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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
<TABLE>
<S> <C>
CALIFORNIA 95-4054791
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
</TABLE>
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:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
CLASS AT NOVEMBER 3, 1997
----- -------------------
<S> <C>
Common Stock, no par value 38,798,910
</TABLE>
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 1997 and December 31, 1996. 2
Consolidated Statements of Income--Three and nine months ended
September 30, 1997 and 1996.......................................... 3
Consolidated Statements of Cash Flows--Nine months ended September 30,
1997 and 1996........................................................ 4
Consolidated Statement of Changes in Shareholders' Equity--Nine months
ended
September 30, 1997................................................... 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 15
</TABLE>
PART II--OTHER INFORMATION
Items 1-5 Not Applicable
<TABLE>
<S> <C>
Item 6. Exhibit--Statement Regarding Computation of Earnings Per Share..... 29
Signatures.............................................................. 30
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
------
<S> <C> <C>
Cash................................................ $ 55,104 $ 74,247
Interest bearing deposits........................... 191,406 3,369
Investment in Federal Home Loan Bank stock.......... 4,473 17,152
Trading securities, at market....................... 66,028 25,180
Securities available for sale, at market............ 32,355 59,116
Securities held to maturity......................... 2,748 --
Loans held for sale................................. 678,572 940,096
Loans held for investment, net...................... 1,190,199 1,068,599
Purchased and originated servicing rights........... 6,091 14,887
Capitalized excess servicing fees receivable........ -- 23,142
Retained interest in loan and lease securitizations. 36,190 49,548
Interest-only and residual certificates............. -- 87,017
Accrued interest receivable......................... 19,918 13,847
Premises and equipment, net......................... 9,928 12,442
Other real estate owned, net........................ 14,834 12,214
Goodwill............................................ 49,392 38,491
Investment in Southern Pacific Funding Corporation.. 58,797 --
Other assets........................................ 16,569 31,292
---------- ----------
Total assets.................................... $2,432,604 $2,470,639
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits............................................ $1,244,409 $1,069,184
Borrowings from Federal Home Loan Bank.............. 20,000 140,500
Other borrowings.................................... 483,756 694,352
Remarketed Par Securities........................... 70,000 --
Senior Notes........................................ 219,803 88,209
Convertible subordinated debentures................. -- 75,000
Accrued interest payable............................ 20,948 14,034
Accrued income taxes payable........................ 36,591 55,327
Minority interest in consolidated subsidiaries...... 11,149 54,936
Other liabilities................................... 53,623 39,589
---------- ----------
Total liabilities............................... 2,160,279 2,231,131
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding.............................. -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,759,021 and 38,291,112 shares issued and
outstanding at September 30, 1997 and
December 31, 1996, respectively.................... 147,381 145,521
Retained earnings................................... 124,676 88,977
Unrealized gain on securities available for sale,
net................................................ 268 5,010
---------- ----------
Total shareholders' equity...................... 272,325 239,508
---------- ----------
Total liabilities and shareholders' equity...... $2,432,604 $2,470,639
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases..... $ 20,512 $ 28,640 $ 57,736 $ 69,517
Interest on loans.................... 54,027 51,002 150,469 139,284
Interest on investments.............. 9,493 442 16,247 2,831
Interest on other finance activities. 750 3,748 2,141 6,957
--------- --------- -------- --------
Total interest income.............. 64,270 55,192 168,857 149,072
Interest expense..................... 35,089 33,029 95,145 100,767
--------- --------- -------- --------
Net interest income................ 29,181 22,163 73,712 48,305
Provision for loan and lease losses.. 9,559 2,617 18,165 6,142
--------- --------- -------- --------
Net interest income after provision
for loan and lease losses........... 19,622 19,546 55,547 42,163
--------- --------- -------- --------
Loan servicing income................ 2,331 702 5,781 2,264
Gain on sale of servicing rights..... -- -- -- 7,808
Gains on sale of Southern Pacific
Funding Corporation stock........... 5,182 -- 9,488 62,007
Gain on sale of Imperial Credit
Mortgage Holdings stock............. 11,496 -- 11,496 --
Loss on sale of securities........... -- -- (403) --
Equity in net income of Southern
Pacific Funding Corporation......... 6,432 -- 19,363 --
Management fees...................... 858 986 3,674 2,157
Other (loss) income.................. (894) 1,299 657 5,613
--------- --------- -------- --------
Total other income................. 25,405 2,987 50,056 79,849
--------- --------- -------- --------
Total revenue.................... 65,539 51,173 163,339 191,529
--------- --------- -------- --------
EXPENSES:
Personnel expense.................... 17,844 13,075 40,948 36,477
Amortization of PMSR's and OMSR's.... 206 196 431 1,028
Occupancy expense.................... 1,051 1,038 2,941 3,308
Data processing expense.............. 515 394 1,320 1,324
Net expenses of other real estate
owned............................... 1,146 867 5,383 4,853
Professional services................ 1,964 1,919 8,167 5,600
FDIC insurance premiums.............. -- 154 -- 199
Telephone and other communications... 875 563 2,058 2,108
Restructuring provision --
Exit from mortgage banking
operations........................ -- -- -- 3,800
General and administrative expense... 11,489 6,718 24,040 14,047
--------- --------- -------- --------
Total expenses................... 35,090 24,924 85,288 72,744
--------- --------- -------- --------
Income before income taxes, minority
interest and extraordinary item..... 30,449 26,249 78,051 118,785
Income taxes......................... 10,959 13,553 28,802 51,322
Minority interest in income of
consolidated subsidiaries........... 4,901 3,263 9,555 6,373
--------- --------- -------- --------
Income before extraordinary item..... 14,589 9,433 39,694 61,090
--------- --------- -------- --------
Extraordinary item--Loss on early
extinguishment of debt, net of
income taxes........................ -- -- (3,995) --
--------- --------- -------- --------
Net income........................... $ 14,589 $ 9,433 $ 35,699 $ 61,090
========= ========= ======== ========
PRIMARY AND FULLY DILUTED INCOME PER
SHARE:
Income before extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60
Extraordinary item--Loss on early
extinguishment of debt, net of
income taxes........................ -- -- (0.10) --
--------- --------- -------- --------
Net income per common share.......... $ 0.36 $ 0.23 $ 0.87 $ 1.60
========= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................. $ 35,699 $ 61,090
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses.... 18,165 6,142
Restructuring provision exit from
mortgage banking operations........... -- 3,800
Depreciation........................... 3,178 4,373
Amortization........................... 2,933 1,971
Accretion of discount.................. (2,142) (6,957)
Gain on sale of Southern Pacific
Funding Corporation stock............. (9,488) (62,007)
Gain on sale of Imperial Credit
Mortgage Holdings stock............... (11,496) --
Gain on sale of servicing rights....... -- (7,808)
Gain on sale of loans and leases....... (57,736) (69,517)
Equity in net earnings of Southern
Pacific Funding Corp.................. (19,363) --
Loss on sale of OREO................... 4,345 2,557
Writedowns of OREO..................... 166 2,459
Originations of loans held for sale.... (1,024,500) (1,367,100)
Sales and collections on loans held for
sale.................................. 1,343,760 1,838,331
Net change in retained interest in loan
and lease securitizations............. 13,358 --
Net change in capitalized excess
servicing............................. 23,142 --
Net change in other assets............. 49,707 65,081
Net change in other liabilities........ 23,641 58,455
---------- ----------
Net cash provided by operating
activities............................. 393,369 530,870
---------- ----------
Cash flows from investing activities:
Net change in interest bearing
deposits.............................. (188,037) (89,936)
Purchase of servicing rights........... -- (10,389)
Proceeds from sale of servicing rights. -- 31,032
Proceeds from sale of other real estate
owned................................. 2,651 5,534
Purchase of securities available for
sale.................................. -- (219,702)
Sale of securities available for sale.. 27,955 267,098
Purchase of securities held to
maturity.............................. (2,748) --
Net change in loans held for
investment............................ (148,356) (140,320)
Purchases of premises and equipment.... (5,834) (3,853)
Net change in investment in Southern
Pacific Funding Corporation........... (39,434) --
Proceeds from sale of SPFC stock....... 13,707 36,362
Proceeds from sale of Imperial Credit
Mortgage Holdings stock............... 11,950 --
Redemption of stock in Federal Home
Loan Bank............................. 12,679 --
Cash utilized for acquisitions......... (14,699) --
---------- ----------
Net cash used in investing activities... (330,166) (124,174)
---------- ----------
Cash flows from financing activities:
Net change in deposits................. 175,225 (40,637)
Advances from Federal Home Loan Bank... 50,000 738,000
Repayments of advances from Federal
Home Loan Bank........................ (170,500) (590,000)
Net change in convertible subordinated
debentures............................ (75,000) --
Net change in other borrowings......... (210,596) (480,771)
Proceeds from offering of Senior Notes
due 2007.............................. 194,500 --
Proceeds from offering of Remarketed
Par Securities........................ 70,000 --
Repayment of Senior Notes due 2004..... (73,241) --
Repayment of bonds..................... -- (111,995)
Net change in minority interest........ (43,787) 24,820
Issuance of common stock............... -- 59,229
Proceeds from resale of Senior Notes... -- 7,615
Proceeds from exercise of stock
options............................... 1,053 5,815
---------- ----------
Net cash used in financing activities... (82,346) (387,924)
---------- ----------
Net change in cash...................... (19,143) 18,772
Cash at beginning of year............... 74,247 39,166
---------- ----------
Cash at end of period................... $ 55,104 $ 57,938
========== ==========
Supplemental disclosure of cash flow
information:
Income taxes paid during the period.... $ 15,736 $ 16,253
Interest paid during the period........ 88,231 104,427
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SECURITIES
NUMBER OF AVAILABLE TOTAL
SHARES COMMON RETAINED FOR SALE, SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS NET EQUITY
----------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508
Exercise of stock
options................ 470 1,090 -- -- 1,090
Tax benefit from
exercise of stock
options................ -- 807 -- -- 807
Net change in unrealized
gain on securities
available for sale..... -- -- -- (4,742) (4,742)
Retirement of stock..... (2) (37) -- -- (37)
Net income for period... -- -- 35,699 -- 35,699
------ -------- -------- ------ --------
Balance, September 30,
1997................... 38,759 $147,381 $124,676 $ 268 $272,325
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc. (the "Company" or "ICII"), incorporated in
1986 in the State of California, is 23.5% owned by Imperial Bank. Since its
initial capitalization in 1991 by Imperial Bank, the Company has transformed
itself from a full service mortgage banking operation to a diversified
commercial and consumer finance holding company.
The consolidated financial statements include ICII, its wholly owned
subsidiaries and a majority owned consolidated subsidiary (collectively the
"Company"). The wholly owned operating subsidiaries include Southern Pacific
Bank ("SPB") formally Southern Pacific Thrift & Loan, Imperial Business
Credit, Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing
Network, Inc. ("AMN"), Imperial Credit Commercial Asset Management Corp.
("ICCAMC"), Imperial Credit Worldwide Ltd. ("ICW"), a majority owner of
Credito Imperial Argentina ("CIA"), a mortgage banking company conducting
business in Argentina and Imperial Credit Capital Trust I ("ICCTI"), a
subsidiary of the Company organized for the sole purpose of issuing trust
securities. The majority-owned consolidated subsidiary is Franchise Mortgage
Acceptance Company, LLC ("FMAC"). FMAC is owned two-thirds by the Company and
one-third by the President of FMAC. The Company owns 8.6% of the common stock
of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (NASDAQ:
ICMI), a commercial Real Estate Investment Trust managed by ICCAMC. The
Company accounts for its investment in ICCMIC using the cost method of
accounting. The Company also has a 47% ownership interest in Southern Pacific
Funding Corporation ("SPFC") (NYSE: SFC). The Company accounts for this
investment using the equity method of accounting. All material intercompany
balances and transactions have been eliminated.
2. DECONSOLIDATION OF SOUTHERN PACIFIC FUNDING CORPORATION AND ICI FUNDING
CORPORATION
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, and resulting in a gain of $4.3 million, reducing its ownership of
SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore,
the results of SPFC operations are now accounted for in the Company's
financial statements under the equity method of accounting. During the third
quarter ending September 30, 1997, the Company sold an additional 500,000
shares of SPFC common stock, generating net proceeds of $7.6 million and
resulting in a gain of $5.2 million, further reducing its ownership percentage
to 47%. The equity investment in SPFC is carried at cost adjusted for equity
in SPFC's undistributed earnings. Deferred income taxes were provided for by
the Company at the time of the sale of SPFC stock.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation ("ICIFC"), a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings ("ICMH") (AMEX: IMH). At
December 31, 1996, ICII owned 100% of the common stock of ICIFC which
represented a 1% economic interest since ICMH a former subsidiary and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in
ICIFC. The Company's disposal of its remaining economic interest in ICIFC
concluded its exit from the original mortgage banking business. The Company
did not receive any proceeds on the disposition of the ICIFC common stock. The
Company recorded a loss of approximately $90,000 on the disposition.
3. 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. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1997 are not
6
<PAGE>
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. 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, 1996.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses
for the periods presented. Actual results could differ significantly from
those estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 1997 presentation.
4. NET INCOME PER SHARE INFORMATION
Net income per common share is computed based on the weighted average number
of shares outstanding during the periods presented plus common stock
equivalents deemed to be dilutive. Common stock equivalents deemed to be
dilutive were calculated based on the average price per share during the
periods presented for primary net income per share and based on the ending
stock price per share, if greater than the average stock price per share, for
fully diluted net income per share for the periods presented. The number of
shares used in the computations gives 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 September 30, 1997 and 1996 was 41,094,428 and
40,570,264 for purposes of computing fully diluted income per share,
respectively. The weighted average number of shares including common stock
equivalents for the nine months ended September 30, 1997 and 1996 was
41,033,029 and 38,293,874 for purposes of computing fully diluted income per
share, respectively.
The weighted average number of shares including common stock equivalents for
the three months ended September 30, 1997 and 1996 was 40,884,142 and
40,382,302 for purposes of computing primary income per share, respectively.
The weighted average number of shares including common stock equivalents for
the nine months ended September 30, 1997 and 1996 was 40,803,044 and
38,074,558 for purposes of computing primary income per share, respectively.
5. LOANS HELD FOR SALE
Loans held for sale consisted of the following at September 30, 1997 and
December 31, 1996: (In thousands)
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4............................ $ 10,581 $452,533
Multi-family................................. 141,071 186,391
Commercial................................... 116,616 109,469
-------- --------
268,268 748,393
Leases......................................... 49,461 8,547
Auto........................................... 149,981 --
Commercial loans............................... 210,862 183,156
-------- --------
$678,572 $940,096
======== ========
</TABLE>
6. REMARKETED PAR SECURITIES
During the second quarter of 1997, ICCTI issued $70.0 million of 10.25%
Remarketed Par Securities ("ROPES") due June 14, 2002. These securities can be
redeemed at par upon their maturity or remarketed as 30-year capital
instruments at the Company's option. Under current tax law, the interest
payments on these
7
<PAGE>
securities are tax-deductible. The proceeds from the offering will be used for
capital contributions to subsidiaries, strategic acquisitions, investments and
general corporate purposes.
7. SUBSIDIARY NAME CHANGE
The Company's largest subsidiary, Southern Pacific Thrift and Loan, has
changed its name to Southern Pacific Bank. Southern Pacific Bank is a national
lending institution specializing in non-confoming loans. Through its
divisions, SPB provides consumer loans, commercial real estate loans, asset
based lending, major loan participations and FDIC-insured certificates of
deposits.
8. SUBSEQUENT EVENTS
On October 2, 1997, SPB acquired substantially all of the assets of PrinCap
Mortgage Warehouse, Inc and PrinCap Mortgage Backed, L.P. ("PMW"), located in
Vorhees, New Jersey. PMW's primary business is the warehouse lending to small
and medium sized residential mortgage brokers and mortgage bankers on a
national basis. PMW provides short term lines of credit to be utilized by its
clients for the purpose of aggregating pools of loans for ultimate sale to
investors. At September 30, 1997, PMW had commitments and outstanding loans of
approximately $225 million and $115 million, respectively. The assets acquired
from PMW were contributed to a wholly owned subsidiary of SPB.
On October 20, 1997, the Company completed the initial public offering of
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (NASDAQ:
ICMI), a Maryland corporation that has elected to be taxed as a Real Estate
Investment Trust. The initial public offering of 34,500,000 shares of common
stock was priced at $15.00 per share, representing total net proceeds from the
offering of approximately $481 million. All of the shares were offered by
ICCMIC. The Company purchased 2,970,000 shares or 8.6% of ICCMIC common stock
for $41.4 million. ICCMIC will be managed by ICCAMC, a wholly owned subsidiary
of the Company. ICCMIC intends to invest primarily in performing multifamily
and commercial loans and in mortgage backed securities. On October 31, 1997,
ICCMIC announced the purchase of multifamily/commercial mortgage loans and
interests in certain multifamily and commercial mortgage backed securities
from Southern Pacific Bank and from the Company, for an aggregate purchase
price of approximately $163 million plus accrued interest.
On October 30, 1997, SPB announced that the Memorandum Of Understanding
("MOU") entered into in September 1996 with the Federal Deposit Insurance
Corporation ("FDIC") and the California Department of Financial Institutions
("CDFI") has been terminated as a result of the recent concurrent examinations
by the FDIC and CDFI and their joint conclusion that the terms of the
agreement have been satisfactorily met and that the improvement in SPB's
operations no longer warranted the MOU.
During November 1997, the Company intends to complete the initial public
offering of its subsidiary, FMAC, (NASDAQ: FMAX). A registration statement
relating to the public offering has been filed with the United States
Securities and Exchange Commission. FMAC plans to issue 8,750,000 shares of
common stock, of which 5,312,500 are being sold by FMAC and 3,437,500 are
being sold by the Company and President of FMAC. The assumed initial offering
price range is $16.00 to $18.00 per share. Based on the assumed initial
offering price range, the Company may record a pretax gain of approximately
$60 million to $80 million. After the sale, the Company's ownership interest
in FMAC would be approximately 44%, which would be treated as an equity
investment and accounted for using the equity method of accounting.
8
<PAGE>
9. CONSOLIDATING FINANCIAL STATEMENTS
The following represents summarized consolidating financial information as
of September 30, 1997 and December 31, 1996, and for the nine months ended
September 30, 1997 and for 1996, with respect to the financial position and
operations of the Company and its wholly-owned and majority-owned
subsidiaries. On January 17, 1997, the Company sold $200 million of 9 7/8%
senior notes due 2007. The senior notes are guaranteed by five of the
Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, ICW and AMN (the
"Other Guarantor Subsidiaries"), and the Company's 66 2/3% owned subsidiary,
FMAC. The non-guarantor subsidiaries are SPB and ICCTI. Each of the guarantees
is full and unconditional and joint and several. The summarized consolidated
financial information is presented in lieu of separate financial statements
and other related disclosures of the wholly-owned subsidiary guarantors as
management has determined that such information is not material to investors.
FMAC has filed a Form 10-Q with the SEC as of and for the quarter ended
September 30, 1997. None of the subsidiary guarantors is restricted from
making distributions to the Company.
CONSOLIDATING CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 17,105 $ -- $ 8,252 $ 30,885 $ (1,138) $ 55,104
Interest bearing
deposits............... 61,630 2,705 -- 129,090 (2,019) 191,406
Investment in Federal
Home Loan Bank stock... -- -- -- 4,473 -- 4,473
Securities held to
maturity, available for
sale and trading....... 74,250 2,496 537 23,848 -- 101,131
Loans held for sale..... 10,581 210,862 199,442 257,687 -- 678,572
Loans held for
investment, net........ 111,728 -- 28,195 1,104,365 (54,089) 1,190,199
Purchased and originated
servicing rights....... -- -- 206 5,885 -- 6,091
Retained interest in
loan and lease
securitizations........ -- 7,041 29,149 -- -- 36,190
Investment in
subsidiaries........... 273,470 -- -- -- (214,673) 58,797
Goodwill................ -- 4,430 30,496 14,466 -- 49,392
Other assets............ 63,765 20,195 (36,820) 16,119 (2,010) 61,249
-------- -------- -------- ---------- --------- ----------
Total assets........... $612,529 $247,729 $259,457 $1,586,818 $(273,929) $2,432,604
======== ======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $ -- $1,246,428 $ (2,019) $1,244,409
Other borrowings........ -- 202,956 201,937 135,887 (37,024) 503,756
Remarketed Par
Securities............. 72,165 -- -- (2,165) -- 70,000
Senior notes............ 219,803 -- -- -- -- 219,803
Minority interest in
consolidated
subsidiaries........... 749 -- -- -- 10,400 11,149
Other liabilities....... 47,487 7,973 26,563 49,240 (20,101) 111,162
-------- -------- -------- ---------- --------- ----------
Total liabilities...... 340,204 210,929 228,500 1,429,390 (48,744) 2,160,279
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Common stock............ 147,381 5,792 30,224 82,617 (118,633) 147,381
Retained earnings....... 124,676 31,008 733 74,811 (106,552) 124,676
Unrealized gain on
securities available
for sale............... 268 -- -- -- -- 268
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity................ 272,325 36,800 30,957 157,428 (225,185) 272,325
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity.. $612,529 $247,729 $259,457 $1,586,818 $(273,929) $2,432,604
======== ======== ======== ========== ========= ==========
</TABLE>
9
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 2,594 163 -- 612 3,369
Investment in Federal
Home Loan Bank stock... -- -- -- 17,152 -- 17,152
Investment and trading
securities............. 8,802 39,349 887 35,824 (566) 84,296
Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096
Loans held for
investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599
Purchased and originated
servicing rights....... -- -- 637 14,250 -- 14,887
Capitalized excess
servicing fees
receivable............. -- -- -- 23,142 -- 23,142
Retained interest in
loan and lease
securitizations........ -- 6,908 19,646 22,994 -- 49,548
Interest-only and
residual certificates.. -- -- -- 87,017 -- 87,017
Investment in
subsidiaries........... 269,651 -- -- -- (269,651) --
Goodwill................ -- 4,332 14,115 20,044 -- 38,491
Other assets............ 106,601 8,078 (14,981) (10,333) (19,570) 69,795
-------- -------- -------- ---------- --------- ----------
Total assets.......... $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- -- 140,500 -- 140,500
Other borrowings........ 15,363 143,139 88,768 480,103 (33,021) 694,352
Senior notes............ 88,209 -- -- -- -- 88,209
Convertible subordinated
debentures............. -- -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- -- 9,787 54,936
Other liabilities....... 41,382 2,580 9,222 68,854 (13,088) 108,950
-------- -------- -------- ---------- --------- ----------
Total liabilities..... 190,103 145,719 97,990 1,836,723 (39,404) 2,231,131
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 9,143 (9,143) --
Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521
Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 -- 185 -- (185) 5,010
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity............... 239,508 14,457 25,211 239,883 (279,551) 239,508
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
</TABLE>
10
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of
loans and leases....... $(2,638) $40,497 $ 6,737 $ 12,736 $ 404 $ 57,736
------- ------- ------- -------- ------- --------
Interest income......... 20,712 18,947 23,129 112,326 (6,257) 168,857
Interest expense........ 18,365 15,788 7,953 59,198 (6,159) 95,145
------- ------- ------- -------- ------- --------
Net interest income..... 2,347 3,159 15,176 53,128 (98) 73,712
Provision for loan and
lease losses........... -- -- 9,140 9,025 -- 18,165
------- ------- ------- -------- ------- --------
Net interest income
after Provision for
loan and lease
losses............... 2,347 3,159 6,036 44,103 (98) 55,547
------- ------- ------- -------- ------- --------
Loan servicing income
(expense).............. (1,960) 2,230 3,558 1,953 -- 5,781
Gain on sale of SPFC
stock.................. 9,488 -- -- -- -- 9,488
Gain on sale of ICMH
stock.................. 11,496 -- -- -- -- 11,496
Equity in net income
SPFC................... 19,363 -- -- -- -- 19,363
Other income (expense).. (4,213) (588) 5,637 3,230 (138) 3,928
------- ------- ------- -------- ------- --------
Total other income.... 34,174 1,642 9,195 5,183 (138) 50,056
------- ------- ------- -------- ------- --------
Total revenues...... 33,883 45,298 21,968 62,022 168 163,339
------- ------- ------- -------- ------- --------
EXPENSES:
Personnel expense....... 2,100 9,285 12,572 16,991 -- 40,948
Amortization of PMSR's
and OMSR's............. -- -- 431 -- -- 431
Occupancy expense....... 823 444 419 1,255 -- 2,941
Data processing expense. 427 66 270 557 -- 1,320
Net expenses of other
real estate owned...... 3,548 -- -- 1,835 -- 5,383
Professional services... 2,659 1,792 1,110 2,606 -- 8,167
General, administrative
and other expense...... 3,696 5,046 11,960 5,794 (398) 26,098
------- ------- ------- -------- ------- --------
Total expenses........ 13,253 16,633 26,762 29,038 (398) 85,288
------- ------- ------- -------- ------- --------
Income (loss) before
income taxes (benefit),
minority interest, and
extraordinary item..... 20,630 28,665 (4,794) 32,984 566 78,051
Income taxes (benefit).. 16,587 -- (2,003) 13,979 239 28,802
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 9,555 9,555
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- -- (3,995)
------- ------- ------- -------- ------- --------
Net income (loss)....... $ 48 $28,665 $(2,791) $ 19,005 $(9,228) $ 35,699
======= ======= ======= ======== ======= ========
</TABLE>
11
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans
and leases............. $ 1,297 $14,209 $2,830 $ 50,939 $ 242 $ 69,517
------- ------- ------ -------- ------- --------
Interest income......... 10,625 2,442 835 137,041 (1,871) 149,072
Interest expense........ 13,261 2,215 889 85,026 (624) 100,767
------- ------- ------ -------- ------- --------
Net interest (expense)
income................. (2,636) 227 (54) 52,015 (1,247) 48,305
Provision for loan and
lease losses........... -- -- -- 6,142 -- 6,142
------- ------- ------ -------- ------- --------
Net interest (expense)
income after
Provision for loan
and lease losses..... (2,636) 227 (54) 45,873 (1,247) 42,163
------- ------- ------ -------- ------- --------
Loan servicing (expense)
income................. (2,002) 1,127 2,281 858 -- 2,264
Gain on sale of
servicing rights....... 6,466 -- -- -- 1,342 7,808
Gain on sale of SPFC
stock.................. 62,007 -- -- -- -- 62,007
Other income (expense).. 1,189 (1) 2,282 4,929 (629) 7,770
------- ------- ------ -------- ------- --------
Total other income.... 67,660 1,126 4,563 5,787 713 79,849
------- ------- ------ -------- ------- --------
Total revenues...... 66,321 15,562 7,339 102,599 (292) 191,529
------- ------- ------ -------- ------- --------
EXPENSES:
Personnel expense....... 7,313 5,705 1,831 22,255 (627) 36,477
Amortization of PMSR's
and OMSR's............. 401 -- 89 538 -- 1,028
Occupancy expense....... 1,652 194 135 1,330 (3) 3,308
Data processing expense. 744 -- 1 578 1 1,324
Net expenses of other
real estate owned...... 3,492 -- -- 1,361 -- 4,853
Professional services... 3,028 829 439 1,321 (17) 5,600
General, administrative
and other expense...... 7,946 1,838 1,990 8,572 (192) 20,154
------- ------- ------ -------- ------- --------
Total expenses........ 24,576 8,566 4,485 35,955 (838) 72,744
------- ------- ------ -------- ------- --------
Income before income
taxes and minority
interest............... 41,745 6,996 2,854 66,644 546 118,785
Income taxes............ 21,452 -- 1,180 28,210 480 51,322
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 6,373 6,373
------- ------- ------ -------- ------- --------
Net income(loss)........ $20,293 $ 6,996 $1,674 $ 38,434 $(6,307) $ 61,090
======= ======= ====== ======== ======= ========
</TABLE>
12
<PAGE>
CONSOLIDATING CONDENSED CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $(56,955) $(78,066) $(148,787) $ 667,193 $ 16,136 $ 399,521
-------- -------- --------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits....... (59,512) (111) 163 (128,577) -- (188,037)
Net change securities
available for sale..... 8,069 36,853 535 (13,205) (4,297) 27,955
Net change in loans held
for investment......... (83,910) -- 50,901 (167,855) 52,508 (148,356)
Net change in Investment
in SPFC................ (39,434) -- -- -- -- (39,434)
Net change in Investment
in Subsidiaries........ 90,298 -- -- -- (90,298) --
Other, net.............. 19,724 (1,740) (17,452) 10,346 676 11,554
-------- -------- --------- --------- -------- ---------
Net cash (used in)
provided by investing
activities........... (64,765) 35,002 34,147 (299,291) (41,411) (336,318)
-------- -------- --------- --------- -------- ---------
Cash flows from
financing activities:
Net change in deposits.. 1,063 -- -- 174,162 -- 175,225
Advances from Federal
Home Loan Bank......... -- -- -- 50,000 -- 50,000
Repayments of advances
from Federal Home Loan
Bank Advances.......... -- -- -- (170,500) -- (170,500)
Net change in
convertible
subordinated
debentures............. -- -- -- (75,000) -- (75,000)
Net change in other
borrowings............. (15,363) 48,419 113,169 (374,173) 17,352 (210,596)
Proceeds from offering
of senior notes due
2007................... 194,500 -- -- -- -- 194,500
Proceeds from offering
of Remarketed
Securities............. 70,000 -- -- -- -- 70,000
Repayment of senior
notes due 2004......... (73,241) -- -- -- -- (73,241)
Net change in minority
interest............... (44,400) -- -- -- 613 (43,787)
Other net............... 1,053 (6,322) 1,750 (6,432) 11,004 1,053
-------- -------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities........... 133,612 42,097 114,919 (401,943) 28,969 (82,346)
-------- -------- --------- --------- -------- ---------
Net change in cash...... 11,892 (967) 279 (34,041) 3,694 (19,143)
Cash at beginning of
period................. 5,213 (171) 7,973 64,926 (3,694) 74,247
-------- -------- --------- --------- -------- ---------
Cash at end of period... $ 17,105 $ (1,138) $ 8,252 $ 30,885 $ -- $ 55,104
======== ======== ========= ========= ======== =========
</TABLE>
13
<PAGE>
CONSOLIDATING CONDENSED CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 57,616 $ 158,298 $ 3,747 $ 468,058 $(156,849) $ 530,870
--------- --------- ------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits....... -- (2,034) -- (88,709) 807 (89,936)
Proceeds of sales of
servicing rights....... 31,032 -- -- -- -- 31,032
Net change in securities
available for sale..... 4,682 (47,837) (778) 100,961 (9,632) 47,396
Net change in loans held
for investment......... (2,828) -- -- (251,609) 114,117 (140,320)
Proceeds from sale of
SPFC stock............. 36,362 -- -- -- -- 36,362
Net change in Investment
in Subsidiaries........ (15,952) -- -- -- 15,952 --
Other, net.............. -- (628) (444) (3,071) (4,565) (8,708)
--------- --------- ------- --------- --------- ---------
Net cash provided by
(used in) investing
activities........... 53,296 (50,499) (1,222) (242,428) 116,679 (124,174)
--------- --------- ------- --------- --------- ---------
Cash flows from
financing activities:
Net change in deposits.. (29,556) -- 214 (11,295) -- (40,637)
Advances from Federal
Home Loan Bank......... -- -- -- 738,000 -- 738,000
Repayments of advances
from Federal Home Loan
Bank Advances.......... -- -- -- (590,000) -- (590,000)
Net change in other
borrowings............. (180,222) 4,362 -- (333,839) 28,928 (480,771)
Repayment of Bonds...... -- (111,995) -- -- -- (111,995)
Proceeds from offering
of common stock........ 59,229 -- -- -- -- 59,229
Net change in minority
interest............... 24,820 -- -- -- -- 24,820
Other, net.............. 13,411 -- -- (6,200) 6,219 13,430
--------- --------- ------- --------- --------- ---------
Net cash (used in)
provided by financing
activities........... (112,318) (107,633) 214 (203,334) 35,147 (387,924)
--------- --------- ------- --------- --------- ---------
Net change in cash...... (1,406) 166 2,739 22,296 (5,023) 18,772
Cash at beginning of
period................. 8,593 (445) (1,937) 32,981 (26) 39,166
--------- --------- ------- --------- --------- ---------
Cash at end of period... $ 7,187 $ (279) $ 802 $ 55,277 $ (5,049) $ 57,938
========= ========= ======= ========= ========= =========
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.4 billion, is a diversified commercial and consumer
finance holding company, organized in 1986 with its headquarters located in
Torrance, California. Its principal business activities consist of the
operation of six wholly owned subsidiaries; Southern Pacific Bank ("SPB")
formerly Southern Pacific Thrift and Loan, an industrial loan company
specializing in lending to small businesses and consumers, Imperial Business
Credit Inc. ("IBC"), a commercial leasing company specialized in equipment
leasing to small businesses, Imperial Credit Advisors, Inc. ("ICAI"), a
management advisory services company overseeing the investment activities of a
real estate investment trust, Auto Marketing Network, Inc. ("AMN"), a subprime
auto lender engaged in financing the purchase of new and used motor vehicles,
Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), the external
manager of Imperial Credit Commercial Mortgage Investment Corp., ("ICCMIC")
(NASDAQ: ICMI) a commercial REIT, Imperial Credit Worldwide Ltd. ("ICW"), a
majority owner of Credito Imperial Argentina ("CIA"), a mortgage banking
company conducting business in Argentina Imperial Credit Capital Trust I and
("ICCTI"), a subsidiary of the Company organized for the sole purpose of
issuing trust securities. The Company owns 8.6% of the common stock of ICCMIC.
The Company is the majority owner of a subsidiary, Franchise Mortgage
Acceptance Company, LLC ("FMAC"), a franchise lending company specializing in
lending to business franchisees. In addition, the Company owns 47.0% of the
outstanding common stock of Southern Pacific Funding Corporation ("SPFC"), a
company engaged in sub-prime residential mortgage lending (NYSE: SFC).
DECONSOLIDATION OF SUBSIDIARIES
During the first quarter ended March 31, 1997, the Company reduced its
common stock ownership in Southern Pacific Funding Corporation ("SPFC") from
51.2% at December 31, 1996 to 49.4% at March 31, 1997, generating net proceeds
of $6.2 million and resulting in a gain of $4.3 million. As a result,
commencing with the three months ended March 31, 1997, SPFC's financial
statements are no longer consolidated with those of ICII. Under Generally
Accepted Accounting Principles ("GAAP"), when a subsidiary's ownership
percentage is reduced to below 50%, consolidation is no longer required.
Accordingly, the Company's investment in SPFC is reflected in the Company's
statement of condition as a separate line item entitled "Investment in
Southern Pacific Funding Corporation" and in the statement of income as
"Equity in net income of Southern Pacific Funding Corporation." During the
third quarter ending September 30, 1997, the Company sold an additional
500,000 shares of SPFC common stock, generating net proceeds of $7.6 million
and resulting in a gain of $5.2 million, further reducing its ownership
percentage to 47%. The income from SPFC represents the Company's percentage
ownership in SPFC's net income. For the three months and nine months ended
September 30, 1997, the equity in net income of SPFC was $6.4 million and
$19.4 million, respectively.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation "ICIFC," a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings, Inc. ("ICMH"). At December
31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1%
economic interest since ICMH (AMEX: IMH), a former affiliate and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in
ICIFC. The Company did not receive any proceeds on the disposition of ICIFC
common stock. The Company recorded a loss of approximately $90,000 on the
disposition.
Franchise Lending
For the three and nine months ended September 30, 1997, FMAC originated or
acquired $211.2 million and $484.3 million of franchise loans as compared to
$96.5 million and $305.6 million for the same period last year. For the three
and nine months ended September 30, 1997 loan securitizations totaled $185.2
million and $343.8 million as compared to none and $167.4 million for the same
period last year. At September 30, 1997,
15
<PAGE>
FMAC had total assets of $247.6 million as compared to $160.2 million at
December 31, 1996. FMAC's total revenues for the three and nine months ended
September 30, 1997 were $22.7 million and $45.3 million as compared to $2.0
million and $15.6 million for the same periods last year, respectively. FMAC's
net income (loss) for the three and nine months ended September 30, 1997 were
$14.7 million and $28.7 million as compared to ($767,000) and $7.0 million for
the same periods last year, respectively.
Business Finance Lending
Imperial Business Credit. IBC leases business equipment including copying,
data processing, communication, printing and manufacturing equipment
exclusively to business users. IBC's lease originations totaled $46.0 million
and $110.5 million for the three and nine months ended September 30, 1997 as
compared to $20.8 million and $54.4 million for the same period last year. IBC
securitized $22.2 million and $137.7 million of leases during the three and
nine months ended September 30, 1997 as compared to $20.7 million and
$67.7 million for the same period last year.
At September 30, 1997, IBC had total assets of $69.2 million. IBC's total
revenues for the three months and nine months ended September 30, 1997 were
$3.4 million and $14.4 million as compared to $2.3 million and $5.0 million
for the same period last year, respectively. IBC's net income for the three
and nine months ended September 30, 1997 was $351,000 and $3.5 million as
compared to $630,000 and $1.3 million for the same period last year,
respectively.
Coast Business Credit ("CBC"). CBC, a division of SPB, is a national asset-
based lender specializing in lending to middle market manufacturers,
distributors, retailers, and high-technology businesses. At September 30,
1997, CBC's loan portfolio represented lending relationships with
approximately 132 customers, with an average total loan per customer of $3.3
million. During 1996 and through September 30,1997, CBC has executed an
expansion plan, which increased its customer base outside of California. CBC
currently operates four loan production centers in California and additional
loan production centers in Atlanta, Baltimore, Boston, Cleveland, Detroit,
Minneapolis, Portland, Chicago, and Seattle. At September 30, 1997 and
December 31, 1996, CBC had outstanding loans totaling $443.2 million and
$288.5 million, of which $179.5 million and $115.6 million were outstanding to
technology companies, respectively. CBC had open unused commitments of $289.2
million at September 30, 1997.
Loan Participation and Investment Group ("LPIG"). LPIG was formed by SPB in
September 1995 to invest in and purchase syndicated commercial loan
participations in the secondary market originated by commercial banks. At
September 30, 1997, loan participations held in the LPIG portfolio ranged in
size from approximately $450,000 to approximately $19.0 million, as compared
to approximately $900,000 to $10.0 million at September 30, 1996,
respectively. As of September 30, 1997, LPIG committed to fund approximately
$417.8 million of senior secured loan participation commitments. Loans
outstanding under LPIG's participation commitments at September 30, 1997
totaled $198.2 million.
Auto Lend Group. Auto Lend was formed by SPB in September 1996 to finance
automobile dealership inventories. SPB believes that Auto Lend's products
offer synergistic opportunities, when offered in connection with the Company's
sub-prime auto lending operations, to provide car dealers a complete financing
package. As of September 30, 1997, Auto Lend had total loan commitments of
$45.6 million of which $21.1 million of loans were outstanding.
COMMERCIAL MORTGAGE LENDING
Income Property Lending Division
For the three and nine months ended September 30, 1997, the Income Property
Lending Division ("IPLD") of SPB, funded approximately $58.6 million and
$206.8 million in loans as compared to $60.5 million and $182.2 million for
the same period last year.
16
<PAGE>
CONSUMER LENDING
Auto Lending Division
The Auto Lending Division ("ALD"), a division of SPB, originated $23.4
million and $63.0 million in sub-prime auto loans during the three and nine
months ended September 30, 1997, as compared to $11.4 million and $24.8
million, for the same period last year, respectively. ALD currently originates
sub-prime auto loans through three Northern California retail offices and is
expanding its activities to Central California and areas outside California.
Auto Marketing Network
On March 14, 1997, ICII acquired for $750,000 all of the outstanding shares
of Auto Marketing Network, Inc. ("AMN") of Boca Raton, Florida, a sub-prime
auto lender. AMN is a nationally recognized specialty finance company engaged
in financing the purchase of new and used motor vehicles. ICII also advanced
AMN $11.5 million to repay amounts owed pursuant to operating lines of credit
and for working capital purposes. The acquisition was recorded using the
purchase method of accounting. Goodwill of approximately $14.7 million was
recorded. The acquisition of AMN is consistent with the Company's general
financing strategy: the loans AMN originates will be pooled and securitized
for sale in the secondary market. For the quarter ending September 30, 1997
and since the date of acquisition through September 30, 1997, AMN originated
$57.6 million and $151.5 million in sub prime auto loans. The Company has
delayed its securitization of AMN originated loans. The delay has resulted
from AMN's bond insurer's due diligence lawsuit filed against AMN regarding a
securitization that occurred in 1993.
Home Improvement Loans and Other Consumer Credit
During the three months and nine months ended September 30, 1997, the
Consumer Credit Division ("CCD") of SPB originated $4.4 million and $14.5
million in loans as compared to $7.0 million and $16.4 million for the same
period last year.
SECURITIZATION TRANSACTIONS
During the three and nine months ended September 30, 1997, the Company
completed loan and lease securitizations totaling $207.4 million and $684.6
million. The Company has retained interests in loan and lease securitizations
representing the excess of the total amount of loans sold in the
securitization over the amounts represented by interests in the securities
sold to investors. The retained interests in the loan and lease
securitizations totaled $36.2 million and $49.5 million at September 30, 1997
and December 31, 1996, respectively. At September 30, 1997 and December 31,
1996, the Company's consolidated balance sheet reflected Capitalized Excess
Servicing Fees Receivable of none and $23.1 million, respectively. At
September 30, 1997 and December 31, 1996, the Company's consolidated balance
sheet reflected Interest Only and Residual Certificates of none and $87.0
million, respectively. The decline in Capitalized Excess Servicing Fees
Receivable and Interest Only and Residual Certificates resulted from the
deconsolidation of SPFC and ICIFC.
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",
("PMSR's" and "OMSR's"). At September 30, 1997, PMSR's and OMSR's outstanding
were $6.1 million, consisting of $5.9 million at SPB and $200,000 at ICAI. At
December 31, 1996, PMSR's and OMSR's were $14.9 million, consisting of $5.5
million at SPB, $600,000 at ICAI and $8.8 million at ICIFC.
17
<PAGE>
FUNDING
Lines of Credit
Until 1995, apart from equity and debt offerings in the capital markets, the
Company's primary sources of financing were warehouse lines of credit and
deposits at SPB. Typically, ICII consolidated entities other than SPB would
borrow funds under their warehouse lines in connection with their wholesale
loan originations and purchases, while SPB used its deposits and borrowings
from the Federal Home Loan Bank of San Francisco ("FHLB") to finance its
lending activities. During the three months ended September 30, 1997, SPB
obtained a $200.0 million line of credit from Morgan Stanley in order to fund
loan originations and to provide SPB with additional liquidity in order to
explore potential acquisition and investment opportunities . 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.
The Company continues to rely on FDIC insured deposits generated by SPB and
third party warehouse lines of credit and securitizations. At September 30,
1997, SPB had total deposits of approximately $1.2 billion (excluding deposits
of $2.0 million ICII maintained with SPB).
ICII's subsidiaries had various revolving warehouse lines of credit
available at September 30, 1997, as follows: (In thousands)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATE COMMITMENT OUTSTANDING INDEX
---------------- ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 6.91% $210,000 $171,937 Libor+125bp's
Banco Santander (FMAC).. 7.29% 50,000 19,575 Libor+160bp's
Sanwa Bank (FMAC)....... 7.50% 15,000 12,508 Eurodollars+200bp's
CS First Boston (FMAC).. 7.29% 300,000 169,736 Libor+160bp's
CoreStates Bank, N.A.
(IBC).................. 8.36% 30,000 30,000 Libor+230bp's
Morgan Stanley (SPB).... 6.16% 200,000 80,000 Libor+50bp's
-------- --------
$805,000 $483,756
======== ========
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Income before extraordinary item for the three months and nine months ended
September 30, 1997 was $14.6 million and $39.7 million or $0.36 and $0.97 per
share, as compared to $9.4 million and $61.1 million or $0.23 and $1.60 per
share for the same periods last year, respectively.
Net income for the three months ending September 30, 1997 was $14.6 million
or $0.36 per share. Net income including an extraordinary item representing a
loss on the early retirement of debt for the nine months ending September 30,
1997 was $35.7 million or $0.87 per share. There were no extraordinary items
for the same periods last year.
EXTRAORDINARY ITEM
During the first quarter 1997, the Company successfully issued $200.0
million of 9.875% Senior Notes due 2007. A portion of the proceeds from the
offering was used to repurchase $69.8 million of the existing outstanding
9.75% Senior Notes, due 2004. As a result, the Company recorded an
extraordinary item relating to the early retirement of debt of $4.0 million or
$0.10 per share for the first quarter. The Company expects to utilize the
remaining proceeds for capital contributions to subsidiaries, strategic
acquisitions, investments, and for general corporate purposes.
REMARKETED PAR SECURITIES
During the second quarter 1997, Imperial Credit Capital Trust I, a
subsidiary of the Company organized for the sole purpose of issuing trust
securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES")
due June 14, 2002. These securities can be redeemed at par upon their maturity
or remarketed as 30-year capital instruments at the Company's option. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering will be used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
RETURN ON EQUITY
Return on equity ("ROE") based on the Company's core net income (defined as
net income excluding gain on sale of SPFC and ICMH stock, the ICAI profit
sharing arrangement buyout, gain on sale of servicing rights, the
restructuring provision for the Company's exit from the mortgage banking
business, and the extraordinary item, net of income taxes, relating to the
early retirement of debt) was 12.1 % and 16.0 % for the three months and nine
months ending September 30, 1997, as compared to ROE of 17.7 % and 19.6 % for
the same periods last year. The Company's strong capital position provides it
with excellent opportunities to reduce risk and improve corporate performance
and profitability in the future through investments, acquisitions, or other
capital redeployment opportunities.
DECONSOLIDATION OF SUBSIDIARIES
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of Southern Pacific Funding Corporation ("SPFC") at $16.63 per
share, generating net proceeds of $6.2 million, and resulting in a gain of
$4.3 million, reducing its ownership of SPFC from 51.2% at December 31, 1996
to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now
accounted for in the Company's financial statements under the equity method of
accounting. During the third quarter ending September 30, 1997, the Company
sold an additional 500,000 shares of SPFC common stock, generating net
proceeds of $7.6 million and resulting in a gain of $5.2 million, further
reducing its ownership percentage to 47%. The equity investment in SPFC is
accounted for by the equity method of accounting in accordance with Generally
Accepted Accounting Principles. The equity investment in SPFC is carried at
cost adjusted for equity in SPFC's undistributed earnings. Deferred income
taxes were provided for by the Company at the time of the sale of SPFC stock.
For the three months and nine months ended September 30, 1997, the equity in
net income of SPFC was $6.4 million and 19.4 million, respectively.
19
<PAGE>
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation (ICIFC), a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings ("ICMH"). At December 31,
1996, ICII owned 100% of the common stock of ICIFC which represented a 1%
economic interest since ICMH (AMEX: IMH) a former subsidiary and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in
ICIFC. The Company's disposal of its remaining economic interest in ICIFC
concluded its exit from the original mortgage banking business. The Company
did not receive any proceeds on the disposition of the ICIFC common stock. The
Company recorded a loss of approximately $90,000 on the disposition.
As a result of the deconsolidation of SPFC and ICIFC; gain on sale of loans,
net interest income, other income and, general and administrative expenses are
not comparable to the prior period. Therefore, the following income statements
present the gain on sale of loans, net-interest income, other income and
general and administrative expenses for the Company as if SPFC had been
accounted for as an equity investment and ICII's common stock interest in
ICIFC had been disposed of for all periods presented.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1997 1996 1997 1996
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on sale of loans and leases......... $20,512 $ 10,160 $ 57,736 $ 25,638
Interest income.......................... 64,270 43,110 168,857 114,211
Interest expense......................... 35,089 23,559 95,145 70,454
------- -------- -------- --------
Net interest income.................... 29,181 19,551 73,712 43,757
Provision for loan and lease losses.... 9,559 2,617 18,165 6,142
------- -------- -------- --------
Net interest income after provision for
loan and lease losses................... 19,622 16,934 55,547 37,615
Other income:
Loan servicing income.................. 2,331 262 5,781 1,495
Gain on sale of servicing rights....... -- -- -- 8,065
Gain on sale of SPFC stock............. 5,182 -- 9,488 62,007
Gain on sale of ICMH stock............. 11,496 -- 11,496 --
Loss on sale of securities............. -- -- (403) --
Equity in net/pretax income of SPFC.... 6,432 4,800 19,363 21,297
Other (loss) income.................... (36) 1,643 4,331 6,868
------- -------- -------- --------
Total other income....................... 25,405 6,705 50,056 99,732
------- -------- -------- --------
Total revenue............................ 65,539 33,799 163,339 162,985
------- -------- -------- --------
Expenses:
Personnel expense...................... 17,844 8,296 40,948 24,774
Amortization of PMSR's and OMSR's...... 206 272 431 742
Occupancy expense...................... 1,051 812 2,941 2,807
Data processing expense................ 515 342 1,320 1,012
Net expenses of other real estate
owned................................. 1,146 867 5,383 4,853
General and Administrative expense..... 14,328 6,640 34,265 20,772
------- -------- -------- --------
Total expenses........................... 35,090 17,229 85,288 54,960
------- -------- -------- --------
Income before income taxes, minority
interest and extraordinary item......... 30,449 16,570 78,051 108,025
Income taxes............................. 10,959 7,393 28,802 44,800
Minority interest in income of
consolidated subsidiaries............... 4,901 (256) 9,555 2,135
------- -------- -------- --------
Income before extraordinary item....... 14,589 9,433 39,694 61,090
Extraordinary item-Loss on early
extinguishment of debt, net............. -- -- (3,995) --
------- -------- -------- --------
Net income............................. $14,589 $ 9,433 $ 35,699 $ 61,090
======= ======== ======== ========
</TABLE>
20
<PAGE>
REVENUES
Total revenues for the Company during the third quarter ended September 30,
1997 were $65.5 million as compared to $51.2 million reported for the same
period in 1996. Excluding the gains on the sale of SPFC and ICMH stock from
the third quarter ending September 30, 1997, and adjusting for the
deconsolidation of SPFC and ICI Funding Corporation from the third quarter
1996 total revenues increased by 45% to $48.9 million as compared to $33.8
million for the same period last year. Total revenues for the nine months
ended September 30, 1997 were $163.3 million, as compared to $191.5 million
for the same period last year. Excluding the gains on the sale of SPFC and
ICMH stock for the nine month periods ended September 30, 1997 and 1996, total
revenues increased by 41% to $142.4 million from $101.0 million, respectively.
Gain on Sale of Loan & Leases
Gain on sale of loans and leases decreased $8.1 million to $20.5 million
during the third quarter of 1997 from $28.6 million for the same period last
year primarily resulting from the deconsolidation of SPFC and ICIFC and the
scheduling of additional loan and lease securitizations for the fourth quarter
of 1997. Gain on sale of loans decreased $11.8 million to $57.7 million for
the nine months ended September 30, 1997 from $69.5 million for the same
period last year, primarily as a result of the deconsolidation of SPFC and
ICIFC.
Loan and Lease Originations
During the third quarter ending September 30, 1997, the Company originated
$401.2 million in loans and leases as compared to $426.5 million for the same
period last year. The decrease in originations for the quarter ending
September 30, 1997 as compared to the same period last year resulted from the
deconsolidation of SPFC partially offset by the increased originations at
FMAC, IBC and the inclusion of AMN originations. Excluding SPFC's loan
originations from the same period last year, originations would have increased
$205.0 million when comparing the third quarter 1997 to the same period last
year.
Total loan originations for the nine months ended September 30, 1997 and
1996 were $1.0 billion and $1.4 billion, respectively. Excluding SPFC's and
ICII's loan originations from the same period last year, originations would
have increased $442.3 million when comparing the nine months ending September
30, 1997 to the same period last year.
During the third quarter ending September 30, 1997, the Company originated
loans/leases at SPB, IBC, FMAC, AMN and ICII of $86.4 million, $46.0 million,
$211.2 million, $57.6 million and none, as compared to $78.9 million, $20.8
million, $96.5 million, none and none, respectively, for the same period last
year. For the nine months ending September 30, 1997, the Company originated
loans/leases at SPB, IBC, FMAC, AMN and ICII of $284.2 million, $110.5
million, $478.3 million, $151.5 million and none, as compared to $223.4
million, $54.4 million, $304.4 million, none and 310.1 million, respectively,
for the same period last year.
Interest Income and Expense
Interest income increased $9.1 million to $64.3 million for the third
quarter of 1997 from $55.2 million for the same period last year. For the nine
months ended September 30, 1997, interest income increased $19.8 million to
$168.9 million from $149.1 million for the same period last year. The increase
in interest income was primarily attributable to the increase in yield and
average outstanding balances on interest earning assets and the addition of
AMN, partially offset by the deconsolidation of SPFC and ICIFC in 1997.
Excluding interest income for SPFC and ICIFC from the third quarter and nine
months ended September 30, 1996, interest income would have increased by $21.2
million and $54.6 million for the third quarter and nine months ended
September 30, 1997, respectively, when compared to the same periods last year.
Interest expense increased $2.1 million to $35.1 million for the third
quarter of 1997 from $33.0 million for the same period last year. For the nine
months ended September 30, 1997, interest expense decreased
21
<PAGE>
$5.7 million to $95.1 million from $100.8 million for the same period last
year. Excluding interest expense for SPFC and ICIFC from the third quarter and
nine months ended September 30, 1996, interest expense would have increased by
$11.5 million and $24.7 million for the third quarter and nine months ended
September 30, 1997, respectively, as compared to the same periods last year.
This increase in interest expense primarily resulted from higher borrowing
costs as a result of the Company's newly issued Remarketed Par Securities, as
well as from increased outstanding average balances of senior notes, deposits
and warehouse lines.
NET INTEREST INCOME AND MARGIN
Net interest income continued to improve for the third quarter of 1997. Net
interest income increased by $7.0 million to $29.2 million for the third
quarter of 1997 from $22.2 million for the same period last year. For the nine
months ended September 30, 1997, net interest income increased $25.4 million
to $73.7 million from $48.3 million for the same period last year. Excluding
net interest income for SPFC and ICIFC from the third quarter and nine months
ended September 30, 1996, net interest income would have increased by $9.6
million and $30.0 million, respectively, for the quarter and nine months ended
September 30, 1997 as compared to the same periods last year.
Net interest margin at SPB was 4.86% for the third quarter of 1997, an
increase of 71 basis points as compared to 4.15% for the same period last
year. For the nine months ended September 30, 1997 net interest margin was
4.45%, an increase of 42 basis points as compared to 4.03% for the same period
last year. The improvement in net interest margin is primarily the result of
the Company's efforts to originate higher yielding loan and lease products.
SALE OF SPFC AND ICMH STOCK
During the third quarter ended September 30, 1997, the Company sold 500,000
and 462,269 shares of common stock in SPFC and ICMH respectively, generating
cash proceeds of $7.6 million and $12.0 million. As a result of the sales, the
Company recorded pre-tax gains of $5.2 million and $11.5 million,
respectively. As a result of the sale of SPFC stock, the Company's ownership
percentage has been reduced to 47% at September 30, 1997 from 51.2% from
December 31, 1996.
OTHER INCOME ITEMS
Loan servicing income totaled $2.3 million for the third quarter of 1997 as
compared to $702,000 for the same period last year. The increase in loan
servicing income was primarily due to two factors: 1) a decrease in the levels
of foreclosure and liquidation costs associated with the Company's former
conforming residential mortgage loan servicing portfolio and 2) an increase in
the outstanding performing balance of loans and leases serviced for others at
Franchise Mortgage Acceptance Company, LLC, Imperial Business Credit, Inc.,
and Southern Pacific Bank.
Other (loss) income totaled ($894,000) during the third quarter of 1997 as
compared to $1.3 million for the same period in 1996. Other income decreased
during the third quarter of 1997 as a result of one time charge of $1.5 million
at SPB, partially offset by the deconsolidation of SPFC and ICIFC in 1997. REIT
management fees for the three months ended September 30, 1997 were $858,000 as
compared to $986,000 for the same period last year. For the nine months ended
September 30, 1997 REIT management fees totaled $3.7 million as compared to $2.2
million for the same period last year. The REIT management fee results from the
Company's advisory contract with ICMH.
EXPENSES
Total expenses for the Company during the quarter ended September 30, 1997
were $35.1 million, an increase of $10.2 million from the $24.9 million
reported for the same period in 1996. For the nine months ended September 30,
1997 total expenses were $85.3 million, an increase of $12.6 million from the
$72.7 million reported for the same period last year. Excluding total expenses
for SPFC and ICIFC from the third quarter and nine months ending September 30,
1996, total expenses increased by $17.9 million and $30.3 million when
compared to the third quarter and nine months ending September 30, 1997,
respectively.
22
<PAGE>
Total expenses increased primarily due to a one-time charge of $5.5 million
relating to the buyout of a profit sharing arrangement on ICAI's REIT
management fee contract. Of the $5.5 million one time charge, $1.0 million was
charged to personnel expense and $4.5 million was charged to other general and
administrative expense. Expenses also increased due to the continued expansion
of operations at the Company's new business lines and subsidiaries, including
AMN, acquired in the first quarter of 1997.
Personnel expenses increased to $17.8 million for the three months ended
September 30, 1997 as compared to $13.1 million for the same period of the
previous year. Excluding personnel expenses for SPFC and ICIFC from the three
months ended September 30, 1996, personnel expense increased to $17.8 million
from $8.3 million for the quarter ending September 30, 1997. The increase in
personnel expense excluding SPFC and ICIFC resulted from the Company's
acquisition and expansion activities throughout 1996 and during the first nine
months of 1997 in addition to the personnel expense related to the buyout of a
profit sharing arrangement on ICAI's REIT management fee contract. For the
nine months ended September 30, 1997, personnel expenses increased to $40.9
million from $36.5 million primarily due to the Company's expansion activities
offset by the deconsolidation of SPFC and ICIFC.
Amortization of PMSR's and OMSR's increased to $206,000 for the three months
ended September 30, 1997 as compared to $196,000 for the same period last
year. The increase primarily resulted from an increase in prepayment rates on
the underlying mortgage loan portfolio partially offset by the deconsolidation
of SPFC and ICIFC. For the nine months ended September 30, 1997 amortization
of PMSR's and OMSR's decreased to $431,000 as compared to $1.0 million for the
same period last year. The decrease was primarily the result of the
deconsolidation of SPFC and ICIFC.
Occupancy expense remained relatively constant at $1.0 million for the three
months ended September 30, 1997 as compared to the same period last year.
Excluding occupancy expenses for SPFC and ICIFC from the three months ended
September 30, 1996, occupancy expense increased to $1.0 million from $812,000
for the quarter ending September 30, 1997. The increase in occupancy expense
was primarily attributable to the Company's acquisition and expansion
activities throughout 1996 and during the first nine months of 1997. For the
nine months ended September 30, 1997 occupancy expense decreased to $2.9
million as compared to $3.3 million for the same period last year primarily
due to the deconsolidation of SPFC and ICIFC.
Net expenses of OREO increased to $1.1 million for the three months ended
September 30, 1997 as compared to $867,000 for the same period last year. Net
expenses of OREO increased primarily due to an increase in OREO expenses from
properties foreclosed on related to the conforming mortgage banking operations
exited in 1996 and to a loan portfolio at SPB. For the nine months ended
September 30, 1997 and 1996, net expenses of OREO were $5.4 million and $4.9
million, respectively.
In the prior year's nine months ending September 30, 1996, the Company
recorded a $3.8 million restructuring charge representing the costs
anticipated to be incurred in connection with the Company's exit from the
conforming mortgage business. For the three and nine month periods ended
September 30, 1997, there were no additional restructuring charges required.
All other general and administrative expenses, including Federal Deposit
Insurance Corporation ("FDIC") insurance premiums, data processing,
professional services, and telephone and other communications expense,
increased to $14.8 million for the three months ended September 30, 1997 as
compared to $9.7 million for the same period last year. For the nine months
ended September 30, 1997 and 1996 these expenses were $35.6 million and $23.3
million, respectively. Excluding SPFC and ICIFC for the third quarter and nine
months ending September 30, 1996, such expenses were $7.0 million and $21.8
million in the prior year. The overall increase in general and administrative
expenses was primarily attributable to the Company's acquisition and expansion
activities throughout 1996 and during the first nine months of 1997 including
the one-time charge relating to the buyout of a profit sharing arrangement on
ICAI's REIT management fee contract.
23
<PAGE>
ASSET QUALITY
Loan and Lease Loss Provision and Nonaccrual Loans and Leases
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. The provision for loan and lease losses increased $7.0 million to $9.6
million for the third quarter of 1997 from $2.6 million for the same period
last year. The increase in the provision for loan and lease losses for the
third quarter of 1997 was primarily the increase in nonaccrual auto loans
resulting from the delay in the securitization of AMN originated loans from
the second and third quarters of 1997. The delay results from AMN's bond
insurer's due diligence investigation of a lawsuit filed against AMN regarding
a securitization completed in 1993. By delaying the securitization of AMN's
loans, the Company has carried a larger more seasoned auto loan portfolio, of
which $17.7 million of AMN's loans were not accruing interest at September 30,
1997. Nonaccrual loans and leases as of September 30, 1997 and December 31,
1996 were $65.0 million and $50.1 million or 5.3% and 4.6% of gross loans held
for investment, respectively. The balance of nonaccrual loans relating to the
former mortgage banking operations included $12.1 million and $19.9 million of
loans at September 30, 1997 and December 31, 1996, respectively. The increase
in loans and lease charge-offs were primarily due to the consumer loan and
lease portfolios.
Non-performing assets as a percentage of loans held for investment and OREO
at September 30, 1997 increased to 6.40% from 5.71% at December 31, 1996. The
increase in the percentage of non-performing assets results primarily from an
increase in non-accrual loans at AMN. The percentage of the allowance for loan
and lease losses to nonperforming assets increased to 40.1% at September 30,
1997 as compared to 31.5% at December 31, 1996.
The Company periodically reviews the allowance for loan and lease losses in
connection with the investment loan and lease portfolios. Based on level and
composition of non-accrual loans and leases and the Company's charge-off
experience, the Company believes that the allowance for loan and lease losses
is adequate. Increasing levels of non-accrual loans and non-performing assets
may occur and would be consistent with the Company's shift to higher yielding
loan and lease products. The Company believes it has more than adequately
priced these new loan and lease products for potential future increases in the
overall levels of non-accrual loans as evidenced by the significant increase
in net interest income after the provision for loan and lease losses.
24
<PAGE>
The Company's activity in the allowance for loan and lease losses was as
follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
BEGINNING BALANCE AS OF DECEMBER 31, 1996 AND 1995........... $ 19,999 $13,729
Provision for loan and lease losses.......................... 18,165 6,142
Business acquisitions........................................ 7,484 --
Lease sales.................................................. (900) --
Deconsolidation of ICIFC..................................... (687) --
-------- -------
44,061 19,871
-------- -------
LOANS CHARGED OFF:
Mortgage..................................................... (2,160) (1,980)
Multifamily.................................................. (420) (1,023)
Commercial................................................... (955) (432)
Leases....................................................... (3,737) (1,490)
Consumer..................................................... (5,399) (598)
-------- -------
Total........................................................ (12,671) (5,523)
-------- -------
RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF:
Mortgage..................................................... 46 26
Leases....................................................... 425 --
Consumer..................................................... 183 87
-------- -------
Total........................................................ 654 113
-------- -------
Net charge-offs.............................................. (12,017) (5,410)
-------- -------
Ending balance as of September 30, 1997 and 1996............. $ 32,044 $14,461
======== =======
</TABLE>
Loans held for investment consisted of the following at September 30, 1997
and December 31, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4.................................... $ 266,611 $ 375,476
Multi-Family......................................... 26,112 2,527
Commercial........................................... 6,628 11,011
---------- ----------
299,351 389,014
Leases............................................... 7,499 99,717
Installment loans.................................... 139,402 34,248
Franchise loans...................................... 86,077 115,910
Asset based loans.................................... 443,154 288,528
Commercial........................................... 258,563 173,932
---------- ----------
Total.............................................. 1,234,046 1,101,349
Unearned income...................................... (3,134) (6,336)
Deferred loan fees................................... (8,669) (6,415)
---------- ----------
Total.............................................. 1,222,243 1,088,598
Allowance for loan losses............................ (32,044) (19,999)
---------- ----------
Total.............................................. $1,190,199 $1,068,599
========== ==========
</TABLE>
25
<PAGE>
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 franchise concepts. As a result, the loan
portfolio has a high concentration in the same geographic region. Although the
Company has a diversified portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the economy of California.
The following table sets forth the amount of non-performing assets
attributable to the Company's former mortgage banking operations and to all of
its other lending activities.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
---------------------- ----------------------
FORMER FORMER
ALL OTHER MORTGAGE ALL OTHER MORTGAGE
LENDING BANKING LENDING BANKING
ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans:
One to four family............ $ 21,267 $12,098 $ 24,711 $19,928
Commercial property........... 2,527 -- 3,052 --
Multi-family property......... 7,952 -- 1,421 --
Leases and installment........ 21,162 -- 997 --
--------- ------- --------- -------
Total nonaccrual loans.......... 52,908 12,098 30,181 19,928
--------- ------- --------- -------
Other real estate owned:
One to four family............ 8,725 3,047 6,639 3,508
Commercial property........... 2,753 -- 1,200 --
Multi-family property......... 309 -- 867 --
--------- ------- --------- -------
Total other real estate owned... 11,787 3,047 8,706 3,508
Loans with modified terms:
One to four family............ -- -- 800 --
Commercial property........... -- -- 456 --
Multi-family property......... -- -- -- --
--------- ------- --------- -------
Total loans with modified terms. -- -- 1,256 --
Total non performing assets..... $ 64,695 $15,145 $ 40,143 $23,436
========= ======= ========= =======
Total loans and OREO............ 1,898,585 28,867 2,012,704 40,955
Total NPA's as a percentage of
Loans and OREO................. 3.41% 52.46% 1.99% 57.22%
</TABLE>
There are no loans over 90 days past due accruing interest at September 30,
1997 or December 31, 1996.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management considers such
factors as historical loan loss experience, underlying collateral values,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio.
Loans deemed by management to be uncollectible are charged to the allowance
for loan and lease losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by
management based upon its evaluation of the known and inherent risks in the
loan portfolio. Future additions to the allowance for loan and lease losses
may be necessary.
26
<PAGE>
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting
Principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Inflation affects the Company primarily through its effect on
interest rates, since interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. During periods of
increasing interest rates, demand for loans and a borrower's ability to
qualify for mortgage financing in a purchase transaction may be adversely
affected. During periods of decreasing interest rates, borrowers are more
likely to refinance their existing loans which may negatively impact the
Company's investments.
REGULATORY MATTERS
SPB's Capital Ratios
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital and (iii) the FDIC Leverage Ratio as of September 30, 1997.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- ------- -----
(IN THOUSANDS EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation................. $133,937 10.75% $ 62,321 5.00% $ -- -- %
Risk-based Capital.......... 192,063 11.99% 128,135 8.00% 160,169 10.00%
Risk-based Tier 1 Capital... 137,908 8.61% 64,068 4.00% 96,101 6.00%
FDIC Leverage Ratio......... 137,908 9.36% 58,935 4.00% 73,668 5.00%
</TABLE>
On September 30, 1996 SPB entered into a Memorandum of Understanding ("MOU")
with the FDIC and the California Department of Financial Institutions
("CDFI"). This agreement requires that SPB shall (i) have and retain qualified
management, (ii) adopt and implement comprehensive risk management policies,
programs and systems, (iii) take all reasonable and good faith steps to ensure
future compliance with all applicable laws and regulations, (iv) develop a
credit review program, (v) update the lending, investments and audit policies,
and (vi) provide quarterly progress reports to the FDIC and the Department of
Corporations. On October 30, 1997, SPB announced that the MOU entered into in
September 1996 has been terminated as a result of the recent concurrent
examinations by the FDIC and CDFI and their joint conclusion that the terms of
the agreement have been satisfactorily met and the improvement in SPB's
operations no longer warranted the MOU.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from the need for the
Company to fund mortgage loans originated 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.
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
27
<PAGE>
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 $70 million principal amount of Remarketed Par
Securities and $220 million principal amount of Senior Notes due 2004 and 2007
(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 SPB, public offerings of capital
stock of ICII and SPFC, the issuance of the Notes and Remarketed Par
Securities, the issuance of convertible securities, and securitizations. The
Company believes that such sources will be sufficient to fund the Company's
liquidity requirements for the foreseeable future. Any future financing may
involve the issuance of additional Common Stock or other securities, including
securities convertible into or exercisable for Common Stock.
The Company 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.
The Company has warehouse lines of credit and repurchase facilities under
which it had available an aggregate of approximately $805 million in financing
at September 30, 1997. 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.
SPB obtains the necessary liquidity to fund its own lending activities
through deposits, warehouse lines of credit and, if necessary through
borrowings from the FHLB. At September 30, 1997 and December 31, 1996, SPB had
available lines of credit from the FHLB equal to $55.8 million and $212.7
million, respectively. The FHLB advances are secured by the investment in
stock of FHLB and certain real estate loans with a carrying value of $127.8
million and $228.5 million at September 30, 1997 and December 31, 1996,
respectively. The highest FHLB advance outstanding during the quarter ending
September 30, 1997 was $20.0 million, with an average outstanding balance of
$5.8 million. There were $20.0 million in outstanding balances of FHLB
advances on September 30, 1997. Since December 31, 1991, SPB has increased its
deposits as necessary so that deposits, together with cash, liquid assets and
FHLB borrowings have been sufficient to provide the funding for its loans held
for sale and investment. During the three months ended September 30, 1997, SPB
obtained a $200.0 million line of credit from Morgan Stanley in order to fund
loan originations and to provide SPB with additional liquidity in order to
explore potential acquisition and investment opportunities. At September 30,
1997, SPB's outstanding balance of the Morgan Stanley warehouse line of credit
was $80.0 million. As of September 30, 1997, SPB's deposit portfolio which
consists primarily of certificate accounts increased approximately $100
million to $1.2 billion from $1.1 billion at December 31, 1996.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. SPB tracks on a daily basis all new loan applications by office
and, based on historical closing statistics, estimates expected fundings. Cash
management systems at SPB allow SPB to anticipate both funding and sales and
adjust deposit levels and short-term investments against the demands of the
Company's lending activities.
During the second quarter, Imperial Credit Capital Trust I, a subsidiary of
the Company organized for the sole purpose of issuing trust securities, issued
$70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002.
These securities can be redeemed at par upon their maturity or remarketed as
30-year capital instruments at the Company's option. Under current tax law,
the interest payments on these securities are tax-deductible. The proceeds
from the offering will be used for capital contributions to subsidiaries,
strategic acquisitions, investments and general corporate purposes.
28
<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 SPB 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 addition, in order to gain access to the secondary market for loans and
leases, the Company has relied to some extent 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 believes that the liquidity available at ICII and its
subsidiaries will provide the capacity to adequately fund the Company's
lending activities. Under applicable regulations, dividends and loans from SPB
to ICII and its other subsidiaries are subject to various limitations. Since
December 31, 1992, ICII's liquidity needs have included $51 million to make
capital contributions to SPB. The combination of cash from operations,
including servicing sales, and the net proceeds received by the Company from
its Remarketed Par Securities and Senior Note offerings have allowed the
Company to meet its required liquidity needs for 1996 and 1997. These
available sources, in addition to the proceeds received from the Company's
secondary stock offering in April, 1996 and the completion of the Company's
offering of SPFC stock in June 1996, have allowed the Company to meet its
capital resource needs for at least the next 12 months.
29
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT -11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
QUARTER ENDED QUARTER ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before
extraordinary items.... $14,589 $ 9,433 $39,694 $61,090
------- ------- ------- -------
Extraordinary item Early
extinguishment of debt,
net of income taxes.... -- -- (3,995) --
------- ------- ------- -------
Net income.............. $14,589 $ 9,433 $35,699 $61,090
------- ------- ------- -------
Average number of shares
outstanding............ 38,721 37,895 38,550 35,385
Net effect of dilutive
stock options-based on
treasury stock method
using average market
price.................. 2,163 2,487 2,253 2,690
------- ------- ------- -------
Total average shares.... 40,884 40,382 40,803 38,075
======= ======= ======= =======
PRIMARY EARNINGS PER
SHARE:
Income before
extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (0.10) --
------- ------- ------- -------
Net income per share.... $ 0.36 $ 0.23 $ 0.87 $ 1.60
======= ======= ======= =======
FULLY DILUTED EARNINGS
PER SHARE:
Income before extraordi-
nary item.............. $14,589 $ 9,433 $39,694 $61,090
------- ------- ------- -------
Extraordinary item-Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (3,995) --
------- ------- ------- -------
Net Income.............. $14,589 $ 9,433 $35,699 $61,090
------- ------- ------- -------
Average number of shares
outstanding............ 38,721 37,895 38,550 35,385
Net effect of dilutive
stock options-based on
treasury stock method
using ending market
price.................. 2,373 2,675 2,483 2,908
------- ------- ------- -------
Total average shares.... 41,094 40,570 41,033 38,293
======= ======= ======= =======
FULLY DILUTED EARNINGS
PER SHARE:
Income before
extraordinary item..... $ 0.36 $ 0.23 $ 0.97 $ 1.60
Extraordinary item Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (0.10) --
------- ------- ------- -------
Net Income.............. $ 0.36 $ 0.23 $ 0.87 $ 1.60
======= ======= ======= =======
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPERIAL CREDIT INDUSTRIES, INC.
Date: November 14, 1997
By: /s/ Kevin Villani
-------------------------
Kevin Villani
Executive Vice President and CFO
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 55,104
<INT-BEARING-DEPOSITS> 191,406
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 4,473
<INVESTMENTS-HELD-FOR-SALE> 32,355
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,868,771
<ALLOWANCE> 32,044
<TOTAL-ASSETS> 2,432,604
<DEPOSITS> 1,244,409
<SHORT-TERM> 483,756
<LIABILITIES-OTHER> 122,311
<LONG-TERM> 289,803
0
0
<COMMON> 147,381
<OTHER-SE> 124,676
<TOTAL-LIABILITIES-AND-EQUITY> 2,432,604
<INTEREST-LOAN> 150,469
<INTEREST-INVEST> 16,247
<INTEREST-OTHER> 2,141
<INTEREST-TOTAL> 168,857
<INTEREST-DEPOSIT> 54,155
<INTEREST-EXPENSE> 95,145
<INTEREST-INCOME-NET> 73,712
<LOAN-LOSSES> 18,165
<SECURITIES-GAINS> (403)
<EXPENSE-OTHER> 94,843
<INCOME-PRETAX> 78,051
<INCOME-PRE-EXTRAORDINARY> 39,694
<EXTRAORDINARY> (3,995)
<CHANGES> 0
<NET-INCOME> 35,699
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
<YIELD-ACTUAL> 4.45
<LOANS-NON> 65,006
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,999
<CHARGE-OFFS> (12,671)
<RECOVERIES> 654
<ALLOWANCE-CLOSE> 32,044
<ALLOWANCE-DOMESTIC> 32,044
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
