction, Paul Lipson, the President of SDI and one of the former holders
of the SDI capital stock, entered into a three year employment contract with
ICII to be President and Chief Executive Officer of SDI.
F-65
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Belch v. Imperial Credit Industries, Inc., San Diego County Superior Court
Case No. 718817.
On April 22, 1998, the Company was served with an alleged class action
complaint filed in the Superior Court of San Diego County, California by
plaintiff Michael Belch. Plaintiff seeks to represent a class of individuals
who, since March 1994, requested, obtained and were charged fees for both loan
payoff statements and corporate, recording and other fees incurred in the
early repayment of mortgage loans where the borrowers were obtaining
refinancing from other lenders. The complaint alleges, on behalf of the
purported class, that the fees charged were unauthorized, oppressive,
unreasonable or in violation of applicable statute and seeks monetary damages
according to proof. The case involves the discontinued mortgage banking
operations of the Company. The Company is actively defending this case.
Fortune Mortgage, etc., et. al. v. Imperial Credit Industries, Inc.,
Imperial Credit Mortgage Holdings, Inc., ICI Funding Corp., Imperial Warehouse
Lending Group, Inc., William Ashmore, Edward Pollard, Wayne Snavely, and
Joseph Tomkinson, Orange County Superior Court Case No. 776153.
Reference is made to the discussion of the above-referenced legal
proceedings contained in the Company's Form 10-K for the year ended December
31, 1997 under Part I, Item 3, "Legal Proceedings." The lawsuit was resolved
in June 1998. The terms of the resolution are confidential, however, such
resolution will not have a material impact on the Company's financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Stockholders was held on June 24, 1998.
PROPOSAL 1.Election of Board of Directors to serve for the ensuing year:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
H.Wayne Snavely.......................................... 31,713,737 589,666
Kevin Villani............................................ 31,713,539 589,864
Stephan J. Shugerman..................................... 31,713,737 589,666
G. Louis Graziadio, III.................................. 31,713,737 589,666
James Clayburn La Force Jr. ............................. 31,713,737 589,666
Perry Lerner............................................. 31,713,737 589,666
Robert Muehlenbeck....................................... 31,713,737 589,666
Joseph Tomkinson......................................... 31,710,082 589,321
</TABLE>
PROPOSAL 2. To consider and act upon a proposal to ratify the appointment of
KPMG Peat Marwick LLP as the independent accountants of the
Company for the year ending December 31, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
32,288,145 11,308 3,950
</TABLE>
F-66
<PAGE>
PROPOSAL 3. To approve the Executive Performance Compensation Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
32,170,548 116,141 16,714
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The registrant filed the following report on Form 8-K dated August 14, 1998.
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation, Inc.,
("SDI"), a company providing loan documentation preparation, loan closing,
national notary and recording services and marketing of insurance products,
for 236,302 shares of ICII common stock (the "ICII Shares"). The Company
granted the former holders of the SDI capital stock certain registration
rights covering the ICII Shares. The acquisition will be recorded using the
purchase method of accounting. The purchase price was allocated to the net
assets acquired based on their fair value and goodwill of approximately $4.7
million will be recorded. In connection with this transaction, Paul Lipson,
the President of SDI and one of the former holders of the SDI capital stock,
entered into a three year employment contract with ICII to be President and
Chief Executive Officer of SDI.
On July 31, 1998, Imperial Credit Industries, Inc. (the "Company" and
"ICII") announced that the operations of its wholly owned subsidiary, Auto
Marketing Network, Inc. ("AMN") were being discontinued. AMN's near term
activities will be limited to the disposition of the remaining loans and
residual interests in securitizations effected with previously originated
loans. Effective as of August 1, 1998, AMN and ICII retained an unrelated
third party to perform all of the AMN auto loan servicing and collection
obligations. Management anticipates that the bulk of the discontinued assets,
consisting of the loans and residual interests in securitizations, will be
sold within one year.
The Company will take an after-tax charge of $7.1 million for the quarter
ending September 30, 1998 related to the discontinuation of AMN's operations.
Additionally, AMN will be recording a $1.5 million net operating loss for the
month of July 1998.
F-67
<PAGE>
ITEM 6 EXHIBIT-11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary items...... $16,262 $14,073 $29,162 $25,105
------- ------- ------- -------
Extraordinary item--Early
extinguishment of debt, net of income
taxes................................. -- -- -- (3,995)
------- ------- ------- -------
Net income............................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
Weighted-average common shares
outstanding used to compute basic
income per share...................... 38,752 38,509 38,747 38,464
Assumed common shares issued on
exercise of stock options............. 2,060 2,114 2,052 2,305
------- ------- ------- -------
Number of common shares used to compute
diluted income per share.............. 40,812 40,623 40,799 40,769
======= ======= ======= =======
BASIC EARNINGS PER SHARE:
- -------------------------
Income before extraordinary item....... $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................. -- -- -- (0.10)
------- ------- ------- -------
Net income per common share............ $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
- ---------------------------
Income before extraordinary item....... $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................. -- -- -- (0.10)
------- ------- ------- -------
Net income per common share............ $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======= =======
</TABLE>
F-68
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ Kevin E. Villani
By: _________________________________
KEVIN E. VILLANI
Executive Vice President--Finance
Date: August 14, 1998
F-69
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-71
Consolidated Balance Sheets................................................ F-72
Consolidated Statements of Income.......................................... F-73
Consolidated Statements of Changes in Shareholders' Equity................. F-74
Consolidated Statements of Cash Flows...................................... F-75
Notes to Consolidated Financial Statements................................. F-77
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 27, 1998
F-71
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ 50,597 $ 74,247
Interest bearing deposits................................ 103,738 3,369
Investment in Federal Home Loan Bank stock............... 5,646 17,152
Securities held for trading, at market................... 120,904 25,180
Securities available for sale, at market................. 107,727 59,116
Loans held for sale...................................... 162,571 940,096
Loans held for investment, net........................... 1,266,718 1,068,599
Purchased and originated servicing rights................ 4,731 14,887
Capitalized excess servicing fees receivable............. -- 23,142
Retained interest in loan and lease securitizations...... 43,105 49,548
Interest-only and residual certificates.................. -- 87,017
Accrued interest receivable.............................. 9,132 13,847
Premises and equipment, net.............................. 9,513 12,442
Other real estate owned, net............................. 10,905 12,214
Goodwill................................................. 35,607 38,490
Investment in Southern Pacific Funding Corporation ...... 65,303 --
Investment in Franchise Mortgage Acceptance Company...... 53,099 --
Other assets............................................. 52,798 31,293
---------- ----------
Total assets........................................... $2,102,094 $2,470,639
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits................................................. $1,156,022 $1,069,184
Borrowings from Federal Home Loan Bank................... 45,000 140,500
Other borrowings......................................... 144,841 694,352
Remarketed Par Securities................................ 70,000 --
Senior Notes............................................. 219,813 88,209
Convertible subordinated debentures...................... -- 75,000
Accrued interest payable................................. 21,484 14,034
Accrued income taxes payable............................. 60,528 55,327
Minority interest in consolidated subsidiaries........... 3,174 54,936
Other liabilities........................................ 57,299 39,589
---------- ----------
Total liabilities...................................... 1,778,161 2,231,131
---------- ----------
Commitments and contingencies (note 25)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued
or outstanding.......................................... -- --
Common stock, no par value. Authorized 80,000,000 shares;
38,791,439 and 38,291,112 shares issued and outstanding
at December 31, 1997 and 1996, respectively ............ 147,109 145,521
Retained earnings........................................ 174,898 88,977
Unrealized gain on securities available for sale, net.... 1,926 5,010
---------- ----------
Total shareholders' equity............................. 323,933 239,508
---------- ----------
Total liabilities and shareholders' equity............. $2,102,094 $2,470,639
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-72
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases................. $ 67,723 $ 88,156 $ 39,557
-------- -------- --------
Interest on loans and leases..................... 201,728 188,242 120,244
Interest on investments.......................... 23,531 10,807 6,630
Interest on other finance activities............. 2,678 8,422 2,608
-------- -------- --------
Total interest income.......................... 227,937 207,471 129,482
Interest on deposits............................. 71,014 60,999 51,565
Interest on other borrowings .................... 29,604 64,407 35,783
Interest on long term debt....................... 25,976 9,630 8,380
-------- -------- --------
Total interest expense......................... 126,594 135,036 95,728
-------- -------- --------
Net interest income............................ 101,343 72,435 33,754
Provision for loan and lease losses.............. 38,951 9,773 5,450
-------- -------- --------
Net interest income after provision for loan and
lease losses.................................... 62,392 62,662 28,304
-------- -------- --------
Loan servicing income............................ 10,743 1,680 12,718
Loss on sale of securities....................... (936) -- --
Equity in net income of Southern Pacific Funding
Corporation..................................... 25,869 -- --
Equity in net loss of Franchise Mortgage
Acceptance Company.............................. (3,050) -- --
Investment banking fees.......................... 7,702 -- --
Management fees.................................. 5,810 3,347 38
Gain on sale of servicing rights................. -- 7,591 3,578
Gain on sale of Franchise Mortgage Acceptance
Company stock................................... 48,924 -- --
Gain on sale of Southern Pacific Funding
Corporation stock............................... 9,488 51,243 --
Gain on sale of stock by subsidiary.............. 43,213 31,447 --
Gain on sale of Impac Mortgage Holdings stock.... 11,496 -- --
Gain on termination of REIT advisory agreement... 19,046 -- --
Other income..................................... 1,140 10,807 1,114
-------- -------- --------
Total other income............................. 179,445 106,115 17,448
-------- -------- --------
Total revenue.................................... 309,560 256,933 85,309
-------- -------- --------
EXPENSES:
Personnel expense................................ 60,830 48,355 34,053
Amortization of PMSR's and OMSR's................ 3,089 1,121 3,986
Occupancy expense................................ 4,319 4,653 3,904
Data processing expense.......................... 1,503 2,163 1,461
Net expenses of other real estate owned.......... 6,527 7,014 1,913
Professional services............................ 10,303 9,559 2,769
FDIC insurance premiums.......................... 250 327 1,137
Telephone and other communications............... 2,926 2,917 2,509
Restructuring provision--exit from mortgage
banking operations.............................. -- 3,800 --
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC.................... 3,709 -- --
Provision for loss on repurchase of former
mortgage banking loans.......................... 5,400 -- --
Amortization of Goodwill......................... 23,260 1,875 321
General and administrative expense............... 28,268 17,265 9,127
-------- -------- --------
Total expenses................................. 150,384 99,049 61,180
-------- -------- --------
Income before income taxes, minority interest
and extraordinary item.......................... 159,176 157,884 24,129
Income taxes..................................... 58,747 69,874 10,144
Minority interest in income (loss) of
consolidated subsidiaries....................... 10,513 12,026 (208)
-------- -------- --------
Income before extraordinary item................. 89,916 75,984 14,193
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (3,995) -- --
-------- -------- --------
Net income..................................... $ 85,921 $ 75,984 $ 14,193
======== ======== ========
BASIC INCOME PER SHARE:
Income before extraordinary item................. $ 2.33 $ 2.11 $ 0.45
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (0.10) -- --
-------- -------- --------
Net Income per common share, basic............... $ 2.23 $ 2.11 $ 0.45
======== ======== ========
DILUTED INCOME PER SHARE:
Income before extraordinary item................. $ 2.20 $ 1.95 $ 0.40
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (0.10) -- --
-------- -------- --------
Net Income per common share, diluted............. $ 2.10 $ 1.95 $ 0.40
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 9,621 $ 51,156 $ 24,717 $ -- $ 75,873
Exercise of stock
options................ 147 825 -- -- 825
3-for-2 stock split..... 4,810 -- -- -- --
Increase in unrealized
gain on securities
available for sale,
net.................... -- -- -- 3,211 3,211
Net income, 1995........ -- -- 14,193 -- 14,193
------ -------- -------- ------ --------
Balance, December 31,
1995................... 14,578 51,981 38,910 3,211 94,102
Exercise of stock
options................ 868 1,671 -- -- 1,671
1-for-10 stock dividend. 1,460 25,917 (25,917) -- --
2-for-1 stock split..... 18,952 -- -- -- --
Issuance of common
stock.................. 2,440 59,228 -- -- 59,228
Increase in unrealized
gain on securities
available for sale,
net.................... -- -- -- 1,799 1,799
Tax benefit from
exercise of stock
options................ -- 6,851 -- -- 6,851
Retirement of stock..... (7) (127) -- -- (127)
Net income, 1996........ -- -- 75,984 -- 75,984
------ -------- -------- ------ --------
Balance, December 31,
1996................... 38,291 145,521 88,977 5,010 239,508
Exercise of stock
options................ 530 1,332 -- -- 1,332
Decrease in unrealized
gain on securities
available for sale,
net.................... -- -- -- (3,084) (3,084)
Tax benefit from
exercise of stock
options................ -- 807 -- -- 807
Retirement of stock..... (30) (551) -- -- (551)
Net income, 1997........ -- -- 85,921 -- 85,921
------ -------- -------- ------ --------
Balance, December 31,
1997................... 38,791 $147,109 $174,898 $1,926 $323,933
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-74
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 85,921 $ 75,984 $ 14,193
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan and lease losses. 38,951 9,773 5,450
Recovery for operational losses..... -- -- (1,819)
Restructuring Provision............. -- 3,800 --
Loss on restructuring of
Dabney/Resnick/Imperial, LLC....... 3,709 -- --
Provision for loss on repurchase of
former mortgage banking loans...... 5,400 -- --
Depreciation........................ 4,523 3,483 2,657
Amortization of goodwill............ 23,260 1,875 321
Amortization of PMSR's and OMSR's... 3,089 1,121 3,986
Accretion of discount............... (2,678) (8,350) (2,608)
Gain on sale of servicing rights.... -- (7,591) (3,578)
Gain on sale of loans and leases.... (67,723) (88,156) (39,557)
Gains on sale of SPFC stock......... (9,488) (82,690) --
Gain on sale of FMC stock........... (92,137) -- --
Gain on sale of IMH stock........... (11,496) -- --
Gain on termination of REIT advisory
agreement.......................... (19,046) -- --
Equity in net earnings of SPFC...... (25,869) -- --
Equity in net loss of FMC........... 3,050 -- --
Loss on sale of OREO................ 4,453 2,843 --
Loss on sale of securities.......... 936 -- --
Writedowns of capitalized excess
servicing.......................... -- 4,675 --
Writedowns of fixed assets.......... -- 886 --
Stock option compensation expense... -- -- 653
Writedowns on other real estate
owned.............................. 892 3,252 2,085
Provision for deferred income taxes. 6,191 22,104 2,120
Originations of loans held for sale. (1,232,100) (1,939,200) (2,813,378)
Purchases of loans held for sale.... -- -- (159,122)
Purchase of trading securities...... (126,083) (25,180) --
Sales of trading securities......... 48,369 -- --
Sales and collections on loans held
for sale........................... 1,309,323 2,159,055 1,923,733
Net change in accrued interest
receivable......................... (311) (3,683) (4,247)
Net change in retained interest in
loan and lease securitizations..... -- (21,481) (14,012)
Net change in capitalized excess
servicing.......................... -- 33,234 (37,500)
Net change in other assets.......... 78,528 (210,969) (51,644)
Net change in other liabilities..... 28,063 33,953 (1,436)
----------- ----------- -----------
Net cash provided by (used in)
operating activities................. 57,727 (31,262) (1,173,703)
----------- ----------- -----------
</TABLE>
F-75
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits.................................. (100,369) 264,407 (257,176)
Purchase of servicing rights............... -- -- (8,128)
Proceeds from sale of servicing rights..... 2,213 10,011 12,815
Proceeds from sale of other real estate
owned..................................... 21,171 1,202 7,072
Purchase of securities available for sale.. (42,938) (48,553) --
Sales of securities available for sale..... 5,404 -- --
Net change in loans held for investment.... (206,172) (27,651) 566,693
Purchases of premises and equipment........ (6,839) (5,442) (1,367)
Proceeds from sale of SPFC stock........... 13,707 64,625 --
Proceeds from sale of FMC stock............ 59,731 -- --
Proceeds from sale of IMH stock............ 11,950 -- --
Purchases of Federal Home Loan Bank stock.. (3,634) (7,652) (3,933)
Redemption of stock in Federal Home Loan
Bank ..................................... 15,140 13,250 --
Cash utilized for acquisitions............. (124,488) (20,020) (175,015)
--------- --------- ----------
Net cash (used in) provided by investing
activities.................................. (355,124) 244,177 140,961
--------- --------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits........ $ 86,838 $ (23,805) $ 158,369
Net increase (decrease) in borrowings from
Imperial Bank............................. -- (5,000) 5,000
Advances from Federal Home Loan Bank....... 50,000 434,000 347,000
Repayments of advances from Federal Home
Loan Bank................................. (145,500) (483,500) (452,000)
Proceeds from issuance of convertible
subordinated debentures................... -- 72,162 --
Net change in other borrowings............. 143,505 (181,463) 875,815
Issuance of bonds.......................... -- -- 111,995
Repayment of bonds......................... -- (111,995) --
Proceeds from issuance of Senior Notes due
2007...................................... 194,500 -- --
Proceeds from issuance of Remarketed Par
Securities................................ 68,075 -- --
Repayments of Senior Notes due 2004........ (73,241) -- --
Proceeds from resale of Senior Notes due
2004...................................... -- 7,384 --
Proceeds from issuance of common stock..... -- 59,228 --
Net change in minority interest............ (51,762) 53,484 --
Proceeds from exercise of stock options.... 1,332 1,671 825
--------- --------- ----------
Net cash provided by (used in) financing
activities.................................. 273,747 (177,834) 1,047,004
Net change in cash........................... (23,650) 35,081 14,262
Cash at beginning of year.................... 74,247 39,166 24,904
--------- --------- ----------
Cash at end of year.......................... $ 50,597 $ 74,247 $ 39,166
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-76
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.0% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation. The consolidated financial statements include Imperial Credit
Industries, Inc. ("ICII"), its significant wholly-owned operating
subsidiaries, significant majority-owned operating subsidiaries and
significant equity investments in two publicly traded companies (collectively
the "Company"). The significant wholly-owned subsidiaries include Southern
Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit
Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"), Imperial Credit
Commercial Asset Management Corporation, ("ICCAMC") and Imperial Credit
Worldwide ("ICW"). The significant operating majority owned consolidated
subsidiary is Imperial Capital Group ("ICG") which is 60% owned by the Company
and 40% owned by outside private investors. The significant equity investments
in publicly traded companies are Southern Pacific Funding Corporation ("SPFC")
NYSE Symbol: SFC, and Franchise Mortgage Acceptance Company ("FMC") NASDAQ
Symbol: FMAX. Both SPFC and FMC were former consolidated subsidiaries of the
Company. All material intercompany balances and transactions with consolidated
subsidiaries have been eliminated.
2. STRATEGIC FOCUS AND ACQUISITIONS
Strategic Divestitures
In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses
and commenced several new businesses, including non-conforming residential
mortgage banking, commercial mortgage banking, business lending and consumer
lending. The Company's loans and leases by sector consist primarily of the
following: sub-prime residential mortgage banking; commercial mortgage banking
and income producing property loans; business lending--equipment leasing,
asset-based lending, and participation in syndicated commercial lending;
consumer loans--sub-prime auto loans and Title I home improvement loans. The
Company solicits loans and leases from brokers on a wholesale and portfolio
basis and originates loans directly from borrowers. The majority of the
Company's loans and leases, other than those held by SPB for investment, are
sold in secondary markets through securitizations and whole loan sales.
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"),
formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets,
the Company received approximately 11.8% of the common stock of IMH.
Additionally, ICAI entered into a management agreement with IMH pursuant to
which ICAI advised upon the day-to-day operations of IMH and for which it was
paid a management fee. During 1997, the Company sold its common stock interest
in IMH for a gain of approximately $11.5 million. In December 1997, IMH and
the Company negotiated a termination of the management agreement (the
"Termination Agreement"). The consideration received by the Company pursuant
to the Termination Agreement was $44 million, comprised of 2,009,310 shares of
IMH common stock and certain securitization-related assets. Additionally, the
Company agreed to cancel its note receivable from ICI Funding Corporation
("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding
Corporation and is the origination unit of IMH, in the amount of $29.1
million. The IMH common stock and the securitization-related assets were
recorded by the Company at their estimated fair values of approximately $35.0
million and $13.1 million, respectively, for a total of $48.1 million. This
amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, at a loss of $100,000. At December 31, 1996, the Company
owned 100% of the common stock of ICIFC which represented only a 1% economic
interest as IMH owned all of the non-voting preferred stock of ICIFC which
gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the original
mortgage banking business.
Franchise Mortgage Acceptance Company
On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed Franchise
Mortgage Acceptance Company LLC ("FMAC"), a limited liability company, in
which the Company had a 66.7% ownership interest. The acquisition was
accounted for as a purchase and the purchase price of $7.6 million, which
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC, a Delaware corporation formed for the purpose of succeeding
to the business of FMAC, and FMC completed an initial public offering of its
common stock. The Company sold into FMC's initial public offering 3,568,175
shares at $18.00 per share generating net proceeds of $59.7 million and a gain
of $48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. Upon the completion of FMC's
initial public offering and at December 31, 1997, the Company's percentage
ownership of FMC common stock was 38.4%. Accordingly, FMC's operating results
are no longer consolidated with those of the Company and the Company's
investment in FMC is accounted for under the equity method.
Southern Pacific Funding Corporation
For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential lending
subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC
completed an initial public offering of its common stock pursuant to which
ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares
and 3.5 million shares, respectively, at $11.33 per share. In a secondary
offering, the Company sold 1.5 million SPFC shares at $19.83 per share. The
Company recognized a gain on sale of the SPFC shares it owned of $51.2
million, which is net of offering expenses and the Company's cost basis in the
shares. The Company also recognized a gain of $31.4 million related to the
stock sold by SPFC. The gain related to the stock sold by SPFC is based on the
difference between the Company's equity ownership in SPFC after the sale and
such equity ownership prior to the sale, using the Company's respective SPFC
ownership percentages. During the first quarter of 1997, the Company sold
370,000 shares of SPFC common stock at $16.63 per share generating net
proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced
the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to
49.4% at March 31, 1997. Accordingly, SPFC's operating results are no longer
consolidated with those of the Company and the Company's investment in SPFC is
accounted for under the equity method. During the third quarter of 1997, the
Company sold an additional 500,000 shares of SPFC common stock generating net
proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the
Company's ownership interest in SPFC was 47.0%.
Imperial Business Credit
The Company expanded its commercial equipment leasing business conducted by
IBC through the acquisitions of substantially all of the assets of First
Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million
in May 1995 and all of the assets of Avco Leasing Services, Inc and Avco
Financial Services of Southern California, Inc. (together "Avco") for
approximately $94.8 million in October 1996.
F-78
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These acquisitions were accounted for as purchases and the purchase prices
were allocated to the net assets acquired based on their fair value resulting
in goodwill of $1.2 million and $12.5 million for the FCAC and Avco
transactions, respectively.
IBC's lease originations were $151.3 million and $87.2 million, and it
securitized and sold $213.6 million and $87.0 million during the years ended
December 31, 1997, and 1996, respectively.
Coast Business Credit
In September 1995, the Company began making asset-based loans to middle
market companies located mainly in California by acquiring CoastFed Business
Credit. This entity, now a division of SPB, was renamed Coast Business Credit
("CBC"). The acquisition was accounted for as a purchase and the purchase
price of $150 million was allocated to the net assets acquired based on their
fair value resulting in goodwill of approximately $16 million. At December 31,
1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million,
of which $484.8 million and $288.5 million of loans were outstanding,
respectively.
Imperial Capital Group
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm. DRI was headquartered in Beverly Hills, California
with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and
offered full service investment banking, brokerage, and asset management
services. DRI managed and underwrote public offerings of securities, arranged
private placements and provided advisory and other services in connection with
mergers, acquisitions, restructurings, and other financial transactions. The
Company acquired a 1% interest in DRI and purchased a warrant to acquire an
additional 48% interest. During the fourth quarter of 1997, the Company formed
a new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. In connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million. At December 31, 1997, the Company's
ownership interest in ICG was 60%.
Auto Marketing Network
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
PrinCap Mortgage Warehouse
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and
F-79
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributed such assets to a subsidiary. The acquisition was accounted for as
a purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million.
PrinCap's primary business is residential mortgage warehouse lending to
medium-sized brokers and mortgage bankers on a national basis. At December 31,
1997, PrinCap had commitments outstanding and loans of $124.6 million and
$122.5 million, respectively.
Imperial Credit Commercial Asset Management Corporation
The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of Imperial Credit Commercial Mortgage Investment Corporation
("ICCMIC"), a real estate investment trust intending to invest primarily in
performing multi-family and commercial real estate loans and mortgage-backed
securities. In October 1997, ICCMIC completed its initial public offering and
sold approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997. As of December 31, 1997, the
Company owned 8.9% of the common stock of ICCMIC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of
contingent liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Significant balance sheet items which
could be materially affected by such estimates include: loans held for
investment, which is presented net of the allowance for loan and lease losses,
and the valuation of the Company's securitization related assets. Actual
results could differ significantly from management's estimates. Prior years'
consolidated financial statements have been reclassified to conform to the
1997 presentation.
Investment Securities
The Company classifies investments as held to maturity, trading securities,
or available for sale securities. Held to maturity investments are reported at
amortized cost, trading securities are reported at fair value with unrealized
gains and losses included in operations, and available for sale securities are
reported at fair value with unrealized gains and losses, net of related income
taxes, included as a separate component of shareholders' equity.
Investment securities held to maturity are those securities that management
has the positive intent and the ability to hold to maturity.
Trading securities include mortgage-backed securities resulting from certain
mortgage banking related activities and United States Treasury securities.
F-80
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held to maturity
portfolio.
Realized gains and losses on securities available for sale are included in
income and are derived using the specific identification method for
determining the cost of securities sold.
Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market,
which is based on sale commitments or prices for similar products.
Loans which are ineligible for sale, generally those 90 days past due, are
transferred to loans held for investment at the lower of cost or market on the
day of transfer.
Loans Held for Investment
Loans held for investment are stated at the principal amount outstanding.
Interest income is recorded on the accrual basis in accordance with the terms
of the loans, except that accruals are discontinued when the payment of
principal or interest is 90 or more days past due. Future collections of
interest are included in interest income or applied to the loan balance based
on an assessment of the likelihood that the loan will be repaid. Additionally,
unearned income on installment contracts and leases is recognized in interest
income over the life of the related loans using the interest method.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management considers such
factors as historical loan loss experience, underlying collateral values,
known problem loans, evaluations made by bank regulatory authorities,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Loans deemed by management to be uncollectible
are charged to the allowance for loan and lease losses. Recoveries on loans
previously charged off are credited to the allowance. Provisions for loan
losses are charged to expense and credited to the allowance in amounts deemed
appropriate by management based upon its evaluation of the known and inherent
risks in the loan portfolio.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Individually
significant loans are evaluated for impairment separately; other loans are
evaluated for impairment collectively. The value of impaired loans is
established by discounting the expected future cash flows at the loan's
effective interest rate, or by the current observable market price or by the
fair value of its collateral. Many factors are considered in the determination
of impairment. The measurement of collateral dependent impaired loans is based
on the fair value of the loan's collateral. Non-collateral dependent loans are
valued based on a present value calculation of expected future cash flows,
discounted at the loan's effective rate.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will fully recover the remaining principal balance of the
loan, in which case such cash receipts are recognized as interest income.
Impairment losses are included in the allowance for loan losses through a
charge to the provision for loan losses. Adjustments to impairment losses due
to changes in the fair value of collateral of impaired loans are
F-81
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
included in the provision for loan losses. Upon disposition of an impaired
loan, loss of principal, if any, is recorded through a charge-off to the
allowance for loan losses.
Purchased and Originated Servicing Rights
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. The cost relating to purchased and originated servicing is
capitalized and amortized in proportion to, and over the period of, estimated
future net servicing income.
The Company assesses the purchased servicing rights portfolio for impairment
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
For the purpose of measuring impairment, the Company has stratified the
capitalized mortgage servicing rights using the following risk
characteristics: loan program type and interest rate tranche in 100 basis
point increments.
In order to determine the fair value of the servicing rights, the Company
uses market prices under comparable servicing sales contracts, when available,
or alternatively, it uses a valuation model that calculates the present value
of future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed rate mortgages with similar coupons
and prepayment rates for comparable variable rate loans. In addition, the
Company uses market comparables for estimates of the cost of servicing per
loan, an inflation rate, ancillary income per loan and default rates.
Capitalized Excess Servicing Fees Receivable
The Company has created capitalized excess servicing fees receivable as a
result of the sale of loans, and to a lesser extent leases, into various trust
vehicles. These various trust vehicles are majority owned by an independent
third party who has made a substantial capital investment and has substantial
risks and rewards of ownership of the assets of the trust; therefore, these
trust vehicles are not consolidated with the Company.
Retained Interest in Loan and Lease Securitizations
The Company adopted on January 1, 1997, Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes accounting for transfers
and servicing of financial assets and extinguishment of liabilities. This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment. Under SFAS 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered, and discontinues recognition of liabilities only
when they have been extinguished. SFAS 125 requires that the selling entity
continue to carry retained interests, including servicing assets, relating to
assets it no longer recognizes. Such retained interests are based on the
relative fair values of the retained interests of the subject assets at the
date of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. SFAS 125
requires an entity to recognize its obligation to service financial assets
that are retained in a transfer of assets in the form of a servicing asset or
liability. The servicing asset or liability is amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value.
F-82
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The implementation of SFAS 125 did not have a material impact on the
Company's financial condition or results of operation. Under the provisions of
SFAS 125, securitization interests retained by the Company as a result of
securitization transactions are held as either available for sale or trading.
The Company may create retained interest in loan and lease securitizations
as a result of the sale of loans into securitization trusts. Loan and lease
securitizations have specific credit enhancement requirements in the form of
overcollateralization which must be met before the Company receives cash flows
due. As the securitized assets generate excess cash flows, they are initially
used to pay down the balance of the pass-through certificates until such time
as the ratio of securitized assets to pass-through certificates reaches the
overcollateralization requirement specified in each securitization.
This overcollateralization amount is carried on the balance sheet as
retained interest in loan and lease securitizations. After the
overcollateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as available for sale, and income is amortized using the interest
method. To the extent that the future performance results are less than the
Company's initial performance estimates, the Company's retained interest in
loan and lease securitizations will be written down through a charge to
operations.
Interest-only and Residual Certificates
Assets reflected in the accompanying balance sheet as interest-only and
residual certificates in real estate mortgage investment conduits are recorded
as a result of SPB's and SPFC's securitization of loans through various trust
vehicles.
Loan Sales and Related Gain or Loss
Loans are sold through either securitizations or whole loan sales with
servicing retained by the Company. Securitizations typically require credit
enhancements in the form of cash reserves or overcollateralization that are
reflected as retained interest in loan and lease securitizations on the
balance sheet. Sales are recognized when the transaction settles and the risks
and rewards of ownership are determined to have been passed to the purchaser.
Gain is recognized to the extent that the selling prices exceed the carrying
value of the loans sold based on the estimated relative fair values of the
assets transferred, assets obtained and liabilities incurred. The assets
obtained in a sale include, generally, retained interest in loan and lease
securitizations, loan servicing assets, and call options. Liabilities incurred
in a sale include, generally, recourse obligations, put options, and servicing
liabilities. In the securitizations completed to date, the Company retained
call options giving it the right to repurchase loans sold when the outstanding
amount of such loans is 1% to 10% or less of the original amount sold,
depending on the terms of the related securitization. As these call options
are equivalent to a cleanup call, the Company has ascribed no value to them.
The securitizations completed to date had no put option features.
In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows therefrom and
discounts such cash flows at interest rates determined by management to be
rates market participants would use in similar circumstances. Discount rates
ranged from 11% to 28%, as of and for the year ended December 31, 1997. Quoted
market prices are not available as no active market exists for retained
interest in loan and lease securitizations. In estimating the cash flows, the
Company considers default and prepayment rates. The default rates used by the
Company as of and for the year ended December 31, 1997 have ranged from 2.0%
to 18.5%, and the prepayment rates used by the Company have ranged from 0.25%
to 48.0%.
F-83
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Origination Fees
Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such loan is to the total commitment. Any remaining deferred
commitment fee income is recognized at expiration of the commitment. When
exercise of such commitment is deemed remote, the fee is recognized over the
remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method. When a loan
is classified as a nonaccrual loan, the related net deferred origination fees
are no longer amortized.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost which
approximates market value.
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at the lower
of the cost of the former mortgage loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Subsequent
increases in fair value are credited to income and reduce the valuation
allowance.
Subsequent increases in the fair value of an asset are only recognized to
the extent that decreases in fair value were recorded through the valuation
allowance. Gains and losses from sales of OREO, provisions for losses on OREO,
and net operating expenses of OREO are recorded in operations and included in
the caption "net expenses of other real estate owned" in the accompanying
consolidated statements of income.
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its subsidiaries except
ICG. The Company accounts for income taxes using 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. 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.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset. Impairment
is measured by discounting operating income of the related entity at an
appropriate discount rate. At December 31, 1997 and 1996, Goodwill is
presented net of accumulated amortization of $25.5 million and $2.2 million,
respectively.
Debt Issue Costs
Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
Hedging Loans Held for Sale
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 United States
Treasury futures contracts. Unrealized and realized gains and losses on such
positions are deferred as an adjustment to the carrying value of loans and
leases held for sale and included in income as gain or loss on sale of loans
when the related loans are sold.
Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk. The futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
Total Rate of Return Swaps
The Company has entered into total rate of return swap contracts with
various investment bank counterparties, the provisions of which entitle the
Company to receive the total return on various commercial loans in exchange
for a floating payment of one month LIBOR plus a spread. These contracts are
off-balance sheet financial instruments. The Company's cash collateral held by
the counterparties is included in trading securities. Net income or expense on
these contracts is included in interest income, and the contracts are carried
at their estimated fair values.
Equity Investments
Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings, the ownership
percentage of its equity investments net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
F-85
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the
Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
net earnings, pro forma income per share, and plan disclosures as set forth in
SFAS 123.
Income Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This statement replaces the previously reported primary and fully-
diluted income per share with basic and diluted income per share. Unlike
primary income per share, basic income per share excludes any dilutive effects
of stock options. Diluted income per share is similar to fully-diluted income
per share. Income per share amounts for all periods ending prior to December
31, 1997, have been restated to conform to the SFAS 128 requirements. The
following table reconciles the number of shares used in the computations of
basic and diluted income per share for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average common shares outstanding
during the year used to compute basic
income per share.......................... 38,610,952 36,062,776 31,825,495
Assumed common shares issued on exercise of
stock options............................. 2,244,321 2,912,058 3,296,167
---------- ---------- ----------
Number of common shares used to compute
diluted income per share.................. 40,855,273 38,974,834 35,121,662
========== ========== ==========
</TABLE>
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
This statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus represent
the sum of net income and comprehensive income, although SFAS 130 does not
require the use of the terms comprehensive income or other comprehensive
income. The accumulated balance of other comprehensive income is required to
be displayed separately from retained earnings and additional paid in capital
in the statement of financial condition. This statement is effective for the
fiscal years and interim periods beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that the adoption of
SFAS 130 will have no significant impact on its financial position or results
of operations.
F-86
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS 131 requires that all public enterprises report financial
and descriptive information about reportable operating segments. Operating
segments are defined as components regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. Management is in the process of
determining the impact, if any, this statement will have on the financial
position, results of operations and disclosures of the Company.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits". The statement revises the
required disclosures for pensions and other post retirement plans but does not
change the measurement or recognition of such plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. The Company, as required, will
adopt this statement during 1998. As the Company does not offer defined
benefit pension plans, Management believes that the adoption of SFAS 132 will
not have a material effect on the Company's existing disclosures regarding
postretirement benefits
F-87
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest......................................... $119,144 $134,251 $ 93,223
Income taxes..................................... 24,611 24,134 8,283
Significant non-cash activities:
Loans transferred from held for investment to
held for sale................................... -- -- 505,037
Loans transferred to OREO or repossessed assets.. 29,359 14,203 12,302
Loans transferred from held for sale to held for
investment...................................... 37,007 197,141 83,398
Loans to facilitate the sale of OREO............. 2,347 1,871 1,315
Retained interest in loan and lease
securitizations capitalized..................... 23,592 6,908 14,002
Transfer of securities from available for sale to
trading......................................... 15,178 -- --
Securities received in consideration of IMH
Termination Agreement........................... 48,167 -- --
Cancellation of note receivable from ICIFC in
consideration of IMH Termination Agreement...... 29,121 -- --
Change in unrealized gain on securities available
for sale........................................ (3,084) 1,799 3,211
Deconsolidation of SPFC, ICIFC and FMAC:
Decrease in loans held for sale.................. 768,025 -- --
Decrease in interest only and residual
certificates.................................... 87,017 -- --
Decrease in retained interest in loan
securitizations................................. 30,035 -- --
Decrease in capitalized excess servicing......... 23,142 -- --
Decrease in accrued interest receivable.......... 5,026 -- --
Decrease in other borrowings..................... 693,016 -- --
Decrease in convertible subordinated debt........ 75,000 -- --
Purchase of Auto Marketing Network:
Assets acquired, including goodwill of $20,770... $ 82,484 $ -- $ --
Liabilities assumed.............................. 81,734 -- --
-------- -------- --------
Cash paid........................................ $ 750 $ -- $ --
======== ======== ========
Purchase of PrinCap Mortgage Warehouse, Inc.
assets:
Assets acquired, including goodwill of $6,800.... $123,767 $ -- $ --
Liabilities assumed.............................. 29 -- --
-------- -------- --------
Cash paid........................................ $123,738 $ -- $ --
======== ======== ========
</TABLE>
5. INVESTMENT IN FHLB STOCK
As a member of the FHLB system, the Company's wholly owned subsidiary, SPB,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of 1% of residential mortgage assets, or
5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock
and loans are pledged to secure FHLB advances.
F-88
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
The following table provides a summary of securities available for sale with
a comparison of amortized cost and fair values as of December 31, 1997 and
1996.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment in IMH stock............... $ 35,037 $ 879 $-- $ 35,916
Investment in ICCMIC stock............ 42,938 1,961 -- 44,899
Avalon total return fund.............. 5,000 492 -- 5,492
AMN Auto Trust 1997-A Class A-2
principal-only security.............. 6,809 -- -- 6,809
IBC 1997-1 Class B-1 subordinated
bond................................. 4,585 -- -- 4,585
IBC 1997-1 Class C-1 interest-only
security............................. 9,638 -- -- 9,638
Other................................. 388 -- -- 388
-------- ------ ---- --------
$104,395 $3,332 $ -- $107,727
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment in IMH stock................ $ 454 $8,668 $-- $ 9,122
SPTL 1996 C-1 interest only securities. 9,829 -- -- 9,829
FLRT 1991-A residual interest.......... 36,571 -- -- 36,571
FLRT 1994-A interest-only security..... 1,814 -- -- 1,814
FLRT 1995-A interest-only security..... 964 -- -- 964
Other.................................. 816 -- -- 816
------- ------ ---- -------
$50,448 $8,668 $ -- $59,116
======= ====== ==== =======
</TABLE>
Gross realized gains and losses on the sale of available for sale securities
were $11.5 million and $936,000, respectively for the year ended December 31,
1997. There were no sales of available for sale securities for the years ended
December 31, 1996 and 1995.
7. TRADING SECURITIES
The following table provides a summary of trading securities as of December
31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities................................. $ 79,751 $ --
FLRT 1996-A interest-only securities..................... 8,541 --
SPTL 1997 C-1 interest-only security..................... 6,637 --
SPTL 1996 C-1 interest-only securities................... 12,179 25,180
Other.................................................... 13,796 --
-------- -------
$120,904 $25,180
======== =======
</TABLE>
F-89
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gross unrealized gains and losses on trading securities included in income
were $709,000 and $835,000 for the year ended December 31, 1997. There were no
gross unrealized gains or losses on trading securities included in income for
the years ended December 31, 1996 and 1995.
During the year ended December 31, 1997, the Company entered into total rate
of return swap contracts for investment purposes with various investment bank
counterparties, the provisions of which entitle the Company to receive the
total return on various commercial loans in exchange for a floating payment of
one month LIBOR plus a spread. These contracts are off balance sheet
instruments. As of December 31, 1997, the Company was party to total rate of
return swap contracts with a total notional amount of $150.6 million, under
which the Company was obligated to pay one month LIBOR plus a weighted average
spread of 0.78%. The weighted average remaining life of these contracts was
37.1 months as of December 31, 1997. For the year ended December 31, 1997, the
Company recognized $448,000 in interest income on total return swaps.
The Company's cash collateral held by the counterparties is included in
trading securities. Net income or expense on these contracts is included in
interest income, and the contracts are carried at their estimated fair values.
8. LOANS HELD FOR SALE
Loans held for sale, at the lower of cost or market, consisted of the
following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4..................................... $ 13,169 $562,002
Multi-family.......................................... 68,294 186,391
-------- --------
81,463 748,393
Automobile loans........................................ 9,102 --
Leases.................................................. 13,561 8,547
Commercial loans........................................ 58,445 183,156
-------- --------
$162,571 $940,096
======== ========
</TABLE>
9. LOANS HELD FOR INVESTMENT, NET
Loans held for investment consisted of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4................................ $ 244,588 $ 375,476
Multi-family..................................... 17,261 2,527
Commercial....................................... 1,085 11,011
---------- ----------
262,934 389,014
Leases............................................. 7,745 99,717
Installment loans.................................. 154,919 34,248
Franchise loans.................................... 62,219 115,910
Asset based loans.................................. 484,832 288,528
Commercial loans................................... 344,882 173,932
---------- ----------
1,317,531 1,101,349
Unearned income.................................... (7,850) (6,336)
Deferred loan fees................................. (4,916) (6,415)
---------- ----------
1,304,765 1,088,598
Allowance for loan and lease losses.............. (38,047) (19,999)
---------- ----------
$1,266,718 $1,068,599
========== ==========
</TABLE>
F-90
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset based loans to
middle market companies mainly in California, loans to experienced franchisees
of nationally recognized restaurant concepts, and participations in syndicated
commercial loans. As a result, the loan portfolio has a high concentration in
the same geographic region. Although the Company has a diversified portfolio,
a substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of California.
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................... $ 19,999 $13,729 $ 7,054
Provision for loan and lease losses.............. 38,951 9,773 5,450
Business acquisitions and bulk loan purchases.... 11,161 4,500 4,320
Sale of Leases................................... (900) -- --
Deconsolidation of ICIFC......................... (687) -- --
Loans charged off................................ (31,053) (8,326) (3,106)
Recoveries on loans previously charged off....... 576 323 11
-------- ------- -------
Net charge-offs.................................. (30,477) (8,003) (3,095)
-------- ------- -------
Balance, end of period........................... $ 38,047 $19,999 $13,729
======== ======= =======
</TABLE>
As of December 31, 1997 and 1996 and 1995, non-accrual loans totaled $70.6
million, $50.1 million, and $31.0 million, respectively. Interest income
foregone on nonaccrual loans was $4.9 million, $1.1 million, and $492,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, impaired loans and the related allowance for
loan and lease losses were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
SPECIFIC SPECIFIC
ALLOWANCE ALLOWANCE
RECORDED FOR CARRYING RECORDED FOR CARRYING
INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE
---------- --------- -------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans........ $70,631 $(5,351) $65,280 $38,297 $(3,671) $34,626
Restructured loans...... -- -- -- 800 (4) 796
------- ------- ------- ------- ------- -------
Total impaired loans.... $70,631 $(5,351) $65,280 $39,097 $(3,675) $35,422
======= ======= ======= ======= ======= =======
</TABLE>
Impaired loans averaged $61.8 million, $33.3 million and $21.1 million
during 1997, 1996 and 1995 respectively. During 1997 total interest income
recognized on impaired loans was not material. During 1996 total interest
income recognized on impaired loans was $2.0 million and was immaterial during
1995. At December 31, 1997, total impaired loans were comprised of $40.1
million which had $5.4 million of specific allowances for losses and $30.5
million with no related specific allowance. There were no impaired loans
without a related allowance for losses at December 31, 1996 and 1995.
10. RESTRUCTURING
Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination,
F-91
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sale and servicing of conforming residential mortgage loans. During 1996, the
Company sold the majority of its wholesale mortgage origination offices and
disposed of fixed assets related to its former conforming residential mortgage
lending business. The Company believes that significant changes to the exit
plan are not likely, and that the exit plan should be completed in the second
quarter of 1998.
Activity in the allowance for restructuring charges during 1997 and 1996 was
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
ALLOWANCE CHARGES CHARGES BALANCE AT
PROVIDED INCURRED INCURRED DECEMBER 31, 1997
--------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Disposition of wholesale mortgage
origination offices............. $2,500 $(2,354) $(146) $--
Disposal of fixed assets......... 1,000 (886) (114) --
Other............................ 300 -- (229) 71
------ ------- ----- ----
Total.......................... $3,800 $(3,240) $(489) $ 71
====== ======= ===== ====
</TABLE>
11. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
Changes in capitalized excess servicing fees receivable were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................. $ 23,142 $ 33,181 $ 4,319
Present value of excess servicing fees on
loans sold................................... -- 19,448 40,353
Amortization.................................. -- (24,812) (11,491)
Writedowns.................................... -- (4,675) --
Deconsolidation of ICIFC...................... (23,142) -- --
-------- -------- --------
Ending balance................................ $ -- $ 23,142 $ 33,181
======== ======== ========
</TABLE>
Capitalized excess servicing fees receivable are net of a valuation
allowance of $4.5 million at December 31, 1996.
12. PURCHASED AND ORIGINATED SERVICING RIGHTS
Changes in purchased and originated servicing rights were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................... $14,887 $ 18,428 $16,746
Additions....................................... 2,982 10,970 7,340
Increase as a result of the FMAC acquisition.... -- -- 3,805
Decrease as a result of the ICIFC
deconsolidation................................ (8,785) -- --
Bulk purchase of servicing...................... -- -- 757
Sales of servicing rights....................... (1,264) (13,390) (6,234)
Amortization--accelerated....................... (2,217) -- (1,176)
Amortization--scheduled......................... (872) (1,121) (2,810)
------- -------- -------
Ending balance.................................. $ 4,731 $ 14,887 $18,428
======= ======== =======
</TABLE>
The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1997 and 1996 was $665.3 million and $1.0 billion,
respectively.
F-92
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment................................... $14,504 $19,606
Leasehold improvements................................... 1,371 1,394
------- -------
15,875 21,000
Less accumulated depreciation and amortization........... (6,362) (8,558)
------- -------
$ 9,513 $12,442
======= =======
</TABLE>
14. DEPOSITS
Deposits of $100,000 and over totaled approximately $236.4 million and
$220.8 million at December 31, 1997 and 1996, respectively. Interest expense
associated with certificates of deposit of $100,000 and over was approximately
$15.6 million, $13.6 million, and $15.4 million for the years ended December
31, 1997, 1996, and 1995, respectively.
15. BORROWINGS FROM FEDERAL HOME LOAN BANK
SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow
up to a maximum of 35% of the assets of SPB. These borrowings must be fully
collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPB's option. At December 31, 1997 and
1996, all of the outstanding borrowings from the FHLB were scheduled to mature
within one year. The FHLB advances are secured by the investment in stock of
the FHLB and certain real estate mortgage loans with a carrying value of
$104.7 million and $228.5 million at December 31, 1997 and 1996, respectively.
At December 31, 1997, 1996 and 1995, FHLB borrowings are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at year end.......................... $ 45,000 $140,500 $190,000
Maximum outstanding at any month end......... 109,500 338,000 435,000
Average balance during the year.............. 56,761 188,765 292,000
Weighted average rate during the year........ 5.82% 6.10% 6.26%
Weighted average rate at year end............ 6.71% 6.30% 6.10%
</TABLE>
Interest expense on borrowings from the FHLB was $3.3 million, $12.1 million
and $19.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
16. OTHER BORROWINGS
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company's and its subsidiaries' lending activities. At December 31,
1997 and 1996, approximately $159 million and $700 million of loans and
securities were pledged as collateral for other borrowings.
These lines of credit are short term and management believes these lines
will be renewed in the normal course of business. Certain covenants exist in
regards to these lines of credit with which the Company was in
F-93
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
compliance at December 31, 1997 and 1996. ICII and its subsidiaries have
various revolving warehouse lines of credit and repurchase facilities
available at December 31, 1997, as follows:
<TABLE>
<CAPTION>
INTEREST INDEX
RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
-------- ---------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998
Donaldson, Lufkin and
Jenrette (Corona Film
Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998
Core States (IBC)....... 8.17 30,000 10,192 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998
-------- --------
6.37 $434,591 $144,841
======== ========
</TABLE>
ICII and its subsidiaries had various revolving warehouse lines of credit
available at December 31, 1996, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PaineWebber (ICII)........................... 6.81% $ 200,000 $ 5,686
Banco Santander (FMAC)....................... 7.63 50,000 16,229
First Boston (FMAC).......................... 7.31 200,000 48,773
Greenwich Capital Markets (FMAC) 7.36 unspecified 35,158
Lehman Brothers (SPFC)....................... -- 200,000 --
Imperial Warehouse Lending Group (ICIFC)..... 8.25 600,000 337,380
Core States (IBC)............................ 7.61 10,000 1,111
Conti (IBC).................................. 7.50 100,000 87,657
Morgan Stanley Mortgage Capital (SPFC)....... 6.16 150,000 152,681
Imperial Warehouse Lending Group (ICII)...... 8.00 20,000 5,077
Warehouse Lending Corporation of America
(ICII)...................................... 7.94 20,000 4,600
------------ --------
7.55 $ 1,550,000 $694,352
============ ========
</TABLE>
Interest expense on other borrowings was $29.6 million, $64.4 million and
$35.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-94
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SENIOR NOTES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
UNAMORTIZED
FACE VALUE DISCOUNT BOOK VALUE
---------- ----------- ----------
<S> <C> <C> <C>
9.75% Senior Notes due 2004.............. $ 20,174 $(361) $ 19,813
9.875% Senior Notes due 2007............. 200,000 -- 200,000
-------- ----- --------
$220,174 $(361) $219,813
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
UNAMORTIZED
FACE VALUE DISCOUNT BOOK VALUE
---------- ----------- ----------
<S> <C> <C> <C>
9.75% Senior notes due 2004.............. $90,000 $(1,791) $88,209
------- ------- -------
$90,000 $(1,791) $88,209
======= ======= =======
</TABLE>
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were used to make capital
contributions to subsidiaries, strategic acquisitions, investments, and for
general corporate purposes. The effective interest rate on the tendered notes
was approximately 10.8% after the amortization of original issue discount and
deferred bond issue costs. The effective interest rate on the new notes is
approximately 10.4% after the amortization of deferred bond issue costs. The
Company engaged in the tender offer and new issuance in order to obtain a more
favorable debt covenant package and to raise new capital to support its
growing businesses.
The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option
of the Company until maturity at a declining premium, plus accrued interest.
The 9.875% Senior Notes are general unsecured obligations of the Company
ranking pari passu with all senior indebtedness of the Company, but are
effectively subordinated to the liabilities of SPB. The Indenture for the
9.875% Senior Notes includes provisions which limit the ability of the Company
to incur additional indebtedness or issue certain stock of the Company, to
make certain investments, engage in certain transactions with affiliates,
create restrictions on the ability of subsidiaries to pay dividends or certain
other distributions, create liens and encumbrances, or allow its subsidiaries
to issue certain classes of stock. As of December 31, 1997, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
In January 1994, the Company issued $90.0 million of 9.75% Senior Notes. At
December 31, 1997 and 1996, $20.2 million and $90.0 million of the 9.75%
Senior Notes were outstanding, respectively. The 9.75% Senior Notes may be
redeemed after January 15, 1999 at the option of the Company until maturity at
a declining premium, plus accrued interest. The 9.75% Senior Notes are
unsecured and rank pari passu with all other senior unsecured indebtedness of
the Company, but are effectively subordinated to the liabilities of SPB.
The Indenture for the 9.75% Senior Notes includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1997 and 1996, the Company was in compliance with the debt covenants related
to the 9.75% Senior Notes.
F-95
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total interest expense on the Senior Notes for the years ended December 31,
1997, 1996 and 1995 was $21.7 million, $9.0 million and $8.4 million,
respectively.
18. CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1996, the SPFC convertible subordinated debentures were
convertible into 3,151,125 shares of common stock of the Company's former
consolidated subsidiary, SPFC, at a conversion price of $23.80 per share, at
any time prior to maturity. Interest on the convertible subordinated
debentures is payable semi-annually. Debt issuance costs of $2.8 million
associated with the convertible subordinated debentures were being amortized
over ten years using the effective interest method. Total interest expense on
the convertible subordinated debentures for the year ended December 31, 1996
was $887,093. The convertible subordinated debentures were deconsolidated
during the first quarter of 1997 when the Company reduced its ownership
percentage in SPFC to below 50%.
19. REMARKETED PAR SECURITIES
During the second quarter of 1997, Imperial Credit Capital Trust I
("ICCTI"), a subsidiary of the Company organized for the sole purpose of
issuing trust securities, issued $70.0 million of 10.25% Remarketed Par
Securities ("ROPES") due June 14, 2002 at par. The ROPES are secured by
resettable rate debentures which are general unsecured obligations of the
Company and can be redeemed at par upon their maturity or remarketed as 30
year capital instruments at the Company's option. Under current tax law, the
interest payments on these securities are tax-deductible. The proceeds from
the offering were used for capital contributions to subsidiaries, strategic
acquisitions, investments and general corporate purposes. Interest expense on
the ROPES was $4.3 million for the year ended December 31, 1997.
The Trust Indenture for the ROPES includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1997, the Company was in compliance with the debt covenants related to the
ROPES.
20. PREFERRED AND COMMON STOCK
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
In the fourth quarter of 1997, the Company's board of directors announced
the authorization to repurchase approximately 5% of the company's common
stock, or as much as 1.9 million shares. During 1997, the Company repurchased
and retired 25,000 shares of common stock under this program.
During 1996, the Company issued an additional 2.4 million shares to the
public, generating net proceeds of $59.2 million, which is net of expenses of
$891,000.
On October 22, 1996, the Company effected a 2-for-1 stock split to
shareholders of record as of October 15, 1996.
On February 26, 1996, the Company paid a stock dividend to shareholders of
record as of February 12, 1996. One new share of Common Stock was issued for
each, 10 shares currently held by shareholders.
F-96
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 24, 1995, the Company effected a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
21. INCOME TAXES
The Company's income taxes for the years ended December 31, 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $41,988 $31,138 $ 7,803
State......................................... 13,551 12,210 2,452
------- ------- -------
Total current............................... 55,539 43,348 10,255
------- ------- -------
Deferred:
Federal....................................... 4,399 16,009 1,846
State......................................... 1,792 6,095 274
------- ------- -------
Total deferred.............................. 6,191 22,104 2,120
------- ------- -------
Taxes credited (charged) to shareholders'
equity......................................... 2,916 4,422 (2,231)
Reduction of deferred tax liability due to FMC
public offering ............................... (5,899) -- --
------- ------- -------
Taxes on income before extraordinary item....... 58,747 69,874 10,144
Current taxes--extraordinary item............... (2,919) -- --
------- ------- -------
Income taxes.................................... $55,828 $69,874 $10,144
======= ======= =======
</TABLE>
The Company's current income taxes payable totaled approximately $24.8
million and $25.7 million at December 31, 1997 and 1996, respectively.
F-97
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowances for loan losses............................... $ 13,156 $ 4,365
Unrealized gain on loans and securities.................. -- 1,671
State taxes.............................................. 7,099 5,677
Executive stock options.................................. 543 548
Other.................................................... 213 1,309
-------- --------
Total.................................................. 21,011 13,570
-------- --------
Valuation allowance...................................... -- --
-------- --------
Deferred tax assets, net of valuation allowance.......... 21,011 13,570
-------- --------
Deferred tax liabilities:
Sales/Investments in FMAC/SPFC/ICIFC..................... (41,984) (12,934)
Purchased and originated servicing rights................ -- (5,222)
Gain on sale of servicing................................ (926) (8,934)
Excess servicing gains................................... (1,143) (6,162)
Leases................................................... (7,915) (3,930)
Deferred loan fees....................................... (505) (510)
Depreciation............................................. (1,160) (468)
Unrealized gain on securities available for sale......... (1,363) (3,473)
FHLB stock dividends..................................... (1,791) (1,522)
-------- --------
Total.................................................. (56,787) (43,155)
-------- --------
Net deferred tax liability................................. $(35,776) $(29,585)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks and future taxable
income, in making this assessment. Based upon the schedule of reversals,
future taxable income and available tax carrybacks, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets.
A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate.................. 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit............ 6.3 7.5 7.3
Reduction of deferred tax liability due to FMC public
offering............................................. (3.7) -- --
Other, net............................................ (0.7) 1.8 (0.3)
---- ---- ----
Effective income tax rate............................... 36.9% 44.3% 42.0%
==== ==== ====
</TABLE>
F-98
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND 401(K) PLAN
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $296,000, $305,000, and $209,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
An additional Company contribution may be made at the discretion of the
Company. 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 on the first 4% of the employee's
deferrals. Discretionary contributions of $0, $350,000, and $200,000 were
charged to operations in each of the years ending December 31, 1997, 1996, and
1995.
Company matching contributions are made as of December 31st each year.
1992 STOCK OPTION PLAN
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,082,493 options were outstanding at December 31,
1997.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
1996 STOCK OPTION PLAN
The Company adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 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.
F-99
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The exercise price for any option granted under the 1996 Stock Option Plan
may not be less than 100% (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 1996 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 1996 Stock Option Plan was June 21,
1996.
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 1,453,200 options
were outstanding at December 31, 1997.
If an option granted under the 1996 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 1996 Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 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.
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 1996 Stock Option Plan is
payable in full (i) in cash, (ii) 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
1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, or (iv) by any combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 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
1996 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 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
F-100
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
SHARES IN THOUSANDS SHARES PRICE SHARES PRICE SHARES PRICE
------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1. 2,589 $8.58 1,637 $2.94 1,758 $2.46
Options granted................ 470 18.72 1,609 13.62 394 5.01
Options exercised.............. (430) 2.61 (295) 2.61 (323) 2.55
Options canceled............... (93) 10.56 (362) 8.32 (192) 2.80
----- ----- ----- ----- ----- -----
Options outstanding, December
31............................ 2,536 11.41 2,589 8.58 1,637 2.94
===== ===== =====
Options Exercisable............ 678 6.95 551 2.47 467 2.24
</TABLE>
There were 1,636,431 options available for future grants at December 31,
1997.
The stock option information presented in the above tables reflects the 2-
for-1 stock split and 1-for-10 stock dividend in 1996, 3-for-2 stock split
paid in 1995, the 1-for-10 stock dividend paid in 1993, and the 1-for-19 stock
dividend paid in 1992.
Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plan. Had compensation
expense for the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1997, 1996 and 1995 consistent with the
provisions of SFAS 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported...................................... $85,921 $75,984 $14,193
Pro forma........................................ 81,707 74,733 14,089
Basic income per share:
As reported...................................... $ 2.23 $ 2.11 $ 0.45
Pro forma........................................ 2.12 2.07 0.44
Diluted income per share:
As reported...................................... $ 2.10 $ 1.95 $ 0.40
Pro forma........................................ 2.00 1.92 0.40
</TABLE>
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.
F-101
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value at date of grant of options granted during
1997, 1996 and 1995 was $11.27, $6.22 and $3.09 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Expected life (years)................................. 5.53 3.40 3.43
Interest rate......................................... 5.76% 5.48% 5.14%
Volatility............................................ 64.33 57.51 60.80
Dividend yield........................................ 0.00% 0.00% 0.00%
</TABLE>
23. EXECUTIVE COMPENSATION
Employment Agreements
On January 1, 1997, the Company entered into five-year employment contracts
with H. Wayne Snavely, Chairman of the Board, President and Chief Executive
Officer, Kevin E. Villani, Executive Vice President, Chief Financial Officer
and a Director and Stephen J. Shugerman, President of SPB and a Director,
which provide for minimum annual aggregate compensation of $1 million, subject
to adjustment for inflation, plus an annual bonus approved by the Company's
Board of the Directors based on the attainment of performance objectives,
including the Company's return on equity, earnings per share and increase in
the price of the Company's common stock. The total cash compensation of the
three senior officers is limited in the aggregate to $2.95 million annually.
Stock Options
On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997). These options
expire on December 1, 2001 and are not covered by the Company's stock option
plan.
Compensation expense relating to these options was recorded in the Company's
consolidated financial statements over a four year period which ended December
31, 1995 for an amount representing the difference between the exercise price
of the options and the market price of the Company's stock at the grant date.
The aggregate amount of compensation expense recognized on these stock options
since their grant date is $2,178,000.
The amount of compensation expense recorded for the year ended December 31,
1995 related to the stock options was $871,200.
24. INTEREST RATE SWAPS
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk.
The contract or notional amounts do not represent exposure to credit loss.
Risk originates from the inability of counterparties to meet the terms of the
contracts and from market movements in securities values and interest rates.
The Company controls the credit risk of its interest rate cap, floor and swap
agreements through credit approvals, limits and monitoring procedures.
F-102
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a part of the SPB securitization in the third quarter of 1996 of $277.0
million of multi-family and commercial mortgage loans, the Company delivered
subordinate bonds of approximately $22 million into a total rate of return
swap with JP Morgan. The provisions of the swap entitle the Company to receive
the total return on the subordinate bonds delivered in exchange for a floating
payment of LIBOR plus a spread of 1.95%. The swap was an off balance sheet
instrument, and it expired on September 30, 1997.
25. COMMITMENTS AND CONTINGENCIES
Loan Servicing
As of December 31, 1997 and 1996 the Company was servicing loans for others,
directly and through sub-servicing arrangements, totaling approximately $1.3
billion and $2.1 billion, respectively.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $8.3 million and $1.3 million at December 31, 1997 and 1996,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPB. The Company is a guarantor of certain performances and
lease servicing by IBC. The Company is a guarantor for AMN's performance with
regards to the Auto Trust 1997-A securitization.
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of
mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties. The Company provided $5.4
million in 1997 as an allowance for losses on repurchases of former mortgage
banking loans.
During the years ended December 31, 1997 and 1996, the Company retained
servicing rights on $197.8 million and $35.1 million of mortgage loans sold
through traditional secondary market channels and $919.1 million and $1.3
billion on loans and leases sold through securitizations. Additionally, during
the year ended December 31, 1996, the Company released servicing rights to the
purchasers on $627.0 million of mortgage loans sold. During the year ended
December 31, 1995, the Company retained servicing rights on $794.9 million of
mortgage loans sold, and released servicing rights to the purchasers on $1.1
billion of mortgage loans sold.
Loan Commitments
As of December 31, 1997 and 1996, the Company had unfunded open loan
commitments amounting to $655.3 million and $642.8 million, respectively, to
fund loans. There is no exposure to credit loss in this type of commitment
until the loans are funded. Interest rate risk is mitigated by the use of
forward contracts to sell loans to investors.
F-103
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Forward Contracts
The Company sold mortgage-backed securities through forward delivery
contracts with major dealers in such securities, primarily through its former
mortgage banking operations. At December 31, 1997 and 1996, the Company had $0
and $143.0 million, respectively, in outstanding commitments to sell mortgage
loans through mortgage-backed securities.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
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.
As of December 31, 1997 and 1996, the Company had open positions of $16.4
million and $183.7 million related to the sales of United States Treasury
futures contracts hedging the interest rate risk on fixed rate loans held for
sale. At December 31, 1997, the Company had unrealized gains of $277,000 on
open positions. At December 31, 1996, the Company had unrealized losses of
$1.7 million on open positions.
Options
The Company may purchase put options or write covered call options to hedge
against adverse movements in the value of the loans held for sale portfolio.
The Company will realize a gain or loss upon the expiration or closing of
the option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option, or the cost
of the security for a purchased put or call option is adjusted by the amount
of premium received or paid.
The risk in writing a call option is that the Company gives up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in buying an option is that the Company pays a
premium whether or not the option is exercised.
The Company had $0 and $70.0 million notional amount of written call option
contracts outstanding at December 31, 1997 and 1996, respectively. The Company
received $0 and $366,000 in premiums related to the options outstanding at
December 31, 1997 and 1996, respectively. There were no option contracts
exercised during the year.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................... $ 4,629
1999...................................... 3,664
2000...................................... 3,421
2001...................................... 2,828
2002...................................... 2,572
Thereafter................................ 1,493
-------
Total................................... $18,607
=======
</TABLE>
F-104
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $4.0
million, $4.2 million, and $3.6 million, respectively.
Legal Proceedings
The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., originally filed in Orange County Superior Court on March 5, 1997 and
recently ordered removed to arbitration under the auspices of the American
Arbitration Association. The complaint alleges breach of contract, breach of
implied covenant of good faith and fair dealing, negligent misrepresentation,
fraud, conspiracy to commit fraud, aiding and abetting fraud, contractual
indemnity and reimbursement, money had and received, and unjust enrichment
arising from the Company's sale of a group of loan production offices to
plaintiffs. The plaintiffs seek rescission, restitution and general, special
and/or consequential damages, and also exemplary and punitive damages as
relate to the claims regarding fraud. The plantiffs are seeking approximately
$3.5 million in general damages and approximately $10.0 million in punitive
damages.
In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997
in the U.S. District Court, Northern District of Illinois, the plaintiff seeks
a declaratory judgment, compensatory damages in the amount of $9 million and
punitive damages arising from an alleged breach of contract and allegedly
fraudulent conduct by AMN. The claim relates to an insurance policy issued to
AMN in 1993 covering certain losses resulting from auto loan defaults.
The Company and a Director are defendants in Judy L. Resnick v. Imperial
Credit Industries, Inc., et al originally filed on January 14, 1998, in Los
Angeles Superior Court. The complaint alleges conspiracies by the defendants
to defraud, interfere with advantageous business relationships, defame, and
breach of fiduciary duty as well as actual fraud, defamation, and breach of
implied covenant of good faith and fair dealing arising out of ICG's
acquisition of substantially all of the assets of Dabney/Resnick/Imperial. The
plaintif is seeking actual, consequential, incidental, general and punitive
damages in a sum of not less than $25 million.
The Company is involved in additional litigation arising in the normal
course of business.
All of the above referenced actions are being actively defended and although
the ultimate outcome can not be estimated, management believes, based in part
upon the advice of legal counsel, that none of these proceedings will have a
material effect on the Company's financial condition or results of operations.
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include securities, loans receivable, time deposits
and various off-balance sheet items. Because no market exists for a portion of
the Company's loans held for investment and securitization related assets,
fair value estimates are based on judgments regarding credit risk, investor
expectation 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.
F-105
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
FINANCIAL ASSETS
The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
held for sale is based on forward sales contracts or quoted market prices. The
fair value of loans held for investment is estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices for similar instruments, taking into consideration the varying
degrees of credit risk.
The fair value of servicing rights, excess servicing fees and securitization
related assets is estimated by discounting future cash flows using appropriate
risk, default and prepayment rates. The fair value of investments in
unconsolidated publicly traded affiliates is based on quoted market prices.
FINANCIAL LIABILITIES
The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
interest rate futures and interest rate swaps is based on quoted market
prices. The fair value of option contracts is based on the unamortized
premium.
F-106
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash............................. $ 50,597 $ 50,597 $ 74,247 $ 74,247
Interest bearing deposits........ 103,738 103,738 3,369 3,369
Investment in Federal Home Loan
Bank stock...................... 5,646 5,646 17,152 17,152
Securities held for trading...... 115,905 115,905 25,180 25,180
Securities available for sale.... 112,726 112,726 59,116 59,116
Loans held for sale.............. 162,571 168,262 940,096 954,299
Loans held for investment, net... 1,266,718 1,286,820 1,068,599 1,081,053
Purchased and originated
servicing rights................ 4,731 4,731 14,887 14,887
Capitalized excess servicing fees
receivable...................... -- -- 23,142 23,142
Retained interest in loan and
lease securitizations........... 43,105 43,105 49,548 49,548
Interest only and residual
certificates.................... -- -- 87,017 87,017
Accrued interest receivable...... 9,132 9,132 13,847 13,847
Investments in unconsolidated
subsidiaries.................... 118,402 330,427 -- --
LIABILITIES:
Deposits......................... $1,156,022 $1,160,294 $1,069,184 $1,069,624
Borrowings from Federal Home Loan
Bank............................ 45,000 45,000 140,500 140,500
Other borrowings................. 144,841 144,841 694,352 694,352
Remarketed par securities........ 70,000 70,000 -- --
Senior notes..................... 219,813 219,474 88,209 93,150
Convertible debentures........... -- -- 75,000 75,000
Accrued interest payable......... 21,484 21,484 14,034 14,034
OFF BALANCE SHEET ITEMS:
Options.......................... -- -- 366 366
Interest rate swap............... -- -- -- 1,166
Forward treasury contracts....... 277 277 (1,700) (1,700)
</TABLE>
F-107
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
27. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Gain on sale of loans............. $ 8,666 $28,558 $20,512 $ 9,987
Net interest income............... 20,808 23,723 29,181 27,631
Other revenues.................... 13,691 10,960 25,405 128,517
Provision for loan and lease
losses........................... 2,870 5,736 9,559 20,786
Other expenses.................... 21,134 29,064 35,090 64,224
Net income........................ 7,037 14,073 14,589 50,222
Income per share:
Basic........................... $ 0.18 $ 0.37 $ 0.38 $ 1.29
Diluted......................... $ 0.17 $ 0.35 $ 0.36 $ 1.22
Year ended December 31, 1996
Gain on sale of loans............. $21,711 $19,166 $28,640 $18,639
Net interest income............... 12,737 13,405 22,163 24,130
Gain (loss) on sale of servicing.. 8,065 (257) -- (217)
Other revenues.................... 3,212 65,843 2,987 26,483
Provision for loan and lease
losses........................... 1,500 2,025 2,617 3,631
Other expenses.................... 27,168 20,652 24,924 26,305
Net income........................ 8,616 43,041 9,433 14,894
Income per share:
Basic........................... $ 0.27 $ 1.19 $ 0.25 $ 0.39
Diluted......................... $ 0.24 $ 1.11 $ 0.23 $ 0.37
</TABLE>
28. SELECTED FINANCIAL INFORMATION OF SOUTHERN PACIFIC BANK AND SOUTHERN
PACIFIC FUNDING CORPORATION
The following represents summarized financial information with respect to the
operations of SPB, a significant wholly-owned subsidiary of ICII.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
SOUTHERN PACIFIC BANK 1997 1996 1995
--------------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets................................ $1,503,807 $1,384,008 $1,432,554
Deposits.................................... 1,189,841 1,072,266 1,093,250
Borrowings from Federal Home Loan Bank...... 45,000 140,500 190,000
Other borrowings............................ 80,000 -- --
Stockholders' equity........................ 157,081 144,798 126,599
Interest income............................. 153,824 131,184 103,112
Interest expense............................ 80,453 73,141 70,819
Noninterest income.......................... 34,636 15,149 17,790
Noninterest expense......................... 39,768 21,846 13,942
Provision for loan losses................... 14,900 8,938 5,450
Income before taxes......................... 53,339 42,408 30,691
Net income.................................. 30,824 24,399 17,753
</TABLE>
F-108
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents summarized financial information with respect to the
operations of SPFC, in which the Company has a significant equity investment.
SPFC is a publicly traded sub-prime mortgage banking company, that is subject
to the reporting requirements of the United States Securities and Exchange
Commission.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
--------------------------
SOUTHERN PACIFIC FUNDING CORPORATION 1997 1996 1995
------------------------------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets..................................... $589,345 $340,377 $120,405
Interest-only and residual certificates.......... 277,156 87,017 25,659
Long term debt................................... 175,000 75,000 --
Stockholders' equity............................. 139,155 85,086 12,889
Gain on sale of loans............................ 148,404 55,361 16,329
Interest income.................................. 39,307 13,849 4,305
Interest expense................................. 27,613 7,800 3,414
Noninterest income............................... 1,634 4,265 1,667
Noninterest expense.............................. 69,714 17,596 6,344
Income before taxes.............................. 92,018 48,079 12,543
Net income....................................... 53,775 27,632 7,337
</TABLE>
F-109
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents summarized consolidating financial information as
of December 31, 1997 and December 31, 1996, and for the years ended December
31, 1997, 1996 and 1995, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 1997, the 9.875% Senior Notes
are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, ICW and AMN (the "Guarantor Subsidiaries"). As of December 31, 1997,
the non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor
subsidiary through September 30, 1997. Each of the guarantees is full and
unconditional and joint and several. The summarized consolidated financial
information is presented in lieu of separate financial statements and other
related disclosures of the wholly-owned subsidiary guarantors as management
has determined that such information is not material to investors. None of the
subsidiary guarantors is restricted from making distributions to the Company.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
Interest bearing
deposits............... 31,390 1,149 71,199 -- 103,738
Investments in Federal
Home Loan Bank stock... -- -- 5,646 -- 5,646
Securities available for
sale and trading....... 107,671 21,031 99,929 -- 228,631
Loans held for sale..... 12,138 23,694 126,739 -- 162,571
Loans held for
investment, net........ 78,922 44,941 1,197,430 (54,575) 1,266,718
Investment in SPFC...... 65,303 -- -- -- 65,303
Purchased and originated
servicing rights....... -- -- 4,731 -- 4,731
Investment in FMC....... 53,099 -- -- -- 53,099
Retained interest in
loan and lease
securitizations........ -- 43,105 -- -- 43,105
Investment in
subsidiaries........... 281,454 -- -- (281,454) --
Goodwill................ -- 13,229 22,378 -- 35,607
Other assets............ 59,911 (1,104) 26,473 (2,932) 82,348
-------- -------- ---------- --------- ----------
Total assets.......... $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings........ -- 30,250 196,528 (36,937) 189,841
Remarketed Par
Securities............. 72,165 -- (2,165) -- 70,000
Senior notes............ 219,813 -- -- -- 219,813
Minority interest in
consolidated
subsidiaries........... 946 20 111 2,097 3,174
Other liabilities....... 86,260 7,327 45,095 629 139,311
-------- -------- ---------- --------- ----------
Total liabilities..... 379,184 37,597 1,429,409 (68,029) 1,778,161
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 147,109 125,139 89,342 (214,481) 147,109
Retained earnings....... 174,898 (22,023) 79,092 (57,069) 174,898
Unrealized gain on
securities available
for sale............... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 323,933 115,116 168,434 (283,550) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
</TABLE>
F-110
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of
loans and leases....... $ (4,427) $ 5,894 $ 65,853 $ 403 $ 67,723
-------- -------- -------- -------- --------
Interest income......... 28,916 32,736 172,894 (6,609) 227,937
Interest expense........ 25,703 11,283 96,116 (6,508) 126,594
-------- -------- -------- -------- --------
Net interest income..... 3,213 21,453 76,778 (101) 101,343
Provision for loan and
lease losses........... 5,000 19,051 14,900 -- 38,951
-------- -------- -------- -------- --------
Net interest income
after Provision for
loan and lease
losses................ (1,787) 2,402 61,878 (101) 62,392
-------- -------- -------- -------- --------
Loan servicing (expense)
income................. (2,283) 5,212 7,814 -- 10,743
Investment Banking fees. -- -- 7,702 -- 7,702
Gains on sale of FMC
stock.................. 92,137 -- -- -- 92,137
Gain on sale of SPFC
stock.................. 9,488 -- -- -- 9,488
Gain on sale of IMH
stock.................. 9,225 411 1,294 566 11,496
Gain on termination of
REIT contract.......... -- 19,046 -- -- 19,046
Equity in net income
SPFC................... 25,869 -- -- -- 25,869
Equity in net loss FMC.. (3,050) -- -- -- (3,050)
Dividends received from
subsidiaries........... 27,514 -- -- (27,514) --
Other (expense) income.. (3,447) 5,050 5,113 (702) 6,014
-------- -------- -------- -------- --------
Total other income..... 155,453 29,719 21,923 (27,650) 179,445
-------- -------- -------- -------- --------
Total revenues....... 149,239 38,015 149,654 (27,348) 309,560
-------- -------- -------- -------- --------
EXPENSES:
Personnel expense....... 4,682 17,769 38,379 -- 60,830
Amortization of PMSR's
and OMSR's............. 1,580 637 872 -- 3,089
Occupancy expense....... 1,310 598 2,411 -- 4,319
Data processing expense. 260 288 955 -- 1,503
Net expenses of other
real estate owned...... 4,513 (254) 2,268 -- 6,527
Professional services... 3,611 1,684 5,008 -- 10,303
Amortization of
goodwill............... -- 21,724 1,536 -- 23,260
Provision for loss on
loan repurchase........ 5,400 -- -- -- 5,400
Loss on restructuring... 3,709 -- -- -- 3,709
General, administrative
and other expense...... 4,662 13,486 13,695 (399) 31,444
-------- -------- -------- -------- --------
Total expenses......... 29,727 55,932 65,124 (399) 150,384
-------- -------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 119,512 (17,917) 84,530 (26,949) 159,176
Income taxes (benefit).. 41,611 (5,670) 22,568 238 58,747
-------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item..... 77,901 (12,247) 61,962 (27,187) 100,429
Minority interest in
income of consolidated
subsidiaries........... 10,513 -- -- -- 10,513
-------- -------- -------- -------- --------
Income (loss) before
deferred inter-company
expense and
extraordinary item..... 67,388 (12,247) 61,962 (27,187) 89,916
Deferred inter-company
expense, net of income
taxes.................. (327) -- -- 327 --
-------- -------- -------- -------- --------
Income (loss) before
equity in undistributed
income of subsidiaries
and extraordinary item. 67,715 (12,247) 61,962 (27,514) 89,916
Equity in undistributed
income of subsidiaries. 22,201 -- -- (22,201) --
-------- -------- -------- -------- --------
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- (3,995)
-------- -------- -------- -------- --------
Net income (loss)....... $ 85,921 $(12,247) $ 61,962 $(49,715) $ 85,921
======== ======== ======== ======== ========
</TABLE>
F-111
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (2,067) $ 31,657 $ 815,765 $(787,628) $ 57,727
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369)
Purchase of securities
available for sale... (42,938) -- -- -- (42,938)
Sale of securities
available for sale... -- -- 29,354 (23,950) 5,404
Net change loans held
for investment....... (56,088) 15,544 (272,429) 106,801 (206,172)
Proceeds of sale of
SPFC stock........... 13,707 -- -- -- 13,707
Proceeds of sales of
IMH stock............ 9,679 411 1,295 565 11,950
Proceeds of sales of
FMC stock............ 59,731 -- -- -- 59,731
Investment in Imperial
Credit Asset
Resolution Inc....... (74,810) -- -- 74,810 --
Cash utilized for
acquisitions......... (750) -- (123,738) -- (124,488)
Net change in
investment in
Subsidiaries......... (11,803) -- -- 11,803 --
Other, net............ 3,645 (23,283) (40,377) 88,066 28,051
--------- -------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (131,017) (8,314) (476,692) 260,899 (355,124)
--------- -------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 117,575 (30,737) 86,838
Advances from Federal
Home Loan Bank....... -- -- 50,000 -- 50,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (145,500) -- (145,500)
Net change in other
borrowings........... (15,363) (58,518) (290,113) 507,499 143,505
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 194,500
Borrowings from
Imperial Credit
Investment Corp...... 10,000 -- -- (10,000) --
Proceeds from offering
of Remarketed
Securities........... 68,075 -- -- -- 68,075
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Net change in minority
interest............. (44,203) -- 111 (7,670) (51,762)
Other, net............ 1,332 33,870 (92,754) 58,884 1,332
--------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 141,100 (24,648) (360,681) 517,976 273,747
--------- -------- --------- --------- ---------
Net change in cash.... 8,016 (1,305) (21,608) (8,753) (23,650)
Cash at beginning of
period............... 5,213 7,973 64,926 (3,865) 74,247
--------- -------- --------- --------- ---------
Cash at end of period. $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
========= ======== ========= ========= =========
</TABLE>
F-112
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 163 2,594 612 3,369
Investments in Federal
Home Loan Bank stock... -- -- 17,152 -- 17,152
Investment and trading
securities............. 8,802 887 75,173 (566) 84,296
Loans held for sale..... 4,839 8,547 926,710 -- 940,096
Loans held for
investment, net........ 34,505 86,214 948,567 (687) 1,068,599
Purchased and originated
servicing rights....... -- 637 14,250 -- 14,887
Capitalized excess
servicing fees
receivable............. -- -- 23,142 -- 23,142
Retained interest in
loan and lease
securitizations........ -- 19,646 29,902 -- 49,548
Interest-only and
residual certificates.. -- -- 87,017 -- 87,017
Accrued interest on
loans.................. 1,425 -- 12,422 -- 13,847
Premises and equipment,
net.................... 4,922 404 7,116 -- 12,442
Other real estate owned,
net.................... 3,508 -- 8,706 -- 12,214
Investment in
subsidiaries........... 269,651 -- -- (269,651) --
Goodwill................ -- 14,115 24,375 -- 38,490
Other assets............ 96,746 (15,385) (22,998) (27,070) 31,293
-------- -------- ---------- --------- ----------
Total assets.......... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- 140,500 -- 140,500
Other borrowings........ 15,363 88,768 605,343 (15,122) 694,352
Senior notes............ 88,209 -- -- -- 88,209
Convertible subordinated
debentures............. -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- 9,787 54,936
Other liabilities....... 41,382 9,222 71,605 (13,259) 108,950
-------- -------- ---------- --------- ----------
Total liabilities....... 190,103 97,990 1,964,714 (21,676) 2,231,131
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- 9,143 (9,143) --
Common stock............ 145,521 21,501 140,382 (161,883) 145,521
Retained earnings....... 88,977 3,525 104,815 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 185 -- (185) 5,010
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 239,508 25,211 254,340 (279,551) 239,508
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders'
equity............... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639
======== ======== ========== ========= ==========
</TABLE>
F-113
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans... $ (937) $ 2,617 $ 86,090 $ 386 $ 88,156
------- ------- -------- -------- --------
Interest income......... 14,877 3,811 193,963 (5,180) 207,471
Interest expense........ 16,696 1,901 127,181 (10,742) 135,036
------- ------- -------- -------- --------
Net interest income..... (1,819) 1,910 66,782 5,562 72,435
Provision for loan and
lease losses........... -- -- 9,625 148 9,773
------- ------- -------- -------- --------
Net interest income
after provision for
loan and lease losses. (1,819) 1,910 57,157 5,414 62,662
------- ------- -------- -------- --------
Loan servicing income... (3,706) 3,095 11,444 (9,153) 1,680
Gain on sale of
servicing rights....... 6,249 -- -- 1,342 7,591
Gains on sale of SPFC
stock.................. 82,690 -- -- -- 82,690
Dividends received from
subsidiaries........... 6,200 -- -- (6,200) --
Other income............ 741 3,214 6,162 4,037 14,154
------- ------- -------- -------- --------
Total other income..... 92,174 6,309 17,606 (9,974) 106,115
------- ------- -------- -------- --------
Total revenues......... 89,418 10,836 160,853 (4,174) 256,933
------- ------- -------- -------- --------
EXPENSES:
Personnel expense....... 8,757 2,997 36,837 (236) 48,355
Amortization of PMSRs
and OMSRs.............. 402 106 613 -- 1,121
Occupancy expense....... 1,994 229 2,352 78 4,653
Data processing expense. 1,094 62 1,007 -- 2,163
Net expenses of other
real estate owned...... 4,969 -- 765 1,280 7,014
General, administrative
and other expense...... 13,652 3,583 17,877 631 35,743
------- ------- -------- -------- --------
Total expenses......... 30,868 6,977 59,451 1,753 99,049
------- ------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 58,550 3,859 101,402 (5,927) 157,884
Income taxes............ 28,830 1,606 39,135 303 69,874
------- ------- -------- -------- --------
Income before minority
interest, deferred
inter-company expense
and extraordinary item. 29,720 2,253 62,267 (6,230) 88,010
Minority interest in of
consolidated
subsidiaries........... 12,026 -- -- -- 12,026
------- ------- -------- -------- --------
Income before deferred
inter-company expense.. 17,694 2,253 62,267 (6,230) 75,984
Deferred inter-company
expense, net of income
taxes.................. (1,383) -- -- 1,383 --
------- ------- -------- -------- --------
Income before equity in
undistributed income of
subsidiaries........... 19,077 2,253 62,267 (7,613) 75,984
Equity in undistributed
income of subsidiaries. 56,907 -- -- (56,907) --
------- ------- -------- -------- --------
Net income (loss)....... $75,984 $ 2,253 $ 62,267 $(64,520) $ 75,984
======= ======= ======== ======== ========
</TABLE>
F-114
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 141,655 $ 28,949 $(222,480) $ 20,614 $ (31,262)
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... -- (163) 265,206 (636) 264,407
Proceeds of sales of
servicing rights..... 31,799 -- -- (21,788) 10,011
Purchase of securities
available for sale... -- (887) (41,704) (5,962) (48,553)
Net change in loans
held for investment.. (5,310) (86,213) (37,354) 101,226 (27,651)
Cash utilized for
acquisitions......... -- (20,020) -- -- (20,020)
Proceeds from sale of
SPFC stock........... 64,625 -- -- -- 64,625
Net change in
investment in
Subsidiaries......... (155,759) -- -- 155,759 --
Other, net............ 3,762 (524) (6,425) 4,545 1,358
--------- --------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (60,883) (107,807) 179,723 233,144 244,177
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- (20,984) (2,821) (23,805)
Advances from Federal
Home Loan Bank....... -- -- 434,000 -- 434,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (483,500) -- (483,500)
Proceeds from
convertible
subordinated
debentures........... -- -- 72,162 -- 72,162
Net change in other
borrowings........... (196,363) 88,768 105,266 (184,134) (186,463)
Proceeds from issuance
of common stock...... 59,228 -- 53,798 (53,798) 59,228
Repayment of Bonds.... -- -- (111,995) -- (111,995)
Net change in minority
interest............. 43,697 -- -- 9,787 53,484
Other, net............ 9,286 -- 26,400 (26,631) 9,055
--------- --------- --------- --------- ---------
Net cash (used in)
provided by financing
activities............. (84,152) 88,768 75,147 (257,597) (177,834)
--------- --------- --------- --------- ---------
Net change in cash.... (3,380) 9,910 32,390 (3,839) 35,081
Cash at beginning of
period............... 8,593 (1,937) 32,536 (26) 39,166
--------- --------- --------- --------- ---------
Cash at end of period. $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247
========= ========= ========= ========= =========
</TABLE>
F-115
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Gain on sale of loans... $ 12,999 $1,803 $ 36,051 $(11,296) $ 39,557
-------- ------ -------- -------- --------
Interest income......... 15,677 76 110,595 3,134 129,482
Interest expense........ 20,900 17 77,708 (2,897) 95,728
-------- ------ -------- -------- --------
Net interest income..... (5,223) 59 32,887 6,031 33,754
Provision for loan
losses................. -- -- 5,450 -- 5,450
-------- ------ -------- -------- --------
Net interest income
after provision for
loan loss............. (5,223) 59 27,437 6,031 28,304
-------- ------ -------- -------- --------
Loan servicing income... 14,007 27 6,670 (7,986) 12,718
Gain on sale of
servicing rights....... 4,889 -- 401 (1,712) 3,578
Other income............ (885) 2,465 2,676 (3,104) 1,152
-------- ------ -------- -------- --------
Total other income..... 18,011 2,492 9,747 (12,802) 17,448
-------- ------ -------- -------- --------
Total revenues......... 25,787 4,354 73,235 (18,067) 85,309
-------- ------ -------- -------- --------
EXPENSES:
Personnel expense....... 20,281 1,606 12,789 (623) 34,053
Amortization of PMSRs
and OMSRs.............. 3,986 -- 2,892 (2,892) 3,986
Occupancy expense....... 2,874 54 1,065 (89) 3,904
Data processing expense. 1,191 1 358 (89) 1,461
Net expense of other
real estate owned...... 191 -- 1,706 16 1,913
General, administrative
and other expense...... 9,938 493 9,277 (3,845) 15,863
-------- ------ -------- -------- --------
Total expenses......... 38,461 2,154 28,087 (7,522) 61,180
-------- ------ -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... (12,674) 2,200 45,148 (10,545) 24,129
Income taxes............ (5,443) 929 19,212 (4,554) 10,144
-------- ------ -------- -------- --------
(Loss) income before
minority interest,
deferred inter-company
gains and extraordinary
item................... (7,231) 1,271 25,936 (5,991) 13,985
Minority interest in
loss of consolidated
subsidiaries........... (208) -- -- -- (208)
-------- ------ -------- -------- --------
(Loss) income before
deferred inter-company
gains.................. (7,023) 1,271 25,936 (5,991) 14,193
Deferred inter-company
gains, net of income
taxes.................. 1,710 -- -- (1,710) --
(Loss) income before
equity in undistributed
income of subsidiaries. (8,733) 1,271 25,936 (4,281) 14,193
Equity in undistributed
income of subsidiaries. 22,926 -- -- (22,926) --
-------- ------ -------- -------- --------
Net income (loss)....... $ 14,193 $1,271 $ 25,936 $(27,207) $ 14,193
======== ====== ======== ======== ========
</TABLE>
F-116
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $(258,380) $ 22,093 $(1,076,751) $ 139,335 $(1,173,703)
--------- -------- ----------- --------- -----------
Cash flows from
investing activities:
Net change in interest
bearing
deposits............. -- -- (126,700) (130,476) (257,176)
Proceeds of sales of
servicing rights..... 12,815 -- 5,055 (5,055) 12,815
Net change in loans
held for investment.. 51,784 -- 493,749 21,160 566,693
Cash utilized for
acquisitions......... -- (25,015) (150,000) -- (175,015)
Net change in
investment in
Subsidiaries......... (15,581) -- -- 15,581 --
Other, net............ (8,310) (15) 1,194 775 (6,356)
--------- -------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............. 40,708 (25,030) 223,298 (98,015) 140,961
--------- -------- ----------- --------- -----------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 146,390 11,979 158,369
Advances from Federal
Home Loan Bank....... -- -- 347,000 -- 347,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (452,000) -- (452,000)
Net change in other
borrowings........... 211,725 -- 708,823 (39,733) 880,815
Issuance of Bonds..... -- -- 111,995 -- 111,995
Net change in minority
interest............. 1,453 -- -- (1,453) --
Other, net............ 825 1,000 (1,100) 100 825
--------- -------- ----------- --------- -----------
Net cash provided by
financing activities... 214,003 1,000 861,108 (29,107) 1,047,004
--------- -------- ----------- --------- -----------
Net change in cash.... (3,669) (1,937) 7,655 12,213 14,262
Cash at beginning of
period............... 12,262 -- 24,881 (12,239) 24,904
--------- -------- ----------- --------- -----------
Cash at end of period. $ 8,593 $ (1,937) $ 32,536 $ (26) $ 39,166
========= ======== =========== ========= ===========
</TABLE>
F-117
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. SPB REGULATORY MATTERS
General
In August 1989, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to
reform the regulation and supervision of financial institutions. Additionally
legislation was adopted in 1991 with the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for
Federal Deposit Insurance Commission ("FDIC") deposit insurance and for
expanded regulation of financial institutions. Specifically, FDICIA requires
the federal regulators to take prompt corrective action with respect to
depository institutions which do not meet the minimum capital requirements.
FDICIA established five capital ratio categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository institution
may be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives an unsatisfactory
examination rating and may be reclassified to a lower category by action based
on other supervisory criteria. For an institution to be well capitalized it
must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital ratio of at least 6%, and a leverage ratio of at least 5% and
not be subject to any specific capital order or directive. At December 31,
1997 and 1996, SPB was categorized as well capitalized.
Restrictions on Availability of Funds from SPB
Under the California industrial loan law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift and loan's retained earnings, (ii)
any payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), or (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities). Subject to the above limitations, and according to SPB's by-
laws, at December 31, 1997, all of SPB's capital and surplus in excess of
$125.0 million is available for the payment of dividends.
Additionally, SPB generally may not make any loan to, or hold an obligation
of, any of its directors or officers or any director or officer of its holding
company or affiliates, except in specified cases and subject to regulation by
the California Commissioner of Corporations. In addition, SPB may not make any
loan to, or hold an obligation of, any of its shareholders or any shareholder
of its holding company or affiliates, except that this prohibition does not
apply to persons who own less than 10% of the stock of a holding company or an
affiliate that is listed on a national securities exchange.
Recent Development
On October 30, 1997, SPB announced that the Memorandum of Understanding
("MOU") entered into in September 1996 had been terminated as a result of the
recent concurrent examinations by the FDIC and CDFI and their joint
conclusions that the terms of the agreement have been satisfactorily met and
the improvement in SPB's operations no longer warranted the MOU.
On September 30, 1996 SPB entered into a MOU with the FDIC and the
California Department of Financial Institutions ("CDFI"). This agreement
required SPB to (i) have and retain qualified management, (ii) adopt and
F-118
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
implement comprehensive risk management policies, programs and systems, (iii)
take all reasonable and good faith steps to ensure future compliance with all
applicable laws and regulations, (iv) develop a credit review program, (v)
update the lending, investments and audit policies, and (vi) provide quarterly
progress reports to the FDIC and the Department of Corporations.
Regulatory Capital
SPB is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary-- actions by
regulators that, if undertaken, could have a direct material effect on SPB's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, SPB must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. SPB's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require SPB to maintain minimum amounts and ratios, set forth in the table
below, of total and Tier I capital to risk-weighted assets and Tier I capital
to average assets. Management believes, as of December 31, 1997, that SPB
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized SPB as well capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well capitalized SPB must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1997.
<TABLE>
<CAPTION>
MINIMUM WELL CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation................... $157,082 13.20% $ 59,476 5.00% $ -- --
Risk-based Capital............ 190,673 12.25% 124,583 8.00% 155,729 10.00%
Risk-based Tier 1 Capital..... 136,206 8.75% 62,292 4.00% 93,437 6.00%
FDIC Leverage Ratio........... 136,206 8.30% 65,644 4.00% 82,055 5.00%
</TABLE>
F-119
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash......................................................... $ 13,229 $ 5,213
Interest bearing deposits.................................... 31,390 --
Securities available for sale................................ 86,695 8,802
Trading securities........................................... 20,976 --
Loans held for sale.......................................... 12,138 4,839
Loans held for investment, net............................... 78,922 34,505
Premises and equipment, net.................................. 2,272 4,922
Other real estate owned, net................................. 1,158 3,508
Investment in SPFC........................................... 65,303 --
Investment in FMC............................................ 53,099 --
Investment in subsidiaries................................... 281,454 269,651
Accrued interest on loans.................................... 3,320 1,425
Other assets................................................. 53,161 96,746
-------- --------
Total assets............................................... $703,117 $429,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Remarketed Par Securities.................................... $ 72,165 $ --
Other borrowings............................................. -- 15,363
Senior Notes................................................. 219,813 88,209
Minority interest in consolidated subsidiaries............... 946 45,149
Other liabilities............................................ 86,260 41,382
-------- --------
Total liabilities.......................................... 379,184 190,103
-------- --------
Shareholders' equity:
Common stock, no par value, authorized 80,000,000 shares;
38,791,439 and 38,291,112 shares issued and outstanding at
December 31, 1997 and 1996, respectively.................. 147,109 145,521
Retained earnings.......................................... 174,898 88,977
Unrealized gain on securities available for sale, net...... 1,926 5,010
-------- --------
Total shareholders' equity............................... 323,933 239,508
-------- --------
Total liabilities and shareholders' equity............... $703,117 $429,611
======== ========
</TABLE>
F-120
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
(Loss) gain on sale of loans..................... $ (4,427) $ (937) $12,999
-------- ------- -------
Interest income.................................. 28,916 14,877 15,677
Interest expense................................. 25,703 16,696 20,900
-------- ------- -------
Net interest income (expense).................. 3,213 (1,819) (5,223)
-------- ------- -------
Provision for loan and lease losses.............. 5,000 -- --
-------- ------- -------
Net interest expense after provision for loan and
lease losses.................................... (1,787) (1,819) (5,223)
Loan servicing (expense) income.................. (2,283) (3,706) 14,007
Gain on sale of servicing rights................. -- 6,249 4,889
Gains on sale of FMC stock....................... 92,137 -- --
Gain on sale of IMH stock........................ 9,225 -- --
Gains on sale of SPFC stock...................... 9,488 82,690 --
Equity in net income of SPFC..................... 25,869 -- --
Equity in net loss of FMC........................ (3,050) -- --
Dividends received from subsidiaries............. 27,514 6,200 --
Other (loss) income.............................. (3,447) 741 (885)
-------- ------- -------
Total other income............................. 155,453 92,174 18,011
-------- ------- -------
Total revenue.................................... 149,239 89,418 25,787
-------- ------- -------
Expenses:
Personnel expense................................ 4,682 8,757 20,281
Occupancy expense................................ 1,310 1,994 2,874
Other expense.................................... 23,735 20,117 15,306
-------- ------- -------
Total expenses................................. 29,727 30,868 38,461
-------- ------- -------
Income (loss) before income taxes, minority
interest, deferred inter-Company gains and
extraordinary item.............................. 119,512 58,550 (12,674)
Income taxes..................................... 41,611 28,830 (5,443)
-------- ------- -------
Income (loss) before minority interest, deferred
inter-company items and extraordinary item...... 77,901 29,720 (7,231)
Minority interest in income (loss) of
consolidated subsidiaries....................... 10,513 12,026 (208)
Deferred inter-company (expense) income, net of
income taxes.................................... (327) (1,383) 1,710
-------- ------- -------
Income (loss) before extraordinary item.......... 67,715 19,077 (8,733)
Extraordinary item--Loss on extinguishment of
debt, net of income taxes....................... (3,995) -- --
-------- ------- -------
Income (loss) before equity in undistributed
income of subsidiaries.......................... 63,720 19,077 (8,733)
Equity in undistributed income of subsidiaries... 22,201 56,907 22,926
-------- ------- -------
Net income..................................... $ 85,921 $75,984 $14,193
======== ======= =======
</TABLE>
F-121
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities................................... $ (2,067) $ 141,655 $(258,380)
--------- --------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits..... (31,390) -- --
Proceeds from bulk sale of servicing rights. -- 31,799 12,815
Purchase of servicing rights................ -- -- (8,128)
Proceeds from sale of other real estate
owned...................................... 4,637 2,953 --
Net change in securities available for sale. (42,938) -- --
Investment in Imperial Credit Asset
Resolution Inc............................. (74,810) -- --
Proceeds from sale of SPFC stock............ 13,707 64,625 --
Proceeds from sale of FMC stock............. 59,731 -- --
Proceeds from sale of IMH stock............. 9,679 -- --
Net change in loans held for investment..... (56,088) (5,310) 51,784
Net change in investment in subsidiaries.... (11,803) (155,759) (15,581)
Cash utilized for acquisitions.............. (750) -- --
(Purchase) disposal of premises and
equipment.................................. (992) 809 (182)
--------- --------- ---------
Net cash (used in) provided by investing
activities................................... (131,017) (60,883) 40,708
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial Bank. -- (5,000) 5,000
Proceeds from offering of Senior Notes due
2007....................................... 194,500 -- --
Proceed from offering of Remarketed Par
Securities................................. 68,075 -- --
Repayments of Senior Notes due 2004......... (73,241) -- --
Borrowings from Imperial Credit Investment
Corporation................................ 10,000 -- --
Proceeds from resale of Senior Notes due
2004....................................... -- 7,615 --
Proceeds from issuance of common stock...... -- 59,228 --
Proceeds from exercise of stock options..... 1,332 1,671 825
Net change in other borrowings.............. (15,363) (191,363) 206,725
Net change in minority interest............. (44,203) 43,697 1,453
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... 141,100 (84,152) 214,003
--------- --------- ---------
Net change in cash............................ 8,016 (3,380) (3,669)
Cash at beginning of year..................... 5,213 8,593 12,262
--------- --------- ---------
Cash at end of year........................... $ 13,229 $ 5,213 $ 8,593
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the condensed statements of cash flows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................... $19,349 $ 16,315 $20,898
Significant non-cash activities:
Loans transferred to OREO.......................... $ 6,751 $ 8,479 $ 2,419
Loans transferred from held for sale to held for
investment........................................ -- 197,141 83,398
Servicing rights transferred from subsidiary....... -- -- 3,774
Change in unrealized gain on securities available
for sale, net..................................... (3,084) 1,799 3,211
Contribution of fixed assets to ICIFC.............. -- -- 525
</TABLE>
F-122
