<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
- ---------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110,
Torrance, California 90505
(310) 791-8020
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest possible
date:
Class Shares Outstanding at August 14, 1996
- ----------------------- ------------------------------------
Common Stock, no par value 18,950,195
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q/A
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part 1 - Financial Information Page
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995 1
Consolidated Statements of Income (Unaudited)
Six months Ended June 30, 1996 and 1995 2
Consolidated Statement of Changes
in Shareholders' Equity (Unaudited) 3
Consolidated Statements of Cash
Flows (Unaudited) Six months Ended
June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements
(Unaudited) 5
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Part II - Other Information
Items 1-5. Not Applicable
Item 6. Exhibit - Statement Regarding Computation
of Earnings Per Share 32
Signatures 33
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ --------------
<S> <C> <C>
ASSETS
Cash.......................................... $ 116,778 $ 39,166
Interest bearing deposits..................... 45,881 267,776
Investment in Federal Home
Loan Bank stock.............................. 19,250 22,750
Securities available for sale,
at market.................................... 6,596 5,963
Loans held for sale (Fair value of
$982,789 and $1,345,509 at
June 30, 1996 and December 31 1995,
respectively)................................ 982,789 1,341,810
Loans held for investment, net................ 750,470 668,771
Capitalized excess servicing fees receivable.. 79,354 44,031
Purchased and originated servicing rights..... 8,707 18,428
Retained interest in loan and
lease securitizations........................ 22,552 14,241
Accrued interest on loans..................... 10,742 10,164
Premises and equipment, net................... 12,386 11,369
Other real estate owned, net.................. 9,133 7,179
Goodwill...................................... 20,802 20,346
Other assets.................................. 35,599 38,641
------------ ------------
Total assets............................. $ 2,121,039 $ 2,510,635
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits...................................... $ 989,224 $ 1,092,989
Borrowings from Imperial Bank................. -- 5,000
Borrowings from Federal Home Loan Bank........ 295,000 190,000
Other borrowings.............................. 414,967 875,815
Bonds......................................... -- 111,995
Senior Notes.................................. 88,189 80,472
Minority interest in consolidated
subsidiaries................................. 40,414 2,905
Other liabilities............................. 82,481 57,357
------------- --------------
Total liabilities............................ $ 1,910,275 $ 2,416,533
------------- --------------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized;
none issued or outstanding............. -- --
Common stock, no par value. Authorized 40,000
shares; 18,943 and 14,579 shares issued
and outstanding at June 30, 1996 and December
31, 1995, respectively....................... $ 142,892 $ 51,981
Retained earnings............................. 64,650 38,910
Unrealized gain on securities available
for sale, net................................ 3,222 3,211
------------- --------------
Total shareholders' equity.................... 210,764 94,102
------------- --------------
Total liabilities and shareholders' equity.... $ 2,121,039 $ 2,510,635
============== =============
Escrow, agency premium funds, and mortgage
held in trust for various investors
(segregated in special bank accounts -
included in deposits)........................ $ 8,261 $ 35,963
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans........................ $ 19,166 $ 8,794 $ 40,877 $ 15,024
----------- ----------- ------------ -----------
Interest on loans............................ 43,089 25,850 88,282 48,825
Interest on investments...................... 204 500 2,389 984
Interest on other finance activities......... 1,067 -- 3,209 --
----------- ---------- ------------ -----------
Total interest income.................. 44,360 26,350 93,880 49,809
Interest expense............................. 30,955 20,350 67,738 38,975
----------- ---------- ------------ -----------
Net interest income.................... 13,405 6,000 26,142 10,834
Provision for loan losses.............. 2,025 1,700 3,525 2,600
----------- ---------- ------------ -----------
Net interest income after provision
for loan losses........................ 11,380 4,300 22,617 8,234
Loan servicing (expense) income.............. (448) 3,006 1,562 6,541
(Loss) gain on sale of servicing rights...... (257) 496 7,808 2,921
Gain on sale of SPFC stock................... 62,007 -- 62,007 --
Other income................................. 4,284 80 5,485 270
---------- ---------- ------------ ----------
Total other income..................... 65,586 3,582 76,862 9,732
----------- ---------- ------------ ----------
Total revenue.......................... 96,132 16,676 140,356 32,990
Expenses:
Personnel expense............................ 10,967 6,824 23,402 13,719
Amortization of PMSR's and OMSR's............ 114 736 832 1,380
Occupancy expense............................ 950 934 2,270 1,922
Data processing expense...................... 575 450 930 788
Net expenses of other real estate owned...... 1,218 473 3,986 715
Professional services........................ 2,535 405 3,681 857
FDIC insurance premiums...................... -- 559 45 1,123
Telephone and other communications........... 619 709 1,525 1,314
Restructuring provision -
exit from mortgage banking operations....... -- -- 3,800 --
General and administrative expense........... 3,674 2,453 7,349 4,653
---------- --------- ----------- ---------
Total expenses........................... 20,652 13,543 47,820 26,471
Income before income taxes................. 75,480 3,133 92,536 6,519
Income taxes............................... 30,868 1,301 37,769 2,729
Minority interests in net income of
consolidated subsidiaries................. 1,571 -- 3,110 --
---------- --------- ----------- ---------
Net income........................... $ 43,041 $ 1,832 51,657 3,790
=========== ========= =========== =========
Net income per share:
Primary:..................................... $ 2.22 $ 0.11 $ 2.79 $ 0.22
=========== ========== ========= =========
Fully Diluted:............................... $ 2.21 $ 0.11 $ 2.78 $ 0.22
=========== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Number of gain on Total
shares Common Retained securities Shareholders
outstanding stock earnings for sale, net Equity
----------- -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995. 14,579 $ 51,981 $ 38,910 $ 3,211 $ 94,102
Exercise of stock options.. 466 1,358 -- -- 1,358
Stock dividend............. 1,458 25,917 (25,917) -- --
Issuance of common stock... 2,440 59,229 -- -- 59,229
Net change in unrealized
gain on securities
available for sale...... -- -- -- 11 11
Tax benefit from exercise of
stock options........... -- 4,407 -- -- 4,407
Net income for period
(unaudited)................ -- -- 51,657 -- 51,657
----------- --------- ---------- ------------ -----------
Balance June 30, 1996
(unaudited)................ 18,943 $142,892 $ 64,650 $ 3,222 $ 210,764
========== ========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months Six months
ended June 30, ended June 30,
1996 1995
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $ 51,657 $ 3,790
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses................ 3,525 2,600
Restructuring provision - exit from
mortgage banking operations............ 3,800 --
Depreciation and amortization............ 1,958 2,144
Accretion of discount.................... (3,209) --
Gain on sale of servicing rights......... (7,808) (2,921)
Gain on sale of SPFC stock............... (62,007) --
Gain on sale of loans.................... (40,877) (15,024)
Stock option compensation expense........ -- 218
Writedowns on other real estate owned.... 2,088 540
Net change in loans held for sale........ 399,897 12,465
Net change in accrued interest on loans.. (578) (1,861)
Net change in other assets............... (16,869) (12,965)
Net change in other liabilities.......... 63,252 12,456
---------- -----------
Net cash provided by
operating activities: 394,829 1,442
Cash flows from investing activities:
Net change in interest bearing deposits.. 137,300 (14,300)
Purchase of servicing rights............. (4,500) (4,219)
Proceeds from sale of servicing rights... 19,097 11,798
Proceeds from sale of
other real estate owned............... 3,249 1,572
Purchase of securities available
for sale.............................. (154,777) (1,801)
Sale of securities available for sale.... 242,238 --
Net change in loans held for investment.. (85,021) (128,243)
Purchases of premises and equipment...... (2,759) (448)
Net cash provided by
(used in) investing activities: ----------- -----------
154,827 (135,641)
Cash flows from financing activities:
Net change in deposits.................. (103,765) (37,677)
Advances from Federal Home Loan Bank.... 470,000 237,000
Repayments of advances from
Federal Home Loan Bank................ (365,000) (302,000)
Net change in other borrowings.......... (465,848) 269,488
Repayment of bonds...................... (111,995) --
Proceeds from resale of Senior Notes.... 7,615 --
Proceeds from sale of SPFC stock........ 36,362 --
Issuance of common stock................ 59,229 --
Proceeds from exercise of stock options. 1,358 146
----------- -----------
Net cash (used in) provided by financing
activities:........................... (472,044) 166,957
Net change in cash...................... 77,612 32,758
Cash at beginning of year............... 39,166 24,903
----------- -----------
Cash at end of period................... $ 116,778 $ 57,661
=========== ============
Supplemental disclosure of cash flow information:
Income taxes paid during the period...... $ 8,468 $ 6,077
Interest paid during the period.......... $ 67,413 $ 36,474
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization
Imperial Credit Industries, Inc. (the "Company"),incorporated in 1986
in the State of California, is 24.9% owned by Imperial Bank.
The consolidated financial statements include Imperial Credit Industries,
Inc.("ICII"), and its wholly-owned and majority-owned subsidiaries
(collectively the "Company"). The wholly-owned subsidiaries include Southern
Pacific Thrift & Loan Association ("SPTL"),Imperial Business Credit, Inc.
("IBCI") 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 in the majority owned
consolidated subsidiaries are included in minority interest in consolidated
subsidiaries on the consolidated balance sheets. The Company owns 58.4%
of SPFC, with 41.6% owned by other public investors. 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 in ICIFC. The Company also owns 7.6% of
Imperial Credit Mortgage Holdings, Inc. ("ICMH"), an unconsolidated
affiliated company, that owns all of the ICIFC non voting
preferred stock which entitles ICMH to a 99% economic interest in ICIFC.
The Company will retain only 1% of the net earnings or loss derived from
the operations of ICIFC. All material intercompany balances and
transactions have been eliminated.
2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months
ended June 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 years' consolidated financial
statements have been reclassified to conform to the 1996 presentation.
3. Preferred and Common Stock
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series,
and to fix the designations, rights, preferences, privileges,
qualifications and restrictions, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater
than the rights of the Common Stock.
On February 26, 1996, the Company paid a stock dividend to shareholders
of record as of February 12, 1996. One new share of Common Stock was
issued for each 10 shares currently held by shareholders.
On October 24, 1995, the Company paid a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
<PAGE>
Per Share Information
Net income per common share is computed based on the weighted
average number of shares outstanding during the periods presented
plus common stock equivalents deemed to be dilutive. Common stock
equivalents deemed to be dilutive were calculated based on the average price
per share during the periods presented for primary net income per share
and based on the ending stock price per share, if greater than the average
stock price per share, for fully diluted net income per share for the
periods presented. The number of shares used in the computations give
retroactive effect to stock dividends and stock splits for all periods
presented. The weighted average number of shares including common stock
equivalents for the three months ended June 30, 1996 and 1995
was 19,452,044 and 16,982,547 for fully diluted net income per share,
respectively. The weighted average number of shares including common stock
equivalents for the three months ended June 30, 1996 and 1995 was
19,423,270 and 16,902,641 for primary net income per share, respectively.
The weighted average number of shares including common stock equivalents
for the six months ended June 30, 1996 and 1995 was 18,588,101 and
16,980,747 for fully diluted net income per share, respectively.
The weighted average number of shares including common stock equivalents
for the six months ended June 30, 1996 and 1995 was 18,527,646 and
16,803,511 for primary net income per share, respectively. Primary
income per share was not materially different than fully diluted
income per share.
4. Commitments and Contingencies
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to
liability under representations and warranties made to purchasers
and insurers of mortgage loans and the purchasers of servicing rights.
Under certain circumstances, the Company is required to repurchase mortgage
loans if there has been a breach of representations or warranties.
As of June 30, 1996, the Company was servicing loans totaling
approximately $1.2 billion. During the three months ended June 30, 1996,
the Company sold $478.5 million of bulk servicing rights
as compared to the sale of $350.6 million of bulk servicing rights in the
same period of the previous year.
Legal Proceedings
The Company is involved in litigation arising in the normal
course of business of which management believes based in part upon the
advice of legal counsel, will not have a material effect on the
consolidated financial statements.
5. Investment Securities Available for Sale
At June 30, 1996, the carrying value of investment securities available
for sale, including interest bearing deposits and investment in Federal
Home Loan Bank stock, equaled market value.
<PAGE>
6. Loans Held for Sale
Loans held for sale consisted of the following at June 30, 1996 and
December 31, 1995:
(Dollars in thousands)
<TABLE>
<CAPTION>
At June 30, 1996 At December 31, 1995
---------------- -------------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.................. $ 635,273 $ 1,083,038
Multi-family....................... 207,000 171,199
------------- -------------
842,273 1,254,237
Leases............................. 12,893 17,787
Commercial loans................... 127,623 69,786
------------- ------------
$ 982,789 $ 1,341,810
============= =============
</TABLE>
7. Loans Held for Investment, net
Loans held for investment consisted of the following at
June 30, 1996 and December 31, 1995.
(Dollars in thousands)
<TABLE>
<CAPTION>
At June 30, 1996 At December 31, 1995
----------------- -----------------
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4............. $ 221,481 $ 228,721
Multi Family.................. 70,866 7,028
Commercial.................... 57,329 133,189
------------- -----------
349,676 368,938
Leases....................... 1,485 7,297
Installment loans............ 16,060 1,900
Commercial................... 411,468 311,122
------------- ----------
778,689 689,257
Unearned income.............. (6,666) (5,217)
Deferred loan fees........... (7,602) (1,540)
-------------- -----------
764,421 682,500
Allowance for loan losses.... (13,951) (13,729)
-------------- ----------
$ 750,470 $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 debtor's ability to honor their
contracts is dependent upon the economy of California.
<PAGE>
Activity in the allowance for loan losses was as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
At June 30, At December 31,
1996 1995
----------- --------------
<S> <C> <C>
Balance, beginning of year.. $ 13,729 $7,054
Provision for losses
charged to expense ........ 3,525 5,450
Business acquisitions and
bulk loan purchases........ -- 4,320
Loans charged off.......... (3,361) (3,106)
Recoveries on loans
previously charged off..... 58 11
----------- ------------
Net charge-offs............. (3,303) (3,095)
Balance, end of period...... $ 13,951 $ 13,729
=========== ==========
</TABLE>
As of June 30, 1996 and December 31, 1995 non-accrual
loans totaled $43.3 and $31.0 million, respectively.
The following table sets forth the amount of NPA's attributable
to the Company's former mortgage banking operations (Including
ICIFC) and to all of its other lending activities.
<TABLE>
<CAPTION>
At June 30, At December 31,
1996 1995
------------------- ----------------
Former Former
All Other Mortgage All other Mortgage
Lending Banking Lending Banking
Activities Operat. Activities Operat.
---------- -------- ---------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... 12,832 24,576 2,652 20,990
Commercial............. 4,359 -- 1,824 --
Multifamily property... 1,499 -- 5,522 --
------ ------- ------- ------
Total nonaccrual loans... 18,690 24,576 9,998 20,990
Other real estate owned:
One to four family..... 3,883 3,016 1,937 4,173
Commercial ............ 869 -- 211 --
Multifamily property... 1,365 -- 858 --
Total other real ------ ------- ------ -----
estate owned........... 6,117 3,016 3,006 4,173
Loans with modified terms:
One to four family..... 858 -- 870 --
Commercial property.... 456 -- -- --
Multifamily property... -- -- -- --
------ ------- ------- -----
Total loans with
modified terms......... 1,314 -- 870 --
Total non performing
assets................. $ 26,121 $ 27,592 $ 13,874 $ 25,163
Total loans and OREO..... $1,661,587 $109,024 $ 1,168,783 $ 869,463
Total NPA's as a percentage of
loans and OREO....... 1.57% 25.31% 1.19% 2.89%
</TABLE>
<PAGE>
The provision for loan losses was $3.5 million for the
six months ended June 30, 1996, an increase of 36% from $2.6 million for
the same period of the previous year. The increase in the provision was
primarily the result of the significant increase in nonaccrual loans and the
increase in the amount of net charge-offs in the current period. The
Company's Multifamily loans amounted to $1.2 million of charge-offs and loans
originated as a part of the former mortgage banking operations amounted to
$1.1 million of charge offs in the six months ended June 30, 1996. The
Company expects the trend in charge offs to continue relating to loans
originated by the former mortgage banking operations for the next few
quarters, until the existing portfolio of problem loans has been sold, paid
off, or disposed of by other means. The ratio of the allowance for loan
losses to total loans held for investment at June 30, 1996 decreased to
1.79%, from 1.99% at December 31, 1995. The ratio of the allowance for loan
losses to nonaccrual loans decreased to 32.2% at June 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 in both periods on a loan-by-loan basis and has determined that
the allowance is adequate to cover both expected losses on nonaccrual loans
and inherent losses in the remainder of the Company's loans held for
investment portfolio. The Company believes that the current loan
loss allowance is adequate.
The percentage of the allowance for loan loss to nonaccrual loans will
not remain constant due to the changing nature of the Company's portfolio
of loans. The collateral for each nonperforming loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with
other factors, this loss exposure contributes to the overall assessment
of the adequacy of the allowance for loan losses. On an ongoing basis,
management monitors the loan portfolio and evaluates the adequacy of the
allowance for loan losses. In determining the adequacy of the allowance
for loan losses, management considers such factors as historical loan
loss experience, underlying collateral values, evaluations made by bank
regulatory authorities, assessment of economic conditions and other
appropriate data to identify the risks in the loan portfolio. Loans
deemed by management to be uncollectible are charged to the allowance
for loan losses. Recoveries on loans previously charged off are credited
to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio. While management believes that the current allowance for
loan losses is sufficient, future additions to the allowance may be
necessary.
8. Purchased/Originated Servicing Rights and Capitalized
Servicing Fees Receivable
Changes in purchased/originated servicing rights were as
follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six
Months Ended For theYear Ended
June 30, 1996 December 31, 1995
------------- ----------------
<S> <C> <C>
Beginning balance.................. $ 18,428 $ 16,746
Addition........................... 4,501 7,340
Bulk purchase of servicing......... -- 757
Increase as a result of the
FMAC acquisition.................. -- 3,805
Sales of servicing ............... (13,390) (6,233)
Amortization - prepayments......... -- (1,176)
Amortization - scheduled........... (832) (2,811)
------------ ----------
Ending balance..................... $ 8,707 $18,428
============ ===========
</TABLE>
<PAGE>
On May 12, 1995, the Financial Accounting Standards Board
issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights", an amendment to SFAS No. 65. The Company has adopted this
standard for its financial statement reporting beginning with the first
quarter of 1995.
SFAS No. 122 requires that a portion of the cost of originating
a mortgage loan be allocated to the mortgage loan servicing right based
on its fair value relative to the fair value of the loan as a whole. To
determine the fair value of the servicing rights created, the Company
used the market prices under comparable servicing sale contracts, when
available, or alternatively used a valuation model that calculates the
present value of future net servicing revenues to determine the fair
value of the servicing rights. In using this valuation method, the
Company incorporates assumptions that market participants would use in
estimating future net servicing income which includes estimates of the
cost of servicing, a discount rate, an inflation rate, ancillary income
per loan, a loan prepayment speed, and a loan default rate.
Of the $8.7 million of servicing rights outstanding at June 30, 1996,
$3.8 million are held at SPTL as acquired servicing rights of franchise
mortgage loans from FMAC, with the remaining $4.9 million held at ICIFC
in connection with their mortgage banking operations.(See "Notes to
Consolidated Financial Statements -Note 1. -Organization.")
In determining servicing value impairment, the post implementation
originated servicing portfolio was disaggregated into its predominant risk
characteristics. The Company has determined those risk characteristics to
be loan program type and interest rate. Interest rates are stratified
using 100 basis point increments. These segments of the portfolio were
evaluated, using market prices under comparable servicing sale contracts,
when available, or alternatively using the same model as used to
originally determine the fair value at sale, using current assumptions.
The calculated value was compared to the capitalized book value of
each loan type and interest rate pool to determine if a valuation
allowance is required.
The Company will continue to calculate the fair value of
its pre-implementation purchased servicing rights on a loan by
loan basis. Additionally, the Company will continue to amortize
its pre-implementation purchased servicing rights in
proportion to, and over the period of, expected future net
servicing income disaggregated by each individual loan with related
capitalized serving rights.
<PAGE>
Capitalized Servicing Fees Receivable
At June 30, 1996 and December 31, 1995 capitalized excess
servicing fees receivable of 79.4 million and 44.0 million are recorded
net of an allowance for recourse losses of $11.7 million and $8.7 million,
respectively.
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 may represent
the present value of the difference between the interest rate charged by the
Company to a borrower and the interest rate received by the
investors who purchased securities collateralized by the loans sold into
the securitization vehicle.
The Company has created capitalized excess servicing fees
receivable as a result of the sale of loans and to a lesser extent leases
into various trust 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 ownership of the assets
of the trust; therefore, these trust vehicles are not consolidated with
the Company. Capitalized excess servicing fees receivable on the sale
of loans and leases are determined by computing the present value of the
excess of the weighted average coupon on the loans and leases sold (ranging
from 9.0% to 13.3%) over the sum of: (1) the coupon in the pass through
certificates (ranging from 5.6% to 7.4%), (2) a base servicing fee paid to the
loan or lease servicer (ranging from 0.40% to 0.50%), (3) expected
losses to be incurred on the portfolio of loans or leases sold (ranging from
0.25% to 0.50% over the life of the loan), and considering (4) prepayment
assumptions.
<PAGE>
Prepayment assumptions are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment
rates on new portfolios and consideration of the current interest rate
environment and its potential impact on prepayment rates. The cash flows
expected to be received by the Company, not considering the expected
losses, are discounted at an interest rate that the Company believes
an unaffiliated 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 portion of the Company's reported income and all of the related
capitalized servicing fees receivable included in the Company's
consolidated financial statements represent the recognition of the present
value of the excess servicing spread, which is based on certain estimates
made by management at the time loans are sold. The rate of prepayment of
loans may be affected by a variety of economic and other factors,
including prevailing interest rates and the availability of alternative
financing. The effect of those factors on loan prepayment rates may vary
depending on the particular type of loan. Estimates of prepayment rates
are made based on management's expectations of future prepayment rate,
which are based, in part, on the historical rate of prepayment of the
Company's loans, and other considerations. There can be no assurance of
the accuracy of management's initial prepayment estimates. If actual
prepayment with respect to sold loans occur more quickly than was projected
at the time such loans were sold, the carrying value of the capitalized
servicing fees receivable may have to be written down through a charge to
earnings in the period of adjustment. If actual prepayments
with respect to sold loans occur more slowly than estimated, the
carrying value of capitalized servicing fees receivable on the Company's
consolidated statement of financial condition would not increase,
although total income would exceed previously estimated amounts.
9. Borrowings from Imperial Bank
In November 1995, the Company renewed a $10 million line of credit
with Imperial Bank. The line was subsequently increased to $15 million.
In April 1996, the line was repaid in full with the proceeds raised in the
Company's secondary stock offering.
10. Other Borrowings
Other borrowings primarily consist of revolving warehouse lines of
credit to fund the Company's and its subsidiaries lending activities. At
June 30, 1996, approximately $465.0 million of loans were pledged as
collateral for other borrowings. These lines of credit are short term
and management believes these lines will be renewed in the normal course
of business.
<PAGE>
ICII and its subsidiaries has various revolving warehouse lines of
credit available at June 30, 1996, as follows:
<TABLE>
<CAPTION>
Interest
Rate Commitment Outstanding Index
---------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
DLJ (ICII)................. 6.48% $400,000 34,131 FedFunds+80bp-150bp
PaineWebber (ICII)......... 6.13% 200,000 14,369 Libor+65bp-100bp
Banco Santander (FMAC)..... 8.25% 50,000 23,235 Libor+225bp
Lehman Brothers (SPFC)..... 6.30% 200,000 80,137 Libor+30bp
Imperial Warehouse
Lending Group (ICIFC)..... 8.25% 600,000 246,706 Bank of America Prime
Warehouse Lending Corporation
of America (ICII)........ 8.50% 20,000 16,389 Libor+250bp
---------- -------
$1,470,000 $414,967
========== ========
</TABLE>
11. Senior Notes
<TABLE>
<CAPTION>
(Dollars in thousands) Balance at
June 30, December 31,
1996 1995
---------- -----------
<S> <C> <C>
Senior notes........................ $ 90,000 $ 81,500
Unamortized discount................ (1,811) (1,028)
---------- ----------
Net balance, Senior Notes........... $ 88,189 $ 80,472
========= ==========
</TABLE>
In January 1994, the Company issued $90,000,000 of Senior
Notes with a stated interest rate of 9.75% which mature on January 15,
2004. In October 1994, the Company repurchased $8,500,000 of the Senior
Notes. During the first quarter of 1996, the Company sold the repurchased
Senior Notes for prices ranging from 90 to 95. At June 30, 1996,
$90,000,000 of the Senior Notes were outstanding and the interest rate on
the Senior Notes was 9.75%. The Senior Notes may be redeemed after January 15,
1999 at the option of the Company until maturity at a declining
premium, plus accrued interest. The Senior Notes are unsecured and rank pari
passu with all other senior unsecured indebtedness of the Company, but
are effectively subordinated to the liabilities of Southern Pacific Thrift
and Loan Association, the Company's wholly owned subsidiary. The
Trust Indenture (the Indenture) for the Senior Notes includes provisions
which limit the ability of the Company to incur additional indebtedness or
issue certain stock of the Company, to make certain investments, engage
in certain transactions with affiliates, create restrictions on the
ability of subsidiaries to pay dividends or certain other distributions,
create liens and encumbrances, or allow its subsidiaries to issue certain
classes of stock.
Total interest expense on the Senior Notes for the six months ended June
30, 1996 and 1995 was $5.2 million and $4.9 million, respectively.
<PAGE>
12. 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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is a diversified specialty finance company
offering financial products, principally through its subsidiaries, in the
following four sectors: non-conforming residential mortgage banking,
commercial mortgage banking, business lending and consumer lending.
The Company's strategy is to concentrate its lending activities in select
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 four sectors:
non-conforming residential mortgage lending - non conforming single family
mortgage loans
commercial mortgage lending - franchise loans, income property loans and
manufactured housing community loans
business finance lending - equipment leasing, asset-based financing and
loan participations
consumer loans - sub-prime auto loans, home improvement loans and other
consumer credit
The majority of the Company's loans and leases, other than those held by
SPTL for investment, are sold in the secondary market through
securitizations. 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.
<PAGE>
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 58.4% 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 $259.8 million for the six months ended June 30, 1996 from
$128.0 million for the six months ended June 30, 1995.
Commercial Mortgage Lending
The Company engages in commercial lending, which consists of franchise
mortgage lending, asset-based lending, equipment leasing income property
lending, manufactured housing community lending and loan participations.
Franchise Mortgage 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 make this market
sector amenable to securitization. FMAC targets ''top tier'' franchises whose
franchisors exercise significant operating and marketing control. It lends
only to established, successful operators of franchise restaurants with proven
track records. FMAC makes loans directly to franchisees based on the
enterprise value as well as the cash flow of individual restaurants and,
where applicable, the value of any associated real estate. FMAC generally
lends against existing cash flow. It generally does not rely on projected
sales growth to add incremental cash flow to help service debt. Borrowers
must demonstrate positive cash flow on an EBITDA (earnings before interest,
taxes, depreciation and amortization) basis.
During the six months ended June 30, 1996, loans to individual credits
ranged from approximately $300,000 to $27.4 million. For the six months
ended June 30, 1996, FMAC originated or acquired $208.0 million of franchise
mortgage loans. FMAC securitized $167.4 million of franchise mortgage loans
during the six months ended June 30, 1996.
Income Property Lending
SPTL's Income Property Loan Division ("IPLD") was formed in
February 1994 to expand the Company's apartment and commercial property
lending business. 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.
<PAGE>
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 six months ended June 30 1996 and 1995, IPLD funded approximately
$121.7 million and $57.2 million in loans, respectively.
Manufactured Housing Community Lending
Manufactured Housing Community Bankers (''MHCB'') was formed as a division
of ICII in early 1995 as a specialty lending group to finance fully-developed
manufactured housing communities throughout the United States. During the
quarter ended June 30, 1996, the MHCB division of ICII was merged into SPTL,
and will conduct its future operations as a SPTL division. MHCB's loan
programs are designed to originate, underwrite, close, service, warehouse
and securitize mobile home community first mortgage loans. Many of these
properties are master planned communities with recreational and social
amenities. The loans are secured by the manufactured housing community
real estate; the principal source of repayment is the rental payments for
the pads on which the manufactured housing is situated.
MHCB originated $9.7 million and no loans in the six months
ended June 30, 1996 and 1995, respectively.
Business Finance Lending
The Company, through CBCC, IBC and the Loan Participation and Investment
Group of SPTL, also engages in business finance lending, which consists
of asset-based lending, commercial equipment leasing and loan participations.
Asset Based Lending
General
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 to $100
million. Generally, such businesses are constrained from obtaining
financing from more traditional credit sources such as commercial banks
due to inadequate equity capitalization, limited operating history, lack
of profitability or financing needs below commercial bank minimum size
requirements. CBC has focused its lending activities on high technology
businesses engaged in the computer industry.
At June 30, 1996, CBC's loan portfolio represented lending relationships
with approximately 94 customers, with an average total loan per customer
of $2.2 million. During the six months ended June 30, 1996, CBC began
an expansion plan which the Company believes will substantially increase
the customer base of CBC outside the state of California. At June 30, 1996
and December 31, 1995, CBC had outstanding loans totaling $210.2 million
and $154.2 million, respectively. CBC and open commitments to fund additional
loans of $210.4 million at June 30, 1996.
<PAGE>
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.
Upon expiration of the initial lease terms if its direct-financing
leases, IBC expects, on average, to realize slightly more than the
"residual value" at which the leased equipment is carried on IBC's
books. IBC's ability to recover the recorded estimated residual value
depends on the accuracy of initial estimates of the equipment's useful
life, the market conditions for used equipment when leases expire, and
the effectiveness of IBC's program for releasing or otherwise disposing
of leased equipment. Residual recovery, however, is not required for IBC
to achieve a profitable return on its investment. The residual is usually
worth 1% to 2% of the gross yield depending upon original lease term,
further mitigating against the residual risk inherent in the portfolio.
IBC's lease originations totaled $33.7 million in the six
months ended June 30, 1996.
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 June 30, 1996, loan participations
held by LPIG ranged in size from approximately $3 million to approximately
$10 million.
During the six months ended June 30, 1996, LPIG has purchased and
funded approximately $135.0 million of senior secured loan participation
commitments. Loans outstanding under LPIG's participation commitments at
June 30, 1996 totaled $116.3 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.
<PAGE>
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.
During 1995, ALD generated and sold approximately $19 million in sub-prime
auto loans. ALD generated $13.4 million in sub-prime auto loans during the
six months ended June 30, 1996. 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 in 1996.
Home Improvement Loans and Other Consumer Credit
SPTL's Consumer Credit Division ("CCD") was formed in early 1994 to
offer loans primarily to finance home improvements, manufactured housing
and other consumer goods. CCD's business is developed through a network of
retailers and contractors throughout California. All loans are centrally
processed, approved and funded at CCD's headquarters in Irvine,
California.
Home improvement loans offered by CCD range from $5,000 to $350,000 and
include major remodeling projects that are sometimes coupled with
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 six months ended June 30, 1996 and 1995, CCD originated $9.5
million and $5.6 million in loans, respectively.
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 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 six month
ended June 30, 1996, ICIFC had total assets of $258.5 million, total
revenues of $5.1 million, and net income of $624,000.
<PAGE>
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
June 30, 1996 included approximately $258.5 million in assets, and $248.8
million in liabilities related to ICIFC. The Company will retain only 1% of
the net earnings or loss derived from such assets and liabilities along
with the other operations of ICIFC.
In exchange for the contributed assets, the Company received 11.8% of the
capital stock of ICMH. During the quarter ended June 30, 1996, ICMH completed
a secondary offering of its common stock, issuing 2.5 million primary shares,
and generating net proceeds of $37.5 million. ICMH's secondary stock offering
reduced the Company's ownership in ICMH to 7.6% at June 30, 1996. The
Company's wholly-owned subsidiary, Imperial Credit Advisors, Inc. (''ICAI''),
provides management advisory services to ICMH in return for a management fee.
In the first six 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 six
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 expects to sell or
subcontract all servicing related to such mortgage banking business prior
to September 1995 to Advanta or other third party servicers. The Company
intends to continue servicing all loans and leases originated by its
equipment leasing and franchise mortgage lending businesses, as well as
all loans held by SPTL.
Finally, during the quarter ended June 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.
Since April 1995 SPFC has operated as a stand alone entity and has produced
approximately $490.9 million of sub prime credit loans through June 30,
1996. The loans originated by SPFC (and before April 1995, the Residential
Lending Division of SPTL) have accounted for a significant portion of the
loans included in the Company's loan securitizations. During the six months
ended 1996 and 1995, SPFC securitized $229.7 million and $46.1 million of
loans, respectively. SPFC intends to continue to accumulate the loans
originated or acquired and securitize them in the secondary mortgage markets.
As of and for the six months ended June 30, 1996, SPFC had total assets of
$163.4 million and net income of $9.4 million.
Strategic Focuses and Acquisitions
Additionally, in 1995, the Company formed a new
subsidiary, Imperial Credit Advisors, Inc. ("ICAI"), entering the Company in
another new business-investment trust management. ICAI, incorporated
in January 1995 in the State of California, is a 100% owned subsidiary of
ICII. ICII formed ICAI to provide monitoring, reporting, and other
general and administrative services to the Imperial Government Income
Trusts, Series I through IV. ICAI also acts as the manager of ICMH, the
Company's newly formed REIT. ICAI will oversee the day-to-day
operations of ICMH, subject to the supervision of ICMH's Board of Directors,
pursuant to a management agreement. As of and for the six month ended
June 30, 1996, ICAI had total assets of $2.9 million and net income of
$883,400.
<PAGE>
During 1995, the Company completed the acquisition of substantially all of
the assets and assumption of substantially all of the liabilities of First
Concord Acceptance Corporation of Colorado ("FCAC"). At the date of
acquisition the existing employees and operations of FCAC became a part of
Imperial Business Credit, Inc. ("IBC"), a newly formed wholly owned
subsidiary of ICII. The Company paid approximately $21 million in the
acquisition of FCAC. Total assets of approximately $41 million were
acquired and sold to SPTL as a result of the acquisition.
FCAC's operations primarily consist of originating and securitizing equipment
leases throughout the United States. The acquisition of FCAC has resulted
in the significant expansion of the Company's equipment leasing activities.
As of and for the six month ended June 30, 1996, IBC had total assets of
$12.2 million and net income of $660,000.
During 1995, the Company completed the acquisition of two thirds of the
outstanding common stock of Franchise Mortgage Acceptance Corporation
("FMAC") of Greenwich, Connecticut, and placed all of the employees, and
operations of FMAC into a new subsidiary, Franchise Mortgage Acceptance
Company LLC, ("FMAC"). The Company paid approximately $4 million in the
acquisition of FMAC and was obligated to pay an additional $3.8 million
based on FMAC's future loan originations. Total assets of approximately
$3.8 million (primarily servicing rights) were acquired and sold to SPTL
as a result of the acquisition, and the Company recorded goodwill of
approximately $4.0 million. FMAC provides commercial financing programs to
major franchising companies and their franchisees. The $3.8 million of
assets transferred to SPTL consists primarily of franchise mortgage
servicing rights aggregating approximately $267 million. As of and for the
six month ended June 30, 1996, FMAC had total assets of $37.3 million and
income before income taxes of $7.2 million.
In September 1995, the Company completed the acquisition of 100% of the
outstanding common stock of CoastFed Business Credit Corporation ("CBCC"),
and placed all of the employees, and operations of CBCC into its existing
subsidiary, SPTL. The Company paid approximately $150.0 million in its
acquisition of CBCC. At the acquisition date, CBCC had total assets of
approximately $137.2 million, total commitments to fund loans of $460.6
million, and total outstanding loans of $138.8 million. As a result of the
acquisition, and the Company recorded goodwill of approximately $16.0
million. Coast Business Credit Corporation ("CBC") provides commercial
receivables financing programs to retailers in a variety of businesses.
During 1995, CBC originated approximately $42.9 million in commercial
receivables. Substantially all of the assets transferred to SPTL consist
of outstanding loans to CBC customers. At June 30, 1996, SPTL had
total outstanding loans related to CBC of $210.2 million.
Securitization Transactions
During the six months ended June 30, 1996, the Company had completed
three sales, through securitization, of sub prime residential mortgage loans
aggregating $229.7 million and franchise mortgage loans aggregating $167.4
million. Of the principal amount securitized during 1995, $150.8 million
was securitized in the first six months. The Company retained an interest
in each loan securitization, representing the excess of the total amount
of loans sold in the securitization over the amounts represented by
interests in the security sold to investors. The retained interests in the
mortgage loan securitizations were $22.6 million and $14.2 million at
June 30, 1996 and December 31, 1995, respectively. Although the Company
continues to act as master servicer for the underlying mortgage loans
included in each security and maintains the customer relationships,
these securitizations are treated as sales for financial reporting
purposes. Accordingly, the associated securitized mortgage loans are not
reflected on the balance sheet, except for the retained interests and
capitalized excess servicing fees described below.
The Company is subject to certain recourse provisions in connection
with these securitizations. At June 30, 1996 and December 31, 1995, the
Company had discounted recourse allowances of $11,664,421 and $8,749,988,
respectively, related to these recourse provisions which are netted
against capitalized servicing fees receivable.
<PAGE>
A portion of the Company's reported income and all of the related
capitalized servicing fees receivable included in the Company's consolidated
financial statements represent the recognition of the present value of the
excess servicing spread, which is based on certain estimates made by
management at the time loans are sold. The rate of prepayment of loans
may be affected by a variety of economic and other factors, including
prevailing interest rate and the availability of alternative financing. The
effect of those factors on loan prepayment rates may vary depending on the
particular type of loan. Estimates of prepayment rate are made based on
management's expectations of future prepayment rate, which are based, in
part, on the historical rate of prepayment of the Company's loans, and other
considerations. There can be no assurance of the accuracy of management's
initial prepayments estimates. If actual prepayments with respect to sold
loans occur more quickly than was projected at the time such loans were
sold, the carrying value of the capitalized servicing fees receivable may
have to be written down through a charge to earnings in the period of
adjustment. If actual prepayments with respect to sold loans occur more
slowly than estimated, the carrying value of capitalized servicing fees
receivable on the Company's consolidated statement of financial condition
would not increase, although total income would exceed previously estimated
amounts.
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 six months ended June 30, 1996, the Company sold all of its
residential mortgage servicing with related capitalized Purchased and
Originated Servicing Rights. As a result of this sale, of the $8.7 million
of servicing rights outstanding at June 30, 1996, $3.8 million are held at
SPTL as acquired servicing rights of franchise mortgage loans from FMAC,
with the remaining $4.9 million held at ICIFC in connection with their
mortgage banking operations. (See "Notes to Consolidated Financial
Statements -Note 1. -Organization.")
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 June 30, 1996, SPTL
had total deposits of approximately $1.0 billion (excluding deposits of
ICII maintained with SPTL).
<PAGE>
Results of Operations
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
Revenues for the quarter ended June 30, 1996 increased 476% to $96.1
million as compared to $16.7 million for the same period of the previous
year. Expenses for the quarter ended June 30, 1996 increased 52% to
$20.7 million as compared to $13.5 million for the same period of the
previous year. Net income for the quarter ended June 30, 1996 increased
to $43.0 million as compared to $1.8 million for the same period of
the previous year. The 476% increase in revenue, partially offset by the
52% increase in expenses accounted for the increase in the Company's net
income. Fully diluted net income per share for the quarter ended June 30,
1996 was $2.21, as compared to $0.11 for the same period of the
previous year. Net income per share increased at a lower rate than net
income due an increase in outstanding shares used for net income per share
calculations as a result of the Company's common stock offering. (See
Liquidity and Capital Resources, below). The Company had 19.5 million shares
of common stock and common stock equivalents outstanding during the quarter
ended June 30, 1996 as compared to 17.0 million shares outstanding during the
same period of the previous year.
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 gains
on sales of servicing rights) for the quarter ended June 30, 1996 increased
419% and 356% to $8.0 million and $0.41 per share from $1.5 million and
$0.09 per share in the same period of the previous year, respectively.
Gain on sale of loans increased 118% to $19.2 million for the quarter
ended June 30, 1996 as compared to $8.8 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, and due to an increase in the volume of loans sold on a
servicing released basis at the Company's former mortgage banking operations.
Gain on sale of loans includes; $13.2 million in gains recorded as a result of
the securitization of $130.0 million of the Company's sub prime residential
mortgage loans at SPFC, $4.6 million in gains (including $2.7 million in
hedge gains) resulting from the sale of $167.4 million of franchise
mortgage loans at Franchise Mortgage Acceptance Company, LLC, and a $257,000
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. Also included in gain on sale of loans was $1.6 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 Southern Pacific Thrift & Loan
Association for the quarter ended June 30,1996 increased 123% and 91% to
$13.4 million and 4.15% compared to $6.0 million and 2.17% for the same
period of the previous year. The increase in net interest income and net
interest margin was due primarily to two factors. The Company began 1995
with a loan portfolio consisting primarily of adjustable rate residential
mortgage loans. The increase in net interest income can be
directly attributed to the acquisitions completed throughout
the last half of 1995, and the resultant change in the composition
of loans held for sale and investment from primarily conforming
single family residential mortgage loans to a more diversified
mix of 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 $1.1 million from the accretion of discounts on the
Company's capitalized excess servicing fees receivable. The increase in
interest income due to the factors described above was partially offset
by an increase in the average costs of borrowing from all sources,
including warehouse lines of credit, borrowings from the FHLB, and customer
deposits.
<PAGE>
Loan servicing income for the quarter ended June 30, 1996 decreased 115%
to an expense of $448,000 as compared to income of $3.0 million for the same
period in the previous year. The decrease in loan servicing income was
primarily due to a decreased average balance of residential mortgage loans
serviced for others, primarily as a result of the Company's sale of $3.0
billion of servicing rights in connection with the Company's exit from the
conforming mortgage banking business. Additionally, loan servicing income was
negatively effected by increased direct servicing costs related to the loan
foreclosure and property liquidation process of the remaining conforming
residential mortgage loan portfolio. The conforming residential mortgage loan
servicing portfolio decreased 75% to $1.2 billion at June 30, 1996 from $4.5
billion at December 31, 1995. 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 in the near future, as well 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 June 30, 1996, FMAC serviced
franchise mortgage loans for others totaling $454.7 million, IBCI serviced
leases for others of $122.1 million, and SPTL serviced multifamily or
commercial loans for others of $53.8 million. SPFC acts as master servicer
for $376.9 million of sub prime residential loans serviced for others.
However, as a result of the sub servicing fee arrangement with SPFC's sub
servicer, significant revenues are not realized from this operation.
ICIFC also acts as master servicer for $664.1 million of non conforming
residential mortgage loans. (See "Notes to Consolidated Financial Statements
- -Note 1. Organization.").
During the quarter ended June 30, 1996 and 1995, the Company sold
mortgage loan servicing rights relating to $478.5 million and $18.5 million
principal amount of loans, resulting in a pre-tax loss of $300,000 and a pre
tax gain of $500,000, respectively. Gain on the sale of servicing rights
consists of the cash proceeds received on the ''bulk'' sale of
servicing rights, net of the related capitalized originated or purchased
servicing rights. The decline in profitability on the sale of the conforming
residential mortgage servicing rights was due to the increased amounts
of capitalized servicing rights on the portfolio sold in the quarter 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 quarter ended June 30, 1996, the Company sold approximately 42% of
its common stock in SPFC through an initial public offering of 5.8 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 pretax gain of $62.0 million. Since the Company continues
to have 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, the Company will only retain 58.4% of SPFC's net
income or loss in the future.
Other income for the quarter ended June 30, 1996 increased to $4.3 million
as compared to $80,000 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.
Expenses for the quarter ended June 30, 1996 increased 52% to $20.7 million
as compared to $13.5 million for the same period of the previous year.
<PAGE>
Personnel expenses increased 61% to $11.0 million for the quarter ended
June 30, 1996 as compared to $6.8 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 85% $114,000 for the quarter
ended June 30, 1996 as compared to $736,000 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 $8.7 million of
servicing rights outstanding at June 30, 1996, $3.8
million are held at SPTL as acquired servicing rights of franchise mortgage
loans from FMAC, with the remaining $4.9 million held at ICIFC
in connection with their mortgage banking operations. (See "Notes to
Consolidated Financial Statements-Note 1. -Organization.")
Occupancy expense remained relatively unchanged at $950,000
for the quarter ended June 30, 1996 as compared to $934,000 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 increased 158% to $1.2 million for the quarter
ended June 30, 1996 as compared to $473,000 for the same period of the
previous year. The increase in net expense of OREO was primarily the
result of the sale of properties foreclosed on by the Company's former
mortgage banking operations.
FDIC insurance premiums decreased 100% to $0 for the quarter ended
June 30, 1996 as compared to $559,000 for the same period of the previous
year. FDIC insurance premiums decreased primarily as a result of a
decrease in the rate and fee structure of the insurance premium charged
to SPTL for FDIC deposit insurance.
All other general and administrative expenses, including data
processing, professional services, and telephone and other communications
expense increased 84% to $7.4 million for the quarter ended June 30, 1996
as compared to $4.0 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 late 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 19% to $2.0 million
for the quarter ended June 30, 1996, as compared to $1.7 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 change in the composition of the investment
loan portfolio. Total nonaccrual loans increased 40% to $43.3 million
at June 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 June 30, 1996 and December 31, 1995, respectively.
Net charge-offs were $1.4 million for the quarter ended June 30, 1996, as
compared to $1.1 million for the same period of the previous year. Net
charge-offs for the quarter ended June 30, 1996 by product type were as
follows: Multifamily Loans $377,000, Auto Loans $199,000, Conforming
Residential Mortgage Loans $687,000, and Leases $176,000.
<PAGE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues for the six months ended June 30, 1996 increased 325% to $140.4
million as compared to $33.0 million for the same period of the previous
year. Expenses for the six months ended June 30, 1996 increased 81% to
$47.8 million as compared to $26.5 million for the same period of the
previous year. Net income for the six months ended June 30, 1996 increased
1,263% to $51.7 million as compared to $3.8 million for the same period of
the previous year. The 325% increase in revenue, partially offset by the
81% increase in expenses accounted for the increase in the Company's net
income. Fully diluted net income per share for the six months ended
June 30, 1996 increased 1,164% to $2.78, as compared to $0.22 for the same
period of the previous year. Net income per share increased at a lower rate
than net income due an increase in outstanding shares used for net income per
share calculations as a result of the Company's common stock offering as
discussed below. (See "Liquidity and Capital Resources") The
Company had 18.6 million shares of common stock and common stock equivalents
outstanding during the six months ended June 30, 1996 as compared to 17.0
million shares outstanding during the same period of the previous year.
Net income and net income per share from "core" operations (defined as net
income less the net gain from the sale of SPFC stock, net gains on sales of
servicing rights, and in addition to the net expense of the
restructuring provision) for the six months ended June 30, 1996
increased 632% and 569% to $15.3 million and $0.82 per
share from $2.1 million and $0.12 per share in the same period of the previous
year, respectively.
Gain on sale of loans increased 172% to $40.9 million for the six months
ended June 30, 1996 as compared to $15.0 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, and due to
an increase in the volume of loans sold on a servicing released basis. Gain
on sale of loans includes; $20.9 million in gains recorded as a result of the
securitization of $229.7 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 LLC which was accounted
for as a financing at December 31, 1995, $4.6 in gains recorded as a
result of the securitization of $167.4 million of
franchise mortgage loans in the second quarter of 1996, and $2.2 million in
gains recorded as a result of the sale of loans held by the Company's former
mortgage banking operations. Also included in gain on sale of loans were
$4.5 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 six months ended June 30,1996
increased 109% and 81% to $26.1 million and 3.88% compared to $10.8 million
and 2.14% 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 Company began 1995 with a loan portfolio consisting primarily of
adjustable rate residential mortgage loans. The increase in net interest
income can be directly attributed to the acquisitions completed
throughout the last half of 1995, and the resultant change in the
composition of loans held for sale and investment
from primarily conforming single family residential mortgage loans to a more
diversified mix of loan products from the Company's four primary businesses.
The product mix of the Company's interest earning assets now
includes a much larger percentage of higher-yielding loan and lease
products as compared to the previous year. Interest income also
increased as a result of the Company's loan and lease securitizations, which
contributed interest income of $3.2 million from the accretion of
discounts on the Company's capitalized excess servicing fees receivable.
The increase in interest income due to the factors described above was
partially offset by an increase in the average costs of borrowing from all
sources, including warehouse lines of credit, borrowings from the FHLB, and
customer deposits.
<PAGE>
Loan servicing income for the six months ended June 30,1996 decreased 76%
to $1.6 million as compared to $6.5 million for the same period in the
previous year. The decrease in loan servicing income was primarily due to
a decreased average balance of residential mortgage loans serviced for
others, primarily as a result of the Company's sale of $3.0 billion of
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 effected by increased direct
servicing costs related to the loan foreclosure and property liquidation
process. The conforming residential mortgage loan servicing portfolio
decreased 75% to $1.2 million at June 30, 1996 from $4.5 billion at December
31, 1995.
During the six months ended June 30, 1996 and 1995, the Company sold
mortgage loan servicing rights relating to $3.0 billion and $350.6 million
principal amount of loans, resulting in pre-tax gains of $7.8 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 originated or purchased servicing rights.
The decline in profitability on the sale of the conforming residential
mortgage servicing rights was due to the increased amounts of capitalized
servicing rights on the portfolio sold in the quarter 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 six months ended June 30, 1996, the Company sold approximately
42% of its common sock 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, the Company will only retain 58.4% of
SPFC's net income or loss in the future.
Other income for the six months ended June 30, 1996 increased to $5.5
million as compared to $270,000 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.
Expenses for the six months ended June 30, 1996 increased 81% to
$47.8 million as compared to $26.5 million for the same period of the
previous year.
Personnel expenses increased 71% to $23.4 million for the six months
ended June 30, 1996 as compared to $13.7 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 40% to $832,000 for the six
months ended June 30, 1996 as compared to $1.4 million for the
same period of the previous year. The decrease was the result 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.
Occupancy expense increased 18% to $2.3 million for the six months
ended March 31, 1996 as compared to $1.9 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.
<PAGE>
Net expenses of OREO increased 457% to $4.0 million for the six months
ended June 30, 1996 as compared to $715,000 for the same period of the
previous year. The increase in net expense of OREO was primarily the
result of the sale of properties foreclosed on by the Company's former
mortgage banking operations.
FDIC insurance premiums decreased 96% to $45,000 for the six months ended
June 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 six months ended June 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 EITF 94-3, "Accounting for Restructuring Charges."
During the six months ended June 30, 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 six
months ended June 30, 1996, the Company incurred charges against
the allowance of approximately $2.0 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 77% to $13.5 million for the six months ended June 30, 1996
as compared to $7.6 million for the same period of the previous year. The
increase in general and administrative expenses was due primarily to the
Company's acquisition of CBCC, FCAC, and FMAC, as well as to the start up
of ICAI in 1995.
As a result of the change in the composition of the Company's investment
loan portfolio, earnings were reduced by an increase in the provision for
loan losses. The provision for loan losses increased 36% to $3.5 million
for the six months ended June 30, 1996, as compared to $2.6 million for the
same period of the previous year. The increase in the provision was primarily
the result of the increase in nonaccrual loans, the increase in the amount
of net charge-offs, and the change in the composition of the investment
loan portfolio. Net charge-offs were $3.3 million for the six months ended
June 30, 1996, as compared to $1.3 million for the same period of the previous
year. Net charge-offs for the six months ended June 30, 1996 by product
type were as follows: Multifamily Loans $1.2 million, Auto Loans $434,000,
Conforming Residential Mortgage Loans $1.1 million, and Leases $548,000.
Inflation
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Inflation
affects the Company primarily through its effect on interest rates, since
interest rates normally increase during periods of high
inflation and decrease during periods of low inflation.
During periods of increasing interest rates, demand for mortgage loans and a
borrowers ability to qualify for mortgage financing in a purchase
transaction may be adversely effected.
<PAGE>
Liquidity and Capital Resources
The Company's principal liquidity requirements result from the need for
the Company to fund mortgage loans originated or acquired for purposes of
sale or investment. In addition, the Company, as a loan servicer, requires
funding to make advances of delinquent principal and interest payments and
escrow balances, and as basic working capital. SPTL has historically
provided the funding for its lending activities through its deposits and
FHLB borrowings. During the quarter ended June 30, 1996, the Company had
sufficient liquidity to meet its operating needs. In April 1996, the
Company completed a secondary stock offering of 2,439,904 shares of its
Common Stock. The shares issued were sold for $26.00 per share. The
Company received net proceeds from the offering of $59.2 million.
Also, during the quarter ended June 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 June 30,
1996 and December 31, 1995, SPTL had available lines of credit from the
FHLB equal to 35% of its assets, or $517.7 million and $501.4 million,
respectively. The highest FHLB advance outstanding during the quarter
ending June 30, 1996 was $295.0 million, with an average outstanding
balance of $245.0 million. The outstanding balance of FHLB advances was
$295.0 million at June 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.
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 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.
<PAGE>
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 $702 million in financing at June 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 $101 million of
franchise mortgage loans to various investors. The debentures consist of
three separate classes, Class A, Class B and Class C, with principal
balances at December 31, 1995 of approximately $92.6 million, $4.2 million
and $4.2 million, respectively. The Class C bonds are subordinate to Class
B and both Class B and C are subordinate to Class A. The bonds have a
weighted average loan rate of 9.63%, a pass through rate of 8.59%, and
an anticipated life of 13 years. The premium associated with the Bonds
of $11 million was being amortized as an adjustment to interest expense
over the anticipated life of the Bonds. Due to the Company's retained
interest in the SPE and the disproportionate payments on the pass
through certificates, the Company accounted for this transaction as a
financing at December 31, 1995. In the six months ended June 30, 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.
In January 1994, the Company issued $90 million principal amount of Senior
Notes (''Senior Notes'') to yield 10.00%, due 2004. In October 1994, the
Company repurchased $8,500,000 of the Senior Notes. During the quarter
ended June 30, 1996, the Company sold the $8.5 million of Senior Notes. At
June 30, 1996, $90.0 million of the Senior Notes were outstanding.
The Company believes that SPTL, together with liquidity available at ICII
and its subsidiaries, will adequately fund the Company's lending
activities. Under applicable regulations, dividends and loans from SPTL to
ICII and its other subsidiaries are subject to various limitations. The
liquidity needs of ICII arise in operating its former mortgage banking
operations, not only to meet ICII operating expenses but also for its
contractual obligation as a mortgage servicer. As a mortgage servicer,
ICII is required to make advances to investors when a borrower is
delinquent in meeting its payment obligation. Although these advances are
recaptured through a foreclosure proceeding, the uncertainty as to when an
advance will be necessary requires ICII to maintain liquidity. Since
December 31, 1992, ICII's liquidity needs have included $51 million to
make capital contributions to SPTL. The combination of cash from
operations, including servicing sales, the Company's $20 million line of
credit and the net proceeds received by the Company from its Senior Note
offering allowed the Company to meet its required liquidity needs for 1994
and 1995. These available sources, in addition to the proceeds received
from the Company's stock offering in April, 1996 and 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.
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
UNAUDITED
(Dollars in thousands except per share information)
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, 1996 June 30, 1996
--------------- --------------
<S> <C> <C>
Primary earnings per share:
Net income $ 43,041 $ 51,657
=========== ==============
Avg. number of shares outstanding 18,053 17,059
Net effect of dilutive stock options
Based on treasury stock method
using average market price 1,370 1,469
----------- ------------
Total average shares 19,423 18,528
Primary earnings per share $ 2.22 $ 2.79
=========== =============
Fully diluted earnings per share:
Net income $ 43,041 $ 51,657
=========== ==============
Avg. number of shares outstanding 18,053 17,059
Net effect of dilutive stock options
Based on treasury stock method
using average market price 1,399 1,529
------------ ----------
Total average shares 19,452 18,588
Fully diluted earnings per share: $ 2.21 $ 2.78
=========== ============
</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: August 16, 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> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 116,778 39,166
<INT-BEARING-DEPOSITS> 0 267,776
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 71,727 28,713
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,733,259 2,024,310
<ALLOWANCE> 13,951 13,729
<TOTAL-ASSETS> 2,121,039 2,510,635
<DEPOSITS> 989,224 1,092,989
<SHORT-TERM> 709,967 1,070,815
<LIABILITIES-OTHER> 127,302 60,261
<LONG-TERM> 88,189 192,468
0 0
0 0
<COMMON> 142,892 51,981
<OTHER-SE> 67,872 42,121
<TOTAL-LIABILITIES-AND-EQUITY>2,121,039 2,510,635
<INTEREST-LOAN> 88,282 120,244
<INTEREST-INVEST> 2,389 6,630
<INTEREST-OTHER> 3,209 2,608
<INTEREST-TOTAL> 93,880 129,482
<INTEREST-DEPOSIT> 0 0
<INTEREST-EXPENSE> 67,738 95,728
<INTEREST-INCOME-NET> 26,142 33,754
<LOAN-LOSSES> 3,525 5,450
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 47,820 61,180
<INCOME-PRETAX> 92,536 24,130
<INCOME-PRE-EXTRAORDINARY> 92,536 14,193
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 51,657 14,193
<EPS-PRIMARY> 2.79 .75
<EPS-DILUTED> 2.78 .74
<YIELD-ACTUAL> 0 0
<LOANS-NON> 43,266 30,988
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 1,314 870
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 13,729 7,054
<CHARGE-OFFS> (3,361) (3,106)
<RECOVERIES> 58 11
<ALLOWANCE-CLOSE> 13,951 13,729
<ALLOWANCE-DOMESTIC> 13,951 13,729
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
