<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
---------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance,
California 90505
(310) 791-8020
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(b) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest possible date:
Class Shares Outstanding at May 10, 1996
- ------------------ ----------------------------------
Common Stock, no par value 18,331,229
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q/A
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part 1 - Financial Information
Page
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995 1
Consolidated Statements of Income (Unaudited)
Three months Ended March 31, 1996 and 1995 2
Consolidated Statement of Changes in
Shareholders' Equity (Unaudited) 3
Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended
March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements
(Unaudited) 5
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II - Other Information
Items 1-5. Not Applicable
Item 6. Exhibit - Statement Regarding Computation of
Earnings Per Share 34
Signatures 35
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Cash......................................... $34,945,570 $39,165,775
Interest bearing deposits.................... 6,703,397 267,775,615
Investment in Federal Home
Loan Bank stock............................. 10,025,700 22,750,000
Securities available for sale,
at market................................... 5,962,500 5,962,500
Loans held for sale (Fair value of
$1,059,041,873 and $1,345,509,326
at March 31, 1996 and December 31 1995,
respectively)............................... 1,059,041,873 1,341,809,910
Loans held for investment, net............... 647,739,054 668,771,208
Capitalized excess servicing fees receivable. 48,890,226 44,031,189
Purchased and originated servicing rights.... 10,978,196 18,428,520
Retained interest in loan and
lease securitizations....................... 20,417,623 14,241,098
Accrued interest on loans.................... 10,406,899 10,164,585
Premises and equipment, net.................. 11,283,486 11,369,004
Other real estate owned, net................. 6,589,750 7,179,157
Goodwill..................................... 21,120,696 20,345,931
Other assets................................. 50,309,457 38,640,656
-------------- ------------
Total assets........................... $1,944,414,427 $2,510,635,148
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................... $1,023,906,441 $1,092,988,944
Borrowings from Imperial Bank............... 5,000,000 5,000,000
Borrowings from Federal Home Loan Bank...... 195,000,000 190,000,000
Other borrowings............................ 450,031,883 875,815,309
Bonds....................................... -- 111,995,353
Senior Notes................................ 88,128,889 80,472,360
Other liabilities........................... 79,417,549 60,260,718
--------------- --------------
Total liabilities.......................... $1,841,484,762 $2,416,532,684
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized;
none issued or outstanding................. -- --
Common stock, no par value. Authorized 40,000,000
shares; 16,077,597 and 14,578,481 shares issued
and outstanding at March 31, 1996 and December
31, 1995, respectively..................... $ 78,109,623 $ 51,981,388
Retained earnings........................... 21,608,819 38,909,853
Unrealized gain on securities available
for sale, net.............................. 3,211,223 3,211,223
-------------- --------------
Total shareholders' equity.................. 102,929,665 94,102,464
-------------- --------------
Total liabilities and shareholders' equity.. $1,944,414,427 $2,510,635,148
Escrow, agency premium funds, and mortgage
held in trust for various investors
(segregated in special bank accounts -
included in deposits)...................... $ 25,118,370 $ 35,963,060
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
------------ -------------
<S> <C> <C>
Revenue:
Gain on sale of loans........................ $21,710,715 $ 6,229,393
----------- ----------
Interest on loans............................ 45,193,916 22,974,838
Interest on investments...................... 2,185,147 483,784
Interest on other finance activities......... 2,141,392 --
----------- -----------
Total interest income....................... 49,520,455 23,458,622
Interest expense............................. 36,783,076 18,624,529
----------- -----------
Net interest income......................... 12,737,379 4,834,093
Provision for loan losses................... 1,500,000 900,000
----------- -----------
Net interest income after provision
for loan losses............................. 11,237,379 3,934,093
Loan servicing income........................ 2,010,116 3,535,598
Gain on sale of servicing rights............. 8,064,970 2,425,627
Other income................................. 1,201,788 189,260
---------- -----------
Total other income.......................... 11,276,874 6,150,485
----------- -----------
Total revenue.......................... 44,224,968 16,313,971
Expenses:
Personnel expense............................ 12,435,371 6,895,375
Amortization of PMSR's and OMSR's............ 718,452 644,137
Occupancy expense............................ 1,319,520 987,932
Data processing expense...................... 355,205 337,480
Net expenses of other real estate owned...... 2,767,771 242,209
Professional services........................ 1,145,500 451,540
FDIC insurance premiums...................... 45,496 563,404
Telephone and other communications........... 907,136 605,171
Restructuring provision -
exit from mortgage banking operations.... 3,800,000 --
General and administrative expense.......... 3,673,746 2,200,069
---------- ----------
Total expenses........................... 27,168,197 12,927,317
Income before income taxes................. 17,056,771 3,386,654
Income taxes............................... 6,901,204 1,428,514
Minority interest in income of
consolidated subsidiaries................. 1,539,488 --
---------- ----------
Net income........................... $ 8,616,079 $ 1,958,140
Net income per share:
Primary:..................................... $ 0.49 $ 0.12
Fully Diluted:................................... $ 0.49 $ 0.12
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Number of gain on Total
shares Common Retained securities Shareholders
outstanding stock earnings for sale,net Equity
----------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995... $14,578,481 $51,981,388 $38,909,853 $3,211,223 $94,102,464
Exercise of stock options.... 41,268 211,122 -- -- 211,122
Stock dividend............... 1,457,848 25,917,113 (25,917,113) -- --
Net income for period
(unaudited)................ -- -- 8,616,079 -- 8,616,079
------------ --------- ----------- ----------- ------------
Balance March 31, 1996
(unaudited)................ 16,077,597 $78,109,623 $21,608,819 $3,211,223 $102,929,665
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Three months Three months
ended March 31, ended March 31,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $ 8,616,079 $ 1,958,140
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses............ 1,500,000 900,000
Depreciation and amortization........ 709,748 1,049,460
Accretion of discount................ (2,141,392) --
Gain on sale of servicing rights..... (8,064,970) (2,425,627)
Gain on sale of loans................ (21,710,715) (6,229,393)
Stock option compensation expense.... -- 108,900
Writedowns on other real estate owned 1,459,775 170,000
Net change in loans held for sale.... 304,478,752 151,380,811
Net change in accrued
interest on loans.................. (242,314) (662,576)
Net change in other assets........... (9,718,056) (5,416,786)
Net change in other liabilities...... 19,156,831 2,756,265
----------- -----------
Net cash provided by
operating activities: 294,043,738 143,589,194
Cash flows from investing activities:
Net change in interest
bearing deposits.................... 132,600,000 1,900,000
Purchase of servicing rights......... (2,743,745) (1,984,248)
Proceeds from sale of
servicing rights................... 4,573,365 10,274,507
Proceeds from sale of
other real estate owned............ 1,798,356 547,836
Purchase of securities available
for sale........................... (91,771,322) (1,785,783)
Sale of securities available for sale 232,967,840 --
Net change in loans held for investment 19,567,793 (66,758,626)
Purchases of premises and equipment.. (1,221,070) (252,346)
Net cash provided by
(used in) investing activities: ----------- -----------
295,771,217 (58,058,660)
Cash flows from financing activities:
Net change in deposits............... (69,082,503) (90,302,732)
Advances from Federal Home Loan Bank. 120,000,000 155,000,000
Repayments of advances from
Federal Home Loan Bank............. (115,000,000) (220,000,000)
Net change in other borrowings....... (425,783,426) 84,880,541
Sale of bonds........................ (111,995,353) --
Proceeds from resale of Senior Notes. 7,615,000 --
Proceeds from exercise of stock options 211,122 --
------------ -----------
Net cash used in financing activities: (594,035,160) (70,422,191)
Net change in cash (4,220,205) 15,108,343
Cash at beginning of year............. 39,165,775 24,903,671
------------ -----------
Cash at end of period................. $34,945,570 $40,012,014
=========== ============
Supplemental disclosure of cash flow information:
Income taxes paid during the period.... $ 1,506,000 $ 3,650,079
Interest paid during the period........ $39,207,322 $ 19,312,122
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization
Imperial Credit Industries, Inc. (the "Company"), incorporated in 1986
in the State of California, is 26.4% owned by Imperial Bank.
The consolidated financial statements include Imperial Credit Industries,
Inc.("ICII"), its wholly-owned subsidiaries and majority-owned subsidiaries
(collectively the "Company"). The wholly-owned subsidiaries
include Southern Pacific Thrift & Loan Association ("SPTL"), Southern
Pacific Funding Corporation ("SPFC"), Imperial Business Credit, Inc. ("IBCI")
and Imperial Credit Advisors, Inc. ("ICAI"). The majority-owned consolidated
subsidiaries include Franchise Mortgage Acceptance Company, LLC ("FMAC"), and
ICI Funding Corporation ("ICIFC"). The minority interests are included in
other liabilities on the consolidated balance sheet. The Company owns 66 2/3%
of FMAC, with 33 1/3% of FMAC owned by the President of FMAC. The
Company owns 100% of the voting common stock of ICIFC which entitles it
to a 1% economic interest. Imperial Credit Mortgage Holdings, Inc.
("ICMH"), an unconsolidated affiliated company, owns all of the ICIFC non
voting preferred stock which entitles it to a 99% economic interest. All
material intercompany balances and transactions 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 three months
ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. 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,
1995.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ
significantly from those estimates. Prior years' consolidated financial
statements have been reclassified to conform to the 1996 presentation.
3. 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
<PAGE>
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.
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.
On October 24, 1995, the Company paid a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
Per Share Information
Net income per common share is computed based on the weighted average
number of shares outstanding during the periods presented plus common
stock equivalents deemed to be dilutive. Common stock equivalents deemed
to be dilutive were calculated based on the average price per share during
the periods presented for primary net income per share and based on the
ending stock price per share, if greater than the average stock price per
share, for fully diluted net income per share for the periods presented.
The number of shares used in the computations give retroactive effect to
stock dividends and stock splits for all periods presented. The weighted
average number of shares including common stock equivalents for the three
months ended March 31, 1996 and 1995 was 17,635,522 and 16,702,044 for
primary net income per share, respectively. The weighted average number
of shares including common stock equivalents for the three months ended
March 31, 1996 and 1995 was 17,680,403 and 16,837,941 for fully diluted
net income per share, respectively.
4. Commitments and Contingencies
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.
During the three months ended March 31, 1996, the Company retained
servicing rights on $30.6 million of mortgage loans sold and released
servicing rights to the purchasers of mortgage loans sold on $379.7 million.
As of March 31, 1996, the Company was servicing loans totaling
approximately $1.8 billion. During the three months ended March 31, 1996,
the Company sold $2.6 billion of bulk servicing rights as compared to the
sale of $332.1 million of bulk servicing rights in the same period of the
previous year.
Mortgage Loan Applications in Process
As of March 31, 1996 the Company had open short-term commitments
amounting to $23,579,400 million to originate or acquire mortgage loan
applications in process, subject to credit approval. Therefore, there is
no exposure to credit risk in this type of commitment. Interest rate risk
is mitigated by the use of forward contracts to sell loans to investors.
<PAGE>
Forward Contracts
Loans originated or acquired by the mortgage banking business are
sold by the Company under mandatory or standby commitments wherein, upon
sale, the credit risk is passed on to the purchaser.
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At March 31, 1996, the
Company had $706.4 million in outstanding commitments to sell mortgage
loans through mortgage-backed securities. These commitments allow the
Company to enter into mandatory commitments when the Company notifies the
investor of its intent to exercise a portion of the forward delivery
contracts. At March 31, 1996, the Company was obligated under mandatory
commitments to deliver loans to such investors of $20.0 million.
Legal Proceedings
The Company is involved in additional litigation arising in the normal
course of business of which management believes based in part upon the
advice of legal counsel, will not have a material effect on the
consolidated financial statements.
5. Investment Securities Available for Sale
The Company adopted SFAS 115 on January 1, 1994. The impact on the
Company's financial position and results of operations was immaterial. At
March 31, 1996, the carrying value of investment securities available for
sale approximated market value.
6. Loans Held for Sale
Loans held for sale consisted of the following at March 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
At March 31, 1996 At December 31, 1995
---------------- --------------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.................. $648,244,506 $1,083,037,625
Multi-family....................... 229,175,360 171,199,161
------------ --------------
877,419,866 1,254,236,786
Leases............................. 14,054,226 17,787,116
Commercial loans................... 167,567,781 69,786,008
------------ -------------
$1,059,041,873 $1,341,809,910
</TABLE>
<PAGE>
7. Loans Held for Investment, net
Loans held for investment consisted of the following at March
31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
At March 31, 1996 At December 31, 1995
----------------- -------------------
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4............. $233,474,129 $228,721,251
Multi Family.................. 7,274,665 7,027,788
Commercial.................... 142,978,817 133,189,268
------------- ------------
383,727,611 368,938,307
Leases....................... 1,539,421 7,296,735
Installment loans............ 8,393,463 1,900,382
Commercial................... 278,553,180 311,121,613
------------ ------------
672,213,675 689,257,037
Unearned income (4,871,384) (5,216,767)
Deferred loan fees (6,267,542) (1,540,353)
------------- ------------
661,074,749 682,499,917
Allowance for loan losses (13,335,695) (13,728,709)
------------- ------------
$647,739,054 $668,771,208
</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, and loans to
experienced franchisees of nationally recognized restaurant
concepts. As a result, the loan portfolio has a high concentration in
the same geographic region. Although the Company has a diversified
portfolio, a substantial portion of its debtor's ability to honor their
contracts is dependent upon the economy of California.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
At March 31, At December 31, At December 31,
1996 1995 1994
----------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of year.. $13,728,709 $7,053,901 $3,254,748
Provision for losses
charged to expense ........ 1,500,000 5,450,000 5,150,000
Business acquisitions and
bulk loan purchases........ -- 4,320,064 --
Loans charged off.......... (1,921,180) (3,105,943) (1,435,960)
Recoveries on loans
previously charged off..... 28,166 10,687 85,113
----------- ------------- -------------
Net charge-offs............. (1,893,014) (3,095,256) (1,350,847)
Balance, end of period...... $13,335,695 $13,728,709 $7,053,901
As of March 31, 1996 and December 31, 1995 non-accrual loans totaled
$37,180,524 and $30,987,791, respectively.
</TABLE>
<PAGE>
The following table sets forth the amount of NPA's
attributable to the Company's former mortgage banking operations and to
all of its other lending activities.
<TABLE>
<CAPTION>
At March 31, At December 31, At December 31,
1996 1995 1994
------------ -------------- -------------
Former Former Former
All Other Mortgage All other Mortgage All other Mortgage
Lending Banking Lending Banking Lending Banking
Activities Operat. Activities Operat. Activities Operat.
---------- -------- ---------- -------- ----------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... 9,587 19,050 2,652 20,990 4,012 5,697
Commercial property.... 4,648 -- 1,824 -- 2,201 --
Multifamily property... 3,896 -- 5,522 -- 1,195 --
------ ------- ------- ------ ------ ------
Total nonaccrual loans.. 18,131 19,050 9,998 20,990 7,408 5,697
Other real estate owned:
One to four family..... 3,426 2,203 1,937 4,173 1,217 1,277
Commercial property.... 122 -- 211 -- 445 --
Multifamily property... 839 -- 858 -- 329 --
Total other real ------ ------- ------ ----- ----- -----
estate owned........... 4,387 2,203 3,006 4,173 1,991 1,277
Loans with modified terms:
One to four family..... 866 -- 870 -- 76 --
Commercial property.... 457 -- -- -- -- --
Multifamily property... -- -- -- -- -- --
------ ------- ------ ------ ----- ------
Total loans with
modified terms........ 1,323 -- 870 -- 76 --
Total non performing
assets............... $ 23,841 $ 21,253 $ 13,874 $ 25,163 $9,475 $6,974
Total loans and OREO.. $1,229,519 $508,326 $1,168,783 $869,463 $216,555 $1,094,144
Total NPA's as a percentage of
loans and OREO....... 1.94% 4.18% 1.19% 2.89% 4.38% 0.64%
</TABLE>
The provision for loan losses was $1.5 million for the three months ended
March 31, 1996, an increase of 67% from $900,000 for the same period of
the previous year. The increase in the provision was primarily the result
of the increase in nonaccrual loans and the increase in the amount of net
charge-offs. The ratio of the allowance for loan losses to total loans
held for investment was 1.98%, substantially unchanged from 1.99% at
December 31, 1995. The ratio of the allowance for loan losses to
nonaccrual loans decreased to 35.9% at March 31, 1996 from 44.3% at
December 31, 1995. Although nonaccrual loans have increased since
December 31, 1995, with a corresponding decrease in allowance coverage,
the Company evaluates expected losses on these nonaccrual loans in both
periods on a loan-by-loan basis and has determined that the allowance is
adequate to cover both expected losses on nonaccrual loans and inherent
losses in the remainder of the Company's loans held for investment
portfolio. The Company believes that the current loan loss allowance is
adequate.
The percentage of the allowance for loan loss to nonaccrual loans will
not remain constant due to the nature of the Company's portfolio of
mortgage loans. The collateral for each nonperforming mortgage loan is
analyzed by the Company to determine potential loss exposure, and in
conjunction with other factors, this loss exposure contributes to the
overall assessment of the adequacy of the allowance for loan losses. On
an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan losses. In determining the
adequacy of the allowance for loan losses, management considers such
factors as historical loan loss experience, underlying collateral values,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data
<PAGE>
to identify the risks in the loan portfolio. 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 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. While
management believes that the current allowance for loan losses is
sufficient, future additions to the allowance may be necessary
8. Purchased/Originated Servicing Rights and Capitalized
Servicing Fees Receivable
Changes in purchased/originated servicing rights were as follows:
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Beginning balance.................. $18,428,520 $16,745,522
Addition........................... 2,743,745 7,339,799
Bulk purchase of servicing......... -- 757,208
Increase as a result of the
FMAC acquisition.................. 3,804,855
Sales of servicing ............... (9,475,617) (6,232,816)
Amortization prepayments........... (1,175,743)
Amortization - scheduled........... (718,452) (2,810,305)
-------------- ----------------
Ending balance..................... $10,978,196 $18,428,520
On May 12, 1995, the Financial Accounting Standards Board
issued SFAS No. 122, "Accounting for Mortgage Servicing Rights", an
amendment to SFAS No. 65. The Company has adopted this standard for its
financial statement reporting beginning with the first quarter of 1995.
SFAS No. 122 requires that a portion of the cost of originating
a mortgage loan be allocated to the mortgage loan servicing right based
on its fair value relative to the fair value of the loan as a whole. To
determine the fair value of the servicing rights created, the Company
used the market prices under comparable servicing sale contracts, when
available, or alternatively used a valuation model that calculates the
present value of future net servicing revenues to determine the fair
value of the servicing rights. In using this valuation method, the
Company incorporates assumptions that market participants would use in
estimating future net servicing income which includes estimates of the
cost of servicing, a discount rate, an inflation rate, ancillary income
per loan, a loan prepayment speed, and a loan default rate.
The weighted average discount rate used in determining
the fair value of PMSR's and OMSR's for all
periods presented was approximately 11%.
<PAGE>
In determining servicing value impairment, the post implementation
originated servicing portfolio was disaggregated into its predominant risk
characteristics. The Company has determined those risk characteristics to
be loan program type and interest rate. Interest rates are stratified
using 100 basis point increments. These segments of the portfolio were
evaluated, using market prices under comparable servicing sale contracts,
when available, or alternatively using the same model as used to
originally determine the fair value at sale, using current assumptions.
The calculated value was compared to the capitalized book value of
each loan type and interest rate pool to determine if a valuation
allowance is required.
The Company will continue to calculate the fair value of its
pre-implementation purchased servicing rights on a loan by loan
basis. Additionally, the Company will continue to amortize its
pre-implementation purchased servicing rights in proportion
to, and over the period of, expected future net servicing income
disaggregated by each individual loan with related capitalized
servicng rights.
Capitalized Servicing Fees Receivable
Changes in capitalized servicing fees receivable were as
follows:
</TABLE>
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, 1996 December 31, 1995
-------------- ------------------
<S> <C> <C>
Beginning balance........... $44,031,189 $4,319,393
Present value of excess servicing
fees on loans sold........ 9,941,125 42,352,733
Amortization............... (5,082,088) (2,640,937)
------------- ------------------
Ending balance............. $48,890,226 $44,031,189
</TABLE>
At March 31, 1996 and December 31, 1995 capitalized excess servicing
fees receivable are recorded net of an allowance for recourse losses of
$10,051,773 and $8,749,988, respectively.
The servicing portfolio associated with these capitalized excess
servicing rights at March 31, 1996 and December 31, 1995 was $754.8
million and $664.6 million, respectively.
As a fundamental part of its business and financing strategy,
the Company sells the majority of its loans with the associated servicing
rights retained. A significant portion of the Company's revenue is
recognized as gain on sale of loans, which may represent the present value
of the difference between the interest rate charged by the Company
to a borrower and the interest rate received by the investors who
purchased the loan, in excess of normal loan servicing fees
(the "Excess Servicing Spread").
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, primarily consisting of real estate
mortgage investment conduits, 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. Capitalized excess servicing
fees receivable on the sale of loans and leases are
determined by computing the present value
of the excess of the weighted average coupon on the loans and leases sold
(ranging from 9.0% to 13.3%) over the sum of: (1) the coupon in the pass
through certificates (ranging from 5.6% to 7.4%), (2) a base servicing
fee paid to the loan or lease servicer (ranging from 0.40% to 0.50%),
(3) expected losses to be incurred on the portfolio of loans or leases sold
(ranging from 0.25% to 0.50% over the life of the loan), and considering
(4) prepayment assumptions.
<PAGE>
Prepayment assumptions are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment
rates on new portfolios and consideration of the current
interest rate environment and its potential impact on prepayment rates.
The cash flows expected to be received by the Company, not considering the
expected losses, are discounted at an interest rate that the Company
believes an unaffiliated thirdparty purchaser would require as a rate of
return on such a financial instrument. Expected losses are discounted
using a rate equivalent to the riskfree rate for securities with a
duration similar to that estimated for the underlying loans and leases
sold. The combined result is an effective overall rate of approximately
15%. The excess servicing cash flows are available to the Company to the
extent that there is no impairment of the credit enhancements established
at the time the loans and leases are sold. Such credit enhancements are
classified as retained interest in loan and lease securitizations on the
consolidated balance sheets and represent the
amount of overcollateralization of the certificates. To the extent that
actual future performance results are different from the excess cash flows
the Company estimated, the Company's capitalized excess servicing fees
receivable will be adjusted quarterly with corresponding adjustments made
to income in that period. The carrying value of the Company's capitalized
excess servicing fees receivable was subject to a relative fair value
allocation.
A portion of the Company's reported income and all of the related
capitalized servicing fees receivable included in the Company's
consolidated financial statements represent the recognition of the present
value of the excess servicing spread, which is based on certain estimates
made by management at the time loans are sold. The rate of prepayment of
loans may be affected by a variety of economic and other factors,
including prevailing interest rates and the availability of alternative
financing. The effect of those factors on loan prepayment rates may vary
depending on the particular type of loan. Estimates of prepayment rates
are made based on management's expectations of future prepayment rate,
which are based, in part, on the historical rate of prepayment of the
Company's loans, and other considerations. There can be no assurance of
the accuracy of management's prepayment estimates. If actual prepayment
with respect to sold loans occur more quickly than was projected at the
time such loans were sold, the carrying value of the capitalized servicing
fees receivable may have to be written down through a charge to earnings in
the period of adjustment. If actual prepayments with respect to sold
loans occur more slowly than estimated, the carrying value of capitalized
servicing fees receivable on the Company's consolidated statement of
financial condition would not increase, although total income would exceed
previously estimated amounts.
9. Borrowings from Imperial Bank
In November 1995, the Company renewed a $10 million line of credit
with Imperial Bank. The line was subsequently increased to $15 million.
On March 31, 1996, $5 million was outstanding which accrues interest
at the prime lending rate. In April 1996, the line was repaid in full
with the proceed raised in the Company's secondary stock offering.
10. Other Borrowings
Other borrowings primarily consist of revolving warehouse lines of
credit to fund the Company's and its subsidiaries lending activities. At
March 31, 1996, approximately $450 million of loans 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.
<PAGE>
ICII and its subsidiaries has various revolving warehouse lines of
credit available at March 31, 1996, as follows:
<TABLE>
<CAPTION>
Interest
Rate Commitment Outstanding Index
---------- ---------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
DLJ (ICII)................. 6.23% $400,000 149,080 FedFunds+80bp-150bp
DLJ (SPFC)................. 6.04% 50,000 -- FedFunds+65bp-85bp
PaineWebber (ICII)......... 6.06% 200,000 16,720 Libor+65bp-100bp
Banco Santander (FMAC)..... 8.19% 25,000 24,713 Libor+225bp
Lehman Brothers (SPFC)..... 6.24% 200,000 70,103 Libor+30bp
Imperial Warehouse
Lending Group (ICIFC).... 6.09% 600,000 176,322 Bank of America
Prime
Warehouse Lending Corporation
of America (ICII)........ 8.44% 20,000 13,094 Libor+250bp
------- ------
$1,495,000 $450,032
</TABLE>
11. Senior Notes
<TABLE>
<CAPTION> Balance at
March 31, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Senior notes........................ $90,000,000 $81,500,000
Unamortized discount................ (1,871,111) (1,027,640)
---------- ------------
Net balance, Senior Notes........... $88,128,889 $80,472,360
</TABLE>
In January 1994, the Company issued $90,000,000 of Senior Notes with a stated
interest rate of 9.75% which mature on January 15, 2004. In October 1994,
the Company repurchased $8,500,000 of the Senior Notes. During the first
quarter of 1996, the Company sold the repurchased Senior Notes for prices
ranging from 90 to 95. At March 31, 1996, $90,000,000 of the Senior
Notes were outstanding and the interest rate on the Senior Notes was
9.75%. The 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 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 Southern Pacific Thrift and Loan
Association, the Company's whollyowned subsidiary. The Trust Indenture
(the Indenture) for the 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.
Total interest expense on the Senior Notes for the quarters ended March
31, 1996 and 1995 was $2,160,553 and $2,096,513, respectively.
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a diversified specialty finance company offering financial
products, principally through its subsidiaries, in the following four
sectors: non-conforming residential mortgage banking, commercial mortgage
banking, business lending and consumer lending.
The Company's strategy is to concentrate its lending activities in select
highmargin commercial and consumer markets in which loan and lease
products originated or purchased by the Company can be readily sold
through securitization or whole loan sales in the secondary market. The
Company emphasizes (i) opportunistic expansion into niche segments of the
financial services industry, (ii) conservative underwriting and credit
guidelines, (iii) loan and lease originations on a wholesale basis to
maintain low overhead, (iv) securitization or sale in the secondary market
of substantially all of the Company's loans and leases other than those
held by its subsidiary, Southern Pacific Thrift & Loan Association
("SPTL"), for investment and (v) business and financial flexibility to
allow withdrawal from or entry into business segments if warranted by
market conditions.
Since 1995, the Company has attempted to diversify its loan and lease
products by focusing on the creation and acquisition of additional finance
businesses in order to reduce dependency on residential mortgage lending.
When acquiring new businesses or targeting expansion opportunities, the
Company seeks to retain existing management or recruit experienced
management to help make continued growth possible and to reduce the risks
associated with market entry.
The financial products offered by the Company consist of loans and leases
in the following four sectors:
non-conforming residential mortgage lending non-conforming single family
mortgage loans
commercial mortgage lending - franchise loans, income property loans and
manufactured housing community loans
business finance lending - equipment leasing, asset-based financing and
loan participations
consumer loans - sub-prime auto loans, home improvement loans and other
consumer credit
The majority of the Company's loans and leases, other than those held by
SPTL for investment, are sold in the secondary market through
securitizations and whole loan sales. Securitizations and whole loan sales
provide the Company with greater flexibility and operating leverage by
allowing the Company to generate fee and interest income through
originations and investments in loans with a significantly smaller capital
commitment than that required by traditional portfolio lenders. In
addition, the Company
believes that the use of securitizations results in a lower overall cost
of funds. SPTL also accepts Federal Deposit Insurance Corporation
("FDIC") insured deposits which are used to finance SPTL's lending
activities through several active divisions.
<PAGE>
Non-Conforming Residential Mortgage Lending
The Company engages in non-conforming residential mortgage lending through
its whollyowned subsidiary, SPFC, and through the Bulk Acquisitions
Division of SPTL.
SPFC
Through SPFC, the Company is an originator, purchaser and seller of high
yielding, single family non-conforming mortgage loans. SPFC's mortgage
loan production increased to $80.5 million for the quarter ended March 31,
1996 from $54.4 million for the quarter ended March 31, 1995.
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. SPFC typically packages a portfolio of originated and purchased
loans and either sells such loans directly to institutional
purchasers or through securitization. The average initial loan balance of
non conforming residential mortgage loans originated or acquired by SPFC
during the quarter ended March 31, 1996 was $121,000.
Wholesale Division. SPFC originates through its Wholesale Division,
comprised of account executives located in 13 offices in nine states that
have established relationships with independent mortgage loan brokers
located throughout the United States. Of SPFC's 13 sales offices, four are
located in California, two in Oregon, and one is located in each of
Washington, Florida, Colorado, Illinois, Massachusetts, Utah and Virginia.
Mortgage loan brokers act as intermediaries between potential borrowers
and SPFC in arranging mortgage loans that adhere to SPFC's underwriting
guidelines. As part of its lending strategy, SPFC solicits the majority of
its loans from brokers on a wholesale basis. The Company believes that
SPFC can generate sufficient origination volume through its wholesale
network to create economies and compete effectively without the costly
overhead structure associated with a retail branch system. The Wholesale
Division originated nonconforming mortgage loans accounting for $76.4
million or 94.9% of SPFC's total loan origination and purchase volume for
the quarter ended March 31, 1996.
Institutional Division. In November 1995, SPFC established its
Institutional Division to purchase non-conforming loans on a per loan
basis as well as in bulk acquisitions from mortgage lending institutions
primarily consisting of small to medium sized commercial banks, savings
banks and thrift institutions. SPFC establishes correspondent relationships
with these financial institutions as they seek ways to retain and add new
customers, generate additional fee income and broaden their mortgage
product lines.
The Institutional Division establishes a relationship with an institution
to employ its mortgage lending capability to originate, process and, upon
the Institutional Division's underwriting, close the loan and assign it to
SPFC. The financial
institution utilizes SPFC's basic underwriting criteria and closes and
delivers loans in a form acceptable to SPFC. From time to time, the
institution may elect to deliver loans from its portfolio which may not
have been originated in accordance with SPFC's underwriting guidelines.
These portfolio loans are re-underwritten to SPFC's guidelines. Other
factors, such as seasoning and pay history, are also considered before
agreement to purchase such loans has been made.
<PAGE>
The Institutional Division's correspondent relationships are based on
the participating institution's willingness to assume the cost and
responsibility for loan origination, closing and sale in exchange for
closing points and fees, control of the customer and the Institutional
Division's willingness to provide a non conforming product line and a
consistent funding source. The institution further agrees to extensive
representations and warranties concerning its activities as an originator
and seller of the non-conforming loans to SPFC.
The Institutional Division's operating headquarters located in Boca Raton,
Florida, has a staff of seven persons and is responsible for underwriting
and funding loans submitted by correspondent institutions. SPFC also has a
satellite office in Braintree, Massachusetts.
Retail/Telemarketing Division. In March 1996, the SPFC entered into
an agreement with a telemarketing company and a telecommunications
equipment manufacturer pursuant to which the Company will originate loans
utilizing a telemarketing system (the ''Telemarketing Agreement''). The
system facilitates the origination of loans by combining predictive dialing
technology with a scripted, interactive sales presentation, a credit
scoring system using the SPFC's underwriting guidelines, and a loan
quotation system. SPFC will implement the system using two separate
approaches. First, SPFC will develop its own telemarketing division manned
by its own staff. Under the Telemarketing Agreement, SPFC will, upon
completion of its public stock offering, make an initial payment of $1.0
million and purchase a 24station predictive dialing system, and the
telemarketing company will train staff to manage the system. The second
approach is to develop a network of mortgage brokers, primarily from those
who have an existing relationship with SPFC, with the authority to utilize
the system. Those brokers will lease a predictive dialing system directly
from the telecommunications company and staff the system with their
employees. Those brokers will enter into an agreement to offer all of the
originations resulting from the system to SPFC. The loans originated will be
underwritten according to SPFC's guidelines and interest rates and
delivered to SPFC for funding at par. There will be no cost of originating
these loans passed to SPFC.
Bulk Purchase Program. SPFC's Bulk Purchase Program purchases loans on a
bulk basis from third party originators. SPFC has established
relationships with several mortgage bankers who have been reviewed by SPFC
to ensure the quality and type of loans originated. SPFC also analyzes the
financial condition of the mortgage banker, including a review of its
financial statements. Upon approval, SPFC typically requires each mortgage
banker to enter into a purchase and sale agreement with customary
representations and warranties regarding the loans such mortgage brokers
will sell to SPFC.
For the quarters ended March 31, 1996 and 1995, SPFC made bulk loan
purchases of $600,000 and $10.2 million, respectively. All of these loans
were secured by owner occupied single family residences. Although SPFC has
established the infrastructure, systems and personnel to conduct a larger
volume of bulk purchases, SPFC has been constrained by a lack of financial
resources from significantly increasing the amount of loans purchased. In
addition, SPFC has been actively involved in arranging for the purchase of
non-conforming loans for SPTL. The loans were similar quality, size,
weighted average coupon and weighted average initial loan-to-value
relative to what the Company is currently originating and purchasing
through its Wholesale Division and Bulk Purchase Program.
Commercial Mortgage Lending
The Company engages in commercial lending, which consists of franchise
mortgage lending, asset-based lending, equipment leasing income property
lending, manufactured housing community lending and loan participations.
<PAGE>
Franchise Mortgage Lending
General
Franchise Mortgage Acceptance Company, LLC (''FMAC'') makes long-
term, fixed rate loans to established franchisees of major restaurant
franchise concepts, which are then securitized into investment grade
structures and sold to institutional investors. In parallel with the
accumulation of the collateral and the structuring of the securities sold
in each securitization, independent rating agencies are retained to rate
each series of securities issued which securities have, in each instance,
received investment grade ratings (BBB- and above).
During the quarter ended March 31, 1996, loans to individual credits
ranged from approximately $400,000 to $25.0 million.
The Company believes that recent changes in the banking environment have
adversely affected the ability of small business operators to find credit,
regardless of their track record and ratings. Franchise operations
comprise a major portion of overall small business activity in the United
States. The standardization imposed by franchisors make this market sector
amenable to securitization. FMAC targets ''top tier'' franchises whose
franchisors exercise significant operating and marketing control. It lends
only to established, successful operators of franchise restaurants with
proven track records. FMAC makes loans directly to franchisees based on
the enterprise value as well as the cash flow of individual restaurants
and, where applicable, the value of any associated real estate. FMAC
generally lends against existing cash flow. It generally does not rely on
projected sales growth to add incremental cash flow to help service debt.
Borrowers must demonstrate positive cash flow on an EBITDA (earnings
before interest, taxes, depreciation and amortization) basis.
For the quarter ended March 31, 1996, FMAC originated or acquired
$100.5 million of franchise mortgage loans. FMAC did not securitize any
loans during the quarter ended March 31, 1996.
Income Property Lending
SPTL's Income Property Loan Division ("IPLD") was formed in
February 1994 to expand the Company's apartment and commercial property
lending business. In the first quarter of 1996, IPLD funded approximately
$56.4 million in loans. IPLD seeks to make 70% of its loans secured by
apartment buildings and 30% of its loans secured by other commercial
properties. Most of IPLD's business is generated through in-house loan
representatives who market the loans directly to mortgage brokers and
borrowers. Virtually all of IPLD's loans are secured by properties in
California.
The focus of IPLD's lending activity is the small loan market for
apartments and commercial loans. IPLD's maximum loan amount is
approximately $2.5 million. The Company believes that IPLD employs
conservative underwriting criteria, which include a maximum loanto-value
ratio of 70% and minimum debt coverage ratio of 1.2 to 1 on all loans.
Loans secured by income properties entail additional risk as compared to
single family residential lending. The payment experience on such loans is
generally dependent on the successful operation of the related commercial
or multifamily property and thus is subject to a greater extent to adverse
conditions in local real estate markets or in the economy generally.
<PAGE>
All of IPLD's loan programs include 30-year adjustable rate loans tied to
the 6month LIBOR, 1-year Treasury, or Bank of America prime indexes with
margins ranging from 350 to 550 basis points depending on product type,
property location and credit history of the borrower. With respect to
apartment loans, IPLD uses standard FNMA documentation and approved
independent appraisers.
Manufactured Housing Community Lending
Manufactured Housing Community Bankers (''MHCB'') was formed as a division
of ICII in early 1995 as a specialty lending group to finance fully-developed
manufactured housing communities throughout the United States. MHCB's loan
programs are designed to originate, underwrite, close, service, warehouse
and securitize mobile home community first mortgage loans. Many of these
properties are master planned communities with recreational and social
amenities. The loans are secured by the manufactured housing community
real estate; the principal source of repayment is the rental payments for
the pads on which the manufactured housing is situated.
Loan underwriting procedures and guidelines are intended to assess the
value of the mortgaged property, the ability of such property to generate
operating income and the borrower's previous credit experience. MHCB
actively markets its programs through mortgage brokers and mortgage
bankers and stresses rapid turnaround of loan requests and loan structures
that meet borrowers' requirements.
MHCB is currently offering five to ten-year fixed rate and seven-year
variable rate loans ranging from $1 million to $15 million, secured by
existing manufactured housing communities. Only established properties
with a minimum of five years stabilized occupancy qualify for MHCB's loan
programs. Each of these communities must have a rent structure that is
priced below that of the local permanent housing market. MHCB didn't
close any loans in the quarter ended March 31, 1996.
Business Finance Lending
The Company, through CBCC, IBC and the Loan Participation and Investment
Group of SPTL, also engages in business finance lending, which consists
of asset-based lending, commercial equipment leasing and loan
participations.
Asset Based Lending
General
On September 30, 1995, as part of the Company's strategy to diversify its
lending operations, the Company acquired from Coast Savings Bank,
Federal Savings Bank, all of the outstanding capital stock of
CoastFed Business Credit Corporation (''CBCC''), a financial
services company engaged primarily in the asset-based commercial
lending business. The purchase price was approximately $150
million.
Concurrently with the closing of the transaction described
above, CBCC was merged with and into SPTL. Upon consummation of the
merger, CBCC was renamed Coast Business Credit Corporation ("CBC")
and became an operating division of SPTL. CBC's headquarters are located
in West Los Angeles, California and, except for one
marketing representative located in Santa Clara, California, all of CBC's
employees and principal activities are based at CBC's West Los Angeles
headquarters office.
<PAGE>
CBC is a senior secured asset-based lender which lends primarily to
qualified California-based companies. At March 31, 1996, CBC had
outstanding loans totaling $194.4 million.
CBC's principal business is asset-based lending to small to medium-sized
businesses with annual revenues ranging from approximately $10 to $100
million. Generally, such businesses are constrained from obtaining
financing from more traditional credit sources such as commercial banks
due to inadequate equity capitalization, limited operating history, lack
of profitability or financing needs below commercial bank minimum size
requirements. CBC has focused its lending activities on high technology
businesses engaged in the computer industry.
At March 31, 1996, CBC's loan portfolio represented lending relationships
with approximately 80 customers, with an average total loan per customer
of $2.4 million. CBC's loans typically have maturities of one year to five
years, providing borrowers with greater flexibility to manage their
borrowing needs. The Company believes that CBC's offering of shorter
maturity loans, its relationships with principal investors and its
industry expertise contribute to CBC's ability to distinguish itself from
its competitors and grow its lending relationships.
The Company believes that CBC's pricing is competitive with pricing
charged by other commercial finance companies. In addition, CBC attempts
to be flexible in the structuring of its revolving credit lines and to
provide prompt service in order to gain an advantage over its competitors.
When CBC competes against more traditional lenders, it competes less on
price and more on flexibility, speed of funding and the relative
simplicity of its documentation. CBC strives to fund its initial advance
under a loan to an approved client within three weeks of CBC's receipt of
required information
with respect to the client, and strives to fund future advances generally
by the next business day after CBC's receipt of required documentation.
Loan Products and Originations
CBC's loans are categorized based on the type of collateral securing the
loan. CBC makes revolving loans primarily secured by accounts receivable
and secondarily by inventory. It also makes term loans secured by real
property, equipment or other fixed assets. CBC also periodically enters
into participations with other commercial finance companies. The term of
CBC's revolving loans is normally one year with an automatic renewal for a
one year period at the end of such contract term unless terminated by
either party (usually requiring 60 days written notice
prior to the end of such term). Equipment loans are term loans typically
with threeto five-year amortization periods, but are due and payable upon
termination of the master loan and security agreement.
Equipment Leasing
General
On May 31, 1995, as part of the Company's diversification strategy, the
Company acquired all of the assets and assumed certain liabilities of First
Concord Acceptance Corporation (''FCAC''), a Colorado corporation engaged
in the origination, acquisition
and servicing of business equipment leases. The sale was effectuated
pursuant to an asset purchase agreement among the Company, FCAC and Oren L.
Benton, FCAC's majority shareholder (''Benton''). In connection with the
purchase of FCAC's assets, the Company or its affiliates also purchased
100% of the partnership interests of three partnerships controlled by
Benton that were formed for the purpose of securitizing certain of FCAC's
lease receivables.
<PAGE>
The net purchase price for FCAC's assets and the partnership interests was
approximately $21 million. Due to the then-pending bankruptcy of Mr. Benton
and certain affiliated entities, the transactions were subject to the
approval of the United States Bankruptcy Court, which approval was obtained
prior to the closing of the transactions.
Imperial Business Credit, Inc. ("IBC") was formed by ICII in May,
1995 to carry on the business previously operated by FCAC. IBC's corporate
headquarters are located in Rancho Bernardo, California and IBC carries out
its business equipment leasing operations from both its headquarters and
its operations center in Denver, Colorado.
IBC's lease originations totaled $14.4 million in the quarter ended March
31, 1996.
Lease Finance Operations
IBC is in the business of leasing equipment, including copying, data
processing, communication, printing and manufacturing equipment,
exclusively to business users. Initial lease terms typically range from 24
months to 60 months. IBC will commit to purchase this equipment only when
it has a signed lease with a lessee who satisfies its credit and funding
requirements. Substantially all the leases written by IBC are full payout
("direct financing") leases that allow IBC to sell or re-lease the
equipment upon termination of the lease. IBC occasionally purchases small
portfolios of existing equipment leases from brokers with whom it has
established relationships. These portfolios are evaluated on an individual
basis according to IBC's established credit policy. The Company believes
that these acquisitions allow IBC to grow with greater efficiency than usual
at a level of decreased risk due to the portfolio aging that has occurred
in the books of the originating broker. IBC uses an established computer
system and related software systems. The systems have in part been developed
by IBC management. The systems allow IBC to process lease applications, book
leases as post lease payments, follow closely for credit processing and
collections. In the latter part of 1992, the hardware supporting the
software was upgraded.
Upon expiration of the initial lease terms if its direct-financing
leases, IBC expects, on average, to realize slightly more than the
"residual value" at which the leased equipment is carried on IBC's
books. IBC's ability to recover the recorded estimated
residual value depends on the accuracy of initial estimates of the
equipment's useful life, the market conditions for used equipment when
leases expire, and the effectiveness of IBC's program for releasing or
otherwise disposing of leased equipment. Residual recovery, however, is
not required for IBC to achieve a profitable return on its investment. The
residual is usually worth 1% to 2% of the gross yield depending upon
original lease term, further mitigating against the residual risk inherent
in the portfolio.
Lease Terms and Conditions
IBC uses a non-cancelable lease, the terms and conditions of which
vary only slightly from transaction to transaction. In substantially all
of the leases, lessees are obligated to (1) remit all rents due,
regardless of the performance of the equipment; (2) operate the equipment
in a careful and proper manner and in compliance with governmental rules
and regulations; (3) maintain and service the equipment; (4) insure the
equipment against casualty losses and public liability, bodily injury and
property damage; and (5) pay directly, or reimburse IBC for, any taxes
associated with the equipment, its use,
possession or lease, except those relating to net income derived by IBC
therefrom. The lease provides that IBC, in the event of a default by a
lessee, may declare the entire unpaid balance of rentals
<PAGE>
due and payable immediately, and may seize and remove the equipment for
subsequent sale, release or other disposition.
In those instances when a portfolio of leases is acquired,
documentation provided by the originating lessor is checked for compliance
with IBC's standard documentation before accepting the portfolio for
purchase.
Loan Participation and Investment Group
The Company's Loan Participation and Investment Group (''LPIG'') is a
division of SPTL that purchases for investment nationally-syndicated
commercial loan participations originated by commercial banks and
insurance companies, primarily in the secondary market. The principal
types of loans acquired by LPIG are senior secured bank loans consisting
of: (i) revolving lines of credit which allow the borrower to borrow and
repay proceeds as needed for working capital purposes; (ii) long-term
loans with a specific amortization schedule which requires the borrower to
repay the borrowed loans over time, usually on a quarterly basis; or (iii)
letters of credit which are normally funded as a sublimit under the
revolving line of credit commitment. The loans are generally secured by a
first priority lien on all of the borrower's personal property including
accounts receivable, inventory and furniture, fixtures and equipment, as
well as liens on owned real estate. At March 31, 1996, loan participations
held by LPIG ranged in size from approximately $3.0 million to
approximately $10.0 million.
The Company believes that LPIG's purchase of senior secured loan
participations allows it to build and maintain a loan portfolio without
costly direct customer loan servicing and loan origination costs. In
addition, such purchases facilitate the maintenance of a portfolio which
is diversified both geographically and by industry.
LPIG's loan underwriting policy requires an analysis of the
borrower's ability to repay its debts, as well as an evaluation of the
effects of general economic and industry trends and various competitive
factors affecting the borrower.
During the quarter ended March 31, 1996, LPIG has purchased and
funded approximately $37.2 million of senior secured loan participation
commitments. Loans outstanding under LPIG's participation commitments at
March 31, 1996 totaled $23.9 million.
Consumer Lending
Through SPTL, the Company also makes consumer finance loans consisting of
sub-prime auto finance loans, home improvement loans and other consumer
credit.
Sub-Prime Auto Lending
SPTL's Sub-Prime Auto Lending Division ("ALD") was formed in
October 1994 to fund new and used automobile purchase contracts. ALD's
borrowers are generally credit impaired and therefore are unable to access
alternative sources of financing from banks and captive auto finance
companies. ALD seeks to offset the increased risk of default in its
portfolio with higher yields and aggressive servicing and collection
activities.
<PAGE>
During 1995, ALD generated and sold approximately $19 million in sub-prime
auto loans. ALD generated $5.4 million in sub-prime auto loans during the
quarter ended March 31, 1996. The Company currently generates sub-prime
auto loans through three Northern California retail offices and
anticipates expanding its activities to Central California and areas
outside California in 1996.
Home Improvement Loans and Other Consumer Credit
SPTL's Consumer Credit Division ("CCD") was formed in early 1994 to
offer loans primarily to finance home improvements, manufactured housing
and other consumer goods. CCD's business is developed through a network of
retailers and contractors throughout California. All loans are centrally
processed, approved and funded at CCD's headquarters in Irvine,
California.
Home improvement loans offered by CCD range from $5,000 to $350,000 and
include major remodeling projects that are sometimes coupled with
refinancings. CCD's typical loan is secured by a junior lien. In addition,
CCD purchases unsecured installment sales contracts to finance certain
home improvements such as air conditioning, roofing and kitchen and
bathroom remodeling.
During the quarters ended March 31, 1996 and 1995, CCD originated $3.9
million and $2.1 million in loans, respectively.
Strategic Divestitures
Historically, the Company's primary business was the origination and
sale of conforming residential mortgage loans. This business experienced
substantial growth due to high levels of mortgage loan refinancing
activity in 1993 and 1992, as interest rates dropped to historically low
levels. However, as interest rates increased and refinancing activity
declined in 1994, conforming residential mortgage loan originations on an
industrywide basis decreased dramatically and pricing became
increasingly competitive. The Company recognized that the non-conforming
residential mortgage market provided
greater opportunities for mortgage loan origination growth. As a result,
during 1995 and through the first quarter of 1996, the Company directed
additional capital and resources to its nonconforming residential
mortgage lending subsidiary, SPFC, and divested substantially all of its
conforming mortgage lending and servicing businesses. At the same time,
the Company entered or expanded its presence in higher margin commercial
and consumer lending markets. Throughout this realignment, the Company's
core business strategy has remained consistent in that it originates
loans and leases funded primarily through securitizations and whole loan
sales in the secondary market.
During the fourth quarter of 1995, the Company contributed its
mortgage conduit operations and SPTL's warehouse lending operations to
Imperial Credit Mortgage Holdings, Inc., a newly-formed Maryland corporation
("ICMH"),that subsequently engaged in an initial public offering of its common
stock. ICMH operates three businesses, two of which were owned by ICII. ICMH
elected to be taxed as a real estate investment trust. At
the effective date of ICMH's public offering ("Offering"), ICII
contributed to ICI Funding Corporation ("ICIFC") certain of the operating
assets and certain customer lists of ICII's mortgage conduit operations
including all of ICII's mortgage conduit operations' commitments to
purchase mortgage loans subject to rate locks from correspondents, in
exchange for 100% of the voting common stock and 100% of the outstanding
non-voting preferred stock of ICIFC. Simultaneously, on the effective date
of the Offering, in exchange for 500,000 shares of the common stock of
ICMH, ICII (1) contributed to ICMH all of the outstanding non-voting
preferred stock of ICIFC, which represents 99% of the economic interest in
ICIFC, and (2)
<PAGE>
caused SPTL to contribute to ICMH certain of the operating assets and
certain customer lists of SPTL's warehouse lending division, and (3)
executed an agreement not to compete and a right of first refusal agreement
in each case for a period of two years from the effective date of the
Offering. All of the outstanding shares of common stock of ICIFC were
retained by ICII. Lastly, ICMH contributed all of the aforementioned
operating assets contributed by SPTL's warehouse lending operation to
Imperial Warehouse Lending Group ("IWLG") in exchange for shares
representing 100% of the common stock of IWLG. At and as of the quarter
ended March 31, 1996, ICIFC had total assets of $188.1 million, total
revenues of $2.8 million, and net income of $547,600.
The assets and operations of ICIFC are consolidated with ICII. ICMH's 99%
economic interest in the earnings of ICIFC are eliminated from the
Company's consolidated income statement through "Minority Interest in
Income of Consolidated Subsidiaries." As a result, the assets and
liabilities of the Company reflected on its consolidated balance sheet at
March 31, 1996 included approximately $188.1 million in assets, and $178.5
million in liabilities related to ICIFC. The Company will retain only 1% of
the net earnings or loss derived from such assets and liabilities along
with the other operations of ICIFC.
In exchange for the contributed assets, the Company received 11.8% of the
capital stock of ICMH. Additionally, the Company's wholly-owned subsidiary,
Imperial Credit Advisors, Inc. (''ICAI''), entered into a management
agreement with ICMH pursuant to which it provides management advisory
services to ICMH in return for a management fee.
In the first quarter of 1996, the Company sold the majority of its mortgage
origination offices related to its former conforming residential mortgage
lending business. The Company's wholesale offices in Colorado, Florida,
Oregon and Washington have been converted to SPFC offices. (See "Results
of Operations - Quarter Ended March 31, 1996 Compared to Quarter Ended March
31, 1995 Restructuring Charges")
The Company recognized that maintaining a mortgage loan servicing
infrastructure was not economically viable in the absence of a conforming
residential mortgage loan origination business. Thus, in March 1996, the
Company sold substantially all of its conforming residential mortgage loan
servicing rights. Additionally, the Company has subcontracted all remaining
servicing generated by its non-conforming residential mortgage banking
business since September 1995 to Advanta Mortgage Corp. USA (''Advanta'').
The Company expects to sell or subcontract all servicing related to such
mortgage banking business prior to September 1995 to Advanta or other third
party servicers. The Company intends to continue servicing all loans and
leases originated by its equipment leasing and franchise mortgage lending
businesses, as well as all loans held by SPTL.
Finally, the Company has announced that SPFC intends to offer shares
of its common stock to the public in an initial public offering. After
this offering, which is currently expected to include both primary and
secondary shares, ICII expects that it will own approximately 65% of the
issued and outstanding shares of SPFC's common stock, excluding shares
issuable upon exercise of options granted or to be granted pursuant to
SPFC's stock option plans.
Strategic Focuses and Acquisitions
In December 1994, ICII incorporated and capitalized SPFC in the State
of California. SPFC is a 100% owned subsidiary of ICII. SPFC was formed to
originate and acquire non conforming single family residential loans,
including loans secured by second trust deeds. The employees and
operations
<PAGE>
of SPTL's Residential Lending Division
were transferred to SPFC in April 1995. Since that time, SPFC has operated
as a stand alone entity and has produced approximately $314.5 million of
sub prime credit loans through March 31, 1996. The loans originated by
SPFC (and before April 1995, the Residential Lending Division of SPTL)
have accounted for a significant portion of the loans included in the
Company's loan securitizations during the quarter and year ended 1996 and
1995, SPFC securitized $102.4 million and $164.9 million of loans,
respectively. SPFC intends to continue to accumulate the loans originated
or acquired and securitize them in the secondary mortgage markets. As of
and for the quarter ended March 31, 1996, SPFC had total assets of $83.8
million and net income of $4.0 million.
Additionally, in 1995, the Company formed a new subsidiary, Imperial
Credit Advisors, Inc. ("ICAI"), entering the Company in another new
business-investment trust management. ICAI, incorporated in January 1995
in the State of California, is a 100% owned subsidiary of ICII. ICII
formed ICAI to provide monitoring, reporting, and other general and
administrative services to the ''Imperial Government Income Trusts, Series
I through IV''; to advise and assist the Trustee (First Trust of
California, National Association) of such Trusts in the acquisition of
mortgage backed securities and beneficial interests in mortgage servicing
rights by each Trust; and to further assist the Trustee in liquidation of
trust assets in accordance with the Trusts' terms. During the second
quarter of 1995, ICAI closed its first trust-Government Income Trust,
SeriesOne. ICAI continues marketing efforts for the remaining four trusts.
ICAI will also act as the manager of ICMH, the Company's newly formed
REIT. ICAI will oversee the day-to-day operations of ICMH, subject to the
supervision of ICMH's Board of Directors, pursuant to a management
agreement. As of and for the quarter ended March 31, 1996, ICAI had total
assets of $1.4 million and net income of $167,300.
During 1995, the Company completed the acquisition of substantially all of
the assets and assumption of substantially all of the liabilities of First
Concord Acceptance Corporation of Colorado ("FCAC"). At the date of
acquisition the existing employees and operations of FCAC became a part of
Imperial Business Credit, Inc. ("IBC"), a newly formed wholly owned
subsidiary of ICII. The Company paid approximately $21 million in the
acquisition of FCAC. Total assets of approximately $41 million were
acquired and sold to SPTL as a result of the acquisition. FCAC's
operations primarily consist of originating and securitizing equipment
leases throughout the United States. The acquisition of FCAC has resulted
in the significant expansion of the Company's equipment leasing activities.
As of and for the quarter ended March 31, 1996, IBC had total assets of
$4.0 million and net income of $194,100.
During 1995, the Company completed the acquisition of two-thirds of the
outstanding common stock of Franchise Mortgage Acceptance Corporation
("FMAC") of Greenwich, Connecticut, and placed all of the employees, and
operations of FMAC into a new subsidiary, Franchise Mortgage Acceptance
Company LLC, ("FMAC"). The Company paid approximately $4 million in the
acquisition of FMAC and was obligated to pay an additional $3.8 million
based on FMAC's future loan originations. Total assets of approximately
$3.8 million (primarily servicing rights) were acquired and sold to SPTL
as a result of the acquisition, and the Company recorded goodwill of
approximately $4.0 million. FMAC provides commercial financing programs to
major franchising companies and their franchisees. The $3.8 million of
assets transferred to SPTL consists primarily of franchise mortgage
servicing rights aggregating approximately $267 million. As of and for the
quarter ended March 31, 1996, FMAC had total assets of $34.1 million and
income before income taxes of $3.0 million.
<PAGE>
In September 1995, the Company completed the acquisition of 100% of the
outstanding common stock of CoastFed Business Credit Corporation ("CBCC"), and
placed all of the employees, and operations of CBCC into its existing
subsidiary, SPTL. The Company paid approximately $150.0 million in its
acquisition of CBCC. At the acquisition date, CBCC had total assets of
approximately $137.2 million, total commitments to fund loans of $460.6
million, and total outstanding loans of $138.8 million. As a result of the
acquisition, and the Company recorded goodwill of approximately $16.0
million. Coast Business Credit Corporation ("CBC") provides commercial
receivables financing programs to retailers in a variety of businesses.
During 1995, CBC originated approximately $42.9 million in commercial
receivables. Substantially all of the assets transferred to SPTL consist
of outstanding loans to CBC customers. At March 31, 1996, SPTL had
total outstanding loans related to CBC of $194.4 million.
Servicing Rights
When the Company purchases servicing rights from others, or loans which
include the associated servicing rights, the price paid for the servicing
rights, net of amortization based on assumed prepayment rates, is included
on the consolidated balance sheet as "Purchased and Originated Servicing
Rights."
The Company's Purchased and Originated Mortgage Servicing Rights
("PMSR's" and "OMSR's") are subject to some degree of volatility in
the event of unanticipated prepayments or defaults. Prepayments in excess
of those anticipated at the time PMSR's and OMSR's are recorded result in
accelerated amortization. Such prepayments may result in the impairment of
PMSR's and OMSR's. In 1995 and 1994, the Company experienced prepayment
rates of 13% and 22%, respectively, as a percentage of the servicing
portfolio at the beginning of each period. In 1995 and 1994, the Company's
amortization rates of its purchased and originated servicing rights were
23% and 19%, respectively as a percentage of the average balance of
purchased and originated servicing rights outstanding during the period.
During the quarter ended March 31, 1996 and the years ended December 31,
1995, and 1994, the Company incurred no impairment related write offs of
its purchased and originated servicing rights.
To the extent that servicing fees on a mortgage loan exceed a
"normal" servicing fee (typically 0.25% to 0.40% per annum of the
mortgage loan principal amount), the Company will generate "Capitalized
Servicing Fees Receivable" as an asset that represents an estimated
present value of these excess fees on the mortgage loans.
After servicing rights are generated through its mortgage loan
originations or acquisitions and sales, the Company's policy is to sell
some of its servicing on a "bulk" basis to generate current earnings and
cash flow, while keeping a portion of its servicing in order to build a
source of future cash flow and earnings for the Company, and to reduce
future borrowing costs as a result of cash balances that are held in trust
in connection with servicing operations. Management believes that this loan
servicing income may somewhat protect the Company against future adverse
effects of interest rate changes on loan origination or acquisition and
sale income. However,
depending on certain factors, management may elect to change its policies
with regard to the sale of servicing rights. Future results of operations
for the Company may fluctuate significantly from period to period
depending upon the amount of servicing rights sold.
<PAGE>
Funding
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 SPTL. Typically, ICII would borrow
funds under its warehouse lines in connection with its wholesale loan
originations and purchases, while SPTL 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 SPFC, IBC and
FMAC. Therefore, ICII expects that it will no longer maintain its
warehouse lines of credit beyond the second quarter of 1996. With respect
to all of its other lending activities, the Company continues to rely on
FDIC insured deposits generated by SPTL, but it also utilizes third party
warehouse lines of credit and securitizations. At March 31, 1996, SPTL
had total deposits of approximately $1.0 billion (excluding deposits of
ICII maintained with SPTL).
Results of Operations
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Revenues for the quarter ended March 31, 1996 increased 171% to $44.2
million as compared to $16.3 million for the same period of the previous
year. Expenses for the quarter ended March 31, 1996 increased 110% to
$27.2 million as compared to $12.9 million for the same period of the
previous year. Net income for the quarter ended March 31, 1996 increased
340% to $8.6 million as compared to $2.0 million for the same period of
the previous year. The 171% increase in revenue, partially offset by the
110% increase in expenses accounted for the increase in the Company's net
income. Net income per share for the year quarter ended March 31, 1996
increased 308% to $0.49, as compared to $0.12 for the same period of the
previous year. Net income per share increased at a lower rate than net
income due an increase in outstanding shares used for net income per share
calculations as a result of the increased dilutive effect of common stock
equivalents due to the increase in the price of the Company's stock in the
Quarter ended March 31, 1996 as compared to the same period of the
previous year. The Company had 17.7 million shares of common stock or
common stock equivalents outstanding during the quarter ended March 31,
1996 as compared to 16.8 million shares outstanding during the same period
of the previous year.
Gain on sale of loans increased 249% to $21.7 million for the quarter
ended March 31, 1996 as compared to $6.2 million for the same period of
the previous year. Gain on sale of loans consists primarily of gains
recorded upon the sale of loans, net of associated expenses, and to a
lesser extent, fees received on the origination of loans, and fees
received for commitments to fund loans. The increase was primarily the
result of substantially increased profitability on the sale of various
servicing retained variable and fixed rate loan products through
securitizations, in addition to the recognition of gains which were
deferred at December 31, 1995, and due to an increase in the volume of
loans sold on a servicing released basis. Gain on sale of loans includes;
$7.7 million in gains recorded as a result of the securitization of $102.3
million of the Company's sub prime residential
mortgage loans, $3.6 million in gains resulting from the sale of the
Company's retained interest in the securitization of $105.2 million of
franchise mortgage loans which was accounted for as a financing at
December 31, 1995, and $4.0 million in gains recorded as a result of the
sale of loans held by the Company's former
<PAGE>
mortgage banking operations. Also included in gain on sale of loans was
$2.9 million in gains from the sale of loans at the Company's consolidated
subsidiary, ICIFC. (See "Notes to Consolidated Financial Statements -
Note 1. - Organization.")
Net interest income, which consists of interest and fees net of interest
charges, and net interest margin for the quarter ended March 31,1996
increased 163% and 100% to $12.7 million and 4.24% compared to $4.8 million
and 2.12% for the same period in the same period of the previous year. The
increase in net interest income and net interest margin was due primarily to
two factors. The Company began 1995 with a loan portfolio consisting primarily
of adjustable rate residential mortgage loans. The increase in net
interest income can be directly attributed to the acquisitions completed
throughout the last half of 1995, and the resultant change in the
composition of loans held for sale and investment from primarily
conforming single family residential mortgage loans to a more diversified
mix of loan products from the Company's four primary businesses. The
product mix of the Company's interest earning assets now includes a much
larger percentage of higher-yielding loan and lease products as
compared to the previous year. Interest income also increased as a result
of the Company's loan and lease securitizations, which contributed
interest income of $2.1 million from the accretion of discounts on the
Company's capitalized excess servicing fees receivable. The increase in
interest income due to the factors described above was partially offset by
an increase in the average costs of borrowing from all sources, including
warehouse lines of credit, borrowings from the FHLB, and customer
deposits.
Loan servicing income for the quarter ended March 31, 1996 decreased 43%
to $2.0 million as compared to $3.5 million for the same period in the
previous year. The decrease in loan servicing income was primarily due to
a decreased average balance of residential mortgage loans serviced for
others, primarily as a result of the Company's sale of $2.6 billion of
servicing rights in connection with the Company's exit from the mortgage
banking business. Additionally, loan servicing income continues to be
negatively effected by increased direct servicing costs related to the
loan foreclosure and property liquidation process. The annualized
prepayment rate on the Company's residential mortgage loan servicing
portfolio was 19% for the quarter ended March 31, 1996, and the weighted
average interest rate on the portfolio was 8.98% as compared to an
annualized prepayment rate of 8% and a weighted average
interest rate of 7.84% for and at the quarter ended March 31, 1995. The
residential mortgage loan servicing portfolio decreased 60% to $1.8
billion at March 31, 1996 from $4.5 billion at December
31, 1995. As a result of the Company's strategic divestitures, the Company
expects loan servicing income to continue to decrease substantially. This
decrease is anticipated to be offset by increases in other finance
activity revenues in the future and a reduction in servicing related
expenses.
During the quarter ended March 31, 1996 and 1995, the Company sold
mortgage loan servicing rights relating to $2.6 billion and $332.1 million
principal amount of loans, resulting in pre-tax gains of $8.1 million and
$2.4 million, respectively. Gain on the sale of servicing rights consists
of the cash proceeds received on the ''bulk'' sale of servicing rights,
net of the related capitalized originated or purchased servicing rights.
The decision to sell servicing rights was based upon the Company's exit
plan from its former mortgage banking operations.
Expenses for the quarter ended March 31, 1996 increased 110% to
$27.2 million as compared to $12.9 million for the same period of
the previous year.
Personnel expenses increased 80% to $12.4 million for the quarter
ended March 31, 1996 as compared to $6.9 million for the same period of
the previous year. This increase was primarily the result of personnel
expenses related to the Company's acquisition and expansion activities
throughout the
<PAGE>
second half of 1995, partially offset by reductions in personnel expense
at the Company's mortgage banking operations.
Amortization of capitalized servicing rights increased 12% to
$718,000 for the quarter ended March 31, 1996 as compared to $644,000 for
the same period of the previous year. The increase was the result of an
increased outstanding average balance of mortgage loan servicing rights
with related capitalized values during the quarter ended March 31, 1996,
as compared to the same period of the previous year.
Occupancy expense increased 34% to $1.3 million for the quarter ended March
31, 1996 as compared to $988,000 for the same period of the previous year. The
increase primarily reflects an increase in lease expenses as a result of
the Company's acquisition of Coast Business Credit, First Concord Leasing,
and Franchise Mortgage Acceptance Company in the second half of 1995.
Net expenses of OREO increased 1,043% to $2.8 million for the quarter
ended March 31, 1996 as compared to $242,000 for the same period of the
previous year. The increase in net expense of OREO was primarily the
result of the sale of properties foreclosed on by the Company's former
mortgage banking operations.
FDIC insurance premiums decreased 92% to $45,000 for the quarter ended
March 31, 1996 as compared to $563,000 for the same period of the previous
year. FDIC insurance premiums decreased primarily as a result of a
decrease in the rate of the insurance premium charged to SPTL for FDIC
deposit insurance.
Restructuring charges were $3.8 million for the quarter ended March
31, 1996 as compared to no charge for the same period of the previous
year. The charge represents those costs incurred in connection with the
Company's exit from the conforming mortgage banking business in accordance
with the provisions of EITF 943, "Accounting for Restructuring Charges."
During the quarter ended March 31, 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,
sale and servicing of conforming residential mortgage loans. The Company
believes that significant changes to the exit plan are not likely, and that
the exit plan should be completed by December, 1996. The Company has included
in the restructuring charge those costs resulting from the exit plan that
are not associated with, nor would have benefit for the continuing
operations of the Company.
All other general and administrative expenses, including data
processing, professional services, and telephone and other communications
expense increased 69% to $6.1 million for the quarter ended March 31, 1996
as compared to $3.6 million for the same period of the previous year. The
increase in general and administrative expenses was due primarily to the
Company's acquisition of CBCC, FCAC, and FMAC, as well as to the start up
of ICAI in 1995.
As a result of the change in the composition of the Company's investment
loan portfolio, earnings were reduced by an increase in the provision for
loan losses. The provision for loan losses increased 67% to $1.5 million
for the quarter ended March 31, 1996, as compared to $900,000 for the same
period of the previous year. The increase in the provision was primarily
the result of the increase in nonaccrual loans, the increase in the amount
of net charge-offs, and the change in the composition of the investment
loan portfolio. Total nonaccrual loans increased 20.0% to $37.2 million
at March 31, 1996, as compared to $31.0 million at December 31, 1995.
Total nonaccrual loans as a percentage of loans held for investment were
5.53% and 4.50% at March 31, 1996 and December 31, 1995,
<PAGE>
respectively. Net chargeoffs
were $1.9 million for the quarter ended March 31, 1996, as compared to
$214,000 for the same period of the previous year. Net charge-offs for
the quarter ended March 31, 1996 by product type were as follows:
Multifamily Loans $845,000, Auto Loans $235,000, Conforming Residential
Mortgage Loans - $470,000, and Leases - $371,000.
At March 31, 1996, of the $37.2 million of nonaccrual loans, 77%, 10% and
13% were single family, multifamily and non-residential loans,
respectively, as compared to 76%, 18% and 6%, respectively, at December
31, 1995. The increase in nonaccrual loans represented by residential
loans was due to the expansion of the investment loan portfolio with
residential (one-to-four) loans originated by the Company's former
mortgage banking operations. The Company's non-residential loans
are comprised of commercial mortgages, commercial loans, indirect
equipment leases and consumer loans.
NPA's consist of nonaccrual loans, loans with modified terms and
OREO. Total NPA's increased 16% to $45.1 million at March 31, 1996, as
compared to $39.0 million at December 31, 1995. The ratio of the allowance
for loan losses to nonaccrual loans decreased to 35.9% at March 31, 1996
from 44.3% at December 31, 1995. NPA's as a percentage of total assets
were 2.32% and 1.55% at March 31, 1996 and December 31, 1995,
respectively. The Company evaluates expected losses on nonaccrual loans in
both periods on a loan-byloan basis and has determined that the allowance
is adequate to cover both expected losses on nonaccrual loans and inherent
losses in the remainder of the Company's loans held for investment
portfolio. The Company believes the overall increase in NPA's was a
result of the transfer of unsaleable loans originated by the Company's
former mortgage banking operations to the held for investment portfolio.
The Company views the level of NPA's related to its other lending
activities as acceptable due to the attractive yield on these loans.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for losses considering such factors as
historical loan loss experience, evaluations made by bank regulators,
assessment of economic conditions and other appropriate data to identify
the risks in the loan portfolio.
Inflation
The Consolidated 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. 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 mortgage loans and a borrowers
ability to qualify for mortgage financing in a purchase transaction may be
adversely effected. However, as interest rates increase, and loan
prepayments decline, the value and earnings from the servicing portfolio
increases.
Liquidity and Capital Resources
The Company's principal liquidity requirements result from the need for
the Company to fund mortgage loans originated or acquired for purposes of
sale or investment. In addition, the Company, as a loan servicer, requires
funding to make advances of delinquent principal and interest payments and
escrow balances, and as basic working capital. SPTL has historically
provided the funding for its lending activities through its deposits and
FHLB borrowings. During the quarter ended March 31,
1996, the Company had sufficient liquidity to meet its operating needs.
In April 1996, the Company completed a secondary stock offering of
1,877,091 shares of its Common Stock. The shares issued were sold for
$26.00 per share. The Company received net proceeds from the offering of
$46.2 million.
<PAGE>
Through the first quarter of 1995, funding for the Company's former
mortgage banking operations was provided primarily by SPTL. In order for
SPTL to provide funding for the Company's mortgage banking business, SPTL
has historically originated and held substantially all of the Company's
mortgage loans held for sale, and in accordance with a series of
agreements with ICII, provided loan solicitation, origination and
acquisition, and servicing. The agreements provided for the purchase of
mortgage loans by ICII concurrent with sales to outside investors. In the
first quarter of 1995, the former mortgage banking business became self-
funded by using a gestation repurchase line provided by DLJ. While the
repurchase line does reduce the net interest income earned on loans held
for sale, holding the loans at ICII provides an additional source of cash
for the parent company, and provides additional liquidity for SPTL to
finance all of its other lending activities.
SPTL historically obtained the liquidity necessary to fund the Company's
former mortgage banking operations through deposits and, if necessary
through borrowings from the FHLB. At March 31, 1996 and December 31, 1995,
SPTL had available lines of credit from the FHLB equal to 35% of its
assets, or $480.9 million and $501.4 million, respectively. The highest
FHLB advance outstanding during the quarter ending March 31, 1996 was
$195.0 million, with an average outstanding balance of $128.3 million. The
outstanding balance of FHLB advances was $195.0 million at March 31, 1996.
Since December 31, 1991, SPTL 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 mortgage loans held for
sale and investment.
SPTL has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPTL 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 SPTL allow SPTL to
anticipate both funding and sales and adjust deposit levels and short-term
investments against the demands of the Company's lending activities.
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, (vi) interest and principal payments under ICII's $90
million principal amount of Senior Notes due 2004 (the "Notes") and
(vii) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions. The Company has financed
its activities through repurchase facilities, warehouse lines of credit
from financial institutions, including SPTL, public offerings of capital
stock of ICII, the issuance of the Notes and securitizations. The Company
believes that such sources will be sufficient to fund the Company's
liquidity requirements for the foreseeable future. Any future financing
may involve the issuance of additional Common Stock or other securities,
including securities convertible
<PAGE>
into or exercisable for Common Stock, and any such issuance may dilute the
equity interest of purchasers of the Common Stock offered hereby.
The Company currently pools and sells through securitization a
substantial portion of the loans or leases which it originates or
purchases, other than loans held by SPTL for investment. Accordingly,
adverse changes in the securitization market could impair the Company's
ability to originate, purchase and sell loans or leases on a favorable or
timely basis. Any such impairment could have a material adverse effect upon
the Company's business and results of operations. In addition, the
securitization market for many types of assets is relatively undeveloped
and may be more susceptible to market fluctuations or other adverse
changes than more developed capital markets. Finally, any delay in the
sale of a loan or lease pool could cause the Company's
earnings to fluctuate from quarter to quarter.
In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization, but does not
receive the cash representing such gain until it receives the excess
servicing fees, which are payable over the actual life of the loans or
leases securitized. As a result, such transactions may not generate cash
flows to the Company for an extended period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the trusts to which such
loans and leases are sold to enable it to obtain an ''AAA/Aaa'' rating for
such interests. Any unwillingness of the monoline insurance companies to
guarantee the senior interests in the Company's loan or lease pools could
have a material adverse effect on the Company's financial position and
results of operations.
The Company is dependent upon its ability to access warehouse credit and
repurchase facilities, in addition to its ability to continue to pool and
sell loans and leases in the secondary market, in order to fund new
originations and purchases. The Company has warehouse lines of credit and
repurchase facilities under which it had available an aggregate of
approximately $1.1 billion in financing at March 31, 1996 (excluding
financing available to the Company's whollyowned subsidiary, ICI Funding
Corporation ("ICIFC")). (See "Notes to Consolidated Financial Statements
Note 1. Organization") Certain of these credit and repurchase facilities
will expire in 1996. The Company expects to be able to maintain existing
warehouse lines of credit and repurchase facilities (or to obtain
replacement or additional financing) as current arrangements expire or
become fully utilized; however, there can be no assurance that such
financing will be obtainable on favorable terms. To the extent that the
Company is unable to arrange new warehouse lines of credit and repurchase
facilities, the Company may have to curtail its loan origination and
purchasing activities, which could have a material adverse effect on the
Company's operations and financial position.
In December 1995, the Company, through a Special Purpose Entity ("SPE")
issued pass through certificates (the Bonds) secured by $101 million of
franchise mortgage loans
to various investors. The debentures consist of three separate classes,
Class A, Class B and Class C, with principal balances at December 31, 1995
of approximately $92.6 million, $4.2 million and $4.2 million,
respectively. The Class C bonds are subordinate to Class B and both Class
B and C are subordinate to Class A. The Bonds have a weighted average loan
rate of 9.63%, a pass through rate of 8.59%, and an anticipated life of 13
years. The premium associated with the Bonds of $11 million was being
amortized as an adjustment to interest
expense over the anticipated life of the Bonds. Due to the Company's
retained interest in the SPE and the disproportionate payments on the pass
through certificates, the Company accounted for this transaction as a
financing at December 31, 1995. In the quarter ended March 31, 1996, the
Company sold its retained interest in the SPE, resulting in a gain of $3.6
million.
<PAGE>
In October 1995, Imperial Bank extended ICII a $10 million revolving line
of credit bearing interest at the prime rate (8.50% at December 31, 1995.
During the quarter ended March 31, 1996, the line of credit was increased to
$15 million. At March 31, 1996 $5 million was outstanding under this
line. In April of 1996, the Company repaid its advances under this line
with a portion of the proceeds from its secondary stock offering.
In January 1994, the Company issued $90 million principal amount of Senior
Notes (''Senior Notes'') to yield 10.00%, due 2004. In October 1994, the
Company repurchased $8,500,000 of the Senior Notes. During the quarter
ended March 31, 1996, the Company sold the $8.5 million of Senior Notes it
purchased in October 1994. At March 31, 1996, $90 million of the Senior
Notes were outstanding.
The Company believes that SPTL, together with liquidity available at ICII
and its subsidiaries, will adequately fund the Company's lending
activities. Under applicable regulations, dividends and loans from SPTL to
ICII and its other subsidiaries are subject to various limitations. The
liquidity needs of ICII arise in operating its former mortgage banking
operations, not only to meet ICII operating expenses but also for its
contractual obligation as a mortgage servicer. As a mortgage servicer,
ICII is required to make advances to investors when a borrower is
delinquent in meeting its payment obligation. Although these advances are
recaptured through a foreclosure proceeding, the uncertainty as to when an
advance will be necessary requires ICII to maintain liquidity. Since
December 31, 1992, ICII's liquidity needs have included $51 million to
make capital contributions to SPTL. The combination of cash from
operations, including servicing sales, the Company's $20 million line of
credit and the net proceeds received by the Company from its Senior Note
offering allowed the Company to meet its required liquidity needs for 1994
and 1995. These available sources, in addition to the proceeds received
from the Company's stock offering in April, 1996, are expected to meet the
Company's needs for capital for at least the next 12 months.
Securitization Transactions
During the three months ended March 31, 1996, the Company had completed
one sale, through securitization, of sub prime residential mortgage loans
aggregating $102.3 million. Of the principal amount securitized during
1995, $95.5 million was securitized at the end of the first quarter. The
Company retained an interest in the loan securitization, 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 mortgage loan securitizations were $20,417,623
and $14,241,098 million at March 31, 1996 and December 31, 1995,
respectively. Although the Company continues to service the underlying
mortgage loans included in each security and maintains the customer
relationships, these securitizations are treated as sales for financial
reporting purposes. Accordingly, the associated securitized mortgage loans
are not reflected on the balance sheet, except for the retained interests
as discussed above.
The Company is subject to certain recourse provisions in connection
with these securitizations. At March 31, 1996 and December 31, 1995, the
Company had discounted recourse allowances of $10,051,773 and $8,749,988,
respectively, related to these recourse provisions which are netted
against capitalized servicing fees receivable.
A portion of the Company's
reported income and all of the related capitalized servicing fees
receivable included in the Company's consolidated financial statements
represent the recognition of the
<PAGE>
present value of the excess servicing spread, which is based on certain
estimates made by management at the time loans are sold. The
rate of prepayment of loans may be affected by a variety of economic and
other factors, including prevailing interest rate and the availability of
alternative financing. The effect of those factors on loan prepayment
rates may vary depending on the particular type of loan. Estimates of
prepayment rate are made based on management's expectations of future
prepayment rate, which are based, in part, on the historical rate of
prepayment of the Company's loans, and other considerations. There can be
no assurance of the accuracy of
management's prepayments estimates. If actual prepayment with respect to
sold loans occur more quickly than was projected at the time such loans
were sold, the carrying value of the capitalized servicing fees receivable
may have to be written down through a charge to earnings in the period of
adjustment. If actual prepayments with respect to sold loans occur more
slowly than estimated, the carrying value of capitalized servicing fees
receivable on the Company's consolidated statement of financial condition
would not increase, although total income would exceed previously
estimated amounts.
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
UNAUDITED
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Primary earnings per share:
Net income $ 8,616,079 $ 1,958,140
=========== ===========
Avg. number of shares outstanding 16,064,226 15,874,572
Net effect of dilutive stock options
Based on treasury stock method
using average market price 1,571,296 827,472
----------- -----------
Total average shares 17,635,522 16,702,044
Primary earnings per share $ 0.49 $ 0.12
Fully diluted earnings per share:
Net income $ 8,616,079 $ 1,958,140
=========== ============
Avg. number of shares outstanding 16,064,226 15,874,572
Net effect of dilutive stock options
Based on treasury stock method
using average market price 1,616,177 963,369
---------- -----------
Total average shares 17,680,403 16,837,941
Fully diluted earnings per share: $ 0.49 $ 0.12
</TABLE>
<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.
Date: May 14, 1996 By: /s/Kevin Villani
--------------------
Kevin Villani
Executive Vice President and CFO
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 34,946 39,166
<INT-BEARING-DEPOSITS> 6,703 267,776
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 15,989 28,713
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,720,117 2,024,310
<ALLOWANCE> 13,336 13,729
<TOTAL-ASSETS> 1,944,414 2,510,635
<DEPOSITS> 1,023,906 1,092,989
<SHORT-TERM> 650,032 1,070,815
<LIABILITIES-OTHER> 79,418 60,261
<LONG-TERM> 88,129 192,467
0 0
0 0
<COMMON> 78,110 51,981
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 102,930 94,102
<INTEREST-LOAN> 45,194 120,244
<INTEREST-INVEST> 2,185 6,630
<INTEREST-OTHER> 2,141 2,608
<INTEREST-TOTAL> 49,520 129,482
<INTEREST-DEPOSIT> 0 0
<INTEREST-EXPENSE> 36,783 95,728
<INTEREST-INCOME-NET> 12,737 33,754
<LOAN-LOSSES> 1,500 5,450
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 27,168 61,180
<INCOME-PRETAX> 17,057 24,130
<INCOME-PRE-EXTRAORDINARY> 8,616 14,193
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,616 14,193
<EPS-PRIMARY> .49 .82
<EPS-DILUTED> .49 .81
<YIELD-ACTUAL> 0 0
<LOANS-NON> 37,181 30,988
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 1,323 870
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 13,729 16,824
<CHARGE-OFFS> 1,921 3,106
<RECOVERIES> 28 11
<ALLOWANCE-CLOSE> 13,336 13,729
<ALLOWANCE-DOMESTIC> 13,336 13,729
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
