<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505
(310) 791-8022
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Class Shares Outstanding at November 12, 1996
Common Stock, no par value 37,905,109
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IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Part 1 - Financial Information
Page
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Income -
Three months and nine months Ended September 30, 1996
and 1995 2
Consolidated Statements of Cash Flows
Nine months Ended September 30, 1996 and 1995 3
Consolidated Statement of Changes in Shareholders' Equity 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II - Other Information
Items 1-5. Not Applicable
Item 6. Exhibit - Statement Regarding Computation of Earnings
Per Share 26
Signatures 27
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<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Cash...................................................................... $ 57,938 $ 39,166
Interest bearing deposits................................................. 314,192 267,776
Investment in Federal Home Loan Bank stock................................ 16,900 22,750
Securities available for sale, at market.................................. 7,937 5,963
Loans held for sale (Fair value of $816,996 and $1,345,509
at September 30, 1996 and December 31 1995, respectively).............. 812,257 1,341,810
Loans held for investment, net............................................ 803,205 668,771
Capitalized excess servicing fees receivable.............................. 30,282 34,396
Retained interest in loan and lease securitizations....................... 33,196 13,036
Interest-only and residual certificates, at market 58,854 10,840
Purchased and originated servicing rights................................. 14,038 18,428
Accrued interest on loans................................................. 8,880 10,164
Premises and equipment, net............................................... 12,388 11,369
Other real estate owned, net.............................................. 11,303 7,179
Goodwill.................................................................. 20,988 20,346
Other assets.............................................................. 43,779 38,641
----------------- -----------------
Total assets........................................................... $ 2,246,137 $ 2,510,635
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................................. $ 1,052,352 $1,092,989
Borrowings from Imperial Bank............................................. -- 5,000
Borrowings from Federal Home Loan Bank.................................... 338,000 190,000
Other borrowings.......................................................... 400,045 875,815
Bonds..................................................................... -- 111,995
Senior Notes.............................................................. 88,169 80,472
Minority interest in consolidated subsidiaries............................ 43,678 1,452
Other liabilities......................................................... 102,544 58,810
------------------ ----------------
Total liabilities......................................................... $ 2,024,788 $ 2,416,533
Shareholders' equity:
Preferred stock, 8,000 shares authorized; none issued or
outstanding......................................................... $ -- $ --
Common stock, no par value. Authorized 80,000 shares; 37,903
and 14,579 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively................................. 142,943 51,981
Retained earnings......................................................... 74,082 38,910
Unrealized gain on securities available for sale, net..................... 4,324 3,211
------------------ ----------------
Total shareholders' equity............................................. 221,349 94,102
------------------ ----------------
Total liabilities and shareholders' equity............................. $ 2,246,137 $ 2,510,635
================= =================
Escrow, agency premium funds, held in trust
for various investors (segregated in special bank
accounts - included in deposits)...................................... $ 2,044 $ 35,963
================= =================
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------- ------ ------- --------
Revenue:
Gain on sale of loans......................... $ 28,640 $ 14,929 $69,517 29,953
------- ------ ------- --------
Interest on loans............................ 51,002 32,437 139,284 81,262
Interest on investments...................... 442 1,651 2,831 2,635
Interest on other finance activities......... 3,748 -- 6,957 --
------- ------ ------- -------
Total interest income..................... 55,192 34,088 149,072 83,897
Interest expense............................. 33,029 26,141 100,767 65,115
------ ------ ------- -------
Net interest income....................... 22,163 7,947 48,305 18,782
Provision for loan losses................... 2,617 1,350 6,142 3,950
------- ------ ------- --------
19,546 6,597 42,163 14,832
------ ----- ------ -------
Loan servicing income........................ 702 3,272 2,264 9,813
Gain on sale of servicing rights............. -- -- 7,808 2,921
Gain on sale of SPFC stock................... -- -- 62,007 --
Other income................................. 2,285 268 7,770 537
----- ----- ----- ------
Total other income........................ 2,987 3,540 79,849 13,271
----- ----- ------ ------
Total revenue............................ 51,173 25,066 191,529 58,056
------- ------ ------- --------
Expenses:
Personnel expense............................ 13,075 10,321 36,477 24,041
Amortization of PMSR's and OMSR's............ 196 1,257 1,028 2,637
Occupancy expense............................ 1,038 973 3,308 2,895
Data processing expense...................... 394 333 1,324 1,121
Net expenses of other real estate owned...... 867 897 4,853 1,611
Professional services........................ 1,919 825 5,600 1,682
FDIC insurance premiums (refund)............. 154 (9) 199 1,114
Telephone and other communications........... 563 493 2,108 1,807
Restructuring provision - exit from
mortgage banking operations................ -- -- 3,800 --
General and administrative expense........... 6,718 2,550 14,047 7,203
------- ------ ------- --------
Total expenses........................... 24,924 17,640 72,744 44,111
Income before income taxes................... 26,249 7,426 118,785 13,945
Income taxes................................. 13,553 3,115 51,322 5,844
Minority interest in income of consolidated
subsidiaries............................... 3,263 -- 6,373 --
------- ------ ------- -------
Net income................................... 9,433 4,311 61,090 8,101
======= ====== ======= =======
Net income per share:
Primary......................................... 0.23 0.12 1.60 0.24
==== ==== ==== ====
Fully Diluted:................................. $ 0.23 0.12 1.60 0.23
==== ==== ==== ====
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine months ended Nine months ended
September 30, September 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 61,090 $ 8,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses........................... 6,142 3,950
Depreciation and amortization....................... 4,373 4,106
Restructuring provision............................ 3,800 --
Interest on other finance activities................ (6,957) --
Gain on sale of servicing rights.................... (7,808) (2,921)
Gain on sale of loans............................... (69,517) (29,953)
Gain on sale of SPFC stock......................... (62,007) --
Stock option compensation expense................... -- 653
Provision for losses on other real estate owned..... 2,459 1,105
Net change in loans held for sale................... 599,070 (49,113)
Net change in accrued interest on loans............. 1,284 (301)
Net change in other assets.......................... (59,513) (47,672)
Net change in other liabilities..................... 83,275 12,195
---------- ----------
Net cash provided by (used in) operating activities: 555,691 (99,850)
---------- ----------
Cash flows from investing activities:
Net change in interest bearing deposits............. (89,936) (1,000)
Purchase of servicing rights........................ (10,389) (6,205)
Proceeds from sale of servicing rights.............. 31,032 11,798
Proceeds from sale of other real estate owned....... 5,534 1,594
Purchase of securities available for sale........... (219,702) (220,547)
Sale of securities available for sale............... 267,098 12,630
Net change in loans held for investment............. (140,320) (68,618)
Purchases of premises and equipment................. (3,853) (842)
---------- ----------
Net cash used in investing activities: (160,536) (271,190)
---------- ----------
Cash flows from financing activities:
Net change in deposits.............................. (40,637) (27,255)
Advances from Federal Home Loan Bank................ 738,000 502,000
Repayments of advances from Federal Home Loan Bank.. (590,000) (527,000)
Net change in other borrowings...................... (480,771) 403,836
Sale of bonds....................................... (111,995) --
Proceeds from issuance of ICII common stock......... 59,228 --
Proceeds from sale of SPFC common stock............. 36,362 --
Proceeds from resale of Senior Notes................ 7,615 --
Proceeds from exercise of stock options............. 5,815 385
---------- ----------
Net cash (used in) provided by financing activities: (376,383) 351,966
---------- ----------
Net change in cash..................................... 18,772 (19,074)
Cash at beginning of year.............................. 39,166 24,904
---------- ----------
Cash at end of period.................................. $ 57,938 $ 5,830
========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid during the period................. $ 16,253 $ 7,429
Interest paid during the period..................... $ 104,427 $ 65,555
See accompanying notes to consolidated financial statements
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Unrealized
gain on
Number of securities Total
shares Common Retained available Shareholders'
outstanding stock earnings for sale, net Equity
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ............ $ 14,579 $ 51,981 $ 38,910 $ 3,211 $ 94,102
Exercise of stock options ............. 474 1,408 -- -- 1,408
Issuance of common stock............... 2,440 59,229 -- -- 59,229
Stock dividend ........................ 1,458 25,918 (25,918) -- --
Stock split ........................... 18,952 -- -- -- --
Tax benefit from exercise
stock options........................ -- 4,407 -- -- 4,407
Net change in unrealized gain
on securities available for sale...... -- -- -- 1,113 1,113
Net income for period (unaudited) -- -- 61,090 -- 61,090
----------- --------- ---------- ---------- ----------
Balance September 30, 1996 (unaudited) $ 37,903 $142,943 $ 74,082 $ 4,324 $221,349
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization
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"), Imperial Business Credit, Inc.
("IBC") and Imperial Credit Advisors, Inc. ("ICAI"). The majority-owned
consolidated subsidiaries include Southern Pacific Funding Corporation ("SPFC"),
Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding Corporation
("ICIFC"). The minority interests of these majority owned subsidiaries are
included as "Minority interest in consolidated subsidiaries" on the Company's
consolidated balance sheet. As of September 30, 1996, the Company owned 58.4% of
SPFC, with 41.6% owned by other public investors. However, since that time, the
Company has sold an additional 7.2% of the outstanding shares of SPFC, reducing
its ownership in SPFC to 51.2%. 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.
Imperial Credit Industries, Inc. (the "Company"), incorporated in 1986 in
the State of California, is 24.8% owned by Imperial Bank
2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 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 year's consolidated financial statements have been reclassified
to conform to the 1996 presentation
3. Net Income 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, including the Company's most recent 2-for-1 stock split on
October 23, 1996.
<PAGE>
The weighted average number of shares including common stock equivalents
for the three months ended September 30, 1996 and 1995 was 40,570,264 and
35,058,544 for fully diluted income per share, respectively. The weighted
average number of shares including common stock equivalents for the nine months
ended September 30, 1996 and 1995 was 38,293,874 and 35,004,055 for fully
diluted net income per share, respectively.
The weighted average number of shares including common stock equivalents
for the three months ended September 30, 1996 and 1995 was 40,382,302 and
34,697,623 for primary income per share, respectively. The weighted average
number of shares including common stock equivalents for the nine months ended
September 30, 1996 and 1995 was 38,074,558 and 34,137,402 for primary income per
share, respectively.
4. Loans Held for Sale
Loans held for sale consisted of the following at September 30, 1996 and
December 31, 1995:
(Dollars in thousands)
<TABLE>
At September 30, 1996 At December 31, 1995
--------------- -------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4........ $ 539,143 $ 1,083,038
Multi-family............. 93,666 171,199
----------- ----------
632,809 1,254,237
Leases........................ 3,785 17,787
Commercial loans.............. 175,663 69,786
---------- ---------
$ 812,257 $ 1,341,810
========== ==========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company is a diversified financial services company offering
financial products, principally through its subsidiaries, in the following five
sectors: franchise lending, commercial mortgage banking, business lending,
consumer lending, and non-conforming residential mortgage banking. The Company's
strategy is to concentrate its lending activities in select high margin
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 as 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 five sectors:
franchise lending - franchise loans;
commercial mortgage lending - income property 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
non-conforming residential mortgage lending - non conforming single
family mortgage loans.
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.
Securitizations 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.
Franchise Lending
General
Franchise Mortgage Acceptance Company, LLC ("FMAC"), a 66 2/3% owned
subsidiary, makes long-term, fixed and variable rate loans to established
franchisees of major restaurant franchise concepts, which are then securitized
into investment grade structures and sold to institutional investors. 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 makes this market sector
<PAGE>
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.
During the nine months ended September 30, 1996, loans to individual
credits ranged from approximately $241,000 to $7.0 million. For the nine months
ended September 30, 1996, FMAC originated or acquired $304.8 million of
franchise loans. FMAC securitized $167.4 million of franchise loans during the
nine months ended September 30, 1996. At September 30, 1996 FMAC had total
assets of $71.8 million. FMAC's total revenues and net income for the nine
months ended September 30, 1996 were $14.1 million and $6.4 million,
respectively.
Commercial Mortgage Lending
The Company engages in commercial lending, which consists of income
property lending.
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. 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 loan to 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. For the nine months ended September 30,
1996 and 1995, IPLD funded approximately $182.2 million and $93.9 million in
loans, respectively. During the quarter ended September 30, 1996, SPTL completed
a securitization of approximately $277.0 million of multi family and commercial
mortgage loans. This securitization consisted primarily of loans originated and
purchased by the Income Property Lending Division of SPTL.
Business Finance Lending
The Company, through CBC, IBC, and the Loan Participation and Investment
Group, also engages in business finance lending, which consists of asset-based
lending, commercial equipment leasing and loan participations.
Asset Based Lending
General
The Company, through its SPTL division, Coast Business Credit Corporation
("CBC"), conducts an asset based lending business. CBC is a senior secured
asset-based lender which lends primarily to qualified companies throughout the
nation.
CBC's principal business is asset-based lending to small to medium-sized
businesses with annual revenues ranging from approximately $10 million 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.
<PAGE>
At September 30, 1996, CBC's loan portfolio represented lending
relationships with approximately 104 customers, with an average total loan per
customer of $2.7 million. During 1996, CBC executed an expansion plan which has
increased the customer base of CBC outside the State of California. This
includes production centers operating in the states of Massachusetts, Minnesota,
and Georgia. At September 30, 1996 and December 31, 1995, CBC had outstanding
loans totaling $278.9 million and $154.2 million, respectively. CBC had open
unused commitments of $236.4 million at September 30, 1996.
Equipment Leasing
General
Imperial Business Credit, Inc. ("IBC") was formed by ICII in May, 1995 to
carry on the Company's equipment leasing business. IBC carries out its business
equipment leasing operations from both its headquarters in Rancho Bernardo,
California, and its operations center in Denver, Colorado.
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 release 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.
In October 1996, the Company acquired from AVCO Financial Services, Inc.
("AFS"), an $85 million lease portfolio and the operations of the Business
Equipment Lease Division of AVCO Leasing Services, Inc. ("ALSI"). ALSI,
originates and services leases for general office and business equipment. The
acquired assets will be consolidated with IBC. The purchase price was
approximately $95 million.
IBC's lease originations totaled $60.9 million for the nine months ended
September 30, 1996. IBC securitized $67.7 million of leases during the nine
months ended September 30, 1996. At September 30, 1996 IBC had total assets of
$14.4 million. IBC's total revenues and net income for the nine months ended
September 30, 1996 were $5.0 million and $1.3 million, respectively.
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 September 30, 1996, loan
participations held by LPIG ranged in size from approximately $900,000 to
approximately $10 million, as compared to approximately $2 million to $10
million at December 31, 1995, respectively.
<PAGE>
During the nine months ended September 30, 1996, LPIG has purchased and
funded approximately $174.7 million of senior secured loan participation
commitments. Loans outstanding under LPIG's participation commitments at
September 30, 1996 totaled $129.6 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.
ALD generated $24.8 and $19 million and in sub-prime auto loans during the
nine months and year ended September 30, 1996 and December 31, 1995,
respectively. The Company currently generates sub-prime auto loans through three
Northern California retail offices and is expanding its activities to Central
California and areas outside California.
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 refinancing.
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 nine months ended September 30, 1996 and year ended December
31, 1995, CCD originated $16.5 million and $14.6 million in loans, respectively.
Non-Conforming Residential Mortgage Lending
The Company engages in non-conforming residential mortgage lending through
its majority owned subsidiary, SPFC, and through the Bulk Acquisitions Division
of SPTL.
SPFC
Through SPFC, a 51.2% owned subsidiary, the Company is an originator,
purchaser and seller of high yielding, single family non conforming mortgage
loans. Substantially all of SPFC's loans are secured by first or second
mortgages on owner occupied single family residences. The majority of the
originated and purchased loans are made to borrowers who do not qualify for or
are unwilling to obtain financing from conventional mortgage sources. SPFC
typically packages a portfolio of originated and purchased loans and sells such
through securitization.
SPFC's mortgage loan production increased to $490.2 million for the nine
months ended September 30, 1996 from $85.8 million for the nine months ended
September 30, 1995. SPFC securitized $421.8 million of sub prime residential
mortgage loans for the nine months ended September 30, 1996. At September 30,
1996 SPFC had total assets of $235.1 million. SPFC's total revenues and net
income for the nine months ended September 30, 1996 were $14.1 million and $17.8
million, respectively.
<PAGE>
Strategic Divestitures
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) 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 for the nine months ended September 30, 1996, ICIFC had total assets of
$185.5 million, total revenues of $7.7 million, and net income of $726,000.
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 September 30, 1996
included approximately $185.5 million in assets, and $175.7 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.
The Company currently intends to reduce its ownership in ICIFC to below
50% by December 31, 1996, resulting in the deconsolidation of the assets and
liabilities of ICIFC from the Company's consolidated balance sheet. Such
reduction in ownership may occur as a result of the sale or transfer of ICII
owned shares of ICIFC stock, or by other possible means.
In the first nine months of 1996, the Company sold all 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 were converted to SPFC offices.
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, during the first nine
months of 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 has sold or subcontracted most of its servicing related to its former
mortgage banking operations to other third party servicers. The Company intends
to continue servicing all loans and leases originated by its equipment leasing
and Franchise Lending businesses, as well as all loans originated by SPTL.
Manufactured Housing Community Lending ("MHCB") - During the quarter ended
September 30, 1996, the MHCB division of ICII was merged into SPTL, and the
origination operations of MHCB were discontinued. MHCB will operate as a
division of SPTL only to satisfy its remaining commitments. The Company believes
that MHCB will cease all of its operations permanently during the fourth quarter
of 1996.
<PAGE>
Business Strategies
Since September 30, 1996, the Company has completed the sale of an
additional one million shares, or 7.3% of SPFC, reducing its ownership to 51.2%
of SPFC. The registration statement filed with the Securities and Exchange
Commission grants the underwriters of the sale the option to issue up to an
additional 150,000 shares of SPFC stock for sale. If so exercised, the Company's
ownership in SPFC would decline to 50.1%.
The Company currently intends to reduce its ownership in SPFC to below 50%
by December 31, 1996, resulting in the deconsolidation of the assets and
liabilities of SPFC from the Company's consolidated balance sheet. Such
reduction in ownership may occur as a result of the issuance of additional
shares of SPFC stock under SPFC's stock option plan, by the sale or transfer of
additional ICII owned shares of SPFC stock, or by other possible means.
In October 1996, as a part of the Company's strategy of expanding into new
business opportunities, the Company invested approximately $9 million, primarily
in the form of a subordinated loan to Dabney/Resnick, Inc. ("DRI"). In
conjunction with the loan, the Company received warrants which are convertible
into a 49% ownership interest in Dabney/Resnick/Imperial, LLC ("DRIL"). DRI,
headquartered in Beverly Hills, California, with offices in Chicago, Illinois,
Dallas, Texas, and Sun Valley, Idaho, offers full service investment banking,
brokerage and asset management services.
In October 1996, the Company acquired from AVCO Financial Services, Inc.
("AFS"), an $85 million lease portfolio and the operations of the Business
Equipment Lease Division of AVCO Leasing Services, Inc. ("ALSI"). ALSI,
originates and services leases for general office and business equipment. The
acquired assets will be consolidated with IBC. The purchase price was
approximately $95 million.
Securitization Transactions
During the nine months ended September 30, 1996, the Company had completed
five loan and lease securitizations totaling $933.9 million. Sub prime
residential mortgage loans securitized totaled $421.8 million, multifamily and
commercial mortgage loans totaled $277.0 million, franchise mortgage loans
totaled $167.4 million, and leases totaled $67.7 million. Of the principal
amount securitized during 1995, $505.0 million was securitized in the first nine
months. The Company has retained interests in loan and lease securitizations,
representing the excess of the total amount of loans sold in the securitization
over the amounts represented by interests in the security sold to investors. The
retained interests in the loan and lease securitizations were $33.2 million and
$13.0 million at September 30, 1996 and December 31, 1995, respectively.
The Company is subject to certain recourse provisions in connection with
these securitizations. At September 30, 1996 and December 31, 1995, the Company
had discounted recourse allowances of $15.8 million and $8.7 million,
respectively, related to these recourse provisions which are netted against
capitalized servicing fees receivable and interest-only and residual
certificates.
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans through loan securitization transactions. A
significant portion of the Company's revenue is recognized as gain on sale of
loans, which represents 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 securities collateralized by the loans sold into the
securitization vehicle.
The Company has created capitalized excess servicing fees receivable and
interest-only and residual certificates as a result of the sale of loans and to
a lesser extent leases into various trust securitization 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
<PAGE>
ownership of the assets of the trust; therefore, these trust vehicles are not
consolidated with the Company. Capitalized excess servicing fees receivable and
interest-only and residual certificates 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.
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 third party purchaser
would require as a rate of return on such a financial instrument. Expected
losses are discounted using a rate equivalent to the risk free rate for
securities with a duration similar to that estimated for the underlying loans
and leases sold. The combined result is an effective overall discount 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.
A significant portion of the Company's reported income and all of the
related capitalized servicing fees receivable and interest-only and residual
certificates 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 and expected losses may be affected by a
variety of economic and other factors, including the 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 and losses are made based on management's
expectations of future prepayment rates and losses, which are based, in part, on
the historical rate of prepayment and previous loss experience of the Company's
loans, and other considerations. There can be no assurance of the accuracy of
management's initial prepayment or loss estimates. If actual prepayments and
losses 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 and losses, with respect to sold
loans occur more slowly than estimated, the carrying value of capitalized
servicing fees receivable on the Company's consolidated balance sheet would not
increase, although total income would exceed previously estimated amounts.
Interest-only and residual certificates in loan securitizations retained by the
Company's subsidiary Southern Pacific Funding Corporation, are held as trading
securities and are adjusted to their respective market values quarterly with
corresponding charges and credits made to income in the adjustment period.
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."
During the nine months ended September 30, 1996, the Company sold
substantially all of its conforming residential mortgage servicing with related
capitalized Purchased and Originated Servicing Rights. As a result of this sale,
of the $14.0 million of Purchased and Originated Servicing Rights outstanding at
September 30, 1996, $5.8 million are held at SPTL and $700,000 are held at ICAI,
with the remaining $7.5 million held at ICIFC in connection with its ongoing
mortgage banking operations. (See "Notes to Consolidated Financial Statements
- -Note 1. -Organization.")
<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 December 31, 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 September 30, 1996, SPTL had total deposits of approximately
$1.1 billion (excluding deposits of ICII maintained with SPTL).
ICII and its subsidiaries have various revolving warehouse lines of credit
available at September 30, 1996, as follows:
<TABLE>
<CAPTION>
Weighted
average
interest
rate Commitment Outstanding Index
-------- -------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
PaineWebber (ICII)................ 6.18% $ 200,000 $ 13,774 Libor+65bp - 100bp
Banco Santander (FMAC)............ 7.78% 50,000 26,141 Libor+225bp
Stanley Mortgage Capital (SPFC)... -- 150,000 -- FedFunds+65bp - 85bp
Greenwich (FMAC).................. 7.23% 33,086 33,086 Libor+175bp
Lehman Brothers (SPFC)............ 6.28% 200,000 141,078 Libor+30bp
Imperial Warehouse
Lending Group (ICIFC).......... 8.25% 600,000 171,504 Bank of America Prime
Warehouse Lending
Corporation of America (ICII).. 7.94% 20,000 14,462 Libor+250bp
----------- ---------
$1,253,086 $400,045
</TABLE>
<PAGE>
Results of Operations
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30,1995
Revenues for the quarter ended September 30, 1996 increased 104% to $51.2
million as compared to $25.1 million for the same period of the previous year.
Expenses for the quarter ended September 30, 1996 increased 41% to $24.9 million
as compared to $17.6 million for the same period of the previous year. Net
income for the quarter ended September 30, 1996 increased to $9.4 million as
compared to $4.3 million for the same period of the previous year. Fully diluted
net income per share for the quarter ended September 30, 1996 was $0.23, as
compared to $0.12 for the same period of the previous year. Net income increased
primarily due to the increased revenues from gain on sale of loans and net
interest income, partially offset by increases in total expenses. 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 Company's
common stock offering, and as a result of the increased dilutive effect of
outstanding shares under the Company's stock option plans. (See Liquidity and
Capital Resources, below.) The Company had 40.6 million shares of fully diluted
common stock and common stock equivalents outstanding during the quarter ended
September 30, 1996 as compared to 35.1 million shares of common stock and common
stock equivalents outstanding during the same period of the previous year.
The number of shares used in the computations of net income per share give
retroactive effect to stock dividends and stock splits for all periods
presented, including the Company's most recent 2-for-1 stock split on October
23, 1996.
Net income and net income per share from core operations (defined as net
income less the net gain from the sale of SPFC stock, and less the net gain or
loss on sales of servicing rights) and excluding the net expense of the
restructuring provision for the quarter ended September 30, 1996 increased 120%
and 90% to $9.5 million and $0.23 per share from $4.3 million and $0.12 per
share in the same period of the previous year, respectively.
Gain on sale of loans increased 92% to $28.6 million for the quarter ended
September 30, 1996 as compared to $14.9 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 volume
and profitability on the sale of various servicing retained variable and fixed
rate loan products through securitizations. Gain on sale of loans includes $17.0
million in gains recorded as a result of the securitization of $189.5 million of
the Company's sub prime residential mortgage loans at SPFC, $11.2 million in
gains resulting from the sale of $277.0 million of commercial and multi-family
loans at SPTL, less a $900,000 loss recorded as a result of the sale of loans
held by the Company's former mortgage banking operations in connection with the
planned exit from this business. Upon completion of an analysis of the carrying
values of the Company's excess servicing assets during the third quarter, the
Company wrote down the balance of excess servicing assets by $2.5 million. Also
included in gain on sale of loans was $1.3 million in gains from the sale of
loans at the Company's consolidated subsidiary, ICIFC. (See "Notes to
Consolidated Financial Statements -Note 1. - Organization.")
As a part of the SPTL securitization of $277.0 million of multi-family and
commercial mortgage loans, the Company retained subordinate bonds of
approximately $22 million and delivered the bonds into a total rate of return
swap with JP Morgan. The provisions of the swap entitle the Company to receive
the total return on the subordinate bonds delivered in exchange for a floating
payment of Libor plus a spread of 1.95%. The swap is an off balance sheet
instrument.
Net interest income, which consists of interest and fees net of interest
charges, and net interest margin at Southern Pacific Thrift & Loan Association
for the quarter ended September 30,1996 increased 179% and 87% to $22.2 million
and 4.15% compared to $7.9 million and 2.22% for the same period of the previous
year, respectively. The increase in net interest income and net interest margin
was due primarily to two factors. 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
<PAGE>
conforming single family residential mortgage loans to
a more diversified mix of higher yielding 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
$3.7 million from the accretion of discounts on the Company's capitalized excess
servicing fees receivable. In anticipation of potential writedowns of the
Company's excess servicing fees, the Company began to slow the rate of accretion
of the discounts related to excess servicing assets in the second quarter of
1996. Upon completion an analysis of the carrying values of the Company's excess
servicing assets during the third quarter, the Company accreted into interest
income those discounts which had been deferred, and simultaneously wrote down
the balance of excess servicing fees receivable. The net result of these events
was to increase interest income by approximately $2.5 million, with an
offsetting writedown of excess servicing assets through gain on sale of loans.
The increase in interest income due to the factors described above was partially
offset by an increase in the average costs of borrowings from all sources,
including warehouse lines of credit, borrowings from the FHLB, and customer
deposits.
Loan servicing income for the quarter ended September 30, 1996 decreased
79% to $702,000 as compared to $3.3 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 or transfer of substantially all of its
conforming residential mortgage loan servicing rights in connection with the
Company's exit from the conforming mortgage banking business. Additionally, loan
servicing income was negatively affected by increased direct servicing costs
related to the loan foreclosure and property liquidation process of the
remaining conforming residential mortgage loan portfolio. As a result of the
Company's strategic divestitures, the Company does not expect loan servicing
income to be a strong contributor to total revenues in the near future. This
reduced contribution to revenues is anticipated to be offset by increases in
other finance activity revenues, as well as from a reduction in servicing
related expenses.
In addition to the above referenced servicing portfolio, the Company also
services a variety of other loan products at its other business operations that
make positive contributions to total revenue. At September 30, 1996, FMAC
serviced franchise loans for others totaling $527.2 million, and SPTL serv
iced multifamily or commercial loans for others of $328.6 million. SPFC acts as
master servicer for $497.8 million of sub prime residential loans serviced for
others. As a result of the sub servicing fee arrangement with SPFC's sub
servicer; however, significant servicing revenues are not realized from this
operation. ICIFC also acts as master servicer for $1.2 billion of non
conforming residential mortgage loans. (See "Notes to Consolidated
Financial Statements -Note 1. Organization.").
Other income for the quarter ended September 30, 1996 increased to $2.3
million as compared to $268,000 for the same period of the previous year. This
increase was primarily due to $986,000 of fee income generated from the
Company's advisory contract of with ICMH and dividend payments of $193,000
received by the Company on its investment in ICMH. Additionally, impacting other
income was the resolution and recovery of $1.4 million of certain outstanding
reconciling items at SPTL.
<PAGE>
Personnel expenses increased 27% to $13.1 million for the quarter ended
September 30, 1996 as compared to $10.3 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
second half of 1995, partially offset by reductions in personnel expense at the
Company's former mortgage banking operations.
Amortization of PMSR's and OMSR's decreased 84% to $196,000 for the
quarter ended September 30, 1996 as compared to $1.3 million for the same period
of the previous year. The decrease was the result of a decreased outstanding
balance of PMSR's and OMSR's as a result of the Company's sale of conforming
residential mortgage loan servicing rights generated by its former mortgage
banking operations. As a result of this sale, of the $14.0 million of PMSR's and
OMSR's outstanding at September 30, 1996, $5.8 million are held at SPTL,
$700,000 are held at ICAI, with the remaining $7.5 million held at ICIFC in
connection with it's continuing mortgage banking operations. (See "Notes to
Consolidated Financial Statements-Note 1. -Organization.")
Occupancy expense remained relatively unchanged at $1.0 million for the
quarter ended September 30, 1996 as compared to $973,000 for the same period of
the previous year. Occupancy expense remained relatively unchanged despite the
Company's shift in business focus and related expansion activities due to the
reduction of occupancy costs from the Company's former mortgage banking
operations. The Company expanded its lease obligations in the current year as a
result of the Company's acquisition of Coast Business Credit, First Concord
Leasing, and Franchise Mortgage Acceptance Company LLC in the second half of
1995.
Net expenses of OREO decreased 3% to $867,000 for the quarter ended
September 30, 1996 as compared to $897,000 for the same period of the previous
year. The decrease in net expense of OREO was primarily the result of a
reduction on the average loss on the sale of properties foreclosed on by the
Company's former mortgage banking operations.
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense increased
132% to $9.7 million for the quarter ended September 30, 1996 as compared to
$4.2 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
CBC, FCAC, and FMAC, as well as to the start up of ICAI late in 1995.
Asset Quality
As a result of the continuing 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 94% to $2.6 million for
the quarter ended September 30, 1996, as compared to $1.4 million for the same
period of the previous year. The increase in the provision was primarily the
result of an increase in nonaccrual loans, an increase in the amount of net
charge-offs, and the continuing change in the composition of the investment loan
portfolio to higher-yielding loan products. Total nonaccrual loans increased 50%
to $46.6 million at September 30, 1996, as compared to $31.0 million at December
31, 1995. Total nonaccrual loans as a percentage of loans held for investment
were 5.56% and 4.50% at September 30, 1996 and December 31, 1995, respectively.
Net charge-offs for the quarter and nine months ended September 30, 1996
were $2.2 million and $5.4 million, as compared to $772,000 and $2.1 million for
the same period of the previous year. Net charge-offs for the quarter and nine
months ended September 30, 1996 by product type were as follows: Multifamily
loans $50,000 and $1.0 million, Consumer loans $165,000 and $599,000, Conforming
Residential Mortgage loans $822,000 and $2.0 million, Commercial loans $183,000
and $432,000, Leases $942,000 and $1.5 million, respectively.
<PAGE>
<TABLE>
Loans held for investment consisted of the following at September 30, 1996
and December 31, 1995:
(Dollars in thousands)
<CAPTION>
September 30, 1996 December 31, 1995
------------ -------------
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4................... $ 59,204 $ 228,721
Multi Family........................ 234,608 7,028
Commercial.......................... 25,698 133,189
-------------- --------------
319,510 368,938
Leases.............................. 120 7,297
Installment loans................... 28,094 1,900
Commercial.......................... 481,819 311,122
------------- -------------
829,543 689,257
Unearned income..................... (6,138) (5,217)
Deferred loan fees.................. (5,739) (1,540)
------------ -------------
817,666 682,500
Allowance for loan losses........... (14,461) (13,729)
------------ -------------
$ 803,205 $ 668,771
</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 debtors' ability to honor
their contracts is dependent upon the economy of California.
Activity in the allowance for loan losses was as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1996 December 31, 1995
----------------- ----------------
<S> <C> <C>
Balance, beginning of year...................... $ 13,729 $ 7,054
Provision for losses charged to expense......... 6,142 5,450
Business acquisitions and bulk loan purchases... -- 4,320
Loans charged off............................... (5,523) (3,106)
Recoveries on loans previously charged off...... 113 11
------------ ----------
Net charge offs................................. (5,410) (3,095)
Balance, end of period.......................... $ 14,461 $ 13,729
=========== =========
As of September 30, 1996 and December 31, 1995 non-accrual loans
totaled $46.6 million and $31.0 million, 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 September 30, At December 31,
1996 1995
Former Former
All Other Mortgage All Other Mortgage
Lending Banking Lending Banking
Activities Operations Activities Operations
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
(Dollar amounts in thousands)
Nonaccrual loans:
One to four family............. 27,005 11,842 2,652 20,990
Commercial property............ 2,684 -- 1,824 --
Multifamily property........... 5,054 -- 5,522 --
----------- ---------- ---------- ------------
Total nonaccrual loans.............. 34,743 11,842 9,998 20,990
Other real estate owned:
One to four family............. 5,383 3,797 1,937 4,173
Commercial property............ 1,076 -- 211 --
Multifamily property.......... 1,047 -- 858 --
----------- ---------- ---------- ------------
Total other real estate owned....... 7,506 3,797 3,006 4,173
Loans with modified terms:
One to four family............. 1,314 -- 870 --
Commercial property............ -- -- -- --
Multifamily property........... -- -- -- --
----------- ---------- ---------- ------------
Total loans with modified terms..... 1,314 -- 870 --
Total non performing assets......... $ 43,563 $ 15,639 $ 13,874 $ 25,163
----------- ---------- ---------- ------------
Total loans and OREO................ $1,584,403 $ 68,700 $1,168,783 $869,463
Total NPA's as a percentage of
loans and OREO................... 2.75% 22.76% 1.19% 2.89%
</TABLE>
The provision for loan losses was $2.6 million and $6.1 million for the
quarter and nine months ended September 30, 1996, increases of 94% and 55% from
$1.4 million and $4.0 million and for the same periods of the previous year,
respectively. The increase in the provision in both periods 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 1.74%, a decrease from the 1.99% at December 31, 1995. The ratio
of the allowance for loan losses to nonaccrual loans decreased to 31.0% at
September 30, 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 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 allowance for loan losses is adequate.
The percentage of the allowance for loan losses to nonaccrual loans will
not remain constant due to the nature of the Company's portfolio of 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,
<PAGE>
underlying collateral values,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio. Loans deemed by management to be uncollectible are charged to the
allowance for loan 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. Future
additions to the allowance for loan losses may be necessary.
Nine months Ended September 30, 1996 Compared to Nine months Ended September
30, 1995
Revenues for the nine months ended September 30, 1996 increased 230% to
$191.5 million as compared to $58.1 million for the same period of the previous
year. Expenses for the nine months ended September 30, 1996 increased 65% to
$72.7 million as compared to $44.1 million for the same period of the previous
year. Net income for the nine months ended September 30, 1996 increased 654% to
$61.1 million as compared to $8.1 million for the same period of the previous
year. Net income increased primarily due to increased revenues from gain on sale
of loans, net interest income, and gain on sale of SPFC stock, partially offset
by increased total expenses. Fully diluted net income per share for the nine
months ended September 30, 1996 increased 596% to $1.60, as compared to $0.23
for the same period of the previous year. The Company had 38.3 million shares of
fully diluted common stock and common stock equivalents outstanding during the
nine months ended September 30, 1996 as compared to 35.0 million shares
outstanding during the same period of the previous year.
The number of shares used in the computations of net income per share give
retroactive effect to stock dividends and stock splits for all periods
presented, including the Company's most recent 2-for-1 stock split on October
23, 1996.
Net income and net income per share from "core" operations for the nine
months ended September 30, 1996 increased 368% and 333% to $30.0 million or
$0.78 per share from $6.4 million or $0.18 per share in the same period of the
previous year, respectively.
Gain on sale of loans increased 132% to $69.5 million for the nine months
ended September 30, 1996 as compared to $30.0 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 volume
and profitability on the sale of various servicing retained variable and fixed
rate loan products. Gain on sale of loans includes; $37.8 million in gains
recorded as a result of the securitization of $421.8 million of the Company's
sub prime residential mortgage loans at SPFC, $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 at FMAC which was accounted for as a
financing at December 31, 1995, $4.6 million in gains recorded as a result of
the securitization of $167.4 million of franchise loans in the second quarter of
1996, $11.2 million in gains recorded resulting from the sale of $277.0 million
of multi-family and commercial mortgage loans at SPTL, and $1.5 million in gains
recorded as a result of the sale of loans held by the Company's former mortgage
banking operations. Upon completion of an analysis of the carrying values of the
Company's excess servicing assets during the third quarter, the Company wrote
down the balance of excess servicing assets by $2.5 million. Also included in
gain on sale of loans were $5.9 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 at SPTL for the nine months ended September
30,1996 increased 157% and 87% to $48.3 million and 4.03% compared to $18.8
million and 2.16% for the same period in the previous year. The increase in net
interest income and net interest margin was due primarily to two factors. 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
<PAGE>
and lease
securitizations, which contributed interest income of $7.0 million from the
accretion of discounts on the Company's capitalized excess servicing fees
receivable. In anticipation of potential writedowns of the Company's excess
servicing fees, the Company began to slow the rate of accretion of the discounts
related to excess servicing assets in the second quarter of 1996. Upon
completion of an analysis of the carrying values of the Company's excess
servicing assets during the third quarter, the Company accreted into interest
income those discounts which had been deferred, and simultaneously wrote down
the balance of its excess servicing assets. The net result of these events was
to increase interest income by approximately $2.5 million, with an offsetting
writedown of excess servicing assets through gain on sale of loans. 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 nine months ended September 30, 1996
decreased 77% to $2.3 million as compared to $9.8 million for the same period in
the previous year. The decrease in loan servicing income was primarily due to a
decreased average balance of conforming residential mortgage loans serviced for
others, primarily as a result of the Company's sale or transfer of substantially
all of its conforming residential mortgage servicing rights in connection with
the Company's exit from the mortgage banking business. Additionally, loan
servicing income continues to be negatively affected by increased direct
servicing costs related to the loan foreclosure and property liquidation
process.
During the nine months ended September 30, 1996 and 1995, the Company sold
mortgage loan servicing rights relating to $3.2 billion and $350.6 million
principal amount of loans, resulting in pre-tax gains of $7.7 million and $2.9
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 purchased or originated servicing rights. The decline in
profitability on the sale of the conforming residential mortgage servicing
rights was due a lower average purchase price and due to the increased amounts
of capitalized servicing rights on the portfolio sold in the nine months ended
September 30, 1996 as compared to the same period of the previous year as a
result of the Company's adoption of SFAS 122 in the first quarter of 1995. The
decision to sell servicing rights was based upon the Company's exit plan from
its former mortgage banking operations.
During the nine months ended September 30, 1996, the Company sold
approximately 42% of its common stock in SPFC through an initial public offering
of 5.0 million shares of SPFC common stock. The Company sold 2.3 million shares,
with SPFC selling 3.5 million primary shares. As a result of the sale, the
Company recorded a pre tax gain of $62.0 million. Since the Company continues to
own a majority ownership interest in SPFC, the Company will continue to
consolidate SPFC's operations with its other majority owned or wholly owned
subsidiaries. However, as a result of the Company's requirement to record income
tax expense on its ownership interest in SPFC's after tax income, the Company
will only retain approximately 34% of SPFC's net income or loss, so long as the
Company maintains a 58% ownership interest in SPFC.
Other income for the nine months ended September 30, 1996 increased to
$7.8 million as compared to $537,000 for the same period of the previous year.
This increase was primarily due to fee income generated from the Company's
advisory contract with ICMH and dividend payments received by the Company on its
investment in ICMH. Additionally, impacting other income was the resolution and
recovery of $2.5 million of certain outstanding reconciling items at SPTL.
Personnel expenses increased 52% to $36.5 million for the nine months
ended September 30, 1996 as compared to $24.0 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
second half of 1995, partially offset by reductions in personnel expense at the
Company's former mortgage banking operations.
Amortization of PMSR's and OMSR's decreased 61% to $1.0 million for the
nine months ended September 30, 1996 as compared to $2.6 million for the same
period of the previous year. The decrease was the result of a decreased
outstanding balance of PMSR's and OMSR's as a result of the Company's sale of
servicing rights on conforming residential mortgage loans generated by the
former mortgage banking operations.
<PAGE>
Occupancy expense increased 14% to $3.3 million for the nine months ended
September 30, 1996 as compared to $2.9 million 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 201% to $4.9 million for the nine months
ended September 30, 1996 as compared to $1.6 million for the same period of the
previous year. The increase in net expense of OREO was primarily the result of
the dramatic increase in the volume of properties foreclosed on by the Company's
former mortgage banking operations.
FDIC insurance premiums decreased 82% to $200,000 for the nine months
ended September 30, 1996 as compared to $1.1 million 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 nine months ended
September 30, 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 Emerging Issues Task Force ("EITF") Abstract No. 94-3,
"Accounting for Restructuring Charges." During the first quarter of 1996, the
Company committed itself to, and began the execution of, an exit plan that
specifically identified the necessary actions to be taken to complete the exit
from the origination, sale and servicing of conforming residential mortgage
loans. During the nine months ended September 30, 1996, the Company incurred
charges against the allowance of approximately $2.3 million. 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
97% to $23.3 million for the nine months ended September 30, 1996 as compared to
$11.8 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 55% to $6.1 million for the nine
months ended September 30, 1996, as compared to $4.0 million for the same period
of the previous year.
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 loans and a borrower's ability to
qualify for mortgage financing in a purchase transaction may be adversely
affected. During periods of decreasing interest rates borrowers are more likely
to refinance their existing loans which may negatively impact the Company's
investments in capitalized excess servicing assets.
<PAGE>
Regulatory Matters:
On September 30, 1996 the Omnibus spending bill was signed into law. This
bill includes a comprehensive legislative package on BIF-SAIF. The package
includes the following provisions which impact the Company 1) a FICO premium
assessment on BIF-insured deposits as one-fifth the premium rate (approximately
1.3 basis points) imposed on SAIF-insured deposits for the three year period
beginning in 1997. In the year 2000, the bill required BIF-insured institutions
to share in the payment of the FICO obligations on a pro-rata basis with all
thrift institutions, with annual assessments expected to equal approximately 2.4
basis points until the year 2017, and to be completely phased out by 2019; 2) a
merger of the BIF and SAIF on January 1, 1999, if no thrift institutions exist
on that date; 3) the FDIC is prohibited from setting insurance premiums above
the amount which would result in the deposit insurance fund exceeding its
designated reserve ratio - currently 1.25% and 4) the FDIC was given the
authority to refund assessments paid to it in excess of amounts due.
On September 30, 1996 SPTL entered into an agreement [Memorandum of
Understanding] with the FDIC. This agreement requires that SPTL shall (i) have
and retain qualified management, (ii) within 120 days, adopt and implement
comprehensive risk management policies, programs and systems, (iii) within 30
days, take all reasonable and good faith steps to ensure future compliance with
all applicable laws and regulations, (iv) within 60 days, develop a credit
review program, (v) within 60 days, update the lending, investments and audit
policies, and (vi) provide quarterly progress reports to the FDIC. This
agreement will remain in effect until terminated by the FDIC. Management
believes that it is in compliance with the terms and conditions of the
agreement.
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
and nine months ended September 30, 1996, the Company had sufficient liquidity
to meet its operating needs. In April 1996, the Company completed a secondary
stock offering of 4,879,808 shares of its Common Stock. The shares issued were
sold for $13.00 per share. The Company received net proceeds from the offering
of $59.2 million. Also, during the nine months ended September 30, 1996, the
Company completed its initial public offering of SPFC common stock. After the
offering ICII owned 58.4% 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. The Company received net proceeds
from the offering of SPFC stock of $36.4 million.
SPTL obtained the liquidity necessary to fund the Company's former
mortgage banking operations and its own lending activities through deposits and,
if necessary through borrowings from the FHLB. At September 30, 1996 and
December 31, 1995, SPTL had available lines of credit from the FHLB equal to 35%
of its assets, or $559.4 million and $501.4 million, respectively. The highest
FHLB advance outstanding during the quarter ending September 30, 1996 was $338.0
million, with an average outstanding balance of $229.0 million. The outstanding
balance of FHLB advances was $338.0 million at September 30, 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 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.
<PAGE>
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 and SPFC, the issuance of the
Notes, the issuance of convertible securities, 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 into or exercisable for Common Stock.
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 $424.5 million in
financing at September 30, 1996 (excluding financing available to the Company's
wholly owned 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 $105.2 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
11.0%, 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 first quarter of 1996, the Company sold
its retained interest in the SPE, resulting in the deconsolidation of the SPE
and 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 June 30, 1996, the line of credit was increased to $15
million. In April of 1996, the Company repaid its advances under this line with
a portion of the proceeds from its secondary stock offering.
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 $15 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 and the completion of the Company's offering of
SPFC stock in June, 1996, are expected to meet the Company's needs for capital
for at least the next 12 months.
Current Accounting Issues
In June, 1996 the Financial Accounting Standards Board issued Statement of
Accounting Standards No 125, Accounting for Transfers and servicing of Financial
Assets and Extinguishments of Liabilities ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Those standards
are based on consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at a
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based in their relative fair values at the date of the
transfer.
SFAS 125 included specific provisions to deal with servicing assets or
liabilities. These provisions retain the impairment and amortization approaches
that are contained in Statement No. 122 but eliminates the distinction between
normal and excess servicing.
SFAS 125 will be effective for transactions occurring after December 31,
1996. It is not anticipated that the financial impact of this statement will
have a material effect on Imperial Credit Industries, Inc.
<PAGE>
<TABLE>
<CAPTION>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
UNAUDITED
(In thousands, except per share amounts)
Quarter ended Nine months ended
September 30, 1996 September 30, 1996
Primary earnings per share:
<S> <C> <C>
Net income $ 9,433 $ 61,090
=============== ===============
Avg. number of shares outstanding 37,895 35,385
Net effect of dilutive stock options-
Based on treasury stock method
using average market price 2,487 2,690
-------------- ---------------
Total average shares 40,382 38,075
Primary earnings per share $ 0.23 $ 1.60
=============== ===============
Fully diluted earnings per share:
Net income $ 9,433 $ 61,090
=============== ===============
Avg. number of shares outstanding 37,895 35,385
Net effect of dilutive stock options-
Based on treasury stock method
using greater of ending or average 2,675 2,908
market price -------------- ---------------
Total average shares 40,570 38,293
Fully diluted earnings per share: $ 0.23 $ 1.60
=============== ===============
</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: November 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> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 57,938 39,166
<INT-BEARING-DEPOSITS> 314,192 267,776
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 24,837 28,713
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,629,923 2,024,310
<ALLOWANCE> 14,461 13,729
<TOTAL-ASSETS> 2,246,137 2,510,635
<DEPOSITS> 1,052,352 1,092,989
<SHORT-TERM> 738,045 1,070,815
<LIABILITIES-OTHER> 146,302 60,262
<LONG-TERM> 88,169 192,467
0 0
0 0
<COMMON> 142,943 51,981
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 221,349 94,102
<INTEREST-LOAN> 139,284 120,244
<INTEREST-INVEST> 2,831 6,630
<INTEREST-OTHER> 6,957 2,608
<INTEREST-TOTAL> 149,072 129,482
<INTEREST-DEPOSIT> 0 0
<INTEREST-EXPENSE> 100,067 95,728
<INTEREST-INCOME-NET> 48,305 33,754
<LOAN-LOSSES> 6,142 5,450
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 72,744 61,180
<INCOME-PRETAX> 118,785 24,130
<INCOME-PRE-EXTRAORDINARY> 61,090 14,193
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 61,090 14,193
<EPS-PRIMARY> 1.60 .41
<EPS-DILUTED> 1.60 .40
<YIELD-ACTUAL> 0 0
<LOANS-NON> 46,585 30,988
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 13,729 16,824
<CHARGE-OFFS> (5,523) (3,106)
<RECOVERIES> 113 11
<ALLOWANCE-CLOSE> 14,461 13,729
<ALLOWANCE-DOMESTIC> 14,461 13,729
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
