<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________to _____________________
Commission File Number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-4054791
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
23550 HAWTHORNE BOULEVARD, BUILDING 1, 90505
SUITE 110 (ZIP CODE)
TORRANCE, CALIFORNIA 90505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (310) 791-8020
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ----------------------
<C> <S>
Common Stock, no par value Nasdaq National Market
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) 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 [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT BASED UPON THE CLOSING SALES PRICE OF ITS COMMON STOCK ON APRIL 8,
1997 ON THE NASDAQ NATIONAL MARKET WAS APPROXIMATELY $711,813,733.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF APRIL 8, 1997:
38,476,418
DOCUMENTS INCORPORATED BY REFERENCE
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
Item 1. BUSINESS....................................................... 3
Item 2. PROPERTIES..................................................... 38
Item 3. LEGAL PROCEEDINGS.............................................. 39
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 39
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS........................................... 40
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA........................... 41
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 44
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 64
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 109
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 109
Item 11. EXECUTIVE COMPENSATION......................................... 111
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 116
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 117
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- 125
K.............................................................
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-K 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.
2
<PAGE>
ITEM 1. BUSINESS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.5 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 three wholly owned companies; Southern Pacific Thrift and Loan
("SPTL") a thrift and loan company specializing in business and consumer
lending, Imperial Business Credit Inc., ("IBC") a commercial leasing company
specializing in lending to small businesses and Imperial Credit Advisors, Inc.
("ICAI") a management advisory services company overseeing the investment
activities of a real estate investment trust (Imperial Credit Mortgage
Holdings, Inc. ("ICMH")). In addition, the Company is a majority owner of
three subsidiaries; Franchise Mortgage Acceptance Co. LLC., ("FMAC"), a
franchise lending company specializing in lending to business franchises,
Southern Pacific Funding Corporation ("SPFC") a mortgage banking company
providing non-conforming residential mortgage lending and ICI Funding
Corporation ("ICIFC"), a company engaged in the mortgage conduit operations of
ICMH.
BUSINESS STRATEGY
In 1995, the Company began to reposition its business from originating and
selling conforming residential mortgage loans to offering higher margin loan
and lease products. The Company accomplished this repositioning through a
business strategy that emphasizes:
1. Opportunistic expansion and acquisitions of businesses in niche
segments of the financial services industry.
2. Conservative, disciplined underwriting and credit risk management.
3. Loan and lease originations, where possible, on a wholesale basis.
4. Securitization or sale in the secondary market of substantially all of
the Company's loans and leases, other than those held by SPTL for
investment.
5. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
The Company has diversified its loan and lease products by focusing on the
creation and acquisition of additional finance businesses in order to reduce
dependency on residential mortgage lending. When acquiring new businesses or
targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth
and profitability and to reduce the risks associated with operating the newly
acquired entity. For the years ended December 31, 1996 and December 31, 1995,
the Company originated or acquired $2.2 billion and $3.0 billion of loans and
leases, respectively. In addition, during the years ended December 31, 1996
and December 31, 1995, the Company completed securitization transactions of
$1.3 billion and $1.0 billion, respectively.
Strategic Focus and Acquisitions
Part of the Company's strategy to diversify away from the conforming
residential mortgage business was to focus its residential mortgage
operations, through SPFC, on the origination, purchase and sale of non-
conforming residential mortgage loans secured primarily by single family
residences. During 1995 and 1996, a substantial portion of the Company's
operations were conducted through SPFC. For the years ended December 31, 1996
and December 31, 1995, SPFC originated or acquired $789.9 million and $288.5
million of non-conforming residential mortgage loans, respectively.
SPFC seeks to sell all mortgage loans originated or acquired through its
loan securitization program or through whole loan sales. During the year ended
December 31, 1996 and December 31, 1995, SPFC sold $657.4 million and $164.9
million through securitizations and $0 and $58.6 million through whole loan
sales, respectively.
3
<PAGE>
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by IBC through the acquisition of the assets of First
Concord Acceptance Corporation ("FCAC"). This business was again expanded in
October 1996 when IBC acquired substantially all of the assets of Avco Leasing
Services, Inc. and all of the assets of Avco Financial Services of Southern
California, Inc. related to its business of originating and servicing business
equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). IBC's lease originations were $87.2 million and $36.0 million,
and it securitized, including leases acquired through purchase transactions,
$87.0 million and $85.2 million during the year ended December 31, 1996 and
December 31, 1995, respectively.
In June 1995, the Company expanded into franchise lending by establishing
FMAC, the assets of which were acquired from Greenwich Financial Capital
Products, Inc. During the year ended December 31, 1996, and for the six-month
period ended December 31, 1995, FMAC originated or acquired $449.3 million and
$163.5 million and securitized $325.1 million and $105.2 million of franchise
loans, respectively.
In September 1995, the Company began making asset-based loans to middle
market companies by acquiring CoastFed Business Credit Corporation ("CBCC")
from Coast Federal Bank. This business, now a division of SPTL, was renamed
Coast Business Credit ("CBC"). At December 31, 1996 and December 31, 1995, CBC
had total commitments of $547.7 and $364.2 million, of which $288.5 million
and $154.2 million of loans were outstanding, respectively.
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm.
DRI is headquartered in Beverly Hills, California with offices in Chicago,
Illinois, Dallas, Texas and Sun Valley, Idaho offering full service investment
banking, brokerage and asset management services. DRI manages and underwrites
public offerings of securities, arranges private placements and provides
advisory and other services in connection with mergers, acquisitions,
restructurings, and other financial transactions. The Company has acquired a
1% percent interest in DRI and has purchased a warrant to acquire an
additional 48% interest.
As a part of the Company's diversification strategy, and the related
acquisitions of FMAC, FCAC and CBCC, the product mix of the Company's interest
earning assets has changed in 1996 to include a much larger percentage of
higher-yielding loan and lease products as compared to the previous year.
As part of the repositioning and diversification process, the Company's loan
portfolio composition as a percentage of total loans and leases outstanding at
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
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<S> <C> <C>
Conforming residential mortgage loans...................... 8% 58%
Non-conforming residential mortgage loans.................. 46 28
Commercial mortgage loans.................................. 7 9
Consumer loans............................................. 2 3
Business loans and leases.................................. 37 2
------ ------
Total.................................................... 100% 100%
====== ======
</TABLE>
As noted in the above schedule, the Company's conforming residential
mortgage loans, commercial mortgage loans and consumer loans decreased, while
non-conforming residential mortgage loans, business loans and leases increased
as a percentage of total outstanding loans and leases.
4
<PAGE>
The Company offers loan and lease products in the following sectors:
. FRANCHISE LENDING. Franchise lending is conducted through ICII's 66 2/3%
owned subsidiary, FMAC.
. BUSINESS FINANCE LENDING. Business finance lending is conducted through
IBC and three divisions of SPTL: Coast Business Credit ("CBC"), the Loan
Participation and Investment Group ("LPIG") and the Auto Lend Group
("Auto Lend").
. COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial
mortgage lending operations through the Income Property Lending Division
("IPLD") of SPTL.
. CONSUMER LENDING. The Company conducts consumer lending operations
through the Auto Lending Division ("ALD") and Consumer Credit Division
("CCD") of SPTL.
. NON-CONFORMING RESIDENTIAL LENDING. Non-conforming residential lending
is conducted through ICII's 51.2% owned subsidiary, SPFC.
FRANCHISE LENDING
General
FMAC is a full service franchise finance company engaged in the business of
originating loans and equipment leases to top-tier established franchisees of
national and regional franchise concepts such as Taco Bell, Burger King,
Hardee's, Wendy's, Pizza Hut and KFC, which are then securitized into
investment grade structures and sold to institutional investors.
FMAC's assets were acquired from a division of Greenwich Financial Capital
Products, Inc. ("Greenwich") in June 1995. In addition, included in the
purchase of the assets were all of Greenwich's rights under certain servicing
contracts entered into by FMAC's predecessor (the "Servicing Contracts"). The
Servicing Contracts pertained to the servicing of franchise loans that were
previously securitized or funded by Greenwich through FMAC's predecessor. In
connection with the acquisition, the Company and its affiliates assumed
certain liabilities related to the Servicing Contracts and Greenwich agreed to
act as the Company's exclusive agent in connection with the securitization of
franchise mortgage loans for a period of 24 months. The net purchase price for
these assets was approximately $7.6 million.
Concurrently with the closing of the transactions described above, the
Company entered into an operating agreement with Wayne L. Knyal ("Knyal"), the
former president of FMAC's predecessor, for the formation of FMAC. FMAC was
formed to originate, securitize and service franchise loans secured by
mortgages.
Under the terms of the operating agreement, in exchange for a 66 2/3%
ownership interest in FMAC, the Company contributed to FMAC approximately $1.3
million in cash and all of the assets purchased from Greenwich. In exchange
for a 33.3% ownership interest in FMAC, Knyal caused his wholly-owned
subsidiary, Franchise Mortgage Acceptance Corporation ("FMAC Corporation"), to
contribute to FMAC all of its rights under a servicing contract pertaining to
franchise loans that were previously securitized by FMAC Corporation. FMAC's
headquarters and operations center are located in Greenwich, Connecticut.
During the year ended December 31, 1996, and for the six-month period ended
December 31, 1995, FMAC originated or acquired $449.3 million and $163.5
million and securitized $325.1 million and $105.2 million of franchise
mortgage loans, respectively. At December 31, 1996 and December 31, 1995, none
of the loans included on the Company's consolidated balance sheet originated
by FMAC were delinquent. The Company's current product line consists of
enterprise loans, which are loans to finance the operation of existing
franchise units; development loans, which are loans to fund construction of
new units; other real estate loans, which are loans to acquire additional
units; and equipment financing, which are loans and leases for franchise
equipment.
To reduce credit risk, the Company strategically focuses on lending to
established franchise owners who typically own three or more units, have three
or more years of ownership experience in the concept, or have an equivalent
ownership tenure in a different major concept.
5
<PAGE>
FMAC is currently expanding its marketing focus to include other food and
non-food related franchise concepts. In addition, FMAC recently established a
division to provide financing to experienced golf course operators for the
expansion and development of golf courses. In February 1996, FMAC established
a division doing business under the name Imperial Golf Finance Group, which
expands FMAC's financing to owners and operators of golf courses nationwide,
with a focus on lending to experienced golf course operators. For the year
ended December 31, 1996, FMAC made $21.0 million in loan originations related
to golf course financing.
In connection with its lending activities, the Company has taken equity
positions with borrowers and intends to expand such interests in the future to
increase its returns. For example, in June 1996, FMAC provided a $40.0 million
acquisition loan to Summerwood LP ("Summerwood") for the acquisition of 65
Taco Bell and six KFC restaurants in the greater Philadelphia area. The
restaurant assets were comprised of a mixture of fee and leased properties,
restaurant operating equipment, and the development rights for the
Philadelphia markets for 34 additional Taco Bell and 10 KFC restaurants. As
part of the transaction FMAC acquired warrants to acquire in excess of one-
third of the ownership of Summerwood.
Industry Data
According to the 1996 Edition of the Franchise Opportunities Guide (the
"Guide"), there are more than 550,000 domestic franchise businesses currently
generating more than $800 billion in sales. According to the Guide, sales by
franchised businesses now total more than one-third of the United States
retail market and more than seven million people draw their paychecks from
franchised businesses.
The Company believes that substantial business opportunities exist in the
growing franchise finance market. Although the term franchise is typically
associated with fast food restaurants, there are a multitude of franchise
businesses offering a variety of products and services such as home sales, car
maintenance and hair cutting.
Members of FMAC's management group have gained extensive experience in the
development and refinement of systems of operation, management and research
which have enhanced FMAC's ability to identify, evaluate and structure new
investments. FMAC's experience in the restaurant franchise industry results in
efficient, in-house performance of loan origination, real estate acquisition
and management.
FMAC utilizes experienced loan originators recruited from banking,
commercial finance, and franchise finance companies to analyze operations
data, assess real estate values, process and document loan files, and
implement FMAC's business growth strategy.
LOAN ORIGINATIONS
Overview
Enterprise loans--Enterprise loans are fixed or variable rate loans offered
to finance the value of existing franchise units. These loans are used to
refinance any existing franchise debt of the borrower, provide business
expansion proceeds based on the value of the franchise or for working capital
purposes. Enterprise loans generally have a term and amortization of up to 15
years and are partially secured by taking a first lien on all available
franchise furniture, fixtures and equipment. In the origination process for
enterprise loans, FMAC focuses on the cash flow of the franchise business, the
continuing ability of the borrower to operate the franchise in a cash positive
manner and the borrower's ability to repay the loan. Since neither the
franchise loan nor the franchise agreement is generally not assignable to
secure the loan.
Development loans--Development loans are offered to fund the development and
construction of new franchise units. Development loans generally have a term
and amortization of up to 16 years and are secured by the franchise mortgage
or leasehold interest as well as all available franchise furniture, fixtures
and equipment. The loans may be interest only for the first year and fully
amortizing for the subsequent 15 years. Loans may be fixed or variable rate.
6
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Other real estate loans--Other real estate loans are fixed or variable rate
loans offered to acquire additional franchise units, which may include the
underlying real estate interest. Other real estate loans generally have a term
and amortization of up to 15 years and are secured by the franchise mortgage
or leasehold interest as well as all available franchise furniture, fixtures
and equipment.
Equipment financing--FMAC offers both equipment loans and equipment leases
to finance the acquisition of franchise concept equipment. Equipment loans and
leases generally have a term and amortization of up to seven years and are
secured by the underlying financed equipment.
The following table sets forth FMAC's loan originations by type of loans for
the periods presented.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 SIX MONTHS ENDED DECEMBER 31, 1995
------------------------------------------ ------------------------------------------
WEIGHTED WEIGHTED
NUMBER OF PRINCIPAL AVERAGE NUMBER OF PRINCIPAL AVERAGE
LOANS AMOUNT % OF TOTAL INTEREST LOANS AMOUNT % OF TOTAL INTEREST
ORIGINATED ORIGINATED ORIGINATION RATE ORIGINATED ORIGINATED ORIGINATION RATE
---------- ---------- ----------- -------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Enterprise Loans
Fixed rate loans....... 118 $ 63,357 14.1% 10.30% 82 $ 52,740 32.3% 10.11%
Variable rate loans.... 74 43,606 9.7 8.96 30 12,377 7.6 8.53
--- -------- ----- --- -------- -----
Total.................. 192 106,963 23.8 9.75 112 65,117 39.9 9.81
--- -------- ----- --- -------- -----
Development Loans
Fixed rate loans....... -- -- -- -- -- -- -- --
Variable rate loans.... 103 105,706 23.5 9.50 6 5,955 3.6 9.38
--- -------- ----- --- -------- -----
Total.................. 103 105,706 23.5 9.50 6 5,955 3.6 9.38
--- -------- ----- --- -------- -----
Other Real Estate Loans
Fixed rate loans....... 175 163,737 36.5 10.30 84 73,643 45.0 9.97
Variable rate loans.... 83 72,904 16.2 9.05 20 18,784 11.5 8.57
--- -------- ----- --- -------- -----
Total.................. 258 236,641 52.7 9.92 104 92,427 56.5 9.69
--- -------- ----- --- -------- -----
Total(1).............. 553 $449,310 100.0% 9.78 222 $163,499 100.0% 9.72
=== ======== ===== === ======== =====
</TABLE>
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(1) Excludes $3.2 million of equipment loans and net lease receivables
originated during the twelve months ended December 31, 1996. There were no
equipment leases originated during the period from June 30, 1995 through
December 31, 1995.
All of FMAC's borrowers must have a franchise agreement in place with an
approved concept franchisor. The following table sets forth FMAC's loan
originations by franchise concept.
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED DECEMBER 31, 1996 ENDED DECEMBER 31, 1995
---------------------------------- ----------------------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taco Bell............... 233 $167,544 37.3% 44 $ 33,599 20.6%
Burger King............. 116 109,782 24.4 54 38,503 23.6
Hardee's................ 57 40,586 9.0 39 33,447 20.4
Wendy's................. 41 32,905 7.3 22 16,769 10.3
Pizza Hut............... 16 8,093 1.8 44 27,925 17.0
TGI Friday's............ 4 9,120 2.0 1 2,550 1.6
Long John Silvers....... 15 6,850 1.5 -- -- --
KFC..................... 21 13,411 3.0 18 10,706 6.5
Other................... 50 61,019 13.7 -- -- --
--- -------- ----- --- -------- -----
Total................. 553 $449,310 100.0% 222 $163,499 100.0%
=== ======== ===== === ======== =====
</TABLE>
7
<PAGE>
Geographic Distribution--The following table sets forth by state the number
and principal amount of loans originated by FMAC for the periods presented.
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED DECEMBER 31, 1996 ENDED DECEMBER 31, 1995
---------------------------------- ----------------------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania............ 85 $ 59,719 13.3% -- $ -- -- %
Alabama................. 73 57,503 12.8 -- -- --
California.............. 46 36,986 8.2 16 10,475 6.4
Tennessee............... 43 34,161 7.6 -- -- --
Virginia................ 17 32,789 7.3 25 18,819 11.5
New Jersey.............. 20 25,734 5.7 6 6,258 3.8
Texas................... 34 23,146 5.1 16 13,445 8.2
Maryland................ 20 17,375 3.9 2 1,407 0.9
North Carolina.......... 15 16,992 3.8 17 9,588 5.9
Kansas.................. 33 15,273 3.4 3 1,927 1.2
Illinois................ 17 13,367 3.0 6 4,986 3.1
Wisconsin............... 14 12,040 2.7 13 9,327 5.7
Georgia................. 8 10,590 2.4 16 11,583 7.1
Connecticut............. 10 9,616 2.1 14 7,859 4.8
Maine................... 6 7,150 1.6 -- -- --
Nevada.................. 12 6,689 1.5 -- -- --
New York................ 9 6,286 1.4 9 6,464 4.0
Ohio.................... 9 6,396 1.4 7 8,192 5.0
South Carolina.......... 8 6,106 1.4 8 5,391 3.3
Michigan................ 7 4,848 1.1 6 4,828 3.0
Louisiana............... 6 4,945 1.1 -- -- --
Oregon.................. 8 5,197 1.1 -- -- --
Florida................. 7 4,168 0.9 6 4,634 2.8
Utah.................... 6 4,197 0.9 -- -- --
New Hampshire........... 5 3,250 0.7 -- -- --
Massachusetts........... 4 2,957 0.7 4 4,197 2.6
Kentucky................ 3 3,041 0.7 4 5,423 3.3
Colorado................ 5 2,790 0.6 6 3,807 2.3
Montana................. 2 2,661 0.6 -- -- --
Rhode Island............ 4 2,100 0.5 -- -- --
Washington.............. 3 2,275 0.5 -- -- --
Indiana................. 4 1,794 0.4 -- -- --
Arkansas................ 1 1,600 0.4 -- -- --
New Mexico.............. 3 1,443 0.3 1 189 0.1
Minnesota............... 1 976 0.2 7 5,781 3.4
Alaska.................. 1 750 0.2 11 8,259 5.1
Idaho................... 1 750 0.2 -- -- --
Wyoming................. 1 1,100 0.2 -- -- --
Oklahoma................ 2 550 0.1 9 1,929 1.2
Iowa.................... -- -- -- 2 1,954 1.2
Missouri................ -- -- -- 4 3,884 2.4
Other................... -- -- -- 4 2,893 1.7
--- -------- ----- --- -------- -----
Total................. 553 $449,310 100.0% 222 $163,499 100.0%
=== ======== ===== === ======== =====
</TABLE>
8
<PAGE>
Underwriting
Under FMAC's current underwriting guidelines, each franchisee loan is
originated after a review of the following criteria: (i) the applicant's
ability to repay the franchisee loan, (ii) the adequacy of the cash flow of
both the franchise unit and the borrower, and (iii) the real and tangible
personal property that serves as collateral for such franchisee loan. FMAC has
created an underwriting model which incorporates management's assumptions,
which are based upon industry statistics, into an underwriting formula. Loan
officers input data provided by potential borrowers and determine whether or
not a loan would qualify under FMAC's underwriting guidelines. FMAC's loan
originations typically range in size from $250,000 to $2.0 million for each
franchise location. The majority of borrowers are multiple unit operators.
For all loans, the borrower completes an environmental questionnaire and
FMAC obtains a report from a third party service which identifies
environmental risks in the vicinity. Certificates of occupancy are requested
on all units. Additionally, Uniform Commercial Code ("UCC") searches are
conducted for all borrowers before and after origination of a loan. FMAC
prefers franchisees to pay off all existing loans and equipment leases with
FMAC loan proceeds. For cases in which encumbrances will survive the funding
of the franchisee loan, FMAC reviews all such notes, pledge and security
agreements, and loan documents.
Although the franchise agreement is not assigned to secure the franchisee
loan, the continued ability of the borrower to operate the franchise is
essential to ensure the borrower's ability to repay the franchisee loan. FMAC
reviews a copy of the executed franchise agreement to verify (i) that the
borrower is the franchisee or has been granted an assignment of franchisee
rights from the franchisor, (ii) that the duration of the franchise term is as
reported by the borrower and (iii) that the renewal section of the agreement
provides for renewals of the franchise term, particularly when the franchise
term does not exceed the loan term. In the event a loan term exceeds the term
of a borrower's franchise agreement, the loan documentation provides that it
is an event of default (entitling FMAC to accelerate the loan at a premium) if
the franchise agreement is not renewed. If a franchise agreement is not
renewed, FMAC can permit a borrower to provide substitute collateral
satisfying FMAC's underwriting guidelines. Additionally, a certificate of good
standing is required from the franchisor. Units must meet minimum seasoning
requirements which are typically 12 months of operation. The amount of
seasoning generally required is three years for single unit borrowers and six
to 12 months for multi-unit borrowers.
FMAC reviews the organizational documents of borrowers which are business
entities and reviews the personal net worth of borrowers who are individuals.
Business credit reports are obtained for all borrowers. Personal credit
reports are obtained for majority owners of all borrowers. For borrowers
organized as sole proprietorships (other than multi-unit borrowers) and in
certain other cases, personal guarantees are required from the principals. All
former bankruptcies must be discharged and the time since discharge must be at
least five years except in extraordinary circumstances.
Three years of historical operating statements, if available, are required
of all borrowers. FMAC analyzes the revenue and expense numbers to determine
the ability of the unit to support the repayment of a prospective franchisee
loan. Two measures are calculated for this purpose: fixed charge coverage
ratio, i.e., the ratio of cash flow to fixed charges of both the borrower and
the unit, which is generally required to be 1.15x to 1.25x and loan-to-
business value of the unit. The "business value" of a franchise unit is
derived from a formula based upon the franchise concept and the revenues
(sales) and cash flow generated by the franchise unit through its operations,
which in turn is dependent upon and derived from a borrower's franchise
agreement with (or license from) the franchisor. In the case of development
loans, the maximum loan-to-business value is 70% and, in the case of
enterprise loans, the maximum loan-to-business value is 65%. Exceptions to
these maximum loan-to-business values may be made in certain circumstances and
with respect to single-unit borrowers more stringent loan-to-business value
standards are required.
Marketing
FMAC originates the majority of its loans through its marketing department,
comprised of account executives located in seven offices that have established
relationships with franchise operators located in all 50 states. FMAC's
offices are in Alabama, California, Colorado, Connecticut, Georgia, Nebraska
and
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<PAGE>
Washington. FMAC is actively seeking to expand and diversify its financing
operations pursuant to selected franchise operating statistics and other
criteria developed by FMAC, which are intended to identify attractive markets
for FMAC's products.
Applicants are identified through direct solicitation, targeted mailings,
phone solicitations, participation at franchisee conventions, and through
existing customer contacts. Prospective borrowers are contacted by a lending
officer and complete an application for each franchisee location. In addition
to an application, FMAC reviews substantial required documentation depending
on the nature of the borrower and the collateral securing the loan. If a
borrower meets FMAC's underwriting criteria, the account executive uses the
FMAC underwriting model to generate a loan proposal. FMAC funds over 90% of
all loan proposals generated by its underwriting model.
FMAC's databases include specific franchise location data for over 20
franchise concepts, including demographic information, traffic volumes and
information about surrounding retail and other commercial development that
generate customer traffic for franchise establishments. FMAC also maintains a
database of approximately 3,000 chain restaurant industry participants, as
well as databases of unit-level financial performance for existing and
prospective clients. FMAC has the ability to integrate information collected
on sales performance and restaurant location with a mapping system which
contains demographic, retail space, traffic count and street location
information for every significant market in the United States. FMAC also has
collected extensive data regarding management practices within several
franchised industries, franchisor practices and industry trends.
The information collected by FMAC is actively used to assess lending
opportunities, measure prospective credit risk, evaluate portfolio performance
and manage underperforming assets. FMAC intends to continually develop,
improve and use its knowledge of franchised enterprises through research and
broader application of information technology to lower portfolio risk, improve
performance, expand into other franchise concepts and improve its competitive
advantage.
BUSINESS FINANCE LENDING
The Company, through IBC, and SPTL's CBC, LPIG and Auto Lend divisions,
engages in business finance lending, which consists of commercial equipment
leasing, asset based lending, loan participations and automobile inventory
financing for auto dealers.
Imperial Business Credit. IBC leases business equipment including copying,
data processing, communication, printing and manufacturing equipment
exclusively to business users. IBC was formed in May 1995 to combine the
Company's existing leasing business with the assets acquired from First
Concord Acceptance Corporation ("FCAC"). For the year ended December 31, 1996,
IBC originated $87.2 million of leases and securitized $87.0 million of
leases.
Coast Business Credit. CBC is an asset-based lender specializing in lending
to middle market manufacturing and high-technology businesses. On September
30, 1995, as part of the Company's strategy to diversify its lending
operations, the Company acquired from Coast Federal Bank all of the
outstanding capital stock of CoastFed Business Credit Corporation ("CBCC"), a
financial services company engaged primarily in the asset-based commercial
lending business. The purchase price was approximately $150.0 million. CBC
originates loans and commitments subject to stringent underwriting and
collateral requirements. As of December 31, 1996, CBC had total loan
commitments of $547.7 million of which $288.5 million of loans were
outstanding. Concurrently with the closing of the transaction described above,
CBCC was merged with and into SPTL. Upon consummation of the merger, CBCC
became the Coast Business Credit operating division of SPTL ("CBC").
Loan Participation and Investment Group. LPIG was formed in September 1995
to invest in and purchase syndicated commercial loan participations in the
secondary market originated by commercial banks. As of December 31, 1996, LPIG
had total loan commitments of $267.1 million of which $160.7 million of loans
were outstanding.
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<PAGE>
Auto Lend Group. Auto Lend was formed in September 1996 to finance
automobile dealership inventories. As of December 31, 1996, Auto Lend had
total loan commitments of $28.8 million of which $4.6 million of loans were
outstanding.
ASSET-BASED LENDING
General
CBC is a senior secured asset-based lender located in West Los Angeles,
California which has historically conducted its lending business activities
primarily with California-based companies. During 1996 CBC executed an
expansion plan which has increased its customer base outside of California.
CBC now operates three loan production centers in California and additional
loan production centers in Boston, Minneapolis, Atlanta, Portland, Chicago and
Seattle. At December 31, 1996, and December 31, 1995, CBC had outstanding
loans totaling $288.5 million and $154.2 million, respectively. CBC had unused
loan commitments of $259.2 million at December 31, 1996.
CBC's principal business is asset-based lending to small- to medium-sized
businesses with annual revenues ranging from approximately $10 million to $100
million. Generally, such businesses are constrained from obtaining financing
from more traditional credit sources such as commercial banks due to
inadequate equity capitalization, limited operating history, lack of
profitability or financing needs below commercial bank minimum size
requirements. CBC has focused its lending activities on high technology
businesses engaged in the computer industry, many of which are backed by
venture capital investors. At December 31, 1996, CBC had outstanding loans
totaling $115.6 million to technology companies.
At December 31, 1996, CBC's loan portfolio represented lending relationships
with 105 customers, with an average outstanding loan balance per customer of
$2.8 million. The Company believes that CBC's relationships with venture
capital investors and its industry expertise contribute to CBC's ability to
distinguish itself from its competitors and grow its lending relationships.
The Company believes that CBC's loan pricing is competitive with pricing
charged by other commercial finance companies. In addition, CBC attempts to be
flexible in the structuring of its revolving credit lines and to provide
prompt service in order to gain an advantage over its competitors. When CBC
competes against more traditional lenders, it competes less on price and more
on flexibility, speed of funding and the relative simplicity of its
documentation. CBC strives to fund its initial loan advance under a loan to an
approved client within three weeks of CBC's receipt of required information
with respect to the client, and strives to fund future advances generally by
the next business day after CBC's receipt of required documentation.
Loan Products and Originations
CBC's loans are categorized based on the type of collateral securing the
loan. CBC makes revolving loans primarily secured by accounts receivable and
secondarily by inventory. It also makes term loans secured by real property,
equipment or other fixed assets. CBC also periodically enters into
participations with other commercial finance companies. CBC's loans typically
have maturities of two to five years, providing borrowers with greater
flexibility to manage their borrowing needs. These loans have an automatic
renewal for a one year period at the end of such contract term unless
terminated by either party (usually requiring 60 days written notice prior to
the end of such term). Equipment loans are term loans typically with three- to
five-year amortization periods, but are due and payable upon termination of
the master loan and security agreement.
The principal types of loans made by CBC are as follows:
Accounts Receivable Loans--These loans are revolving lines of credit that
are collateralized principally by accounts receivable. Borrowers normally
remit their customer accounts receivable payments directly to CBC, usually on
a daily basis. CBC deposits the payments daily and apply the funds to the
borrowers' loan balances. CBC typically lends up to 80% of the principal
balance of accounts receivable that meet CBC's eligibility requirements. CBC's
auditors conduct quarterly audits of the collateral and financial condition of
each borrower.
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<PAGE>
Inventory Loans--These loans are revolving lines of credit which are
collateralized by eligible inventory that is restricted to raw materials and
finished goods. Inventory Loans are generally made in conjunction with
accounts receivable loans to qualifying borrowers. Borrowers are required to
provide CBC with monthly inventory designations that are supported by a
physical listing or a copy of a perpetual computer listing. These reports are
compared to the borrower's financial statements for accuracy and CBC advances
the loan proceeds as a percentage of the eligible inventory value. Inventory
loans are primarily structured as revolving lines of credit, but under certain
circumstances may be structured to incorporate monthly amortization.
Participation Loans--These loans consist of term loans or revolving lines of
credit in which CBC and other lenders (banks or other asset-based lenders)
jointly lend to borrowers when the loan amount exceeds the lending limits of
an individual lender.
Set forth below is a table showing the principal amount of CBC's loans
outstanding as of December 31, 1996 and December 31, 1995, and the percentage
of CBC's portfolio comprised of each loan type as of such date.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------- -----------------------
OUTSTANDING % OF OUTSTANDING % OF
BALANCE TOTAL BALANCE TOTAL
------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable
loans................... $ 208.1 72.1% $ 127.3 82.6%
Inventory loans.......... 34.9 12.1 18.9 12.3
Participation loans(1)... 45.5 15.8 8.0 5.1
---------- --------- ---------- ---------
Total.................. $ 288.5 100.0% $ 154.2 100.0%
========== ========= ========== =========
</TABLE>
- --------
(1) Participation loans include $48.4 million and $10.3 million purchased and
$2.9 million and $2.3 million sold at December 31, 1996 and December 31,
1995, respectively.
The weighted average yield on CBC's loans outstanding was 12.41% and 13.25%
at December 31, 1996 and December 31, 1995, respectively.
CBC had commitments to make additional fundings on lines of credit with
existing borrowers totaling approximately $259.2 million and $209.9 million at
December 31, 1996 and December 31, 1995, respectively; however, each
additional funding is contingent upon the borrower's maintaining both
sufficient collateral and compliance with the terms and conditions of the loan
documents.
Underwriting
Before a credit line is established, CBC policy requires a review of the
prospective client, its principals, business and customer base, including a
review of financial statements and other financial records, legal
documentation, samples of invoices and related documentation, operational
matters, account receivables and payables.
Following this review, CBC confirms certain matters with respect to the
prospective client's business and the collectibility of the client's
commercial receivables and other potential collateral by conducting public
record searches for liens, conducting credit reviews of the prospective client
and its principals, contacting major customers and suppliers to identify
potential problems, and conducting an on-site audit of the prospective
client's invoice, bookkeeping and collection procedures to verify that they
are properly conducted and operationally compatible with CBC's operations. For
high technology borrowers, particular emphasis is placed on comprehending the
underlying value of the technology itself, including the value of the
borrowers' intangible assets.
After the preliminary review and diligence, CBC requires the prospective
borrower to provide a deposit for fees, orders appraisals if lending against
inventory, equipment or real estate and schedules an audit. CBC's auditing
staff conducts an audit generally consisting of a due diligence review of the
prospective borrower's
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<PAGE>
accounting and financial records, including a statistical review of accounts
receivable and charge-off history. CBC auditors then submit their audit
reports and work papers to CBC's credit committee for review prior to the
extension of credit.
In making a decision to approve a credit line, CBC establishes credit limits
under the revolving credit line and analyzes the prospective client's customer
base to assure compliance with CBC's policies generally limiting CBC's overall
exposure to individual borrowers, especially with respect to privately held or
non-investment grade borrowers. When deemed necessary for credit approval, CBC
may obtain guaranties or other types of security from a client or its
affiliates and may also obtain subordination and intercreditor agreements from
the borrower's other lenders. Although CBC's underwriting guidelines specify a
review of the factors described above, CBC does not apply a rigid scoring
system to prospective borrowers and decisions to enter into a relationship
with a prospective client are made on a case-by-case basis.
CBC's underwriting guidelines and policies provide that, prior to each loan
funding, the account executive assigned to the borrower (i) obtains the
original or a copy of the invoice to be sent to the borrower and the purchase
order (if one is required by CBC) related to such invoice, (ii) confirms the
validity and accuracy of a representative sampling of invoices and (iii) mails
a letter, on the borrower's letterhead, to the new borrower's customer which
introduces CBC and requests that payment be made directly to CBC.
Credit Monitoring and Controls
An assigned CBC account executive monitors each borrower's credit,
collateral and advances. All account executives are required to meet with each
of their assigned borrowers at least quarterly to monitor the borrower's
business, physically inspect the borrower's facilities and equipment, and
discuss any potential problems the borrower may be experiencing.
CBC monitors borrowers' accounts receivable using three forms. The first
form is an accounts receivable aging analysis report prepared monthly by the
loan processor and reviewed by the account executive, and which includes,
among other things, details pertaining to account concentrations and aging
trends. The second is an accounts receivable activity summary prepared weekly
by the loan processor and reviewed by the account executive, summarizing
borrowings, repayments and pledged collateral. The third is a daily report
prepared by the borrower and reviewed by the account executive to determine
credit availability for a particular day.
In addition to the foregoing monitoring procedures, interim audits of all
borrowers are scheduled as deemed appropriate. Also, each account is reviewed
on its anniversary date and revolving lines are reviewed and reconciled on a
monthly basis.
Where liquidation is required for repayment of an outstanding loan, CBC
attempts to effect a consensual possession of the subject collateral property
and joint collection of accounts receivable. In certain instances, court
action may be required to ensure collection of receivables and possession of
pledged assets. CBC has not experienced any loan losses since its acquisition
by the Company.
Marketing
CBC obtains business through referrals from banks, venture capitalists,
accounting firms, management consultants, existing borrowers, other finance
companies and independent brokers. CBC's marketing officers call on CBC's
referral sources to identify and receive introductions to potential clients
and to identify potential clients from database searches. CBC currently
compensates its marketing personnel with what it believes are competitive base
salaries and commissions based on funded transactions in order to motivate and
reward the creation of new business and the renewal of existing business. Such
commissions can be a significant portion of the total compensation paid to
CBC's marketing personnel. CBC's marketing personnel have no credit decision
authority.
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<PAGE>
The Company believes that CBC's marketing strengths are its rapid response
time and high level of service. The Company believes that, based on CBC's
experience with technology credits and valuation of their associated tangible
and intangible assets, CBC is able to quickly evaluate potential borrowers,
providing it with a competitive advantage over other lenders with less
experience providing loans to high technology companies. The Company also
believes that CBC's ability to quickly evaluate credit requests and provide
loans to borrowers who, for various reasons, have not established
relationships with traditional lenders, has resulted in a loyal customer base.
COMMERCIAL EQUIPMENT LEASING
General
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by its wholly-owned subsidiary, Imperial Business Credit,
Inc. ("IBC"), through the acquisition of the assets and the assumption of
certain liabilities of First Concord Acceptance Corporation ("FCAC"), a
Colorado corporation engaged in the origination, acquisition and servicing of
business equipment leases. The sale was effectuated pursuant to an asset
purchase agreement among the Company, FCAC and Oren L. Benton, FCAC's majority
shareholder ("Benton"). In connection with the purchase of FCAC's assets, the
Company or its affiliates also purchased 100% of the partnership interests of
three partnerships controlled by Benton that were formed for the purpose of
securitizing certain of FCAC's lease receivables. The net purchase price for
FCAC's assets and the partnership interests was approximately $21 million.
In October 1996, IBC acquired substantially all of the assets of Avco
Leasing Services, Inc. and all of the assets of Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). The net purchase price for AVCO's assets was approximately
$94.8 million.
IBC's corporate headquarters are located in Rancho Bernardo, California. IBC
carries out its business equipment leasing operations from both its
headquarters and its sales offices in Irvine, California, Denver, Colorado and
Atlanta, Georgia.
IBC's lease originations totaled $87.2 million and $36.0 million for the
years ended December 31, 1996 and December 31, 1995, respectively. During the
years ended December 31, 1996 and December 31, 1995, IBC securitized $87.0
million and $85.2 million of leases, respectively.
Lease Finance Operations
IBC is in the business of leasing equipment, including copying, data
processing, communication, printing and manufacturing equipment, exclusively
to business users. Initial lease terms typically range from 24 months to 60
months. IBC will commit to purchase this equipment only when it has a signed
lease with a lessee who satisfies its credit and funding requirements.
Substantially all the leases written by IBC are full-payout ("direct
financing") leases that allow IBC to sell or re-lease the equipment upon
termination of the lease.
IBC also purchases small portfolios of existing equipment leases from
brokers with whom it has established relationships. These portfolios are
evaluated on an individual basis according to IBC's established credit policy.
The Company believes that these acquisitions allow IBC to grow with greater
efficiency than usual at a level of decreased risk due to the portfolio aging
that has occurred on the books of the originating broker. IBC uses an
established computer system and related software systems to process lease
applications, book leases, post lease payments, closely monitor credit
processing and collections. These systems have in part been developed by IBC
management.
Upon expiration of the initial lease terms of its direct-financing leases,
IBC expects, on average, to realize slightly more than the "residual value" at
which the leased equipment is carried on IBC's books. IBC's ability to recover
the recorded estimated residual value depends on the accuracy of initial
estimates of the equipment's
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<PAGE>
useful life, the market conditions for used equipment when leases expire, and
the effectiveness of IBC's program for releasing or otherwise disposing of
leased equipment. Residual recovery, however, is not required for IBC to
achieve a profitable return on its investment. The residual is usually worth
1% to 2% of the gross yield depending upon the original lease term, further
mitigating against the residual risk inherent in the portfolio.
The following table sets forth IBC's lease originations by equipment type
for the period presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
NUMBER PRINCIPAL
OF LEASES AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computers............................... 857 $21,331 24.5%
Manufacturing/Machine work.............. 380 11,289 13.0
Restaurant.............................. 395 6,238 7.2
Furniture and fixtures.................. 242 5,963 6.8
Automotive.............................. 475 4,279 4.9
Heavy equipment......................... 163 3,938 4.5
Radio television production equipment... 202 3,838 4.4
Print/Typeset equipment................. 141 3,251 3.7
Health/Sports equipment................. 125 3,069 3.5
Dry cleaning/Washing.................... 102 2,387 2.7
Clothing manufacture.................... 59 2,373 2.7
Other................................... 1,204 19,251 22.1
----- ------- -----
Total................................. 4,345 $87,207 100.0%
===== ======= =====
</TABLE>
IBC uses a non-cancelable lease, the terms and conditions of which vary only
slightly from transaction to transaction. In substantially all of the leases,
lessees are obligated to: (i) remit all rents due, regardless of the
performance of the equipment, (ii) operate the equipment in a careful and
proper manner within compliance of governmental rules and regulations, (iii)
maintain and service the equipment, (iv) insure the equipment against casualty
losses and public liability, bodily injury and property damage and (v) pay
directly, or reimburse IBC for, any taxes associated with the equipment, its
use, possession or lease, except those relating to net income derived by IBC
therefrom. The lease provides that IBC, in the event of a default by a lessee,
may declare the entire unpaid balance of rentals due and payable immediately,
and may seize and remove the equipment for subsequent sale, release or other
disposition.
Underwriting
IBC maintains written credit policies that IBC believes are prudent and
customary within the lease finance industry. Such policies form the basis for
IBC's standardized lease forms and approval processes. On occasion, IBC will
make exceptions to its written credit policy for lease brokers with whom IBC
has had past positive experience. In general, IBC's credit policies encourage
leasing of income-generating equipment. Within these guidelines, there are few
specific equipment or industry prohibitions.
IBC's credit policies allow it to accept credit investigations provided by
select brokers and has generated a database about the brokers with whom it
does business. IBC also maintains a written collection policy to provide
standard collection guidelines. In those instances when a portfolio of leases
is acquired, documentation provided by the originating lessor is checked for
compliance with IBC's documentation standards before accepting the portfolio
for purchase.
Marketing
IBC markets its equipment lease products through its own in-house sales
force and through its network of professional equipment lease brokers. IBC's
20 person in-house sales force solicit end user customers and
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<PAGE>
vendors to market their equipment lease transactions. IBC intends to expand
its marketing efforts to include more vendors. The sales force also calls on
IBC's network of professional equipment lease brokers to solicit these
professionals to send their lease transactions to IBC.
IBC's broker advisory panel consists of a group of its most productive
brokers who are brought together on an annual basis, so that they may have an
open interchange of ideas and information regarding IBC and the leasing
marketplace. IBC believes the advisory panel serves a multi-purpose function
by allowing IBC to reward those brokers that provide a profitable base of
business to IBC, and also providing IBC the opportunity to market new ideas
and concepts to those brokers before a general release to the leasing
community. IBC believes that it benefits by obtaining information on how the
brokers work with IBC's competitors (such as special programs and market
trends), and this information can then be used to drive future marketing
plans.
COMMERCIAL MORTGAGE LENDING
Income Property Lending Division
SPTL's Income Property Lending Division ("IPLD") was formed in February 1994
to expand the Company's apartment and commercial property lending business.
For the years ended December 31, 1996 and 1995, IPLD funded approximately
$260.9 million and $160.0 million in loans, respectively. During the year
ended December 31, 1996 and the year ended December 31, 1995, SPTL completed
securitizations of approximately $277.0 million and $57.7 million of multi-
family and commercial mortgage loans originated or purchased by IPLD,
respectively. At December 31, 1996 and December 31, 1995, $1.9 million and
$0.4 million or 1.1% and 0.04%, respectively, of IPLD's outstanding loans were
30 days or more delinquent. At December 31, 1996 and December 31, 1995, $4.4
million and $0.4 million, respectively, of IPLD originated loans were held for
investment by SPTL. IPLD generally seeks to make 70% of its loans secured by
apartment buildings and 30% of its loans secured by other commercial
properties. Most of IPLD's business is generated through in-house loan
representatives who market the loans directly to mortgage brokers and
borrowers. Most of IPLD's loans have been secured by properties in California.
The focus of IPLD's lending activity is the small loan market for apartments
and commercial loans and its maximum loan amount is $2.5 million. SPTL
believes that IPLD employs conservative underwriting criteria, which include a
maximum loan-to-value ratio of 70% and minimum debt coverage ratio of 1.2x on
all loans. Loans secured by income properties entail additional risk as
compared to single family residential lending. The payment experience on such
loans is generally dependent on the successful operation of the related
commercial or multi-family property and can be greatly impacted by adverse
conditions in local real estate markets or in the economy.
All of IPLD's loan programs include 30-year adjustable rate loans tied to
the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. Margins
vary depending on product type, property location and credit history of the
borrower. With respect to apartment loans, IPLD uses standard government
agency documentation and approved independent appraisers.
Loan Participation and Investment Group
SPTL's Loan Participation and Investment Group ("LPIG") was formed in
September 1995 to invest in and purchase syndicated commercial loan
participations in the secondary market originated by commercial banks. During
the year ended December 31, 1996, LPIG purchased senior secured loan
participations with outstanding loan commitments totaling $267.1 million.
Loans outstanding under these commitments at December 31, 1996, were $160.7
million. At December 31, 1996, none of LPIG's loan participations were 30 days
or more delinquent.
The principal types of loans acquired by LPIG are senior secured bank loans
consisting of: (i) revolving lines of credit which allow the borrower to
borrow and repay proceeds as needed for working capital purposes,
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<PAGE>
(ii) long-term loans with a specific amortization schedule which requires the
borrower to repay the borrowed loans over time, usually on a quarterly basis
or (iii) letters of credit which are normally funded as a sublimit under the
revolving line of credit commitment. The loans are generally secured by a
first priority lien on all of the borrower's property including accounts
receivable, inventory and furniture, fixtures and equipment, as well as liens
on owned real estate. At December 31, 1996, loan participations held by LPIG
ranged in size from approximately $900,000 to approximately $15.0 million.
LPIG believes that its purchase of senior secured loan participations allows
it to build and maintain a loan portfolio without costly direct customer loan
servicing and loan origination costs. In addition, such purchases facilitate
the maintenance of a portfolio which is diversified both geographically and by
industry.
LPIG's loan underwriting policy requires an analysis of the borrower's
ability to repay its debts, as well as an evaluation of the effects of general
economic and industry trends and various competitive factors affecting the
borrower.
LPIG's commitments/outstandings by industry type at December 31, 1996:
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL
COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING
AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Manufacturing................. $ 69,893 26.2% $ 43,865 27.3%
Television broadcasting....... 24,625 9.2 15,040 9.4
Paper......................... 15,195 5.7 7,670 4.8
Supermarkets.................. 14,474 5.4 10,784 6.7
Defense....................... 4,643 1.7 1,427 .9
Hotels........................ 33,942 12.7 14,436 9.0
Credit information services... 11,000 4.1 6,054 3.8
Air carrier................... 20,000 7.5 16,484 10.2
Cable television.............. 10,000 3.8 6,937 4.3
Outdoor advertising........... 19,000 7.1 6,479 4.0
Food distribution............. 4,917 1.8 4,917 3.1
Restaurants................... 5,000 1.9 5,000 3.1
Direct mail advertising....... 4,758 1.8 2,664 1.7
Park management............... 4,620 1.7 3,580 2.2
Waste disposal services....... 10,000 3.8 6,129 3.8
Office products dist.......... 15,000 5.6 9,205 5.7
-------- ----- -------- -----
Total..................... $267,067 100.0% $160,671 100.0%
======== ===== ======== =====
</TABLE>
Auto Lend Group
SPTL's Auto Lend Group ("Auto Lend") was established in September 1996, to
provide automobile inventory financing for automobile dealers. The principal
types of loans originated are fixed-rate lines of credit. Auto Lend had $28.8
million of commitments and $4.6 million of loans outstanding at December 31,
1996. SPTL believes that Auto Lend's products offer synergistic opportunities,
when offered in connection with SPTL's sub-prime auto lending ability, to
provide car dealers a complete financing package. See "--Consumer Lending--
Auto Lending Division."
CONSUMER LENDING
Through SPTL, the Company also makes consumer loans consisting of sub-prime
automobile finance loans, home improvement loans and other consumer credit.
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<PAGE>
Auto Lending Division
ALD was formed in October 1994 to finance new and used automobile purchase
contracts. ALD's borrowers are generally credit-impaired and therefore are
unable to access traditional sources of financing from banks and captive
automobile finance companies. ALD seeks to offset the increased risk of
default in its portfolio with higher yields and aggressive servicing and
collection activities.
During the year ended December 31, 1996 and December 31, 1995, ALD
originated approximately $35.0 million and $19.0 million, respectively, in
automobile loans. SPTL currently generates automobile loans through three
Northern California retail offices and anticipates expanding its activities
within California.
Home Improvement Loans and Other Consumer Credit
CCD was formed in early 1994 to offer loans primarily to finance home
improvements and consumer goods. CCD's business is developed through a network
of retailers and contractors throughout California. All loans are centrally
processed, approved and funded at CCD's headquarters in Irvine, California.
Home improvement loans offered by CCD range from $5,000 to $350,000 and
include major remodeling projects that are sometimes coupled with
refinancings. CCD's typical loan is secured by a junior lien. In addition, CCD
purchases unsecured installment sales contracts to finance certain home
improvements such as air conditioning, roofing, kitchen or bathroom
remodeling.
During the years ended December 31, 1996 and December 31, 1995, CCD
originated $22.0 million and $14.6 million in loans, respectively, all of
which are held for investment. At December 31, 1996 and December 31, 1995 $0.9
million and $0.6 million or 2.4% and 2.3%, respectively, of CCD's outstanding
loans were 30 days or more delinquent.
NON-CONFORMING RESIDENTIAL LENDING
SPFC originates, purchases and sells high yielding, single family non-
conforming mortgage loans. Substantially all of SPFC's loans are secured by
first or second mortgages on owner occupied single family residences. The
majority of the originated and purchased loans are made to borrowers who do
not qualify for or are unwilling to obtain financing from conventional
mortgage sources. SPFC's mortgage loan originations and purchases for the year
ended December 31, 1996 were $789.9 million. SPFC securitized $657.4 million
of non-conforming residential mortgage loans for the year ended December 31,
1996.
OTHER ACTIVITIES
SPFC
During the years ended December 31, 1996 and December 31, 1995, a
substantial portion of the Company's operations were conducted through its
non-conforming residential mortgage lending subsidiary, SPFC. SPFC commenced
operations in January 1993 as a division of SPTL, and has been an operating
subsidiary of ICII since April 1995. SPFC completed an initial public offering
of its common stock in June 1996 and its stock is listed on the New York Stock
Exchange under the symbol "SFC."
As of December 31, 1996, ICII owned 51.2% of SPFC; ICII expects that its
percentage ownership of SPFC will be reduced to below 50% at which point the
financial statements of SPFC would not be consolidated with those of ICII. For
a further description, see "Deconsolidation" in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
SPFC is a specialty finance company engaged in the business of originating,
purchasing and selling high-yielding, sub-prime mortgage loans secured
primarily by one-to-four family residences. The majority of SPFC's loans are
made to owners of single family residences who use the loan proceeds for
purposes such as debt
18
<PAGE>
consolidation, financing of home improvements and educational expenditures.
SPFC focuses on lending to individuals who often have impaired or
unsubstantiated credit histories and/or unverifiable income. As a result,
SPFC's customers are less likely to qualify for loans from conventional
sources and generally pay higher interest rates as compared to interest rates
charged by conventional mortgage sources. Substantially all of SPFC's mortgage
loans originated or purchased during the years ended December 31, 1996 and
December 31, 1995, were secured by first mortgages, and the remainder were
secured by second mortgages. SPFC originates and purchases loans through its
wholesale division (the "Wholesale Division"), its retail/telemarketing
division (the "Retail/Telemarketing Division"), its correspondent program (the
"Correspondent Program"), and its institutional division (the "Institutional
Division").
SPFC originates a majority of its loans through its Wholesale Division,
which is currently comprised of approximately 68 account executives located in
14 sales offices who have established relationships with independent mortgage
brokers. For the year ended December 31, 1996, the Wholesale Division
originated loans in 50 states and the District of Columbia. Of the Wholesale
Division's 14 sales offices, four are located in California, two in Oregon,
and one in each of Ohio, Washington, Florida, Colorado, Illinois,
Massachusetts, Virginia and Texas. The Wholesale Division originated $511.8
million and $267.4 million of loans during the years ended December 31, 1996
and December 31, 1995 respectively, representing 64.8% and 92.7% of SPFC's
total loan originations and purchases during the respective periods.
SPFC recently formed its Retail/Telemarketing Division to solicit loans
directly from prospective borrowers. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. The predictive dialing machine (i) automatically dials prospective
borrowers, (ii) provides the telemarketer with an on-screen marketing
presentation to market efficiently SPFC's loan products and (iii) provides an
interactive loan underwriting program and loan quotation system to assess
immediately the prospect's borrowing capability. During the year ended
December 31, 1996, SPFC originated $4.6 million of mortgage loans through the
Retail/Telemarketing Division.
SPFC purchases loans through its Correspondent Program. Loans purchased
through the Correspondent Program are complete loan packages that have been
underwritten and funded by mortgage bankers or financial institutions. All
loans purchased through the Correspondent Program are reunderwritten by SPFC's
underwriting staff to determine that the loan packages are complete and
materially adhere to SPFC's underwriting guidelines. During the years ended
December 31, 1996 and December 31, 1995 SPFC purchased $204.8 million and
$21.1 million of mortgage loans, respectively, through its Correspondent
Program.
The Institutional Division, which began operations in 1996, also originates
and purchases loans through relationships developed with small- to medium-
sized commercial banks, savings banks and thrift institutions. During the year
ended December 31, 1996, the Institutional Division originated and purchased
$17.2 million of mortgage loans.
Strategic Alliances
In addition to originating loans through its Wholesale Division,
Retail/Telemarketing and the Correspondent Program, SPFC purchases loans
through its Strategic Alliance Division. Purchases under the Strategic
Alliance Division increase SPFC's volume and diversify its sources of loan
originations.
Pursuant to such strategic alliances, SPFC will provide financing
arrangements and a commitment to purchase qualifying loans, and the
participant in such a strategic alliance will be entitled to participate in
the potential profitability of SPFC sponsored securitizations. SPFC currently
has two active strategic alliance partners and two strategic alliance
acquisitions. All four specialize in home equity loans. During the year ended
December 31, 1996, SPFC purchased $51.5 million of mortgage loans through the
Strategic Alliance Program.
19
<PAGE>
SPFC sells a majority of its loan origination and purchase volume through
public securitizations. Generally, in each securitization transaction, SPFC
retains an interest in the loans sold through interest-only and residual
certificates, which are amortized over an estimated average life. Cash flow
received from these interest-only and residual certificates is subject to the
prepayment and loss characteristics of the underlying loans. During the years
ended December 31, 1996 and December 31, 1995, SPFC securitized $657.4 million
and $164.9 million of mortgage loans, respectively.
SPFC retains the servicing rights on all loans it originates or purchases.
In September 1995, SPFC chose to outsource its loan servicing operations to
Advanta Mortgage Corp. USA. As of December 31, 1996, SPFC's servicing
portfolio (inclusive of securitized loans for which SPFC has ongoing risk of
loss but has no remaining servicing rights or obligations) was $908 million.
The delinquency experience as a percentage of loans held for sale or
securitization included in SPFC's servicing portfolio and securitized loans
originated by SPFC but serviced by an affiliate or by an outside party was
6.9%, 3.4%, and 1.3%, at December 31, 1996, 1995, and 1994, respectively.
ICAI
Imperial Credit Advisors, Inc. ("ICAI"), a wholly owned subsidiary of ICII,
oversees the day-to-day operations of ICMH, pursuant to a management agreement
more fully described in "Certain Transactions--Relationships with ICMH--Other
Transactions--General."
DRI
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc. subsequently renamed Dabney/Resnick/Imperial, LLC
("DRI"). DRI engages in investment banking activities. ICII has acquired a 1%
equity interest in DRI and has purchased a warrant to acquire an additional
48% interest therein.
DRI is an investment bank that serves institutional, high net worth, and
corporate clients. DRI's services include securities underwriting, sales and
trading, financial advisory services, investment research, and asset
management. DRI manages and underwrites public offerings of securities,
arranges private placements and provides advisory and other services in
connection with mergers, acquisitions, restructurings, and other financial
transactions. See "Strategic Focus and Acquisition" in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ICIFC
In November 1995, the Company contributed to ICIFC certain of the operating
assets and customer lists of the Company's mortgage conduit operations in
exchange for 100% of ICIFC's common stock, representing 1% of the economic
interest in ICIFC. ICMH owns 100% of ICIFC's non-voting preferred stock,
representing 99% of the economic interest in ICIFC. Since 100% of the common
stock of ICIFC is owned by the Company, the Company consolidates the financial
statements of ICIFC in its financial statements. As a result, the assets and
liabilities of the Company reflected on its balance sheet are significantly
greater than they would otherwise be absent such consolidation. However, since
the Company only owns 1% of the economic interest of ICIFC, it considers
ICIFC's operations immaterial to the Company.
To more properly reflect the Company's future financial condition the
Company intends to dispose of its common stock interest in ICIFC at which
point the financial statements of ICIFC would not be consolidated with those
of ICII. For a further description, see "Deconsolidation" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
20
<PAGE>
LOANS HELD FOR INVESTMENT
The following table sets forth certain information regarding the Company's
loans held for investment. Substantially all of the Company's loans held for
investment are held by SPTL:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------
1996 1995 1994 1993
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real estate:
One to four family.............. $ 375,476 $228,721 $ 897,494 $ 73,636
Multi-family.................... 2,527 7,028 82,004 61,908
Commercial...................... 11,011 133,189 30,287 21,663
---------- -------- ---------- --------
389,014 368,938 1,009,785 157,207
Leases.......................... 99,717 7,297 23,667 2,969
Installment loans............... 34,248 1,900 4,290 12
Franchise loans................. 115,910 46,766 -- --
Asset based loans............... 288,528 154,252 -- --
Commercial loans................ 173,932 110,104 5,882 247
---------- -------- ---------- --------
1,101,349 689,257 1,043,624 160,435
Unearned income................. (6,336) (5,217) (5,900) (1,406)
Deferred loan fees.............. (6,415) (1,540) (1,115) (1,180)
---------- -------- ---------- --------
1,088,598 682,500 1,036,609 157,849
Allowance for loan losses....... (19,999) (13,729) (7,054) (3,254)
---------- -------- ---------- --------
Total....................... $1,068,599 $668,771 $1,029,555 $154,595
========== ======== ========== ========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset-based loans to
middle market companies mainly in California, and loans to experienced
franchisees of national and regional restaurant franchises. 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.
With respect to loans held for investment at SPTL, a continuing decline in
California real estate values may adversely affect the underlying loan
collateral. In order to reduce the Company's risk of loss on any one credit,
the Company has historically sought to maintain a fairly low average loan size
within the portfolio of loans held for investment. The average loan size and
single largest loan, excluding loans originated by CBC, of the loans
originated by and held for investment at SPTL at December 31, 1996 and
December 31, 1995 were $0.1 million and $11.0 million, and $0.1 million and
$3.4 million, respectively. The largest loan held for investment at December
31, 1996 and December 31, 1995 was a performing loan secured by a first deed
of trust.
Non-performing assets ("NPA's") consist of nonaccrual loans, loans with
modified terms and OREO. The Company's policy is to place all loans 90 days or
more past due on nonaccrual. Any mortgage loans held for sale, originated or
acquired as part of the Company's former mortgage banking operations which are
held more than 90 days after origination are classified as mortgage loans held
for investment and are transferred at the lower of carrying value or market
value. Such loans may be unsalable for a variety of reasons, including
documentation deficiencies, payment defaults or borrower misrepresentations.
The former mortgage banking operations' OREO arises primarily through
foreclosure on mortgage loans repurchased from investors, typically due to a
breach of representations or warranties. The Company incurred losses of
approximately $5 million related to the activities during the year ended
December 31, 1996. During the years ended December 31, 1995 and 1994, the
impact of loans repurchased as the result of borrower misrepresentations was
not material.
21
<PAGE>
The following table sets forth the amount of NPA's attributable to the
Company's former mortgage banking operations and to all of its other lending
activities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------- ---------------------- --------------------- ---------------------
FORMER FORMER ALL FORMER FORMER
ALL OTHER MORTGAGE ALL OTHER MORTGAGE OTHER MORTGAGE ALL OTHER MORTGAGE
LENDING BANKING LENDING BANKING LENDING BANKING LENDING BANKING
ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... $ 24,711 $19,928 $ 2,652 $ 20,990 $ 4,012 $ 5,697 $ 1,124 $ 1,198
Commercial property.... 3,052 -- 1,824 -- 2,201 -- 1,481 --
Multi-family property.. 1,421 -- 5,522 -- 1,195 -- 1,136 --
Leases................. 997 -- -- -- -- -- -- --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total nonaccrual
loans............... 30,181 19,928 9,998 20,990 7,408 5,697 3,741 1,198
---------- ------- ---------- -------- -------- ---------- -------- ----------
OREO:
One to four family..... 6,639 3,508 1,937 4,173 1,217 1,277 189 2,148
Commercial property.... 1,200 -- 211 -- 445 -- 358 --
Multi-family property.. 867 -- 858 -- 329 -- 781 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total OREO........... 8,706 3,508 3,006 4,173 1,991 1,277 1,328 2,148
---------- ------- ---------- -------- -------- ---------- -------- ----------
Loans with modified
terms:
One to four family..... 800 -- 870 -- 76 -- 47 --
Commercial property.... 456 -- -- -- -- -- 702 --
Multi-family property.. -- -- -- -- -- -- 871 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total loans with
modified terms......... 1,256 -- 870 -- 76 -- 1,620 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total NPAs........... $ 40,143 $23,436 $ 13,874 $ 25,163 $ 9,475 $ 6,974 $ 6,689 $ 3,346
========== ======= ========== ======== ======== ========== ======== ==========
Total loans and OREO. $2,015,031 $40,955 $1,168,783 $869,463 $216,555 $1,094,144 $120,606 $1,281,313
Total NPA's as a
percentage of loans and
OREO................... 1.99% 57.22% 1.19% 2.89% 4.38% 0.64% 5.55% 0.26%
</TABLE>
The following table summarizes certain information regarding the Company's
allowance for loan losses and losses on OREO:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994 1993
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance at beginning of period........ $13,729 $ 7,054 $ 3,255 $ 1,995
Provision for loan and lease losses..... 9,773 5,450 5,150 2,350
Business acquisitions and bulk loan
purchases.............................. 4,500 4,320 -- --
Loans charged off....................... (8,326) (3,106) (1,436) (1,124)
Recoveries on loans previously charged
off.................................... 323 11 85 34
------- ------- ------- -------
Net charge-offs......................... (8,003) (3,095) (1,351) (1,090)
------- ------- ------- -------
Allowance at end of period............ $19,999 $13,729 $ 7,054 $ 3,255
======= ======= ======= =======
OREO losses:
OREO writedowns....................... 3,252 $ 2,085 $ 369 $ 406
Loss (gain) on sale of OREO........... 2,842 (957) (119) (62)
------- ------- ------- -------
Total OREO losses................... $ 6,094 $ 1,128 $ 250 $ 344
======= ======= ======= =======
</TABLE>
The percentage of the allowance for loan losses to nonaccrual loans will not
remain constant due to the nature of the Company's portfolio of mortgage
loans. The collateral for each non-performing mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an ongoing basis, management
monitors the loan portfolio and evaluates the adequacy of the allowance for
loan losses.
22
<PAGE>
In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio. Loans deemed by management to be uncollectible are charged to
the allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio. While management believes that the current allowance for loan
losses is sufficient, future additions to the allowance may be necessary.
FUNDING AND SECURITIZATIONS
The Company's liquidity requirements are met primarily by repurchase
facilities, warehouse lines of credit from financial institutions,
securitizations, whole loan sales, SPTL customer deposits and FHLB borrowings.
The Company has also accessed the capital markets through equity and debt
offerings.
As of December 31, 1996, the Company had warehouse lines of credit and
commitments of $435.2 million, excluding financing at SPFC and ICIFC and
amounts available to ICII under a warehouse facility with PaineWebber
Incorporated which the Company does not anticipate using in the future.
Amounts outstanding under these facilities at December 31, 1996 totaled $197.5
million. Business operations conducted through divisions of SPTL will be
primarily financed through deposits, capital contributions from ICII to SPTL
and Federal Home Loan Bank of San Francisco ("FHLB") borrowings. At December
31, 1996, SPTL had total deposits of approximately $1.1 billion (excluding
deposits of the Company maintained with SPTL).
Repurchase and Warehouse Facilities
The Company is dependent upon its ability to access repurchase facilities
and warehouse lines of credit in order to fund new originations and purchases.
The Company has repurchase facilities and warehouse lines of credit, under
which it had available approximately $237.7 million in financing at December
31, 1996 excluding financing available to ICIFC and SPFC, and amounts
available under a $200 million warehouse facility with PaineWebber
Incorporated (the "PaineWebber Line") which the Company does not anticipate
using in the future. At such date, approximately $197.5 million in borrowings
were outstanding under such facilities, excluding borrowings by ICIFC and SPFC
and the PaineWebber Line. See "--Other Activities--ICIFC."
23
<PAGE>
The Company, excluding ICIFC's and SPFC's lines and facilities and the
PaineWebber Line, had various warehouse lines and reverse repurchase
facilities available as follows at December 31, 1996.
<TABLE>
<CAPTION>
PRINCIPAL
COMMITMENT AMOUNT
AMOUNT(1) OUTSTANDING INDEX EXPIRATION DATE
----------- ----------- ----- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Warehouse Lending
Corporation of America
(ICII)(2).............. $ 20,000 $ 4,600 LIBOR plus 250 basis points Expired
Imperial Warehouse
Lending Group (ICII)... 20,000 5,077 Prime Rate minus 25 basis points September 30, 1997
CS First Boston (FMAC).. 200,000 48,773 LIBOR plus 125 basis points December 31, 1997
Banco Santander
(FMAC)(3).............. 50,000 16,229 LIBOR plus 225 basis points Under extension
Greenwich Financial
Capital Products, Inc.
(FMAC)................. Unspecified 35,158 LIBOR plus 175 basis points 30 days on demand
CoreStates Bank, N.A.
(IBC).................. 10,000 1,111 LIBOR plus 230 basis points November 30, 1997
Conti (IBC)............. 100,000 87,657 LIBOR plus 200 basis points April 10, 1997
----------- --------
Total................. $ 400,000 $198,605
=========== ========
</TABLE>
- --------
(1) At December 31, 1996, SPFC had two warehouse facilities, a $150 million
commitment with Morgan Stanley Mortgage Capital, Inc. having an index of
LIBOR plus 70 basis points, of which $152.7 million was outstanding at
such date, and a $200 million commitment with Lehman Commercial Paper Inc.
having an index of LIBOR plus 80 to 95 basis points, of which $0 million
was outstanding at such date. In addition, at December 31, 1996, ICIFC had
a $600 million commitment from IWLG having an index of Bank of America's
Prime Rate, of which $337.4 million was outstanding at such date. At
December 31, 1996, ICII had a $200 million commitment under the
PaineWebber Line having an index of LIBOR plus 65 to 85 basis points, of
which $5.7 million was outstanding at such date.
(2) The availability under this facility expired in August 1996. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(3) FMAC is currently negotiating an extension of this facility. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Securitizations of Assets
The Company has created Capitalized Excess Servicing Fees Receivable and
Interest-only and Residual Certificates as a result of the sale of loans and
(to a lesser extent) leases through various trust vehicles. Each trust
vehicle, primarily consisting of real estate mortgage investment conduits
("REMICs"), is majority owned by an independent third party who has made a
substantial capital investment and has substantial risks and rewards of
ownership of the assets of the trust; therefore, these trust vehicles are not
consolidated with the Company. Capitalized Excess Servicing Fees Receivable
and Interest-only and Residual Certificates on the sale of loans and leases
are determined by computing the present value of the excess of the weighted
average coupon on the loans and leases sold over the sum of: (i) the coupon in
the pass-through certificates, (ii) a base servicing fee paid to the loan or
lease servicer, (iii) expected losses to be incurred on the portfolio of loans
or leases sold, and considering (iv) prepayment assumptions. Prepayment
assumptions are based on recent evaluations of the actual prepayments of the
Company's servicing portfolio or on market prepayment rates on new portfolios
and consideration of the current interest rate environment and its potential
impact on prepayment rates. The cash flows expected to be received by the
Company, not considering the expected losses, are discounted at an interest
rate that the Company believes an unaffiliated third-party purchaser would
require as a rate of return on such a financial instrument.
24
<PAGE>
Expected losses are discounted using a rate equivalent to the risk-free rate
for securities with a duration similar to that estimated for the underlying
loans and leases sold. The excess servicing cash flows are available to the
Company to the extent that there is no impairment of the credit enhancements
established at the time the loans and leases are sold. Such credit
enhancements are classified as retained interest in loan and lease
securitizations on the consolidated balance sheets and represent the amount of
overcollateralization of the pass-through certificates. Capitalized Excess
Servicing Fees Receivable are amortized using the interest method. Interest-
only and residual certificates in loan securitizations retained by SPFC are
held as trading securities and are adjusted to their respective market values
quarterly with corresponding charges and credits made to income in the
adjustment period. To the extent that actual future performance results are
different from the excess cash flows the Company estimated, the Company's
Capitalized Excess Servicing Fees Receivable and Interest-only and residual
certificates will be adjusted quarterly with corresponding adjustments made to
income in that period. Carrying values of the Company's Capitalized Excess
Servicing Fees Receivable were subject to relative fair value allocations.
Each loan or lease securitization has specific credit enhancement
requirements in the form of overcollateralization which must be met before the
Company receives cash flows due. As the securitized assets generate excess
servicing fees, they are initially used to pay down the balance of the pass-
through certificates until such time as the ratio of securitized assets to
pass-through certificates reaches the overcollateralization requirement
specified in each securitization. This overcollateralization amount is carried
on the balance sheet as retained interest in loan and lease securitizations.
After the overcollateralization requirement and the other requirements
specified in the pooling and servicing agreement have been met, the Company
begins to receive the excess servicing fees and a portion of the retained
interest on a monthly basis.
The Company's purchased and originated mortgage servicing rights ("PMSR's"
and "OMSR's") are subject to some degree of volatility in the event of
unanticipated prepayments or defaults. Prepayments in excess of those
anticipated at the time PMSR's and OMSR's are recorded result in accelerated
amortization. Such prepayments may result in the impairment of PMSR's and
OMSR's. At December 31, 1996 and December 31, 1995, PMSR's and OMSR's together
amounted to $14.9 million and $18.4 million, respectively.
For the years ended December 31, 1996, 1995 and 1994, the Company's
amortization rates of its PMSR's and OMSR's were 13%, 23% and 19%,
respectively as a percentage of the average balance of PMSR's and OMSR's
outstanding during the period.
During the years ended December 31, 1996, 1995, and 1994, the Company
recognized accelerated amortization of PMSR's and OMSR's due to prepayments of
$0, $1.2 million, and $0.3 million, respectively. During the years ended
December 31, 1996, 1995, and 1994, the Company incurred no impairment related
charge-offs of its PMSR's and OMSR's.
At December 31, 1996 and December 31, 1995, the Company's consolidated
balance sheet reflected retained interest in loan and lease securitizations of
$49.5 million and $14.3 million, respectively. At December 31, 1996 and
December 31, 1995, the Company's consolidated balance sheet reflected
Capitalized Excess Servicing Fees Receivable of $23.1 million and $33.2
million, respectively. Capitalized Excess Servicing Fees Receivable is
computed using prepayment, default, discount rate and interest rate
assumptions that the Company believes market participants would use for
similar instruments at the time of sale. There is no liquid market for
Capitalized Excess Servicing Fees Receivable; therefore, no assurance can be
given that all or any portion of Capitalized Excess Servicing Fees Receivable
could be sold at its stated value on the consolidated balance sheet.
During the year ended December 31, 1996, the Company had completed seven
loan and lease securitizations totaling $1.3 billion. Non-conforming
residential mortgage loans totaled $657.4 million, multi-family and commercial
mortgage loans totaled $277.0 million, franchise loans totaled $325.1 million
and equipment leases totaled $87.0 million.
25
<PAGE>
The following table sets forth the securitizations effected by the Company
since inception:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
ISSUE DATE ISSUANCE NAME SECURITIZED
---------- ------------- -------------
(IN MILLIONS)
<C> <S> <C>
December 1994 Prudential Securities 1994-6................. $ 45.5
March 1995 Prudential Securities 1995-1................. 95.5
June 1995 Southern Pacific Secured Assets Corp. 55.3
("SPSAC") 1995-1.............................
August 1995 Second delivery of SPSAC 1995-1.............. 20.0
August 1995 Donaldson, Lufkin & Jenrette ("DLJ") 1995-4.. 290.9
September 1995 SPSAC 1995-2................................. 261.7
November 1995 DLJ 1995-5................................... 98.3
November 1995 Second delivery of SPSAC 1995-2.............. 28.0
December 1995 Third delivery of SPSAC 1995-2............... 2.3
December 1995 Franchise Loan Receivables Trust ("FLRT") 105.2
1995-B.......................................
March 1996 SPSAC 1996-1................................. 102.4
June 1996 SPSAC 1996-2................................. 130.0
June 1996 FLRT 1996-A.................................. 167.4
July 1996 Second delivery of SPSAC 1996-2.............. 40.0
August 1996 SPSAC 1996-3................................. 150.0
September 1996 Southern Pacific Thrift & Loan 1996 C-1...... 277.0
October 1996 Second delivery of SPSAC 1996-3.............. 50.0
December 1996 SPSAC 1996-4................................. 185.0
December 1996 FLRT 1996-B.................................. 157.7
--------
Total(1)..................................... $2,262.2
========
</TABLE>
- --------
(1) Excludes IBC's monthly deliveries to a Citicorp North America, Inc.
securitization vehicle which totaled $87.0 and $85.2 million for the year
ended December 31, 1996 and 1995, respectively
SPTL Deposits
SPTL obtains its funds from depositors by issuing FDIC insured passbook
accounts and term certificates of deposit. SPTL solicits both individual and
institutional depositors for new accounts through print advertisements and
computerized referral networks. SPTL currently maintains two deposit gathering
facilities in Southern California. At such facilities, tellers provide banking
services to customers such as accepting deposits and permitting withdrawals.
However, customers are not offered check writing services or offered demand
deposit accounts. Generally, certificates of deposit are offered for terms of
one to 12 months. See "--Regulation--Thrift and Loan Operations--Limitations
on Types of Deposits" for a description of limitations on types of deposits
that SPTL, as a thrift and loan, can accept.
The following table sets forth the distribution of SPTL's deposit accounts
(prior to intercompany elimination), and the weighted average nominal interest
rates on each category of deposits:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
% OF AVERAGE % OF AVERAGE
AMOUNT DEPOSITS INTEREST RATE AMOUNT DEPOSITS INTEREST RATE
---------- -------- ------------- ---------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 47,890 4.5% 4.73% $ 51,146 4.7% 1.27%
Time deposits of less
than $100,000.......... 803,556 74.9 5.84 755,499 69.1 5.67
Time deposits of
$100,000 and over...... 220,820 20.6 5.74 286,794 26.2 5.97
---------- ----- ---------- -----
Total................. $1,072,266 100.0% 5.77% $1,093,439 100.0% 5.54%
========== ===== ========== =====
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1996 1995
------------------- -------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months or less.................... $ 404,565 37.7% $ 356,353 32.6%
Over three months through six months.... 279,397 26.1 259,300 23.7
Over six months through twelve months... 311,862 29.1 367,285 33.6
Over twelve months...................... 76,442 7.1 110,501 10.1
---------- ----- ---------- -----
Total................................. $1,072,266 100.0% $1,093,439 100.0%
========== ===== ========== =====
</TABLE>
Certificates of deposit of $100,000 and over totaled approximately $220.8
million and $286.8 million at December 31, 1996 and 1995, respectively.
Interest expense associated with certificates of deposit of $100,000 and over
was approximately $13.6 million, $15.4 million and $16.8 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Since December 31, 1991, SPTL has increased its deposits as necessary so
that deposits together with cash, liquid assets and FHLB borrowings, have been
sufficient to provide SPTL funding for its lending activities. The weighted
average interest rate of the deposit accounts was 5.77% at December 31, 1996
as compared to 5.54% at December 31, 1995 and 4.80% at December 31, 1994.
The Company believes that SPTL's local marketing strategies, as well as its
utilization of domestic money markets, have been the basis by which SPTL has
been able to acquire new deposits at levels consistent with management's
financial targets. Certain levels of growth of SPTL's assets and deposits
require notice to the FDIC.
As an additional source of funds, SPTL was approved in 1991 to become a
member of the FHLB. Currently, SPTL is approved for borrowings from the FHLB
pursuant to a secured line of credit that is automatically adjusted subject to
applicable FHLB regulations and available pledged collateral. At December 31,
1996 $140.5 million was outstanding bearing an average interest rate of 6.30%.
COMPETITION
The businesses in which the Company operates are highly competitive. The
Company faces significant competition from other commercial and consumer
finance lenders, commercial banks, credit unions, thrift institutions and
securities firms, among others. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in obtaining a loan or lease,
customer service, marketing and distribution channels and interest rates
charged to borrowers. In addition, the current level of gains realized by the
Company and its competitors on the sale of their loans and leases could
attract additional competitors into these markets, with the possible effect of
lowering gains that may be realized on the Company's future loan and lease
sales.
Wholesale originations are expected to remain a significant part of the
Company's loan and lease production programs. As a wholesale purchaser of
loans and leases, the Company is exposed to fluctuations in the volume and
cost of wholesale loans and leases resulting from competition with other
purchasers of such loans and leases, market conditions and other factors.
Management believes that SPTL's most direct competition for deposits comes
from savings and loan associations, other thrift and loan companies,
commercial banks and credit unions. The Company's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities as well as money market mutual funds.
27
<PAGE>
REGULATION
The Company's businesses are subject to extensive regulation in the United
States at both the federal and state level. In the Company's home equity loan
and financing businesses, regulated matters include loan origination, credit
activities, maximum interest rates, finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices. As a part of the financing and asset securitization business,
the Company is required to register as a broker-dealer with certain Federal
and state securities regulatory agencies and is a member of the NASD.
Truth in Lending
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Company.
The Company believes that it is in compliance with TILA in all material
respects. The enforcement provisions applicable to TILA grant broad powers to
the appropriate federal regulatory agencies or the Federal Trade Commission to
enforce TILA with respect to those entities not otherwise subject to federal
regulations, such as the Company. TILA also contains criminal penalties for
willful violations and grants a private right of action with specified
statutory damage rewards for certain violations. If the Company were found not
to be in compliance with TILA with respect to certain loans, aggrieved
borrowers could have the right to rescind their mortgage loan transactions and
to demand the return of finance charges paid to the Company, and other damages
provided under TILA. The Board of Governors of the Federal Reserve System
recently amended Regulation Z to add rescission "tolerances" to the rule to
limit the rule's rescission remedy to disclosure inaccuracies of the finance
charge which amount to over one percent of the face amount of the note. The
new rule also implements amendments to TILA which provide for rescission after
the initiation of foreclosure proceedings under certain circumstances.
TILA applies to all individuals and businesses that regularly extend
consumer credit which is subject to a finance charge or is payable by a
written agreement in more than four installments and is primarily for
personal, family or household purposes. As such, TILA is applicable to the
Company and its subsidiaries. Generally, TILA requires a creditor to make
certain disclosures to the consumer concerning, among other things, finance
charges and annual percentage rates. In addition to these general
requirements, recent amendments to TILA require additional disclosures in
connection with certain types of mortgage loans. These additional disclosure
requirements apply to loans (other than mortgage loans to finance the
acquisition or initial construction of a dwelling) with (i) total points and
fees upon origination in excess of eight percent of the loan amount or $400,
whichever is greater or (ii) an annual percentage rate of more than ten
percentage points higher than comparably maturing United States Treasury
securities ("Covered Loans"). Effective January 1, 1997, the $400 figure was
adjusted by the Board of Governors of the Federal Reserve System to $424, in
accordance with Regulation Z. These TILA provisions prohibit lenders from
originating Covered Loans that are underwritten solely on the basis of the
borrower's home equity without regard to the borrower's ability to repay the
loan. The Company believes that only a small portion of loans originated in
1996 are of the type that, unless modified, are prohibited by TILA. It is the
Company's policy to apply to all Covered Loans underwriting criteria that take
into consideration the borrower's ability to repay.
TILA also prohibits lenders from including prepayment fee clauses in Covered
Loans to borrowers except in cases in which the penalty can be exercised only
during the first five years following consummation of the loan, the consumer's
total monthly debt-to-income ratio does not exceed 50% and the Covered Loans
are not used to refinance existing loans originated by the same lender. The
Company will continue to collect prepayment fees on loans originated prior to
October 1995 (the effective date of the prepayment provision of TILA) and on
28
<PAGE>
non-Covered Loans, as well as on Covered Loans in permitted circumstances, but
the level of prepayment fee revenue may decline in future years. TILA imposes
other restrictions on Covered Loans, including restrictions on balloon
payments and negative amortization features, which the Company does not
believe will have a material impact on its operations.
Other Lending Laws
The Company and its subsidiaries are also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on the basis of race, color, religion,
sex, age or marital status. The ECOA also prohibits discrimination in the
extension of credit based on the fact that all or part of the applicant's
income derives from a public assistance program or the fact that the applicant
has in good faith exercised any right under the Consumer Credit Protection
Act. Regulation B promulgated under ECOA restricts creditors from obtaining
certain types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. The Company
is also subject to the Real Estate Settlement Procedures Act of 1974, as
amended, and is required to file an annual report with the Department of
Housing and Urban Development pursuant to the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loans and to
demand the return of finance charges paid to the Company.
In addition, certain of the loans originated or purchased by the Company,
such as Title I home improvement loans, are insured by an agency of the
Federal government. Such loans are subject to extensive government regulation.
Environmental Liability
In the course of its business, the Company may foreclose on properties
securing loans that are in default. There is a risk that hazardous or toxic
substances or petroleum constituents could be on such properties. In such
event, it is possible that the Company could be held responsible for the cost
of cleaning up or removing such waste depending upon the lender's activities,
and such cost could exceed the value of the underlying properties.
Under the laws of certain states, contaminated property may be subject to a
lien on the property to assure payment for cleanup costs. In several states,
such a lien has priority over the lien of an existing mortgage or owner's
interest. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may become liable for cleanup of a property and adjacent
properties that are contaminated by releases from the mortgaged property if
the lender engages in certain activities. These activities include foreclosure
on the property and participation in the management or operational aspects of
such property. In 1996 CERCLA was amended to eliminate federal lender
liability under CERCLA in certain circumstances, including foreclosure if the
lender resells the property at the earliest practicable, commercially
reasonable time on commercially reasonable terms. In addition, the amendments
defined the term participation in management, which provided some guidance to
lenders about the nature of activities that would and would not give rise to
liability under CERCLA. These amendments do not apply to state Superfund laws.
Also, foreclosure and other activities on contaminated property may subject a
lender to state tort liability.
29
<PAGE>
Future Laws
Because each of the Company's businesses is highly regulated, the laws,
rules and regulations applicable to the Company are subject to modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations will not be adopted in the future which could make compliance more
difficult or expensive, restrict the Company's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Company, or otherwise adversely affect the business or prospects
of the Company.
THRIFT AND LOAN OPERATIONS
SPTL is subject to regulation, supervision and examination under both
Federal and California law. SPTL is subject to supervision and regulation by
the California Commissioner of Corporations (the "Commissioner") and, as a
member of the federal deposit insurance fund, by the FDIC. Neither the
Company's mortgage banking operations nor SPTL's thrift business is regulated
or supervised by the Office of Thrift Supervision, which regulates savings and
loan institutions.
ICII is not directly regulated or supervised by the Commissioner, the FDIC,
the Federal Reserve Board or any other bank regulatory authority, except with
respect to the general regulatory and enforcement authority of the
Commissioner and the FDIC over transactions and dealings between ICII or any
of its other subsidiaries and SPTL, and except with respect to both the
specific limitations regarding ownership of the capital stock of a parent
company of any thrift and loan association and the specific limitations
regarding the payment of dividends from SPTL discussed below.
General
SPTL is governed by the California Industrial Loan Law and the rules and
regulations of the Commissioner that, among other things, regulate in certain
limited circumstances the maximum interest rates payable on, and the terms of,
certain thrift deposits as well as the collateral requirements and maximum
maturities of the various types of loans that are permitted to be made by
California chartered industrial loan companies, also known as thrift and loan
companies or thrifts. As SPTL's primary regulator, the Commissioner has broad
supervisory and enforcement authority with respect to SPTL and its affiliates.
The enforcement authority of the Commissioner over thrift and loan companies
includes the ability to impose penalties for and to seek correction of
violations of laws or regulations or unsafe or unsound practices by assessing
monetary penalties, issuing cease and desist or removal and prohibition orders
against a company, its directors, officers or employees and other persons,
initiating injunctive actions or even taking possession of the business and
property of a thrift and loan company. In general, such enforcement actions
may be initiated for violations of laws, regulations, cease and desist orders
or the thrift and loan company's articles of incorporation or for unsafe or
unsound conditions or practices. Certain provisions of the California
Industrial Loan Law also provide for the institution of civil or criminal
actions against thrift and loan companies and their officers, directors,
employees and affiliates with respect to violations of the law and related
regulations.
SPTL's deposits are insured by the FDIC to the full extent permissible by
law. As an insurer of deposits, the FDIC issues regulations, conducts
examinations, requires the filing of reports and generally supervises the
operations of institutions to which it provides deposit insurance. SPTL is
subject to the rules and regulations of the FDIC to the same extent as other
state financial institutions that are insured by that entity. This supervision
and regulation is intended primarily for the protection of depositors, and to
ensure services for the public's convenience and advantage and to ensure the
safety and soundness of the regulated institution. The approvals of the FDIC
and the Commissioner are required before any merger, consolidation or change
in control, or the establishment or relocation of any branch office facility
of SPTL.
30
<PAGE>
The FDIC, as insurer of SPTL's deposits, also has broad enforcement
authority over state-chartered thrift and loan companies, including the power
in appropriate circumstances to issue cease-and-desist orders and removal and
prohibition orders, to impose civil money penalties and to terminate the
insurance of their insured accounts. The FDIC is required to notify the
Commissioner of its intent to take certain types of enforcement actions with
respect to a California chartered, FDIC insured thrift and loan company and of
the grounds therefor. If satisfactory corrective action is not effectuated
within an appropriate time by action of the Commissioner, the FDIC may proceed
with its enforcement action. The FDIC may also terminate the deposit insurance
of any insured depository institution if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed by in writing by the FDIC.
In September 1996, President Clinton signed into law, as part of a 1997
omnibus spending bill, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, which simplifies and streamlines across a broad spectrum the
regulation of federally-insured depository institutions in diverse areas
including consumer credit, truth-in-lending, real estate residential lending,
regulatory applications, branching, disclosures and advertising, regulatory
examinations, insider lending and lender and fiduciary exposure for
environmental contamination under the Comprehensive Environmental Response,
Compensation and Liability Act (i.e., "Superfund" Liability) and the Solid
Waste Disposal Act, and the elimination (after five years) of civil liability
under the Truth in Savings Act.
Recent Development
In January 1996, the California Department of Corporations and the FDIC
conducted a joint examination of SPTL. As a result of such examination, SPTL
entered into a joint memorandum of understanding with the FDIC and the
California Department of Corporations. The memorandum of understanding
requires certain measures to be taken in the areas of: (i) hiring and
retention of management, (ii) adoption of systems to monitor and control risk,
(iii) correction of certain violations of law, (iv) credit review and (v)
enhancement of other operational policies. SPTL does not believe that this
informal agreement will have a material adverse effect on the Company. In the
event that SPTL fails to comply with the memorandum of understanding, SPTL and
its affiliates, officers and directors could be subject to various enforcement
actions, including cease and desist orders, criminal and civil penalties,
removal from office, termination of deposit insurance or the revocation of
SPTL's charter. Any such enforcement action could have a material adverse
effect on the Company. Management believes SPTL has complied fully with the
terms of the memorandum of understanding at December 31, 1996.
Limitations on Investments
Subject to restrictions imposed by California law, SPTL is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by thrift and loan companies may be as long as 40
years and 30 days depending upon collateral and priority of the lender's lien
on the collateral, except that loans with repayment terms in excess of 30
years and 30 days may not in the aggregate exceed five percent of total
outstanding loans and obligations of the thrift. Although secured loans may
generally be repayable in unequal periodic payments during their respective
terms, consumer loans secured by real property with terms in excess of three
years must be repayable in substantially equal periodic payments unless such
loans were made or purchased by the thrift and loan under the Garn-St Germain
Depository Institutions Act of 1982 (which applies primarily to one to four
unit single family residential loans).
California law limits lending activities outside of California by thrift and
loan companies to no more than 40% of total assets. California law contains
extensive requirements for the diversification of the loan portfolio of thrift
and loan companies.
A thrift and loan with outstanding certificates of deposit may not, among
other things: (i) place more than 25% of its loans or other obligations in
loans or obligations that are secured only partially, but not primarily, by
real property; (ii) make any one loan secured primarily by improved real
property that exceeds 20% of its paid-up
31
<PAGE>
and unimpaired capital stock and surplus not available for dividends; (iii)
lend an amount in excess of five percent of its paid-up and unimpaired capital
stock and surplus not available for dividends upon the security of the stock
of any one corporation; (iv) make loans to, or hold the obligations of, any
one person as primary obligor in an aggregate principal amount exceeding 20%
of its paid-up and unimpaired capital stock and surplus not available for
dividends; and (v) have more than 70% of its total assets in loans that have
remaining terms to maturity in excess of seven years and are secured solely or
primarily by real property. At each of December 31, 1996 and December 31,
1995, SPTL had paid-up and unimpaired capital stock and surplus not available
for dividends of $80.5 million and $80.5 million, respectively.
At December 31, 1996 and December 31, 1995, SPTL satisfied its California
investment law requirements. SPTL originates and holds a portion of the
Company's loans held for sale, of which a majority have a maturity of greater
than seven years. SPTL believes that it will be able to continue to meet its
requirements by managing the types of loans originated and where the loans are
domiciled.
Under California law, thrift and loan companies are generally limited to
investments that are legal investments for commercial banks. In general,
California commercial banks are prohibited from investing an amount exceeding
15% of shareholders' equity in the securities of any one issuer, except for
specified obligations of the United States, California and local governments
and agencies. A thrift and loan company may acquire real property only in
satisfaction of debts previously contracted, pursuant to certain foreclosure
transactions, or as may be necessary as premises for the transaction of its
business, in which case such investment is limited to one-third of a thrift
and loan's paid-in capital stock and surplus not available for dividends.
Effective January 1, 1997, SPTL may organize operating subsidiaries to
engage in a variety of activities that are part of or incidental to the
banking business. This results from changes in the California Industrial Loan
Law passed in 1996. In general, these subsidiaries, each capitalized with as
much as 10% of SPTL's gross capital (subject to a 25% gross capital limit for
all such subsidiaries), may sell loan originations to SPTL without being
subject to limitations on "covered transactions" under federal banking law
(see "--Transactions with Affiliates"), and up to 20% of the voting stock of
each subsidiary may be held by other parties. In addition, a subsidiary
capitalized with up to 5% of SPTL's gross capital will be able to enter into
partnerships and limited liability companies provided that the subsidiary
retains veto power over investments of the partnership or other company.
Transactions With Affiliates
Under California law, a thrift and loan generally may not make any loan to,
or hold an obligation of, any of its directors or officers or any director or
officer of its holding company or affiliates, except in specified cases and
subject to regulation by the Commissioner. In addition, a thrift and loan may
not make any loan to, or hold an obligation of, any of its shareholders or any
shareholder of its holding company or affiliates, except that this prohibition
does not apply to persons who own less than 10% of the stock of a holding
company or an affiliate that is listed on a national securities exchange. As a
result of these requirements, SPTL may not make loans to ICII or other
affiliates or purchase a contract, loan or chose in action of ICII or other
affiliates. Subject to prior approval of the Commissioner, exemptions from
these restrictions are available for purchase of loans from affiliates which
are licensed mortgage brokers (such as ICII) or other certain types of
licensed lenders. However, these purchases would be subject to strict
limitations under federal law.
Federal law also limits transactions between SPTL and its affiliates.
Generally, such transactions must be on terms and under conditions, including
credit standards, that are substantially the same, or at least as favorable to
SPTL, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In addition, SPTL is prohibited from
engaging in "covered transactions" with an affiliate if the aggregate amount
of such transactions with such affiliate would exceed 10% of SPTL's capital
stock and surplus, or in the case of all affiliates, if the aggregate amount
of such transactions exceeds 20% of SPTL's capital stock and surplus.
32
<PAGE>
"Covered transactions" include loans or extensions of credit to an
affiliate, a purchase of or investment in securities issued by an affiliate, a
purchase of assets from an affiliate (subject to certain exemptions), the
acceptance of securities issued by an affiliate as collateral security for a
loan or extension of credit to any person or company, or the issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate. For
certain "covered transactions," collateral requirements in specified amounts
will be applicable. SPTL also is generally prohibited from purchasing low-
quality assets from its affiliates. SPTL engages in many transactions which
involve its affiliates, including ICII and its other subsidiaries. As such,
many of the transactions between the Company and SPTL are subject to federal
and state affiliate transaction regulations.
Under the California Industrial Loan Law, it is unlawful for SPTL to offer
or sell any security in an issuer transaction unless the sale has been
qualified under applicable provisions of the California Corporate Securities
Act of 1968, as amended. The Commissioner, however, has authority to exempt
any such transaction which the Commissioner determines is not comprehended
within the purposes of the qualification requirements and which the
Commissioner finds not necessary or appropriate in the public interest or for
the protection of investors, investment certificate holders, and the
industrial loan company industry as a whole. The Commissioner also has
authority to restrict, limit, prohibit or otherwise condition the uses of
proceeds from the sale of securities, the extent to which a security may be
included within the definition of capital, or the extent to which the proceeds
from the sale of securities may be included in the investment certificate
ratio or used to increase outstanding investment certificates. SPTL reasonably
believes that it would qualify for an exemption from qualification and has no
reason to believe it would not have full use of the proceeds as intended as
well as full leverage authority as defined under the Industrial Loan Law.
Capital; Limitations on Borrowings
Under California law, a thrift and loan is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, a thrift and loan institution that has
been in operation in excess of 60 months may have outstanding at any time
deposits not to exceed 20 times paid-up and unimpaired capital and surplus as
restricted in its by-laws as not available for dividends, with the exact
limitation subject to order by the Commissioner. The Commissioner has issued
an order to SPTL authorizing the maximum 20 times leverage standard.
Thrift and loan companies are not permitted to borrow, except by the
issuance of certificates of deposit, in an amount exceeding 300% of
outstanding capital stock, surplus and undivided profits, without the
Commissioner's prior consent. All sums borrowed in excess of 150% of
outstanding capital stock, surplus and undivided profits must be unsecured
borrowings or, if secured, approved in advance by the Commissioner, and be
included as certificates of deposit for purposes of computing the above
ratios; however, collateralized FHLB advances are excluded from this test of
secured borrowings and are not specifically limited by California law.
In 1989, the FDIC and the other federal regulatory agencies adopted final
risk-based capital adequacy standards applicable to financial institutions
like SPTL whose deposits are insured by the FDIC. These guidelines provide a
measure of capital adequacy and are intended to reflect the degree of risk
associated with both on and off balance sheet items, including residential
loans sold with recourse, legally binding loan commitments and standby letters
of credit. Under these regulations, financial institutions such as SPTL are
required to maintain capital to support activities that in the past did not
require capital. Because ICII, unlike SPTL, is not directly regulated by any
bank regulatory agency, it is not subject to any minimum capital requirements.
See "--Holding Company Regulations."
A financial institution's risk-based capital ratio is calculated by dividing
its qualifying capital by its risk-weighted assets. Financial institutions
generally are expected to meet a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 50% of qualifying total capital
must be in the form of core capital (Tier 1), which includes common stock,
noncumulative perpetual preferred stock, minority interests in equity capital
accounts of combined subsidiaries and allowed mortgage servicing rights less
all intangible assets other than allowed mortgage servicing rights and
purchased credit card relationships, subject to certain amount limitations.
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<PAGE>
Supplementary capital (Tier 2) consists of the allowance for loan losses up
to 1.25% of risk-weighted assets, cumulative preferred stock, intermediate-
term preferred stock, hybrid capital instruments and term subordinated debt.
The maximum amount of Tier 2 capital that may be recognized for risk-based
capital purposes is limited to 100% of Tier 1 capital (after any deductions
for disallowed intangibles). The aggregate amount of term subordinated debt
and intermediate term preferred stock that may be treated as Tier 2 capital is
limited to 50% of Tier 1 capital. Certain other limitations and restrictions
apply as well. At December 31, 1996, the Tier 2 capital of SPTL consisted
solely of its allowance for loan losses.
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital. The FDIC rules provide that a minimum leverage ratio of 3%
is required for institutions that have been determined to be in the highest
category used by regulators to rate financial institutions. All other
organizations are required to maintain leverage ratios of at least 100 to 200
basis points above the 3% minimum. At December 31, 1996, SPTL was in
compliance with all of its capital requirements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the federal banking regulators to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. In
response to this requirement, the FDIC adopted final rules based upon FDICIA's
five capital tiers.
The FDIC's rules provide that an institution is "well capitalized" if its
risk-based capital ratio is 10% or greater; its Tier 1 risk-based capital
ratio is 6% or greater; its leverage ratio is 5% or greater; and the
institution is not subject to a capital directive of a federal bank regulatory
agency. A bank is "adequately capitalized" if its risk-based capital ratio is
8% or greater; its Tier 1 risk-based capital ratio is 4% or greater; and its
leverage ratio is 4% or greater (3% or greater for the highest rated
institutions). An institution is considered "undercapitalized" if its risk-
based capital ratio is less than 8%; its Tier 1 risk-based capital ratio is
less than 4%, or its leverage ratio is 4% or less (less than 3% for the
highest rated institutions). An institution is "significantly
undercapitalized" if its risk-based capital ratio is less than 6%; its Tier 1
risk-based capital ratio is less than 3%; or its leverage ratio is less than
3%. A bank is deemed to be "critically undercapitalized" if its ratio of
tangible equity (Tier 1 capital) to total assets is equal to or less than 2%.
An institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position if it engages in unsafe or
unsound banking practices. Under this standard, SPTL is currently "well
capitalized"; this classification, however, is a regulatory capital
classification used for internal regulatory purposes, and is not necessarily
indicative of SPTL's financial condition and operations.
Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; acquisitions, branching and entering into new lines of
business are restricted; and transactions with affiliates or the appointment
of additional directors or senior executive officers are restricted. Finally,
the institution's regulatory agency has discretion to impose certain of the
restrictions generally applicable to significantly undercapitalized
institutions.
In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or
34
<PAGE>
dismiss specified directors or officers. If the institution is a bank holding
company, it may be prohibited from making any capital distributions without
prior approval of the Federal Reserve Board and may be required to divest a
subsidiary.
ICII is not a bank holding company, as that term is defined under the Bank
Holding Company Act of 1956 (the "BHCA"). A critically undercapitalized
institution is generally prohibited from making payments on subordinated debt
and may not, without the approval of its principal bank supervisory agency,
enter into a material transaction other than in the ordinary course of
business; engage in any covered transaction; or pay excessive compensation or
bonuses. Critically undercapitalized institutions are subject to appointment
of a receiver or conservator. Effectively, the FDIC would have general
enforcement powers over SPTL and the Company in the event that SPTL is deemed
undercapitalized.
SPTL's Capital Ratios
The following table presents SPTL's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations and (iii) the FDIC Leverage ratio regulation as of
December 31, 1996.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation............. $144,798 13.50% $ 53,613 5.00% $ -- $ --
Risk-based Capital...... 145,018 10.87% 106,715 8.00% 133,393 10.00%
Risk-based Tier 1
Capital................ 129,497 9.71% 53,357 4.00% 80,036 6.00%
FDIC Leverage Ratio..... 129,497 9.35% 55,397 4.00% 69,247 5.00%
</TABLE>
Limitations on Types of Deposits
Because of the limitations described in "--Holding Company Regulations"
below, SPTL currently offers only passbook accounts and certificates of
deposit and does not offer NOW accounts, checking accounts or similar demand
deposit accounts.
Insurance Premiums
The FDIC administers two separate deposit insurance funds, the Bank
Insurance Fund ("BIF"), which insures the deposits of institutions which were
insured by the FDIC prior to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund
("SAIF"), which insures the deposits of institutions which were insured by the
Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. SPTL's insurance premium for the first quarter of 1997 will be
approximately $115,000.
As required by FDICIA, the FDIC has established a risk-based system for
setting deposit insurance assessments. Under the risk-based assessment system,
an institution's insurance assessments vary depending on the level of capital
the institution holds and the degree to which it is of supervisory concern to
the FDIC. Once an insurance fund has reached its designated reserve ratio of
1.25%, and as long as there are no outstanding borrowings by the FDIC from the
United States Treasury, the FDIC is not permitted to charge assessment
premiums that would increase the reserve ratio of the insurance fund above its
designated reserve ratio. The BIF reached its designated reserve ratio in
1995.
Recent Legislation
A new California state regulatory agency was created in 1996 to be known as
the Department of Financial Institutions ("DFI"). The DFI will become
effective July 1, 1997. All state chartered depository institutions will
35
<PAGE>
be licensed and regulated after July 1, 1997 by the DFI, which includes banks,
savings associations, credit unions, and industrial loan companies. SPTL, an
industrial loan company, will be subject to the jurisdiction of the DFI as its
state regulator. Currently SPTL is regulated by the Commissioner. It is
expected that this transfer of jurisdiction will not have any material effect
on SPTL.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-fifth the premium rate
imposed on SAIF-insured deposits, which will be used to pay the interest on
Financial Corporation ("FICO") bonds issued by the federal government as part
of the savings association bailout provisions of the 1989 FIRREA legislation.
In the year 2000, however, the Funds Act requires BIF-insured institutions to
share in the payment of the FICO obligations on a pro-rata basis with all
savings institutions, with annual assessments expected to equal approximately
2.4 basis points until the year 2017, and to be completely phased out by 2019.
The Funds Act also prohibits the merger of the BIF and SAIF insurance funds
unless the savings institution charter has been eliminated on January 1, 1999.
In addition, on December 6, 1996, the FDIC determined to continue the
current downward adjustment to the assessment rate schedule applicable to
deposits of BIF institutions for the semi-annual assessment period beginning
January 1, 1997. For such period, the BIF assessment rates will range from 0
to 27 basis points. In addition, in accordance with the Funds Act, the FDIC
eliminated the minimum assessment amount for BIF-insured institutions. SPTL
has been notified that its combined FDIC and FICO assessment rate for 1997
will be approximately 4.3 cents per $100 of deposits, which is $115,000 for
the first quarter of 1997.
Safety and Soundness Guidelines
In July 1995, certain federal bank regulatory agencies, including the FDIC,
adopted Interagency Guidelines establishing standards for safety and soundness
as required by the FDICIA. In accordance with these Guidelines, institutions
are required to establish policies and procedures regarding: (i) internal
controls and information; (ii) internal audit systems; (iii) loan
documentation; (iv) credit underwriting; (v) interest rate exposure; and
(vi) asset growth. In addition, under these Guidelines institutions must
maintain safeguards to prevent the payment of compensation and fees which are
excessive or could lead to a material loss for the institution. The federal
bank regulatory agencies recently amended the Interagency Guidelines to
include asset quality and earnings standards. The new guidelines require an
institution to identify problem assets and estimate inherent losses. The
earnings standards under the revised guidelines require an institution to
establish monitoring and reporting systems.
Holding Company Regulations
The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain
previously unregulated companies to regulation as bank holding companies by
expanding the definition of the term "bank" in the BHCA. SPTL remained exempt
from the definition of "bank" under the BHCA, and therefore ICII was exempt
from regulation as a bank holding company. SPTL may cease to fall within those
exceptions if it engages in certain operational practices, including accepting
demand deposit accounts. SPTL currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, ICII and
its affiliates are treated as if ICII were a bank holding company for the
limited purposes of applying certain restrictions on loans to insiders and
anti-tying provisions.
Limitations on Dividends
Under the California Industrial Loan Law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless: (i) such
distribution would not exceed a thrift and loan's retained earnings, (ii) any
payment would not result in a violation of the approved minimum capital
36
<PAGE>
to thrift and loan certificate of deposit ratio and (iii) after giving effect
to the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
a thrift also provides the basis for establishing the maximum amount that a
thrift may lend to one single borrower. As of December 31, 1996 and December
31, 1995, $80.5 million and $80.5 million, respectively, of SPTL's capital was
so restricted.
The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, thrift and loans may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items. Under the Financial Institutions Supervisory
Act and FIRREA, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of a
thrift and other factors, that such regulators could assert that the payment
of dividends in some circumstances might constitute unsafe or unsound
practices and prohibit payment of dividends even though technically
permissible.
Pursuant to FDICIA, SPTL is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPTL which may have been otherwise available to
the Company for working capital.
Limitations on Acquisitions of Voting Stock of the Company
Any person who wishes to acquire 10% or more of the capital stock or capital
of a California thrift and loan company or 10% or more of the voting capital
stock or other securities giving control over management of its parent company
must obtain the prior written approval of the Commissioner. Similarly, the
federal Change in Bank Control Act of 1978 requires any person or company that
wishes to obtain "control" of an insured depository institution to notify the
appropriate Federal banking agency, which would be the FDIC in the case of
SPTL, 60 days prior to the proposed acquisition.
If the FDIC has not issued a notice disapproving the proposed acquisition
within that time period (including a possible 90 day extension), the person
may acquire such institution. For purposes of the statute, "control" is
defined as the power, directly or indirectly, to direct the management or
policies of an insured depository institution or to vote 25% or more of any
class of voting securities of an insured depository institution.
Restrictions on Loans from Imperial Bank
Under certain provisions of the California Financial Code and implementing
regulations thereunder, lending by banks such as Imperial Bank is subject to
certain limitations. Loans by Imperial Bank to any single obligor are limited
to 15% of gross capital (25% with acceptable collateral).
As a result, at December 31, 1996, loans by Imperial Bank to the Company
were limited to approximately $75.1 million. At December 31, 1996, no amounts
were outstanding from Imperial Bank to the Company.
Restriction on Investments by Imperial Bank
At December 31, 1996, Imperial Bank owned 9,396,106 shares of Common Stock,
or 24.5% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
37
<PAGE>
FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities and requires impermissible investments to be
disposed of before December 19, 1996. Imperial Bank acquired its interest in
the Company at its formation, which interest has been reduced by the Company's
sale of Common Stock to third parties, as well as through a sale of stock by
Imperial Bank subsequent to the initial public offering of the Company. The
9.4 million shares of the Company's Common Stock held by Imperial Bank may be
subject to divestiture under FDICIA. Imperial Bank has requested approval from
the FDIC to retain its investment in the Company and the FDIC has extended the
FDICIA-imposed deadline pending a decision on Imperial Bank's application. The
regional office of the FDIC has acknowledged the request and requested and
received additional information on the Company, and has recommended to its
Washington, D.C. headquarters that Imperial Bank be allowed to retain its
stock ownership in the Company subject to certain conditions. The Federal
Reserve Bank of San Francisco has requested that Bancorp make an application
under Section 4 of the Bank Holding Company Act for approval for Imperial Bank
to retain the Company's stock. Bancorp has deferred any application pending
the results of the FDIC application.
Because Imperial Bank owns less than 50% of the outstanding shares of the
Company and the Company is operated as a company independent of Imperial Bank
and Bancorp, the Company believes that, in the event of an insolvency,
bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a
court, exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with either Imperial Bank or Bancorp.
Two directors of the Company also serve on the Board of Directors of
Imperial Bank or its parent, Imperial Bancorp. See item 10, "Directors and
executive officers of the registrant"
EMPLOYEES
As of December 31, 1996, the Company had 488 employees, excluding 370
employees at SPFC; (67 at ICII, 242 at SPTL, 85 at IBC, 88 at FMAC, and 6 at
ICAI). Management believes that its relations with these employees are
satisfactory. Neither ICII nor any of its subsidiaries is a party to any
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's executive offices occupy 7,393 square feet of space in
Torrance, California at a current monthly rental of approximately $11,459.
During the first quarter of 1997, the Company increased its square footage to
14,100 and monthly rent to approximately $20,600.
The Company's administrative facilities occupy approximately 25,122 square
feet of space in Santa Ana Heights, California. The Company leases these
facilities pursuant to a ten-year lease, commencing September 1, 1992 and
subleases a portion of these premises to ICMH for a monthly rental of
approximately $33,936. See "Certain Transactions--Relationships with ICMH."
The Company currently leases offices in San Diego, Walnut Creek, Newport
Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as
in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver,
Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and
Grants Pass, Oregon. SPTL operates in California through branches and loan
production offices and in other states through loan production offices and
representatives.
38
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The predecessor entity to FMAC, and an officer of such entity and of FMAC,
among others, are named as defendants in De Wald et al. vs. Knyal et al. filed
on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. The Company
has not been named as a defendant in this lawsuit.
On September 6, 1996, a former employee filed suit against the Company in
Sanders vs. ICII, filed in the U.S. District Court for the Middle District of
Florida, alleging sexual harassment and sexual discrimination. The complaint
seeks compensatory damages, non-economic damages and punitive damages as a
result of the alleged misconduct. Discovery has only recently commenced, but
the Company believes the claims to be invalid.
The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., filed in Orange County Superior Court on March 5, 1997. The complaint
alleges breach of contract, breach of implied covenant of good faith and fair
dealing, negligent misrepresentation, fraud, conspiracy to commit fraud,
aiding and abetting fraud, contractual indemnity and reimbursement, money had
and received, and unjust enrichment arising from the Company's sale of a group
of loan production offices to plaintiffs. The plaintiffs seek rescission,
restitution and general, specific and/or consequential damages, and also
exemplary and punitive damages as relate to the claims regarding fraud.
In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, the
plaintiff seeks damages from SPTL for alleged breach of written contract and
breach of fiduciary duty arising out of a loan commitment agreement.
All of the above referenced actions are being actively defended.
The Company is involved in additional litigation arising in the normal
course of business. Management believes, based in part upon the advice of
legal counsel, none of these proceedings will have a material effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
39
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since May 18, 1992, the Company's Common Stock has been quoted in the over-
the-counter market on the Nasdaq National Market under the symbol "ICII". The
following table sets forth the high and low closing sales prices for the
Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter.............................................. $13.09 $ 8.52
Second Quarter............................................. $16.69 $11.69
Third Quarter.............................................. $18.44 $13.06
Fourth Quarter............................................. $21.25 $15.38
1995
First Quarter.............................................. $ 7.12 $ 4.85
Second Quarter............................................. $ 8.48 $ 5.68
Third Quarter.............................................. $17.35 $ 7.50
Fourth Quarter............................................. $19.77 $12.05
1994
First Quarter.............................................. $ 8.18 $ 6.21
Second Quarter............................................. $ 7.58 $ 5.83
Third Quarter.............................................. $ 7.42 $ 5.00
Fourth Quarter............................................. $ 6.97 $ 4.85
1993
First Quarter.............................................. $11.85 $ 7.58
Second Quarter............................................. $ 8.13 $ 6.34
Third Quarter.............................................. $ 8.95 $ 7.30
Fourth Quarter............................................. $ 8.95 $ 7.27
</TABLE>
At April 8, 1997, the closing sales price of the Common Stock as reported by
the Nasdaq National Market was $18 1/2. At April 8, 1997, there were
approximately 114 shareholders of record.
The Company has not paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain earnings for use in its operations and the expansion
of its business.
On October 22, 1996, the Company effected a two for one stock split to
shareholders of record as of October 15, 1996.
On February 26, 1996, the Company paid a stock dividend to shareholders of
record as of February 12, 1996. One new share of Common Stock was issued for
each ten shares currently held by shareholders.
On October 24, 1995, the Company effected a three for two stock split to
shareholders of record as of October 10, 1995.
On December 30, 1993, the Company paid a stock dividend to shareholders of
record as of December 20, 1993. One new share of Common Stock was issued for
each ten shares currently held by shareholders.
40
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following schedules set forth selected consolidated income statement data
for each of the years in the five-year period ended December 31, 1996 and the
selected consolidated balance sheet data as of December 31, 1995 and 1996. Such
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto and item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans. $ 88,156 $ 39,557 $ 8,628 $ 18,149 $ 20,606
-------- ---------- --------- ---------- --------
Interest on loans..... 188,242 120,244 79,173 51,612 32,741
Interest on
investments.......... 10,807 6,630 3,610 1,972 1,162
Interest on other
finance activities... 8,422 2,608 -- -- --
-------- ---------- --------- ---------- --------
Total interest
income.............. 207,471 129,482 82,783 53,584 33,903
Interest expense...... 135,036 95,728 61,674 29,811 19,959
-------- ---------- --------- ---------- --------
Net interest income.. 72,435 33,754 21,109 23,773 13,944
Provision for loan and
lease losses......... 9,773 5,450 5,150 2,350 680
-------- ---------- --------- ---------- --------
Net interest income
after provision for
loan losses......... 62,662 28,304 15,959 21,423 13,264
Loan servicing income. 1,680 12,718 16,332 6,785 5,910
Gain on sale of
servicing rights..... 7,591 3,578 30,837 23,655 6,658
Gains on sale of SPFC
stock................ 82,690 -- -- -- --
Other income.......... 14,154 1,152 1,048 1,414 654
-------- ---------- --------- ---------- --------
Total other income... 106,115 17,448 48,217 31,854 13,222
-------- ---------- --------- ---------- --------
Total revenues....... 256,933 85,309 72,804 71,426 47,092
Expenses:
Personnel expense..... 48,355 34,053 33,477 24,520 15,678
Other expenses........ 50,694 27,127 28,037 15,433 8,190
-------- ---------- --------- ---------- --------
Total expenses....... 99,049 61,180 61,514 39,953 23,868
-------- ---------- --------- ---------- --------
Income before income
taxes............... 157,884 24,129 11,290 31,473 23,224
Income taxes............ 69,874 10,144 4,685 13,055 9,583
Minority interest in
income (loss) of
consolidated
subsidiaries........... 12,026 (208) -- -- --
-------- ---------- --------- ---------- --------
Income before
extraordinary item.. 75,984 14,193 6,605 18,418 13,641
Extraordinary item--
repurchase of Senior
Notes, net of income
taxes.................. -- -- 919 -- --
-------- ---------- --------- ---------- --------
Net income........... $ 75,984 $ 14,193 $ 7,524 $ 18,418 $ 13,641
======== ========== ========= ========== ========
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME PER SHARE(1):
Income before
extraordinary item... $ 1.95 $ 0.40 $ 0.19 $ 0.54 $ 0.45
Extraordinary item--
repurchase of Senior
Notes................ -- -- 0.03 -- --
-------- ---------- --------- ---------- --------
Net income........... $ 1.95 $ 0.40 $ 0.22 $ 0.54 $ 0.45
======== ========== ========= ========== ========
Weighted average fully
diluted shares
outstanding.......... 38,975 35,122 33,582 33,880 30,229
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities........... $199,407 $ (668,666) $ 961,579 $ (903,050) $(78,865)
Net cash (used in)
provided by investing
activities........... (51,117) (364,076) (796,638) (145,701) 21,302
Net cash (used in)
provided by financing
activities........... (113,209) 1,047,004 (177,314) 1,066,584 70,216
-------- ---------- --------- ---------- --------
Net increase
(decrease) in cash.. $ 35,081 $ 14,262 $ (12,373) $ 17,833 $ 12,653
======== ========== ========= ========== ========
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA(2):
Loans originated:
ICII...................... $ 310 $ 1,816 $ 4,260 $ 6,019 $ 3,383
SPTL...................... 531 724 NA(3) NA(3) NA(3)
SPFC...................... 790 288 190 -- --
FMAC...................... 450 164 -- -- --
IBC....................... 87 36 -- -- --
---------- ---------- ---------- ---------- --------
Total................... $ 2,168 $ 3,028 $ 4,450 $ 6,019 $ 3,383
========== ========== ========== ========== ========
Loans securitized:
ICII...................... $ -- $ 177 $ -- $ -- $ --
SPTL...................... 277 511 46 -- --
SPFC...................... 657 165 -- -- --
FMAC...................... 325 105 -- -- --
IBC....................... 87 85 -- -- --
---------- ---------- ---------- ---------- --------
Total................... $ 1,346 $ 1,043 $ 46 $ -- $ --
========== ========== ========== ========== ========
Outstanding balance of
loans and leases
securitized (at end of
period)(4)................ $ 2,118 $ 1,047 $ 45 $ -- $ --
SELECTED RATIOS:
Ratio of earnings to fixed
charges(5)................ 2.2x 1.3x 1.2x 2.1x 2.2x
Pre-tax interest coverage
ratio(6).................. 17.0 3.9 2.4 -- --
Ratio of indebtedness to
total capitalization (at
end of period)(7)......... 40.5% 46.1% 51.4% -- % -- %
Average equity to average
assets.................... 7.27 4.72 4.86 6.71 7.71
Return on average common
equity.................... 45.55 17.59 10.57 31.76 37.75
Return on average assets... 3.31 0.82 0.51 2.13 2.91
SPTL REGULATORY CAPITAL
RATIOS (AT END OF PERIOD):
California leverage
limitation................ 13.50% 11.58% 11.50% 7.29% 8.73%
Risk-based--Tier 1......... 9.71 11.72 14.21 10.27 14.94
Risk-based--Total.......... 10.87 13.18 15.13 10.73 15.74
FDIC Leverage Ratio........ 9.35 8.04 8.08 9.47 8.78
ASSET QUALITY RATIOS (AT END
OF PERIOD):
Non-performing assets as a
percentage of total
assets.................... 2.64% 1.55% 1.16% 0.64% 0.79%
Allowance for loan and
lease losses as a
percentage of non-
performing loans.......... 38.94 44.30 53.83 65.91 79.10
Net charge-offs as a
percentage of average
total loans held for
investment................ 0.94 0.36 0.23 0.89 0.18
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ 74,247 $ 39,166 $ 24,904 $ 37,277 $ 19,444
Interest bearing deposits.. 3,369 267,776 10,600 90,000 30,000
Securities available for
sale...................... 59,116 5,963 18,817 18,000 5,000
Loans held for sale........ 940,096 1,341,810 263,807 1,238,006 328,575
Loans held for investment,
net....................... 1,068,599 668,771 1,029,556 154,595 84,843
Securitization related
assets.................... 159,707 58,272 4,558 529 982
Total assets............... 2,470,639 2,510,635 1,420,409 1,572,663 479,430
Deposits................... $1,069,184 $1,092,989 $ 934,621 $1,001,468 $422,551
Borrowings from FHLB....... 140,500 190,000 295,000 320,000 --
Other borrowings........... 694,352 987,810 -- 147,611 --
Senior and convertible
subordinated notes........ 163,209 80,472 80,344 -- --
Total liabilities.......... 2,231,131 2,416,533 1,344,536 1,504,411 429,652
Shareholders' equity....... 239,508 94,102 75,873 68,253 49,778
</TABLE>
42
<PAGE>
- --------
(1) Income per share and weighted average shares outstanding reflect 1-for-10,
1-for-10 and 1-for-19 stock dividends paid in 1996, 1993 and 1992,
respectively, a 3-for-2 stock split effected in 1995 and a 2-for-1 stock
split effected in 1996.
(2) Does not include loans originated or securitized by ICIFC.
(3) Information not available.
(4) Represents the outstanding balance of loans and leases securitized,
excluding loans held for sale and investment.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes, plus fixed charges. Fixed
charges represent interest expense on all indebtedness and the interest
factor of rent expense estimated to be one-third of occupancy expense.
(6) Ratio of (i) the sum of income before income taxes plus interest expense
on non-funding indebtedness to (ii) interest expense on non-funding
indebtedness.
(7) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Organization
The consolidated financial statements include Imperial Credit Industries,
Inc. ("ICII") and its wholly-owned and majority-owned subsidiaries
(collectively the "Company"). All material intercompany balances and
transactions have been eliminated. The wholly-owned subsidiaries include
Southern Pacific Thrift and Loan Association ("SPTL"), Imperial Business
Credit, Inc. ("IBC"), and Imperial Credit Advisors, Inc. ("ICAI"). The
majority-owned consolidated subsidiaries include Franchise Mortgage Acceptance
Company, LLC ("FMAC"), Southern Pacific Funding Corporation ("SPFC") and ICI
Funding Corporation ("ICIFC"). As of December 31, 1996, FMAC was owned 66.7%
by ICII and 33.3% by the President of FMAC. As of December 31, 1996, ICII
owned 51.2% of the outstanding capital stock of SPFC with 48.8% owned by other
public investors. The Company owns 100% of the voting common of ICIFC which
entitles it to a 1% economic interest. Imperial Credit Mortgage Holdings, Inc.
("ICMH"), an unconsolidated affiliated company, owns all of the ICIFC non-
voting preferred stock which entitles it to a 99% economic interest.
General
Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. This business experienced substantial
growth due to high levels of mortgage loan refinancing activity in 1992 and
1993, as interest rates dropped to historically low levels. However, as
interest rates increased and refinancing activity declined in 1994, conforming
residential mortgage loan originations on an industry-wide basis decreased
dramatically and pricing became increasingly competitive. The Company
recognized that the non-conforming residential mortgage loan market provided
greater opportunities for mortgage loan origination growth. As a result,
during 1995 and 1996, the Company directed additional capital and resources to
its non-conforming residential mortgage lending subsidiary, SPFC, and divested
substantially all of its conforming mortgage lending and servicing businesses.
At the same time, the Company entered or expanded its presence in higher
margin commercial and consumer lending markets. 1995 marked the first year for
the Company that included operations from both its historical operations and
newly acquired or recently started business lines.
The Company now operates as a commercial and consumer finance company
providing loan and lease products in the following sectors: franchise lending,
business finance lending, commercial mortgage lending, consumer lending and
non-conforming residential mortgage lending.
Strategic Divestitures
During the fourth quarter of 1995, the Company sold its mortgage conduit
operations and SPTL's warehouse lending operations to Imperial Credit Mortgage
Holdings, Inc. ("ICMH"), a real estate investment trust, which subsequently
completed an initial public offering of its common stock. In exchange for
these assets, the Company received 11.8% of the capital stock of ICMH. As of
December 31, 1996, the Company owned 5.0% of the capital stock of ICMH.
Additionally, the Company's wholly-owned subsidiary, ICAI, entered into a
management agreement with ICMH pursuant to which it provides management
advisory services to ICMH in exchange for management fees. See "Business--
Other Activities."
In the first quarter of 1996, the Company sold the majority of its wholesale
mortgage origination offices related to its former conforming residential
mortgage lending business. The Company's wholesale offices in Colorado,
Florida, Oregon and Washington were converted to SPFC offices.
The Company recognized that maintaining a mortgage loan servicing
infrastructure was not economically viable in the absence of a conforming
residential mortgage loan origination business. Commencing in March 1996, the
Company sold substantially all of its conforming residential mortgage loan
servicing rights.
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Additionally, SPFC has subcontracted substantially all servicing related to
its mortgage lending business to an outside third party. The Company continues
servicing all loans and leases originated by its equipment leasing and
franchise lending businesses, as well as all loans originated or acquired by
SPTL.
Strategic Focus and Acquisitions
Part of the Company's strategy to diversify away from the conforming
residential mortgage business was to focus its residential mortgage
operations, through SPFC, on the origination, purchase and sale of non-
conforming residential mortgage loans secured primarily by single family
residences. During 1995 and 1996, a substantial portion of the Company's
operations were conducted through SPFC. For the years ended December 31, 1996
and December 31, 1995, SPFC originated or acquired $789.9 million and $288.5
million of non-conforming residential mortgage loans, respectively. SPFC seeks
to sell all mortgage loans originated or acquired through its loan
securitization program or through whole loan sales. During the year ended
December 31, 1996 and December 31, 1995, SPFC sold $657.4 million and $164.9
million through securitizations and $0 and $58.6 million through whole loan
sales, respectively.
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by IBC through the acquisition of the assets of First
Concord Acceptance Corporation ("FCAC"). This business was again expanded in
October 1996 when IBC acquired substantially all of the assets of Avco Leasing
Services, Inc. and all of the assets of Avco Financial Services of Southern
California, Inc. related to its business of originating and servicing business
equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). IBC's lease originations were $87.2 million and $36.0 million,
and it securitized, including leases acquired through purchase transactions,
$87.0 million and $85.2 million during the year ended December 31, 1996 and
December 31, 1995, respectively.
In June 1995, the Company expanded into franchise lending by establishing
FMAC, the assets of which were acquired from Greenwich Financial Capital
Products, Inc. During the year ended December 31, 1996, and for the six-month
period ended December 31, 1995, FMAC originated or acquired $449.3 million and
$163.5 million and securitized $325.1 million and $105.2 million of franchise
loans, respectively.
In September 1995, the Company began making asset-based loans to middle
market companies by acquiring CoastFed Business Credit Corporation ("CBCC")
from Coast Federal Bank. This business, now a division of SPTL, was renamed
Coast Business Credit ("CBC"). At December 31, 1996 and December 31, 1995, CBC
had total commitments of $547.7 and $364.2 million, of which $288.5 million
and $154.2 million of loans were outstanding, respectively.
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm.
DRI is headquartered in Beverly Hills, California with offices in Chicago,
Illinois, Dallas, Texas and Sun Valley, Idaho offering full service investment
banking, brokerage and asset management services. DRI manages and underwrites
public offerings of securities, arranges private placements and provides
advisory and other services in connection with mergers, acquisitions,
restructurings, and other financial transactions. The Company has acquired a
1% percent interest in DRI and has purchased a warrant to acquire an
additional 48% interest.
In March 1997, ICII acquired Auto Marketing Network, Inc. ("AMN") through a
stock purchase transaction for 100% of AMN's common stock. In addition, AMN
issued a subordinated note to ICII. The total consideration for the stock
purchase and subordinated note was approximately $12 million. ICII has also
guaranteed AMN's existing warehouse lending agreement and credit facility with
Greenwich Capital Financial Products, Inc.
As a part of the Company's diversification strategy, and the related
acquisitions of FMAC, FCAC and CBCC, the product mix of the Company's interest
earning assets has changed in 1996 to include a much larger percentage of
higher-yielding loan and lease products as compared to the previous year.
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Deconsolidation
In March 1997, ICII reduced its ownership percentage of SPFC to 49.4%. In
future reporting periods, the financial statements of SPFC will not be
consolidated with those of ICII.
At December 31, 1996, ICII owned 100% of the voting common stock of ICIFC
which entitled it to a 1% economic interest. ICIFC is the corporation through
which ICMH conducts its mortgage conduit operations. Since 100% of the common
stock of ICIFC was owned by ICII, ICII consolidated the financial statements
of ICIFC in its financial statements. As a result, the assets and liabilities
of the Company reflected on its balance sheet are greater than they would
otherwise be absent such consolidation. However, since ICII only owns 1% of
the economic interest of ICIFC, it considers ICIFC's operations immaterial to
the Company. Therefore, to more properly reflect the Company's true financial
condition, the Company disposed of its common stock interest in ICIFC during
March 1997. In future reporting periods, the financial statements of ICIFC
will not be consolidated with those of ICII.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company's consolidated net income for the year ended December 31, 1996
was $76.0 million or $1.95 per share as compared to $14.2 million or $0.40 per
share for the previous year, an increase of 435%. The increase in net income
is attributable to several factors: gains on sale of SPFC stock; a 123%
increase in gain on sale of loans; a 115% increase in net interest income; and
an improved net interest margin. These positive factors were partially offset
by an increase in total expenses and the provision for loan and lease losses.
Revenues for the year ended December 31, 1996 increased 201% to $256.9
million as compared to $85.3 million for the same period of the previous year.
Expenses for the year ended December 31, 1996 increased 62% to $99.0 million
as compared to $61.2 million for the same period of the previous year.
Total revenues for the Company included a pre-tax gain of $82.7 million from
the sales of SPFC's common stock through an initial public offering in August
1996 and a secondary offering in November 1996. Prior to the sale of SPFC
stock, SPFC was a wholly owned subsidiary of the Company specializing in non-
conforming residential mortgage lending. In the initial public offering, ICII
sold 3.5 million shares, and recorded a gain of $30.6 million with SPFC
selling 5.2 million primary shares to the public, resulting in a gain to the
Company of $31.5 million. In November 1996, ICII sold an additional 1.5
million shares of SPFC common stock through a secondary offering in which ICII
was the sole selling shareholder, resulting in a gain to the company of
$20.6 million, and reducing its ownership in SPFC to 51.2%. As a result of the
Company's requirement to record income tax expense on its ownership interest
in SPFC's after tax income, the Company will only retain approximately 30% of
SPFC's net income or loss, so long as ICII maintained 51.2% ownership interest
in SPFC. ICII expects that its percentage ownership interest of SPFC will be
reduced below 50% at which point the financial statements of SPFC would not be
consolidated with those of ICII.
Gain on sale of loans increased 123% to $88.2 million for the year ended
December 31, 1996 as compared to $39.6 million for the same period of the
previous year. Gain on sale of loans consists primarily of gains recorded upon
the sale of loans, net of associated expenses, and to a lesser extent, fees
received on the origination of loans, and fees received for commitments to
fund loans. The increase was primarily the result of substantially increased
volume and profitability on the sale of various variable and fixed rate loan
products through securitizations. Gain on sale of loans includes $55.4 million
in gains recorded as the result of the securitization of $657.4 million of the
Company's sub prime residential mortgage loans at SPFC, $11.2 million in gains
resulting from the securitization of $277.0 million of commercial and multi-
family loans at SPTL, $3.6 million gain on sale of the Company's retained
interest in the securitization of $105.2 million of franchise loans at FMAC
which were accounted for as a financing at December 31, 1995 and a gain on
sale of $13.7 million resulting from the securitization of $325.1 million of
franchise loans during the second and fourth quarters of 1996. During the year
ended December 31, 1996, the Company wrote down the carrying value of its
Capitalized Excess Servicing Fees Receivable by $4.7 million due to actual
performance results differing from original excess cash flows estimated by the
Company.
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For the year ended December 31, 1996, net interest income, which consists of
interest income and fees net of interest expense, increased $38.6 million or
115% to $72.4 million as compared to $33.8 million for the year ended December
31, 1995. The increase in net interest income was due primarily to two
factors. The increase in interest income can be directly attributed to the
acquisitions completed throughout the last half of 1995, and the change in the
composition of loans held for sale and investment from primarily conforming
single family residential mortgage loans to a more diversified mix of loan
products. The product mix of the Company's interest earning assets now
includes a much larger percentage of higher-yielding loan and lease products
as compared to the previous year.
For the year ended December 31, 1996, interest income increased $78.0
million or 60% to $207.5 million from $129.5 million for the year ended
December 31, 1995. The increase in interest on loans was primarily
attributable to an overall increase in the yield on outstanding loan and lease
products. Interest income also increased as a result of the Company's loan and
lease securitizations, which contributed interest income of $8.4 million from
the accretion of discounts on the Company's Capitalized Excess Servicing Fees
Receivable.
For the year ended December 31, 1996, interest expense increased $39.3
million or 41% to $135.0 million from $95.7 million for the year ended
December 31, 1995. The increase in interest expense primarily resulted from
increased outstanding average balances of warehouse lines of credit.
For the year ended December 31, 1996, consolidated net interest margin
increased to 3.40%, an increase of 132 basis points as compared to 2.08% for
the year ended December 31, 1995. The improvement in net interest income and
margin is largely the result of the Company's repositioning itself with the
origination and acquisition of higher yielding loan and lease products.
Acquisitions have added to the improvement in net interest income and net
interest margin. For the year ended December 31, 1996, net interest margin and
net income benefited from a full year of operation from the acquired CoastFed
Business Credit Corporation as well as the fourth quarter purchase of
equipment leases totaling approximately $85 million with a weighted average
interest rate of 15.5% from Avco Leasing services, a division of Avco
Financial Services of Southern California, Inc.
Loan servicing income for the year ended December 31, 1996 decreased 87% to
$1.7 million as compared to $12.7 million for the year ended December 31,
1995. The decrease in loan servicing income was primarily due to a decreased
average balance of conforming residential mortgage loans serviced for others,
primarily as a result of the Company's sale or transfer of substantially all
of its conforming residential mortgage servicing rights in connection with the
Company's exit from the conforming mortgage banking business. Additionally,
loan servicing income continues to be negatively affected by increased direct
servicing costs related to the loan foreclosure and property liquidation
process of the remaining delinquent conforming residential mortgage servicing
portfolio of the Company's former mortgage banking operations.
During 1996 and 1995, the Company sold mortgage loan servicing rights
relating to $3.2 billion and $957.2 million principal amount of loans,
resulting in pre-tax gains of $7.6 million and $3.6 million, respectively.
Gain on the sale of servicing rights consisted of the cash proceeds received
on the "bulk" sale of servicing rights, net of the related capitalized
purchased or originated servicing rights. The decline in profitability on the
sale of the conforming residential mortgage servicing rights was due to a
lower average sales price and the increased amounts of capitalized servicing
rights on the portfolio sold during the year ended December 31, 1996 as
compared to the year ended December 31, 1995 as a result of the Company's
adoption of SFAS 122 in the first quarter of 1995.
The decision to sell servicing rights was based upon the Company's plan to
exit the conforming mortgage banking business.
Other income, including management fees, for the year ended December 31,
1996 increased to $14.2 million as compared to $1.2 million for the year ended
December 31, 1995. This increase was primarily due to fee income generated
from the Company's advisory contract with ICMH and dividend payments received
by the Company on its investment in ICMH. Additionally, increasing other
income was the resolution and recovery of $2.5 million of certain outstanding
reconciling items at SPTL.
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Personnel expenses increased 42% to $48.4 million for the year ended
December 31, 1996 as compared to $34.1 million for the year ended December 31,
1995. This increase was primarily the result of personnel expenses related to
the Company's acquisition and expansion activities throughout the second half
of 1995, partially offset by reductions in personnel expense at the Company's
former mortgage banking operations.
Amortization of Purchased Mortgage Servicing Rights and Originated Mortgage
Servicing Rights decreased 72% to $1.1 million for the year ended December 31,
1996 as compared to $4.0 million for the year ended December 31, 1995. The
decrease was the result of a decreased outstanding balance of PMSR's and
OMSR's as a result of the Company's sale of servicing rights on conforming
residential mortgage loans generated by the former mortgage banking
operations.
Occupancy expense increased 19% to $4.7 million for the year ended December
31, 1996 as compared to $3.9 million for the year ended December 31, 1995. The
increase primarily reflected an increase in lease expenses as a result of the
Company's acquisition of FMAC, FCAC and CBCC in the second half of 1995, as
well as to the continued expansion of SPFC throughout 1996.
Net expenses of other real estate owned ("OREO") increased 267% to $7.0
million for the year ended December 31, 1996 as compared to $1.9 million for
the year ended December 31, 1995. The increase in net expense of OREO was
primarily the result of the increase in the volume of properties foreclosed on
and liquidated by the Company's former mortgage banking operations.
Federal Deposit Insurance Corporation ("FDIC") insurance premiums decreased
71% to $327,000 for the year ended December 31, 1996 as compared to $1.1
million for the year ended December 31, 1995. FDIC insurance premiums
decreased primarily as a result of a decrease in the rate of the insurance
premium charged to SPTL for FDIC deposit insurance.
Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination, sale and servicing of
conforming residential mortgage loans. During the year ended December 31,
1996, the Company incurred actual charges of approximately $3.2 million. The
Company believes that significant changes to the exit plan are not likely, and
that the exit plan should be completed in the second quarter of 1997. The
Company has included in the restructuring provision those costs resulting from
the exit plan that are not associated with, nor would have benefit for, the
continuing operations of the Company.
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense,
increased 109% to $33.8 million for the year ended December 31, 1996 as
compared to $16.2 million for the year ended December 31, 1995. The increase
in general and administrative expenses was due primarily to the Company's
acquisition of FMAC, FCAC, and CBCC, as well as to the start up of ICAI in
1995, and the continued expansion of SPFC throughout 1996.
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. For the year ended December 31, 1996, the provision for loan losses
increased $4.3 million to $9.8 million as compared to $5.5 million for the
year ended December 31, 1995.
The increase in the loan and lease loss provision for the year ended
December 31, 1996 was primarily the result of an increase in nonaccrual loans
(specifically one purchased loan portfolio) and due to the continuing change
in the composition of the Company's investment loan portfolio to include
higher yielding loan products.
At December 31, 1996, of the $50.1 million of nonaccrual loans, 89%, 3% and
8% were single family, multi-family and non-residential loans, respectively,
as compared to 76%, 18% and 6%, respectively, at December 31, 1995. The
increase in nonaccrual loans represented by residential loans was due to the
expansion of the investment loan portfolio with residential (one-to-four
family) loans originated by the Company's former mortgage banking operations.
The Company's non-residential loans were comprised of commercial mortgages,
commercial loans, indirect equipment leases and consumer loans.
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Non-performing assets ("NPA's") consist of nonaccrual loans, loans with
modified terms and OREO. Total NPA's increased 63% to $63.6 million at
December 31, 1996, as compared to $39.0 million at December 31, 1995. The
ratio of the allowance for loan and lease losses to nonaccrual loans decreased
to 39.9% at December 31, 1996 from 44.3% at December 31, 1995. NPA's as a
percentage of total assets were 2.64% and 1.55% at December 31, 1996 and 1995,
respectively.
The Company believes the overall increase in NPA's was primarily a result of
the acquisition of a portfolio of sub-prime residential mortage loans by SPTL
late in 1995. Nonaccrual loans in the acquired portfolio increased to $18.2
million from $0.6 million at December 31, 1996 and 1995, respectively.
Although the levels of nonaccrual loans has increased, actual losses from the
acquired portfolio have been minor at $337,000 and $0 in 1996 and 1995,
respectively. The Company considered the level of NPA's related to its other
lending activities to be acceptable due to the attractive yield on these
loans.
The Company evaluated expected losses on nonaccrual loans in both periods on
a loan-by-loan basis and determined that the allowance was adequate to cover
both expected losses on nonaccrual loans and inherent losses in the remainder
of the Company's loans held for investment portfolio.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 increased 17% to $85.3 million
as compared to $72.8 million for the year ended December 31, 1994. Income
before extraordinary item increased 115% to $14.2 million as compared to $6.6
million for the previous year. Net income for the year ended December 31, 1995
increased 89% to $14.2 million as compared to $7.5 million for the previous
year. The 17% increase in revenue and the relatively unchanged level of
expenses accounted for the increase in the Company's net income.
Gain on sale of loans increased 359% to $39.6 million for the year ended
December 31, 1995 as compared to $8.6 million for the year ended December 31,
1994. The increase was primarily the result of substantially increased
profitability on the sale of various servicing retained variable and fixed
rate loan products through securitizations, together with an increase in the
volume of loans sold on a servicing released basis.
Gain on sale of loans includes $28.9 million in gains recorded as a result
of the securitization of $404.9 million of the Company's sub-prime residential
mortgage loans, $98.3 million of non-conforming residential mortgage loans,
$290.9 million of conforming residential mortgage loans, $57.7 million of
multi-family mortgage loans, and $85.2 million of gross lease receivables.
Also during 1995, the Company securitized $105.2 million of franchise mortgage
loans which was accounted for as a financing.
Net interest income, which consists of interest and fees net of interest
charges, and net interest margin for the year ended December 31, 1995
increased 60% and 32% to $33.8 million and 2.08% compared to $21.1 million and
1.57% for the year ended December 31, 1994, respectively. The increase in net
interest income and net interest margin was due primarily to two factors. The
Company began 1995 with a loan portfolio consisting primarily of adjustable
rate residential mortgage loans ("ARMs") tied to either the 11th District Cost
of Funds index, or the 6 Month London Interbank Offering Rate ("LIBOR") index.
These loans were originated during 1994 by the Company's mortgage lending
operations, and the majority of these loans included a "teaser" period
(typically three months) in which the borrower paid an interest rate to the
mortgage lender that is substantially lower than the fully-indexed loan
interest rate. As these loans repriced throughout 1995 and became fully
indexed, the Company's related interest income increased commensurately.
Interest income also increased as a result of the Company's loan and lease
securitizations, which contributed interest income of $2.6 million from the
accretion of discounts on the Company's Capitalized Excess Servicing Fees
Receivable. The increase in interest income due to the factors described above
was partially offset by an increase in the average costs of borrowing from all
sources, including warehouse lines of credit, borrowings from the FHLB, and
SPTL customer deposits.
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Loan servicing income for the year ended December 31, 1995 decreased 22% to
$12.7 million as compared to $16.3 million for the year ended December 31,
1994. The decrease in loan servicing income was primarily due to a decreased
average balance of residential mortgage loans serviced for others, coupled
with an increase in direct servicing costs related to the loan foreclosure and
property liquidation process. As interest rates decreased throughout 1995, the
prepayment rate on the Company's residential mortgage loan servicing portfolio
did not increase dramatically, primarily the result of the relatively low
weighted average interest rate of 8.35% on the Company's residential mortgage
loan servicing portfolio. Total runoff amounted to $612.3 million or 13% of
the beginning balance of the residential mortgage loan servicing portfolio for
1995 as compared to $841.9 million or 22% of the beginning balance of the
residential mortgage loan servicing portfolio for 1994. The residential
mortgage loan servicing portfolio decreased 8% to $4.5 billion at December 31,
1995 from $4.9 billion at December 31, 1994.
During 1995 and 1994, the Company sold mortgage loan servicing rights
relating to $957.2 million and $2.9 billion principal amount of loans,
resulting in pre-tax gains of $3.6 million and $30.8 million, respectively.
During 1995, the average gain on sale of servicing rights decreased 66% to 37
basis points as compared to 108 basis points for the previous year. The
profitability on the sale of servicing decreased primarily as a result of the
Company's adoption of SFAS 122 which required the Company to capitalize
servicing rights related to loans originated.
Gain on the sale of servicing rights consists of the cash proceeds received
on the "bulk" sale of servicing rights, net of the related capitalized PMSR's
and OMSR's. The decision to buy or sell servicing rights is based upon
management's assessment of the market for and current market value of
servicing rights and the Company's current and future earnings and cash flow
objectives.
Expenses for the year ended December 31, 1995 were substantially unchanged
from the previous year at $61.2 million as compared to $61.5 million in 1994.
Personnel expenses increased 1.7% to $34.1 million in 1995 as compared to
$33.5 million in 1994. This increase was primarily the result of increased
personnel expenses related to the Company's acquisition and expansion
activities throughout 1995, partially offset by reductions in personnel
expense at the Company's mortgage banking operations. Amortization of
capitalized servicing rights increased 26% to $4.0 million in 1995 as compared
to $3.2 million in 1994, despite the decrease in the runoff rate of the
Company's residential servicing portfolio. This increase was the result of an
increase in prepayments of loans in the Company's servicing portfolio with
related capitalized servicing. Amortization as a result of loan prepayments
increased 275% to $1.2 million in 1995, as compared to $313,000 in 1994.
Scheduled amortization of capitalized servicing rights was $2.8 million in
1995, substantially equal to the $2.9 million in 1994.
Occupancy expense increased 15% to $3.9 million in 1995 as compared to $3.4
million in 1994. The increase primarily reflected an increase in lease
expenses as a result of the Company's acquisition of FMAC, FCAC and CBCC in
1995.
Net expenses of OREO increased 97% to $1.9 million in 1995 as compared to
$969,000 in 1994. The increase in OREO expenses in 1995 was primarily the
result of an increase in OREO writedowns. OREO writedowns increased 465% to
$2.1 million in 1995 as compared to $369,000 in 1994.
FDIC insurance premiums decreased 48% to $1.1 million in 1995 as compared to
$2.2 million in 1994. FDIC insurance premiums decreased primarily as a result
of a decrease in the premium charged for FDIC insurance in 1995. On June 1,
1995, the premium charged to SPTL decreased from 0.23% of deposits outstanding
to $2,000 annually. SPTL has been considered to be well capitalized by its
regulators.
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense
decreased 12% to $16.2 million in 1995 as compared to $18.3 million in 1994.
The decrease was the result of the reversal in 1995 of $1.8 million of the
$2.0 million
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provision established in 1994 for potential operating losses. The allowance
was established as a result of the discovery of the lack of timely
reconciliation of several cash and loans in process clearing accounts at the
Company's principal subsidiary, SPTL. The Company corrected the accounting
deficiencies at SPTL that included the use of significant Company and external
resources to complete the reconciliations. At the completion of the
reconciliation process, nothing came to the attention of management that
caused the Company to believe any irregularities had taken place. Based on the
resolution of the unidentified reconciling items at December 31, 1994, $1.8
million of the remaining allowance was reversed. Excluding the establishment
in 1994 and the reversal in 1995 of the provision for operating losses,
general and administrative expenses as described increased 10% to $18.0
million in 1995 as compared to $16.3 million in 1994. The increase in general
and administrative expenses was due primarily to the Company's acquisition of
FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995.
As a result of the change in the composition of the Company's investment
loan portfolio, earnings were reduced by an increase in the provision for loan
losses. The provision for loan losses was $5.5 million for 1995, an increase
of 6% from $5.2 million for the same period in 1994. The increase in the
provision was primarily the result of the increase in nonaccrual loans and the
increase in the amount of net charge-offs. Total nonaccrual loans increased
136% to $31.0 million at December 31, 1995, as compared to $13.1 million at
December 31, 1994. Total nonaccrual loans as a percentage of loans held for
investment were 4.50% and 1.26% at December 31, 1995 and 1994, respectively.
Net charge-offs were $3.1 million for 1995, as compared to $1.4 million for
the same period in 1994.
At December 31, 1995, of the $31.0 million of nonaccrual loans, 76%, 18% and
6% were single family, multi-family and non-residential loans, respectively,
as compared to 74%, 9% and 17%, respectively, at December 31, 1994. The
increase in nonaccrual loans represented by residential loans was due to the
expansion of the investment loan portfolio with residential (one-to-four
family) loans originated by the Company's former mortgage banking operations.
The Company's non-residential loans were comprised of commercial mortgages,
commercial loans, indirect equipment leases and consumer loans.
Total NPA's increased 137% to $39.0 million at December 31, 1995, as
compared to $16.4 million at December 31, 1994. The ratio of the allowance for
loan losses to nonaccrual loans decreased to 44.3% at December 31, 1995 from
53.8% at December 31, 1994. NPA's as a percentage of total assets were 1.55%
and 1.16% at December 31, 1995 and 1994, respectively. The Company believes
the overall increase in NPA's was a result of the transfer of unsalable loans
originated by the Company's former mortgage banking operations to the held for
investment portfolio. The Company considered the level of NPA's related to its
other lending activities to be acceptable due to the attractive yield on these
loans.
The ratio of the allowance for loan losses to nonaccrual loans decreased to
44.3% at December 31, 1995 from 53.8% at December 31, 1994. The Company
evaluated expected losses on nonaccrual loans in both periods on a loan-by-
loan basis and determined that the allowance was adequate to cover both
expected losses on nonaccrual loans and inherent losses in the remainder of
the Company's loans held for investment portfolio.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for losses considering such factors as
historical loan loss experience, evaluations made by bank regulators,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio.
LIQUIDITY AND CAPITAL RESOURCES
General
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
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requirements in connection with loans and leases pooled and sold through
securitizations, (v) ongoing administrative and other operating expenses and
(vi) the costs of the Company's warehouse credit and repurchase facilities
with certain financial institutions. The Company has financed its activities
through warehouse lines of credit and repurchase facilities with financial
institutions, equity and debt offerings in the capital markets, deposits or
borrowings at SPTL and securitizations. The Company believes that such sources
will be sufficient to fund the Company's liquidity requirements for the
foreseeable future. There can be no assurance that the Company will have
access to the capital markets in the future or that financing will be
available to satisfy the Company's operating and debt service requirements or
to fund its future growth.
SPTL historically obtained the liquidity necessary to fund the Company's
former mortgage banking operations and its own investing activities through
deposits and, if necessary through borrowings from the FHLB. At December 31,
1996 and December 31, 1995, SPTL had available lines of credit from the FHLB
equal to 35% of its assets, or $484.4 million and $501.4 million,
respectively. The highest FHLB advance outstanding during the year ended
December 31, 1996 was $338.0 million, with an average outstanding balance of
$188.8 million. The highest FHLB advance outstanding during the year ended
December 31, 1995 was $435.0 million, with an average outstanding balance of
$292.0 million. The outstanding balance of FHLB advances was $140.5 million at
December 31, 1996.
SPTL has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPTL maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPTL allow SPTL to anticipate both
funding and sales and adjust deposit levels and short-term investments against
the demands of the Company's lending activities. For a further description of
SPTL's deposit generating activities and available funding, see "Business--
Funding and Securitizations."
In addition to warehouse lines of credit and SPTL borrowings, the Company
has also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share for net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
Senior Notes. In October 1994, the Company repurchased $8.5 million of the
Senior Notes.
In March 1996, the Company reissued the $8.5 million of Senior Notes it
purchased in October 1994. At December 31, 1996, $90.0 million of the Senior
Notes were outstanding.
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which ICII was a selling shareholder. SPFC and ICII received net
proceeds from such offering of approximately $53.8 million and $35.9 million,
respectively. In November 1996, (i) SPFC issued $75.0 million of convertible
subordinated notes due 2006 and (ii) ICII sold 1.0 million shares of SPFC
common stock held by ICII for net proceeds of approximately $28.0 million.
After the sale of such common stock by ICII, ICII owned approximately 51.2%
of the issued and outstanding shares of SPFC's common stock, excluding shares
issuable upon exercise of options granted or to be granted pursuant to SPFC's
stock option plans and shares issuable upon conversion of the $75.0 million of
convertible subordinated notes, mentioned above.
During December 1996, the Company announced that it commenced a cash tender
offer and consent solicitation for all $90 million principal amount of its
9.75% Senior Notes due 2004 at $1,040 per Senior Note. Subsequent to December
31, 1996, the Company successfully issued a 9.875% Senior Note offering due
2007, totaling $200.0 million. A portion of the proceeds from the offering was
used to repurchase $69.8 million of the outstanding 9.75% Senior Notes. The
remaining proceeds will be used to make capital contributions to
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subsidiaries, strategic acquisitions, investments, and for general corporate
purposes. The effective interest rate on the tendered notes was approximately
10.8% after the amortization of original issue discount and deferred bond
issue costs. The effective interest rate on the new notes is approximately
10.4% after the amortization of deferred bond issue costs. The Company engaged
in the tender offer and new issuance in order to obtain a more favorable debt
covenant package, and to raise new capital to support its growing businesses.
In the first quarter of 1997, the Company sold 370,000 shares of its common
stock investment in SPFC, generating net proceeds of $6.2 million. This sale
resulted in a reduction of the company's ownership in SPFC to 49.4%. As such,
beginning with the first quarter of 1997, the Company will no longer
consolidate SPFC in its consolidated financial statements. The Company will
report its investment in SPFC under the equity method.
Limitations on Dividends
Under the California Industrial Loan Law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless: (i) such
distribution would not exceed a thrift and loan's retained earnings, (ii) any
payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
a thrift also provides the basis for establishing the maximum amount that a
thrift may lend to one single borrower. As of December 31, 1996 and December
31, 1995, $80.5 million and $80.5 million, respectively, of SPTL's capital was
so restricted.
The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, thrift and loans may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items. Under the Financial Institutions Supervisory
Act and FIRREA, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of a
thrift and other factors, that such regulators could assert that the payment
of dividends in some circumstances might constitute unsafe or unsound
practices and prohibit payment of dividends even though technically
permissible.
Pursuant to FDICIA, SPTL is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPTL which may have been otherwise available to
the Company for working capital.
Lines of Credit and Warehouse Facilities
The Company is dependent upon its ability to access warehouse credit and
repurchase facilities, in addition to its ability to continue to pool and sell
loans and leases in the secondary market, in order to fund new originations
and purchases. The Company has warehouse lines of credit and repurchase
facilities under which it had available an aggregate of approximately $236.6
million in financing at December 31, 1996 (excluding financing available to
ICIFC and SPFC, and amounts available to ICII under a $200 million warehouse
facility with PaineWebber Incorporated as described below). The Company
expects to be able to maintain existing
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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.
PaineWebber Incorporated has agreed to make available repurchase lines to
ICII in an amount equal to $200.0 million. PaineWebber provided ICII with
these funding capabilities for its former mortgage banking operations, where
ICII can close loans in its name. The loan collateral is held by an
independent third-party custodian and ICII has the ability to borrow against
that collateral at a percentage of the original principal balance. The rate
charged is LIBOR plus 65 to 85 basis points, depending on the loan product
type. This line does not have an expiration date, but is due on 30 days
demand. As of December 31, 1996, ICII had an outstanding balance of $5.7
million with respect to this facility. The Company does not intend to utilize
this facility in the future.
The Warehouse Lending Corporation of America has agreed to make available
repurchase lines to ICII in an amount equal to $20.0 million. The Warehouse
Lending Corporation of America has provided ICII with these funding
capabilities for its former mortgage banking operations, where ICII can
repurchase loans in its name. The loan collateral is held by an independent
third-party custodian and ICII has the ability to borrow against that
collateral at a percentage of the original principal balance.
The rate charged is LIBOR plus 250 basis points, depending on the loan
product type. Availability under this facility expired in August 1996. As of
December 31, 1996, ICII had an outstanding balance of $4.6 million with
respect to this facility.
Imperial Warehouse Lending Group ("IWLG") has agreed to make available
repurchase lines to ICII in an amount equal to $20.0 million. IWLG has
provided ICII with these funding capabilities for its mortgage banking
operations, where ICII can close loans in its name. The loan collateral is
held by an independent third-party custodian and ICII has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is Bank of America's Prime Lending Rate minus 25
basis points. This line has an expiration date of September 30, 1997. As of
December 31, 1996, ICII had an outstanding balance of $5.1 million with
respect to this facility.
CS First Boston has agreed to make available repurchase lines to FMAC in an
amount equal to $200.0 million. CS First Boston has provided FMAC with these
funding capabilities for its franchise mortgage banking operations, where FMAC
can close loans in its name. The loan collateral is held by an independent
third-party custodian and FMAC has the ability to borrow against that
collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 125 basis points. This line is guaranteed by ICII and has an
expiration date of December 1997. As of December 31, 1996, FMAC had an
outstanding balance of $48.8 million with respect to this facility.
Banco Santander has agreed to make available repurchase lines to FMAC in an
amount equal to $50.0 million. Banco Santander has provided FMAC with these
funding capabilities for its franchise mortgage banking operations, where FMAC
can close loans in its name. The loan collateral is held by an independent
third-party custodian and FMAC has the ability to borrow against that
collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 225 basis points. This line is guaranteed by ICII and expired
November 1996; FMAC is currently negotiating an extension of this facility. As
of December 31, 1996, FMAC had an outstanding balance of $16.2 million with
respect to this facility.
Greenwich Financial Capital Products, Inc. ("Greenwich") has agreed to make
available repurchase lines to FMAC. The total commitment amount has been
unspecified. Greenwich has provided FMAC with these funding capabilities for
its franchise mortgage operations, where FMAC can close loans in its name. The
loan collateral is held by an independent third-party custodian and FMAC has
the ability to borrow against that
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collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 175 basis points. This line is guaranteed by ICII and is due on
30 days demand. As of December 31, 1996, FMAC had an outstanding balance of
$35.2 million with respect to this facility.
CoreStates Bank, N.A. ("CoreStates") has agreed to make available repurchase
lines to IBC in an amount equal to $10.0 million. CoreStates has provided IBC
with these funding capabilities for its equipment leasing operations. The loan
collateral is held by an independent third-party custodian and IBC has the
ability to borrow against that collateral at a percentage of the original
principal balance. The rate charged is LIBOR plus 230 basis points. The
Company intends to use this credit line to fund IBC's equipment purchases.
This line is guaranteed by ICII and has an expiration date of November 1997.
As of December 31, 1996, IBC had an outstanding balance of $1.1 million with
respect to this facility.
Conti Financial Corporation has agreed to make available credit lines of
$100.0 million for the purpose of acquiring AVCO and the securitization of
their leasing assets. As of December 31, 1996, IBC has an outstanding balance
of $87.7 million with respect to this credit facility.
Lehman Commercial Paper Inc. ("LCPI") has agreed to make available
repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has
provided SPFC with these funding capabilities for its mortgage banking
operations, where SPFC can close loans in its name. The loan collateral is
held by an independent third-party custodian and SPFC has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is LIBOR plus 80 to 95 basis points. This line is
guaranteed by ICII and has an expiration date of April 1, 1997. As of December
31, 1996, SPFC had an outstanding balance of $0 million with respect to this
facility.
In October 1996, Morgan Stanley Mortgage Capital agreed to make available to
SPFC a $150.0 million warehouse line of credit for the purpose of loan
originations and purchases. The loan collateral is held by an independent
third-party custodian and SPFC has the ability to borrow against that
collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 70 basis points. The lender of this facility did not require
ICII's guarantee. This line has an expiration date of October 22, 1997. As of
December 31, 1996, SPFC had an outstanding balance of $152.7 million with
respect to this facility. In February 1997, the line of credit was increased
to $400 million.
IWLG has agreed to make available to ICIFC repurchase lines in an amount
equal to $600.0 million. IWLG has provided ICIFC with these funding
capabilities for its mortgage banking operations, where ICIFC can close loans
in its name. The loan collateral is held by an independent third-party
custodian and ICIFC has the ability to borrow against that collateral at a
percentage of the original principal balance. The rate charged is Bank of
America's Prime Rate. The Company intends to use this credit line to fund
ICIFC's mortgage loan originations and acquisition in the future. This line
has no expiration date. As of December 31, 1996, ICIFC had an outstanding
balance of $337.4 million with respect to this facility.
Securitizations
The Company currently pools and sells through securitization a substantial
portion of the loans or leases which it originates or purchases, other than
loans held by SPTL for investment. Accordingly, adverse changes in the
securitization market could impair the Company's ability to originate,
purchase and sell loans or leases on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's business
and results of operations. In addition, the securitization market for many
types of assets is relatively undeveloped and may be more susceptible to
market fluctuations or other adverse changes than more developed capital
markets. Finally, any delay in the sale of a loan or lease pool could cause
the Company's earnings to fluctuate from quarter to quarter.
In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization but does not receive
the cash representing such gain until it receives the excess servicing
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fees, which are payable over the actual life of the loans or leases
securitized. As a result, such transactions may not generate cash flows to the
Company for an extended period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the special purpose entities to
which such loans and leases are sold to enable it to obtain investment grade
ratings for such interests. To a limited extent, the Company also relies on
overcollateralization to support outstanding senior interests.
However, 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 pooling and servicing agreements that govern the distribution of cash
flows from the loans included in securitizations require either (i) the
establishment of a reserve account that may be funded with an initial cash
deposit by the Company or (ii) the overcollateralization of the senior
interests by using interest receipts on the loans to reduce the outstanding
principal balance of the senior interests. To the extent that a loss is
realized on the loans, the loss will either be paid out of the reserve account
or the overcollateralization amount or will be reduced to the extent that
funds are available and will result in a reduction in the value of the
Capitalized Excess Servicing Fees Receivable.
The Company may be required either to repurchase or to replace loans which
do not conform to the representations and warranties made by the Company in
the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations.
Franchise Lending
FMAC sells a majority of its loan origination volume in securitizations and
to a lesser extent through whole loan sales. FMAC securitized $325.1 million
and $105.2 million of franchise loans during the year ended December 31, 1996
and the period from its inception at June 30, 1995 through December 31, 1995,
respectively.
Business Finance Lending
IBC sells its lease originations primarily through a revolving
securitization facility administered by Citicorp North America, Inc. ("CNAI").
The facility has a three-year revolving period, which expires on December 29,
1998, and a three and one-half year amortization period.
Under the facility, IBC entered into a sale agreement ("IBC Agreement")
pursuant to which IBC will sell lease receivables to its wholly-owned special
purpose subsidiary, IBC Funding Corp. ("IFC"). During the revolving period,
Corporate Receivables Corporation ("CRC"), a special purpose subsidiary
administered by CNAI, issues commercial paper to fund its purchases of IBC
originations. The purchase limit under the facility is $110.0 million and as
of December 31, 1996, there was approximately $100.4 million of commercial
paper outstanding under the facility.
CRC purchases from IFC all receivables acquired by IFC pursuant to the IBC
Agreement. Such purchases are treated as sales for reporting purposes under
generally accepted accounting principles ("GAAP") and as financings for tax
purposes. CRC is conveyed a 100% ownership interest in the receivables,
together with a security interest in the underlying lease equipment, which
ownership and security interests have been perfected under the Uniform
Commercial Code. Payments of the purchase price are made directly from
payments by lessees on the lease receivables.
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Commercial Mortgage Lending
During the year ended December 31, 1996, SPTL securitized $277.0 million of
multi-family and commercial real estate loans. Subordinated bonds of
approximately $22 million from the securitization were delivered into a total
rate of return swap with a financial institution. The provisions of the swap
entitle the Company to receive the total return on the subordinated bonds
delivered in exchange for a floating payment of LIBOR plus a spread of 1.95%.
The swap is an off balance sheet instrument.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires 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 decreasing interest rates, borrowers are more
likely to refinance their existing loans which may negatively impact the
Company's investments in capitalized excess servicing related assets.
ASSET QUALITY
As a result of the continuing change in the composition of the Company's
investment loan portfolio, earnings were reduced by an increase in the
provision for loan and lease losses.
The provision for loan and lease losses increased to $9.8 million for the
year ended December 31, 1996, as compared to $5.5 million and $5.2 million for
the years ended December 31, 1995 and 1994, respectively. The increase in the
provision for loan and lease losses was primarily the result of an increase in
nonaccrual loans, an increase in the amount of net charge-offs, and the
continuing change in the composition of the investment loan portfolio to
higher-yielding loan products. Total nonaccrual loans increased to $50.1
million at December 31, 1996, as compared to $31.0 million and $13.1 million
at December 31, 1995 and 1994, respectively. Total nonaccrual loans as a
percentage of loans held for investment were 4.55%, 4.50%, and 1.26% at
December 31, 1996, 1995, and 1994, respectively.
Net charge-offs for the years ended December 31, 1996, 1995 and 1994 were
$8.0 million, $3.1 million, and $1.4 million, respectively. Net charge-offs
for the years ended December 31, 1996 and 1995 by product type were as
follows: multi-family loans $1.1 million and $0.3 million, respectively,
consumer loans $0.8 million and $0.1 million, respectively, conforming
residential mortgage loans $2.5 million and $2.0 million, respectively,
commercial loans $0.5 million and $0.2 million, respectively, and leases $3.1
million and $0.5 million, respectively.
The ratio of the allowance for loan and lease losses to total loans held for
investment was 1.82%, 1.99%, and 0.68% at December 31, 1996, 1995, and 1994,
respectively. The ratio of the allowance for loan and lease losses to
nonaccrual loans and leases were 39.9%, 44.3%, and 53.8% at December 31, 1996,
1995, and 1994, respectively. Although nonaccrual loans increased for the year
ended December 31, 1996 from December 31, 1995, with a corresponding decrease
in allowance coverage, the Company evaluated expected losses on nonaccrual
loans on a loan-by-loan basis and determined that the allowance was adequate
to cover both expected losses on nonaccrual loans and inherent losses in the
remainder of the Company's loans held for investment portfolio. The Company
considers the allowance for loan and lease losses to be adequate.
The percentage of the allowance for loan and lease losses to nonaccrual
loans does not remain constant due to the nature of the Company's portfolio of
loans. The collateral for each nonperforming mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss
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exposure contributes to the overall assessment of the adequacy of the allowance
for loan and lease losses. 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 losses.
Recoveries on loans previously charged off are credited to the allowance.
Provisions for loan losses are charged to expense and credited to the allowance
in amounts deemed appropriate by management based upon its evaluation of the
known and inherent risks in the loan portfolio. Future additions to the
allowance for loan losses may be necessary. For further information, see
"Business--Loans Held for Investment."
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of
falling interest rates, the net earnings of an institution with a positive gap
theoretically may be adversely affected due to its interest-earning assets
repricing to a greater extent than its interest-bearing liabilities.
Conversely, during a period of rising interest rates, theoretically, the net
earnings of an institution with a positive gap position may increase as it is
able to invest in higher yielding interest-earning assets at a more rapid rate
than its interest-bearing liabilities reprice.
In addition, a positive gap may not protect an institution with a large
portfolio of ARMs from increases in interest rates for extended time periods as
such instruments generally have periodic and lifetime interest rate caps. The
Company's ARMs are predominantly tied to LIBOR. Interest rates and the
resulting cost of funds increases in a rapidly increasing rate environment
could exceed the cap levels on these loan products and negatively impact net
interest income.
The Company has managed portfolio interest rate risk through the aggressive
marketing and funding of adjustable rate loans, which generally reprice at
least semi-annually and are generally indexed to LIBOR. As a result of this
strategy, at December 31, 1996, the Company's total interest-earning assets
maturing or repricing within one year exceeded its total interest-bearing
liabilities maturing or repricing in the same time by $243.5 million,
representing a positive cumulative gap ratio of 113.3%. The Company closely
monitors its interest rate risk as such risk relates to operational strategies.
The Company's cumulative gap position is at a level satisfactory to management
and the Company is currently attempting to maintain a positive gap position in
light of the current interest rate environment. However, there can be no
assurances that the Company will be able to maintain its positive gap position
or that its strategies will not result in a negative gap position in the
future. The level of the movement of interest rates, up or down, is an
uncertainty and could have a negative impact on the earnings of the Company.
Hedging
The Company has implemented various hedging strategies with respect to its
origination of loans and leases for sale. To date, this has included selling
short comparable maturity United States Treasury securities and preselling
loans through prefunding accounts in its securitizations. The Company is
subject to the risk of rising interest rates between the time it commits to
fund or purchase loans at a fixed price and the time it sells or securitizes
those loans.
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To mitigate this risk, the Company enters into transactions designed to
hedge interest rate risks, including mandatory and optional forward selling of
mortgage-backed securities or United States Treasury securities, and buying
and selling of futures on United States Treasury securities. The nature and
quantity of these hedging transactions is and will be determined by the
management of the Company based on various factors including market conditions
and the expected volume of mortgage loan originations and purchases.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against interest rate risks. However,
an effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. In addition, hedging
involves transaction and other costs which could increase as the period
covered by the hedging protection increases, such costs could also increase in
periods of risk and fluctuating interest rates. Therefore, the Company may be
prevented from effectively hedging its interest rate risks, without
significantly reducing the Company's return on equity.
The Company does not currently engage in the speculative use of trading
activities, including derivatives and synthetic instruments or hedging
activities, in controlling interest rate risk on its portfolio of loans held
for investment.
Former Mortgage Banking Loan Commitments
As of December 31, 1996, 1995, and 1994, the Company had open short-term
commitments amounting to $0, $93.7 million, and $168.5 million, respectively,
to fund loans in process subject to credit approval. Interest rate risk is
mitigated by the use of forward contracts to sell loans to investors.
Forward Contracts
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At December 31, 1996, 1995,
and 1994, the Company had $143.0 million, $279.2 million, and $485.5 million,
respectively, in outstanding commitments to sell mortgage loans through
mortgage-backed securities. These commitments allow the Company to enter into
mandatory commitments when the Company notifies the investor of its intent to
exercise a portion of the forward delivery contracts. The Company was
obligated under mandatory commitments to deliver loans to such investors at
December 31, 1996, 1995, and 1994 in the amounts of $0 million, $97.0 million,
and $79.0, respectively.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
Options
The Company may purchase put options to hedge against adverse movements in
the value of the loans held for sale portfolio. The Company will realize a
gain or loss upon the expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of the security for a
purchased put or call option is adjusted by the amount of premium received or
paid. The risk in buying an option is limited to the cost of the premium.
The Company had $70.0 million $20.0 million, and $0 notional amount of
written call option contracts outstanding at December 31, 1996, 1995, and
1994, respectively. The Company received $366,000, $82,600, and $0 in premiums
related to the options outstanding at December 31, 1996, 1995, and 1994,
respectively. There were no option contracts exercised during the years ended
December 31, 1996, 1995, and 1994.
59
<PAGE>
REPRICING/MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual terms of the asset or
liability.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN MORE THAN 3 YEARS 5 YEARS NON
3 MONTHS 3 MONTHS TO 6 MONTHS 1 YEAR TO TO 5 TO 10 MORE THAN INTEREST
OR LESS 6 MONTHS TO 1 YEAR 3 YEARS YEARS YEARS 10 YEARS BEARING TOTAL
---------- ----------- --------- --------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash................... $ 74,247 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 74,247
Other interest bearing
deposits.............. 3,369 -- -- -- -- -- -- -- 3,369
Investment securities
available for sale.... 91,204 -- -- -- -- -- -- -- 91,204
FHLB stock............. 17,152 -- -- -- -- -- -- -- 17,152
Mortgage loans held
for sale.............. 940,096 -- -- -- -- -- -- -- 940,096
Loans held for
investment, net of
unearned discount and
deferred loan
fees(1)............... 616,998 200,642 127,423 30,497 2,842 15,151 95,045 -- 1,088,598
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Total interest-earning
assets................. 1,743,066 200,642 127,423 30,497 2,842 15,151 95,045 -- 2,214,666
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Less:
Allowance for loan
losses................ -- -- -- -- -- -- -- (19,999) (19,999)
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Net interest earning
assets................ 1,743,066 200,642 127,423 30,497 2,842 15,151 95,045 (19,999) 2,194,667
Non-interest-earning
assets................ -- -- -- -- -- -- -- 275,972 275,972
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Total assets......... $1,743,066 $200,642 $ 127,423 $ 30,497 $ 2,842 $ 15,151 $ 95,045 $255,973 $2,470,639
========== ======== ========= ======== ======== ========= ======== ======== ==========
Interest-bearing
liabilities:
Deposits............... $ 401,483 $279,397 $ 311,862 $ 76,442 $ -- $ -- $ -- $ -- $1,069,184
Borrowings from FHLB... 60,000 4,500 76,000 -- -- -- -- -- 140,500
Other borrowings....... 694,352 -- -- -- -- -- -- -- 694,352
Senior Notes........... -- -- -- -- -- 88,209 -- -- 88,209
Convertible Notes...... -- -- -- -- -- 75,000 -- -- 75,000
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities............ 1,155,835 283,897 387,862 76,442 -- 163,209 -- -- 2,067,245
Non-interest bearing
liabilities............ -- -- -- -- -- -- -- 163,886 163,886
Shareholders' equity.... -- -- -- -- -- -- -- 239,508 239,508
---------- -------- --------- -------- -------- --------- -------- -------- ----------
Total liabilities and
shareholders'
equity.............. $1,155,835 $283,897 $ 387,862 $ 76,442 $ -- $ 163,209 $ -- $403,394 $2,470,639
========== ======== ========= ======== ======== ========= ======== ======== ==========
Interest rate
sensitivity gap(2)..... $ 587,231 $(83,255) $(260,439) $(45,945) $ 2,842 $(148,058) $ 95,045 $ -- $ 147,421
Cumulative interest
sensitivity gap........ $ 587,231 $503,976 $ 243,537 $197,592 $200,434 $ 52,376 $147,421 $147,421
Cumulative interest
sensitivity gap as a
percentage of total
assets................. 23.77% 20.40% 9.86% 8.00% 8.11% 2.12% 5.97%
Cumulative net interest
bearing assets as a
percent of interest
bearing liabilities.... 150.81% 135.00% 113.33% 110.38% 110.53% 102.53% 107.13% 107.13%
</TABLE>
- -------
(1) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARMs, have
features which restrict changes in interest rates on a short term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those reflected in the table. Finally, the ability of many
borrowers to service their ARMs may decrease in the event of an interest rate
increase.
60
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the years ended December 31, 1996, 1995, and 1994. The yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
YIELD/ YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-bearing
deposits.............. $ 143,067 $ 9,862 6.89% $ 131,277 $ 5,641 4.30% $ 89,155 $ 2,757 3.09%
FHLB stock............. 15,853 945 5.96 19,720 989 5.02 18,398 853 4.64
Loans held for sale.... 1,140,790 101,170 8.87 361,156 16,286 4.51 719,487 29,416 4.09
Loans held for
investment, net(1).... 779,522 87,072 11.17 1,091,536 103,958 9.52 521,200 49,757 9.55
Capitalized excess
servicing fees
receivable and
retained interest..... 53,052 8,422 15.87 22,257 2,608 11.72 -- -- --
---------- -------- ---------- -------- ---------- -------
Total interest-
earning assets...... 2,132,284 207,471 9.73 1,625,946 129,482 7.96 1,348,240 82,783 6.14
---------- -------- ---------- -------- ---------- -------
Non interest-earning
assets................. 163,055 45,167 70,117
---------- ---------- ----------
Total assets......... $2,295,339 $1,671,113 $1,418,357
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits............... $1,063,799 $ 60,999 5.73% $ 867,162 $ 51,565 5.95% $ 992,972 $41,765 4.21%
Borrowings from
Imperial Bank 3,311 302 9.12 -- -- -- 1,415 129 9.12
Borrowings from FHLB... 201,693 12,055 5.98 310,425 19,420 6.26 235,922 10,496 4.45
Other borrowings....... 645,313 52,050 8.07 251,684 16,363 6.50 18,877 946 5.01
Senior Notes........... 88,365 8,955 10.13 81,500 8,380 10.28 79,807 8,338 10.45
Convertible
subordinated
debentures............ 10,068 675 6.70 -- -- -- -- -- --
---------- -------- ---------- -------- ---------- -------
Total interest-
bearing
liabilities(2)...... 2,012,549 135,036 6.71 1,510,771 95,728 6.34 1,328,993 61,674 4.64
---------- -------- ---------- -------- ---------- -------
Non interest-bearing
liabilities............ 115,962 88,306 19,025
Shareholders' equity.... 166,828 72,036 70,339
---------- ---------- ----------
Total liabilities and
shareholders'
equity.............. $2,295,339 $1,671,113 $1,418,357
========== ========== ==========
Net interest rate
spread................. $ 72,435 3.02% $ 33,754 1.62% $21,109 1.50%
======== ======== =======
Net interest margin(2).. 3.40% 2.08% 1.57%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 105.95% 107.62% 101.45%
</TABLE>
- -------
(1) Net of deferred income and the allowance for loan losses, includes
nonaccrual loans.
(2) Average interest cost and net interest margin excluding the interest
expense from the Senior Notes held at ICII and the convertible
subordinated debentures held at SPFC during the years ended December 31,
1996, 1995 and 1994 were 6.55% and 3.85%, 6.11% and 2.59%, 4.27% and
2.18%, respectively.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
61
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's net interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes in interest due to
both rate and volume and (iv) the net change.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 OVER 1995 1995 OVER 1994
------------------------------------ -------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- ------- ------- -------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease) in:
Interest-bearing
deposits............. $ 507 $ 3,400 $ 314 $ 4,221 $ 1,302 $ 1,079 $ 503 $ 2,884
FHLB stock............ (194) 185 (35) (44) 61 70 5 136
Loans held for sale... 35,161 15,746 33,977 84,884 (14,656) 3,022 (1,496) (13,130)
Loans held for
investment, net...... (29,704) 18,010 (5,192) (16,886) 54,467 (156) (110) 54,201
Capitalized excess
servicing fees
receivable........... 3,609 924 1,281 5,814 2,608 -- -- 2,608
-------- ------- ------- -------- -------- -------- ------- --------
Total interest
income............. 9,379 38,265 30,345 77,989 43,782 4,015 (1,098) 46,699
-------- ------- ------- -------- -------- -------- ------- --------
Deposits.............. 11,700 (1,908) (358) 9,434 (5,297) 17,278 (2,181) 9,800
Borrowings from
Imperial Bank........ 302 -- -- 302 (129) -- -- (129)
FHLB borrowings....... (6,807) (869) 311 (7,365) 3,315 4,270 1,339 8,924
Other borrowings...... 25,586 3,951 6,150 35,687 11,664 281 3,472 15,417
Senior Notes.......... 706 (122) (9) 575 177 (136) 1 42
Convertible Notes..... 675 -- -- 675 -- -- -- --
-------- ------- ------- -------- -------- -------- ------- --------
Total interest
expense............ 32,162 1,052 6,094 39,308 9,730 21,693 2,631 34,054
-------- ------- ------- -------- -------- -------- ------- --------
Change in net interest
income................. $(22,783) $37,213 $24,251 $ 38,681 $ 34,052 $(17,678) $(3,729) $ 12,645
======== ======= ======= ======== ======== ======== ======= ========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"), which establishes accounting for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, discontinues recognition of assets only when control has been
surrendered, and discontinues recognition of liabilities only when they have
been extinguished. SFAS 125 requires that the selling entity continue to carry
retained interests, including servicing assets, relating to assets it no
longer recognizes. Such retained interests are based on the
62
<PAGE>
relative fair values of the retained interests of the subject assets at the
date of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral.
SFAS 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to, and over the period of, net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can be contractually prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment. In this
case, it requires that they be classified as available for sale or as trading
securities. Interest-only strips and retained interests are to be recorded at
market value.
Under the provisions of SFAS 125, management has determined that mortgage
backed securities retained by the Company as a result of securitization
transactions will be held as trading securities. All other retained securities
will be classified as available for sale or trading as determined at the time
of securitization.
Changes in market value are included in operations, if classified as trading
securities, or in shareholders' equity as unrealized gains or losses, net of
tax, if classified as available for sale. SFAS 125 was effective for the
Company on January 1, 1997. Management has determined that the implementation
of SFAS 125 will not have a material impact on the Company's financial
condition or results of operations.
63
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... 65
Consolidated Balance Sheets................................................ 66
Consolidated Statements of Income.......................................... 67
Consolidated Statements of Changes in Shareholders' Equity................. 68
Consolidated Statements of Cash Flows...................................... 69
Notes to Consolidated Financial Statements................................. 70
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," for the year ended December 31,
1995.
KPMG Peat Marwick LLP
Los Angeles, California
January 29, 1997
65
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ 74,247 $ 39,166
Interest bearing deposits................................ 3,369 267,776
Investment in Federal Home Loan Bank stock............... 17,152 22,750
Trading securities, at market............................ 25,180 --
Securities available for sale, at market................. 59,116 5,963
Loans held for sale ..................................... 940,096 1,341,810
Loans held for investment, net........................... 1,068,599 668,771
Purchased and originated servicing rights................ 14,887 18,428
Capitalized excess servicing fees receivable............. 23,142 33,181
Retained interest in loan and lease securitizations...... 49,548 14,251
Interest-only and residual certificates.................. 87,017 10,840
Accrued interest on loans................................ 13,847 10,164
Premises and equipment, net.............................. 12,442 11,369
Other real estate owned, net............................. 12,214 7,179
Goodwill................................................. 38,491 20,346
Other assets............................................. 31,292 38,641
---------- ----------
Total assets......................................... $2,470,639 $2,510,635
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits................................................. $1,069,184 $1,092,989
Borrowings from Imperial Bank............................ -- 5,000
Borrowings from Federal Home Loan Bank................... 140,500 190,000
Other borrowings......................................... 694,352 875,815
Bonds.................................................... -- 111,995
Senior Notes............................................. 88,209 80,472
Convertible subordinate debentures....................... 75,000 --
Accrued interest payable................................. 14,034 14,494
Income taxes payable..................................... 55,327 12,962
Minority interest in consolidated subsidiaries........... 54,936 1,452
Other liabilities........................................ 39,589 31,354
---------- ----------
Total liabilities.................................... 2,231,131 2,416,533
---------- ----------
Commitments and contingencies (note 27)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding................................. -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,291,112 and 14,578,481 shares issued and
outstanding at December 31, 1996 and 1995,
respectively.......................................... 145,521 51,981
Retained earnings...................................... 88,977 38,910
Unrealized gain on securities available for sale, net.. 5,010 3,211
---------- ----------
Total shareholders' equity........................... 239,508 94,102
---------- ----------
Total liabilities and shareholders' equity........... $2,470,639 $2,510,635
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
66
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
REVENUE:
Gain on sale of loans............................. $ 88,156 $ 39,557 $ 8,628
-------- -------- -------
Interest on loans................................. 188,242 120,244 79,173
Interest on investments........................... 10,807 6,630 3,610
Interest on other finance activities.............. 8,422 2,608 --
-------- -------- -------
Total interest income........................... 207,471 129,482 82,783
Interest expense.................................. 135,036 95,728 61,674
-------- -------- -------
Net interest income............................. 72,435 33,754 21,109
Provision for loan and lease losses............... 9,773 5,450 5,150
-------- -------- -------
Net interest income after provision for loan and
lease losses..................................... 62,662 28,304 15,959
-------- -------- -------
Loan servicing income............................. 1,680 12,718 16,332
Gain on sale of servicing rights.................. 7,591 3,578 30,837
Gain on sale of SPFC stock........................ 51,243 -- --
Gain on sale of stock by subsidiary............... 31,447 -- --
Management fees................................... 3,347 38 --
Other income...................................... 10,807 1,114 1,048
-------- -------- -------
Total other income.............................. 106,115 17,448 48,217
-------- -------- -------
Total revenue..................................... 256,933 85,309 72,804
-------- -------- -------
EXPENSES:
Personnel expense................................. 48,355 34,053 33,477
Amortization of PMSR's and OMSR's................. 1,121 3,986 3,176
Occupancy expense................................. 4,653 3,904 3,399
Data processing expense........................... 2,163 1,461 1,323
Net expenses of other real estate owned........... 7,014 1,913 969
Professional services............................. 9,559 2,769 1,528
FDIC insurance premiums........................... 327 1,137 2,170
Telephone and other communications................ 2,917 2,509 2,820
Restructuring provision--exit from former mortgage
banking operations............................... 3,800 -- --
General and administrative expense................ 19,140 9,448 12,652
-------- -------- -------
Total expenses.................................. 99,049 61,180 61,514
-------- -------- -------
Income before income taxes........................ 157,884 24,129 11,290
Income taxes...................................... 69,874 10,144 4,685
Minority interest in income (loss) of consolidated
subsidiaries..................................... 12,026 (208) --
-------- -------- -------
Income before extraordinary item.................. 75,984 14,193 6,605
Extraordinary item--repurchase of Senior Notes,
net of income taxes.............................. -- -- 919
-------- -------- -------
Net income...................................... $ 75,984 $ 14,193 $ 7,524
======== ======== =======
INCOME PER SHARE:
Primary:
Income before extraordinary item................ $ 1.96 $ 0.41 $ 0.19
Extraordinary item--repurchase of Senior Notes.. -- -- 0.03
-------- -------- -------
Net Income...................................... $ 1.96 $ 0.41 $ 0.22
======== ======== =======
Fully Diluted:
Income before extraordinary item................ $ 1.95 $ 0.40 $ 0.19
Extraordinary item--repurchase of Senior Notes.. -- -- 0.03
-------- -------- -------
Net Income...................................... $ 1.95 $ 0.40 $ 0.22
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 9,607 $ 51,060 $ 17,193 $ -- $ 68,253
Exercise of stock
options................ 14 96 -- -- 96
Net income, 1994........ -- -- 7,524 -- 7,524
------ -------- -------- ------ --------
Balance, December 31,
1994................... 9,621 51,156 24,717 -- 75,873
Exercise of stock
options................ 147 825 -- -- 825
3-for-2 stock split..... 4,810 -- -- -- --
Unrealized gain on
securities available
for sale, net.......... -- -- -- 3,211 3,211
Net income, 1995........ -- -- 14,193 -- 14,193
------ -------- -------- ------ --------
Balance, December 31,
1995................... 14,578 51,981 38,910 3,211 94,102
Exercise of stock
options................ 868 1,671 -- -- 1,671
1-for-10 stock dividend. 1,460 25,917 (25,917) -- --
2-for-1 stock split..... 18,952 -- -- -- --
Issuance of common
stock.................. 2,440 59,228 -- -- 59,228
Unrealized gain on
securities available
for sale, net.......... -- -- -- 1,799 1,799
Tax benefit from
exercise of stock
options................ -- 6,851 -- -- 6,851
Retirement of stock..... (7) (127) -- -- (127)
Net income, 1996........ -- -- 75,984 -- 75,984
------ -------- -------- ------ --------
Balance, December 31,
1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 75,984 $ 14,193 $ 7,524
Adjustments to reconcile net income to
net cash (used in)provided by operating
activities:
Provision for loan and lease losses..... 9,773 5,450 5,150
(Recovery) provision for operational
losses................................. -- (1,819) 2,000
Restructuring Provision................. 3,800 -- --
Depreciation............................ 3,483 2,657 1,846
Amortization............................ 2,996 3,725 2,921
Accretion of discount................... (8,350) (2,608) --
Gain on sale of servicing rights........ (7,591) (3,578) (30,837)
Gain on sale of loans................... (88,156) (39,557) (8,628)
Gains on sale of SPFC stock............. (64,625) -- --
Loss on sale of OREO.................... 2,843 -- --
Writedowns of capitalized excess
servicing.............................. 4,675 -- --
Writedowns of fixed assets.............. 886 -- --
Stock option compensation expense....... -- 653 436
Writedowns on other real estate owned... 3,252 2,085 369
Provision for deferred income taxes..... 22,104 2,120 2,678
Gain on repurchase of senior notes...... -- -- (1,538)
Net change in loans held for sale....... 266,373 (579,730) 982,827
Net change in accrued interest on loans. (3,683) (4,247) (1,342)
Net change in retained interest in loan
and lease securitizations.............. (21,481) (14,012) (239)
Net change in interest only and residual
certificates........................... (75,896) (10,840) --
Net change in capitalized excess
servicing.............................. 33,234 (37,500) (3,790)
Net change in other assets.............. 15,550 (4,222) (11,924)
Net change in other liabilities......... 24,236 (1,436) 14,126
--------- ---------- -----------
Net cash provided by (used in) operating
activities............................... 199,407 (668,666) 961,579
--------- ---------- -----------
Cash flows from investing activities:
Net change in interest bearing deposits. 264,407 (257,176) 79,400
Purchase of servicing rights............ -- (8,128) (14,764)
Proceeds from sale of servicing rights.. 10,011 12,815 26,899
Proceeds from sale of other real estate
owned.................................. 1,202 7,072 1,174
Purchase of trading securities.......... (25,180) -- --
Net change in securities available for
sale................................... (56,901) -- --
Net change in loans held for investment. (224,792) 61,656 (882,390)
Purchases of premises and equipment..... (5,442) (1,367) (6,140)
Sales (purchases) of Federal Home Loan
Bank stock............................. 5,598 (3,933) (817)
Cash utilized for acquisitions.......... (20,020) (175,015) --
--------- ---------- -----------
Net cash used in investing activities..... (51,117) (364,076) (796,638)
--------- ---------- -----------
Cash flows from financing activities:
Net change in deposits.................. (23,805) 158,368 (66,847)
Net change in borrowings from Imperial
Bank................................... (5,000) 5,000 (20,000)
Advances from Federal Home Loan Bank.... 434,000 347,000 988,000
Repayments of advances from Federal Home
Loan Bank.............................. (483,500) (452,000) (1,013,000)
Proceeds from issuance of convertible
subordinated debentures................ 72,162 -- --
Net change in other borrowings.......... (181,463) 875,815 (147,611)
Issuance of bonds....................... -- 111,995 --
Repayment of bonds...................... (111,995) -- --
Proceeds from offering of Senior Notes.. -- -- 88,593
Repurchase of Senior Notes.............. -- -- (6,545)
Proceeds from resale of Senior Notes.... 7,384 -- --
Proceeds from sale of SPFC stock........ 64,625 -- --
Proceeds from issuance of common stock.. 59,228 -- --
Net change in minority interest......... 53,484 -- --
Proceeds from exercise of stock options. 1,671 826 96
--------- ---------- -----------
Net cash (used in) provided by financing
activities (113,209) 1,047,004 (177,314)
Net change in cash........................ 35,081 14,262 (12,373)
Cash at beginning of year................. 39,166 24,904 37,277
--------- ---------- -----------
Cash at end of year....................... $ 74,247 $ 39,166 $ 24,904
========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 24.5% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation.
The consolidated financial statements include Imperial Credit Industries,
Inc. ("ICII"), its wholly-owned subsidiaries and majority-owned subsidiaries
(collectively the "Company"). The wholly-owned subsidiaries include Southern
Pacific Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc.
("IBC") and Imperial Credit Advisors, Inc. ("ICAI"). The majority-owned
consolidated subsidiaries include Southern Pacific Funding Corporation
("SPFC"), Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding
Corporation ("ICIFC"). SPFC is owned 51.2% by the Company and 48.8% by public
investors. FMAC is owned two-thirds by the Company and one-third by the
President of FMAC. The Company owns 100% of the voting common stock of ICIFC
which entitles it to a 1% economic interest. Imperial Credit Mortgage
Holdings, Inc. ("ICMH"), an unconsolidated affiliated company, owns all of the
ICIFC non-voting preferred stock which entitles it to a 99% economic interest.
All material intercompany balances and transactions have been eliminated.
STRATEGIC DIVESTITURES
In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses
and commenced several new businesses, including non-conforming residential
mortgage banking, commercial mortgage banking, business lending and consumer
lending. The Company's loans and leases by sector consist primarily of the
following: non-conforming residential mortgage banking; commercial mortgage
banking--franchise loans and income producing loans; business lending--
equipment leasing and asset-based lending; consumer loans--sub-prime auto
loans and Title I home improvement loans. The Company solicits loans and
leases from brokers on a wholesale and portfolio basis and directly from
borrowers. The majority of the Company's loans and leases, other than those
held by SPTL for investment, are sold in secondary markets through
securitizations and whole loan sales.
During the fourth quarter of 1995, the Company sold its mortgage conduit
operations and SPTL's warehouse lending operations to ICMH, a newly formed
Maryland corporation that subsequently engaged in an initial public offering
of its common stock. In exchange for these assets, the Company received
approximately 11.8% of the common stock of ICMH. At December 31, 1996, the
Company owned approximately 5.0% of the common stock of ICMH. This investment
is included in securities available for sale on the consolidated balance
sheet. Additionally, ICAI entered into a management agreement with ICMH
pursuant to which it advises upon the day-to-day operations of ICMH and for
which it is paid a management fee.
During the first quarter of 1996 the Company sold substantially all of its
conforming residential mortgage loan servicing rights and the majority of its
wholesale mortgage origination offices related to its conforming residential
mortgage lending business. The Company's wholesale offices in Florida,
Colorado, Washington and Oregon have been converted to SPFC offices.
Additionally, the Company has transferred all servicing rights related to its
residential non-conforming mortgage banking business to independent
subservicers. The Company intends to continue servicing all loans and leases
originated by its equipment leasing and franchise mortgage lending businesses
as well as all loans held for investment at SPTL.
STRATEGIC FOCUSES AND ACQUISITIONS
The Company, through SPFC, has refocused its residential mortgage operations
on the origination, purchase and sale of non-conforming residential mortgage
loans secured primarily by one-to-four family residences. The
70
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
majority of SPFC's loans are made to owners of single family residences who
use a portion of the loan proceeds for such purposes as debt consolidation or
financing of home improvements and educational expenditures.
In May 1995, the Company substantially expanded its existing equipment
leasing business, through the acquisition of First Concord Acceptance
Corporation ("FCAC"). IBC conducts its business equipment leasing operations
from its headquarters in Rancho Bernardo, California.
In June 1995, the Company established FMAC which acquired the Franchise
Mortgage Acceptance Company division of Greenwich Financial Capital Products,
Inc. Through FMAC, the Company originates, securitizes and services franchise
mortgage loans, primarily to nationally recognized restaurant franchisees.
FMAC's headquarters and operations center are located in Greenwich,
Connecticut.
In September 1995, the Company acquired CoastFed Business Credit Corporation
("CBCC") from Coast Federal Bank, Federal Savings Bank. CBCC, now a division
of SPTL operating under the name Coast Business Credit Corporation ("CBC"),
provides asset-based lending to middle market companies located mainly in
California. CBC's predecessor corporation began operations in 1955 under the
management of its current chief executive officer and is headquartered in Los
Angeles, California.
In October 1996, IBC acquired substantially all of the assets of Avco
Leasing Services, Inc. and all of the assets of Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). The net purchase price for AVCO's net assets was approximately
$94.8 million.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of the
balance sheets and revenues and expenses for the periods presented.
Significant balance sheet items which could be materially effected by such
estimates include: loans held for investment, which is presented net of the
allowance for loan and lease losses and the valuation of the Company's
securitization related assets. Actual results could differ significantly from
management's estimates.
Prior years' consolidated financial statements have been reclassified to
conform to the 1996 presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Securities
The Company classifies investments as held-to-maturity, trading securities,
and/or available-for-sale securities. Held-to-maturity investments are
reported at amortized cost, trading securities are reported at fair value,
with unrealized gains and losses included in operations, and available-for-
sale securities are reported at fair value with unrealized gains and losses,
net of related income taxes, included as a separate component of shareholders'
equity.
Investment securities held-to-maturity are those securities that management
has the positive intent and ability to hold to maturity.
Trading securities include mortgage-backed securities resulting from certain
mortgage banking related activities.
71
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held-to-maturity
portfolio.
Realized gains and losses on securities available-for-sale are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market.
Loans which are ineligible for sale, generally those 90 days past due, are
transferred to loans held for investment at the lower of cost or market on the
day of transfer.
Loans Held for Investment
Loans held for investment are stated at the principal amount outstanding.
Interest income is recorded on the accrual basis in accordance with the terms
of the loans, except that accruals are discontinued when the payment of
principal or interest is 90 or more days past due. Future collections of
interest are included in interest income or applied to the loan balance based
on an assessment of the likelihood that the loan will be repaid. Additionally,
unearned income on installment contracts and leases is recognized in interest
income over the life of the related loans using the interest method.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management considers such
factors as historical loan loss experience, underlying collateral values,
known problem loans, evaluations made by bank regulatory authorities,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Loans deemed by management to be uncollectible
are charged to the allowance for loan and lease losses. Recoveries on loans
previously charged off are credited to the allowance. Provisions for loan
losses are charged to expense and credited to the allowance in amounts deemed
appropriate by management based upon its evaluation of the known and inherent
risks in the loan portfolio.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The value of
impaired loans is established by discounting the expected future cash flows at
the loan's effective interest rate, or by the current observable market price
or the fair value of its collateral. Many factors are considered in the
determination of impairment. The measurement of collateral dependent impaired
loans is based on the fair value of the loan's collateral. Non-collateral
dependent loans are valued based on a present value calculation of expected
future cash flows, discounted at the loan's effective rate.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses through a
charge to the provision for loan losses. Adjustments to impairment losses due
to changes in the fair value of collateral of impaired loans are included in
the provision for loan losses. Upon disposition of an impaired loan, loss of
principal, if any, is recorded through a charge-off to the allowance for loan
losses.
In originating or acquiring loans, the Company evaluates the borrower's
credit worthiness and debt ratios, the property appraisal and the loan-to-
value ratio. The maximum amount of credit risk related to the Company's
investment in loans is represented by the outstanding principal balance of the
loans plus accrued interest.
72
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Purchased and Originated Servicing Rights
The Company adopted Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122") starting in 1995. SFAS 122 requires
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are
acquired. The adoption of SFAS 122 resulted in an increase in the Company's
revenues and net income of $6.2 million, and $3.6 million, respectively, in
1995.
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. Originated servicing rights are recorded when mortgage loans
are originated and subsequently sold or securitized with the servicing rights
retained. The total cost of the mortgage loans is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based
on their relative fair values. The cost relating to purchased and originated
servicing is capitalized and amortized in proportion to, and over the period
of, estimated future net servicing income.
The Company assesses the impairment of the purchased and originated
servicing portfolio based on the fair value of those rights on a stratum-by-
stratum basis with any impairment recognized through a valuation allowance for
each impaired stratum. For the purpose of measuring impairment, the Company
has stratified the capitalized mortgage servicing rights using the following
risk characteristics: loan program type and interest rate tranche in 100 basis
point increments.
In order to determine the fair value of the servicing rights, the Company
uses market prices under comparable servicing sales contracts, when available,
or alternatively, it uses a valuation model that calculates the present value
of future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed rate mortgages with similar coupons
and prepayment rates for comparable variable rate loans. In addition, the
Company uses market comparables for estimates of the cost of servicing per
loan, an inflation rate, ancillary income per loan and default rates. Amounts
capitalized are recorded at cost, net of accumulated amortization and
valuation allowance.
Capitalized Excess Servicing Fees Receivable
The Company has created capitalized excess servicing fees receivable as a
result of the sale of loans, and to a lesser extent leases, into various trust
vehicles. These various trust vehicles are majority owned by an independent
third party who has made a substantial capital investment and has substantial
risks and rewards of ownership of the assets of the trust; therefore, these
trust vehicles are not consolidated with the Company. Capitalized excess
servicing fees receivable on the sale of loans and leases are determined by
computing the present value of the excess of the weighted average coupon on
the loans and leases sold over the sum of: (1) the coupon in the pass through
certificates, (2) a base servicing fee paid to the loan or lease servicer, (3)
expected losses to be incurred on the portfolio of loans or leases sold and
considering (4) prepayment assumptions. Prepayment assumptions are based on
recent evaluations of the actual prepayments of the Company's servicing
portfolio or on market prepayment rates on new portfolios and consideration of
the current interest rate environment and its potential impact on prepayment
rates.
The cash flows expected to be received by the Company, not considering the
expected losses, are discounted at an interest rate that the Company believes
an unaffiliated third-party purchaser would require as a rate of return on
such a financial instrument. Expected losses are discounted using a rate
equivalent to the risk-free rate for securities with a duration similar to
that estimated for the underlying loans and leases sold. The excess servicing
cash flows are available to the Company to the extent that there is no
impairment of the credit enhancements established at the time the loans and
leases are sold. Such credit enhancements are classified as retained interest
73
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in loan and lease securitizations on the consolidated balance sheets and
represent the amount of overcollateralization of the certificates. Capitalized
excess servicing fees receivable are amortized using the interest method.
To the extent that actual future performance results are different from the
excess cash flows the Company estimated, the Company's capitalized excess
servicing fees receivable will be adjusted quarterly with corresponding
adjustments made to income in that period. The carrying value of the Company's
capitalized excess servicing fees receivable was subject to a relative fair
value allocation and is presented net of an allowance for credit losses.
Retained Interest in Loan and Lease Securitizations
Loan and lease securitizations have specific credit enhancement requirements
in the form of overcollateralization which must be met before the Company
receives cash flows due. As the securitized assets generate excess servicing
fees, they are initially used to pay down the balance of the pass-through
certificates until such time as the ratio of securitized assets to pass-
through certificates reaches the overcollateralization requirement specified
in each securitization. This overcollateralization amount is carried on the
balance sheet as retained interest in loan and lease securitizations. After
the overcollateralization requirement and the other requirements specified in
the pooling and servicing agreement have been met, the Company begins to
receive the excess servicing fees and a portion of the retained interest on a
monthly basis.
Interest-only and Residual Certificates
Assets reflected in the accompanying balance sheet as interest-only and
residual certificates in real estate mortgage investment conduits are recorded
as a result of SPFC's securitization of loans through various trust vehicles.
SPFC is subject to certain recourse provisions in connection with its
securitizations which are measured using a risk free rate. SPFC estimates
future cash flows from these interest-only and residual certificates and
values them utilizing assumptions that it believes are consistent with those
that would be utilized by an unaffiliated third party purchaser and records
them as trading securities at fair value in accordance with SFAS No. 115,
"Accounting for Certain Debt and Equity Securities." Unrealized gains and
losses are included in other income in the accompanying consolidated financial
statements. To SPFC's knowledge, there is no active market for the sale of
these interest-only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold over the lives of the loans, and (4)
fees payable to the trustee and monoline insurer. Prepayment assumptions used
in the present value computation are based on recent evaluations of the actual
prepayments of SPFC's servicing portfolio or on market prepayment rates on new
portfolios, taking into consideration the current interest rate environment
and its expected impact on prepayment rates. The cash flows expected to be
received by SPFC, not considering the expected losses, are discounted at an
interest rate that SPFC believes an unaffiliated third-party purchaser would
require as a rate of return on such a financial instrument. Expected losses
are discounted using a rate equivalent to the risk-free rate for securities
with a duration similar to that estimated for the underlying loans sold and a
discounted recourse liability is recorded. The undiscounted recourse liability
relating to interest-only and residual certificates as of December 31, 1996
and 1995 was $11.2 million and $3.9 million, respectively. The overall effect
of discounting the cash flows expected to be received by SPFC using an
interest rate that SPFC believes an unaffiliated third party purchaser would
require, and a rate equivalent to a risk-free rate for expected credit losses
is a discount rate of approximately 15%. To the extent that actual future
excess cash flows are different from estimated excess cash flows, the fair
value of SPFC's interest-only and residual certificates will be adjusted
quarterly with corresponding adjustments made to earnings in that period.
74
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In certain of its securitizations, SPFC provided an initial
overcollateralization on the securities sold and in all its securitizations
SPFC builds overcollateralization as cash flows projected as described above
are used by the trustee to reduce the outstanding balance of the securities
sold by SPFC. The amount of overcollateralization is recorded by SPFC as part
of its interest-only and residual certificates.
Sales of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when the
sales contract has been executed and the risks and rewards of ownership are
determined to have passed to the purchasing party.
Sales of Loans
The Company divides gains or losses on sales of loans into two categories:
cash gains and securitization gains. Cash gain or loss is the difference
between the Company's carrying value net of commitment fees paid for a
mortgage loan and the proceeds from the sale of a loan. If the mortgage loans
are sold with servicing released to the purchaser of the loans, the value of
the servicing will be reflected in the cash gain on the sale of such loans. If
the loans are sold with servicing retained by the Company, the Company will
recognize the value of the originated mortgage servicing rights. Present value
computations utilize estimated interest rates, prepayment, default, and loss
assumptions that management believes market participants would use for similar
instruments.
The Company recognizes gain or loss on the sale of loans when the sales
transaction settles and the risks and rewards of ownership are determined to
have passed to the purchasing party.
Loan Origination Income
Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such loan is to the total commitment. Any remaining deferred
commitment fee income is recognized at expiration of the commitment. When
exercise of such commitment is deemed remote, the fee is recognized over the
remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost.
75
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at fair value
and classified as other real estate owned ("OREO"). The excess carrying value,
if any, of the loan over the estimated fair value of the collateral less
estimated selling costs is charged to the allowance for loan losses. Any
subsequent impairments in value are recognized through a valuation allowance.
Subsequent increases in fair value are credited to income and reduce the
valuation allowance.
Subsequent increases in the fair value of an asset are only recognized to
the extent that decreases in fair value were recorded through the valuation
allowance. Gains and losses from sales of OREO, provisions for losses on OREO,
and net operating expenses of OREO are recorded in operations and included in
the caption "net expenses of other real estate owned" in the accompanying
consolidated statements of income.
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its subsidiaries except
SPFC, ICIFC, and FMAC. The Company accounts for income taxes using the asset
and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset. At
December 31, 1996, Goodwill is presented net of accumulated amortization of
$2.2 million.
Stock Based Compensation
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
applies to all transactions in which the Company acquires goods or services by
issuing equity instruments or by incurring liabilities where the payment
amounts are based on the Company's common stock price. A new method of
accounting for stock based compensation arrangements with employees is
established by SFAS 123. The new method is based on the fair value method
rather than the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
SFAS 123 does not require companies to adopt the new fair value method for
stock issuances to employees and directors. Issuance of stock to non-
employees, however, must be measured at fair value. Entities are allowed to
either continue to use the APB 25 method or adopt the fair value method set
forth in SFAS 123. Companies that do not adopt the new fair value method in
SFAS 123 for purposes of preparing their consolidated financial statements are
required to include pro-forma disclosures in the notes to the consolidated
financial statements. The pro-forma disclosures should include the impact of
the fair value method on net income and income per share as if SFAS 123 had
been adopted. During 1996, the Company adopted the proforma disclosure
requirements set forth in SFAS 123 for purposes of preparing its consolidated
financial statements.
76
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Per Share
Primary and fully diluted income per common share are computed based on the
weighted average number of shares outstanding during the year plus common
stock equivalents deemed to be dilutive. The number of shares used in the
computations are given retroactive effect for stock dividends and splits for
all periods presented.
Sale of Stock in Subsidiary
The issuance of common stock by SPFC, a subsidiary of the Company, to the
public in 1996 was recorded in the Company's consolidated statement of income
as a "Gain on sale of stock by subsidiary" of $31.4 million at the time the
stock was sold. The gain represents the difference between the benefit
received by the Company relating to the price paid for the stock in the
offering in excess of book value, offset by the Company's ownership dilution.
The Company has adopted the provisions of Staff Accounting Bulletin Topic 5H
for the accounting of SPFC stock.
The sale of a portion of the Company's shares of stock in SPFC in 1996 is
recorded as "Gain on sale of SPFC stock" of $51.2 million in the accompanying
consolidated statement of income. The gain represents the actual proceeds from
the sale of stock reduced by the Company's recorded investment in those shares
and expenses related to the sale.
After the sales of SPFC's common stock by the Company, its ownership
percentage in SPFC was approximately 51.2% of the issued and outstanding
shares of SPFC's common stock, excluding shares issuable upon exercise of
options granted or to be granted pursuant to SPFC's stock option plans and
shares issuable upon conversion of the $75.0 million of convertible
subordinated notes due 2006 issued in November 1996.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"), which establishes accounting for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, discontinues recognition of assets only when control has been
surrendered, and discontinues recognition of liabilities only when they have
been extinguished. SFAS 125 requires that the selling entity continue to carry
retained interests, including servicing assets, relating to assets it no
longer recognizes. Such retained interests are based on the relative fair
values of the retained interests of the subject assets at the date of
transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral.
SFAS 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to, and over the period of, net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can be contractually prepaid or otherwise settled in such a way that the
77
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
holder would not recover substantially all of its recorded investment. In this
case, it requires that they be classified as available for sale or as trading
securities. Interest-only strips and retained interests are to be recorded at
market value.
Under the provisions of SFAS 125, management has determined that mortgage
backed securities retained by the Company as a result of securitization
transactions will be classified as trading securities. All other retained
securities will be classified as available for sale or trading as determined
at the time of securitization.
Changes in market value are included in operations, if classified as trading
securities, or in shareholders' equity as unrealized gains or losses, net of
the related tax effect, if classified as available for sale. SFAS 125 was
effective for the Company on January 1, 1997. Management has determined that
the implementation of SFAS 125 will not have a material impact on the
Company's financial condition or results of operations.
4. ACQUISITIONS
AVCO Leasing Services
In October 1996, IBC acquired substantially all of the assets of Avco
Leasing Services, Inc. and all of the assets of Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). The acquisition was recorded using the purchase method of
accounting. Under this method of accounting the purchase price was allocated
to the respective assets acquired with a fair value of $94.8 million and no
liabilities assumed at the date of the purchase transaction. The excess of the
purchase price over the fair value of the net assets acquired has been
recorded as goodwill of approximately $12.5 million.
Coast Business Credit
On September 30, 1995, the Company completed the acquisition of CBCC for a
purchase price of $150 million. The acquisition was recorded using the
purchase method of accounting. Under this method of accounting the purchase
price was allocated to the respective assets acquired with a fair value of
$139 million and liabilities assumed with a fair value of $5 million at the
date of the purchase transaction. The excess of the purchase price over the
fair value of the net assets acquired has been recorded as goodwill of
approximately $16 million.
The unaudited consolidated information below indicates on a proforma basis
the Company's results of operations as if CBCC had been acquired by the
Company as of January 1, 1995 and 1994.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1995 1994
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Total revenue........................................... $ 93,317 $ 83,321
Net income.............................................. 17,183 11,480
Fully diluted net income per share...................... $ 0.49 $ 0.34
</TABLE>
FMAC
On June 30, 1995, the Company completed the acquisition of certain net
assets of FMAC for a net purchase price of $7.6 million which included $3.8
million in contingent consideration for loans in the pipeline at the time of
acquisition and additional fundings up to a maximum principal amount of such
loans equal to $250,000,000.
78
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition was recorded using the purchase method of accounting. Under
this method of accounting the purchase price was allocated to the respective
assets acquired with a fair value of $3.8 million at the date of the purchase
transaction. The excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill of approximately $4 million.
First Concord Acceptance Corp.
On May 31, 1995, the Company completed the acquisition of net assets of FCAC
for a purchase price of approximately $21 million. The acquisition was
recorded using the purchase method of accounting. Under this method of
accounting the purchase price was allocated to the respective assets acquired
with a fair value of $41 million and liabilities assumed with a fair value of
$20 million at the date of the purchase transaction.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest....................................... $134,251 $ 93,223 $ 51,844
Income taxes................................... 24,134 8,283 4,016
Significant non-cash activities:
Loans transferred from held for investment to
held for sale................................. -- 505,037 --
Loans transferred to OREO...................... 14,203 12,302 3,431
Loans transferred from held for sale to held
for investment................................ 197,141 83,398 787,902
Loans to facilitate the sale of OREO........... 1,871 1,315 2,357
Retained interest in loan and lease
securitizations............................... 6,908 14,002 239
Unrealized gain on securities available for
sale.......................................... 3,112 5,443 --
</TABLE>
6. INVESTMENT IN FHLB STOCK
As a member of the FHLB system, the Company's wholly owned subsidiary, SPTL,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of 1% of residential mortgage assets, or
5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock
and loans are pledged to secure FHLB advances.
7. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of asset backed securities and equity
securities of $50.0 million and $9.1 million, respectively, at December 31,
1996.
Securities available for sale consist of equity securities of $6.0 million
at December 31, 1995. There were unrealized gains of $5.4 million as of
December 31, 1995.
8. TRADING SECURITIES
Trading securities consist of mortgage backed securities of $25.2 million at
December 31, 1996. There were no unrealized gains or losses as of December 31,
1996.
There were no securities held for trading at December 31, 1995.
79
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LOANS HELD FOR SALE
Loans held for sale consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4..................................... $562,002 $1,083,038
Multi-family.......................................... 186,391 171,199
-------- ----------
748,393 1,254,237
Leases.................................................. 8,547 17,787
Commercial loans........................................ 183,156 69,786
-------- ----------
$940,096 $1,341,810
======== ==========
</TABLE>
10. LOANS HELD FOR INVESTMENT, NET
Loans held for investment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.................................... $ 375,476 $228,721
Multi-family......................................... 2,527 7,028
Commercial........................................... 11,011 133,189
---------- --------
389,014 368,938
Leases................................................. 99,717 7,297
Installment loans...................................... 34,248 1,900
Franchise loans........................................ 115,910 46,766
Asset based loans...................................... 288,528 154,252
Commercial loans....................................... 173,932 110,104
---------- --------
1,101,349 689,257
Unearned income........................................ (6,336) (5,217)
Deferred loan fees..................................... (6,415) (1,540)
---------- --------
1,088,598 682,500
Allowance for loan and lease losses.................. (19,999) (13,729)
---------- --------
$1,068,599 $668,771
========== ========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real property
in California, leases secured by equipment, asset based loans to middle market
companies mainly in California, and loans to experienced franchisees of
nationally recognized restaurant concepts. As a result, the loan portfolio has
a high concentration in the same geographic region. Although the Company has a
diversified portfolio, a substantial portion of its debtor's ability to honor
their contracts is dependent upon the economy of California.
80
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $13,729 $ 7,054 $ 3,255
Provision for loan and lease losses............... 9,773 5,450 5,150
Business acquisitions and bulk loan purchases..... 4,500 4,320 --
Loans charged off................................. (8,326) (3,106) (1,436)
Recoveries on loans previously charged off........ 323 11 85
------- ------- -------
Net charge-offs................................... (8,003) (3,095) (1,351)
------- ------- -------
Balance, end of period............................ $19,999 $13,729 $ 7,054
======= ======= =======
</TABLE>
As of December 31, 1996 and 1995 and 1994, non-accrual loans totaled $50.1
million, $31.0 million, and $13.1 million, respectively. Interest income
foregone on nonaccrual loans was $1.1 million and $492,000 for the years ended
December 31, 1996 and 1995, respectively. Interest foregone on loans for the
year ended December 31, 1994 was not material.
At December 31, 1996 and 1995, impaired loans recognized in accordance with
SFAS No. 114 and the related specific allowance for loan and lease losses were
as follows: (In thousands)
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
SPECIFIC SPECIFIC
ALLOWANCE ALLOWANCE
RECORDED FOR CARRYING RECORDED FOR CARRYING
INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE
---------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $38,297 $3,671 $34,626 $30,988 $5,616 $25,372
Restructured loans 800 4 796 870 3 867
------- ------ ------- ------- ------ -------
Total impaired loans $39,097 $3,675 $35,422 $31,858 $5,619 $26,239
======= ====== ======= ======= ====== =======
</TABLE>
Impaired loans averaged $33.3 million and $21.1 million during 1996 and
1995, respectively. During 1996, total interest income recognized on impaired
loans was $2.0 million. There were no impaired loans without a related
allowance for losses at December 31, 1996 and 1995. For 1995, total interest
income recognized on impaired loans was not material.
11. RESTRUCTURING
Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination, sale and servicing of
conforming residential mortgage loans. During 1996, the Company sold the
majority of its wholesale mortgage origination offices and disposed of fixed
assets related to its former conforming residential mortgage lending business.
The Company believes that significant changes to the exit plan are not likely,
and that the exit plan should be completed in the second quarter of 1997.
81
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for restructuring charges was as follows:
<TABLE>
<CAPTION>
ALLOWANCE CHARGES REMAINING
PROVIDED INCURRED BALANCE
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Disposition of Wholesale Mortgage Origination
Offices ..................................... $2,500 $2,354 $146
Disposal of Fixed Assets...................... 1,000 886 114
Other......................................... 300 -- 300
------ ------ ----
Total....................................... $3,800 $3,240 $560
====== ====== ====
</TABLE>
12. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
Changes in capitalized excess servicing fees receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................... $ 33,181 $ 4,319 $ 529
Present value of excess servicing fees on loans
sold........................................... 19,448 40,353 4,261
Amortization.................................... (24,812) (11,491) (471)
Writedowns...................................... (4,675) -- --
-------- -------- ------
Ending balance.................................. $ 23,142 $ 33,181 $4,319
======== ======== ======
</TABLE>
Capitalized excess servicing fees receivable include an allowance for credit
losses of $4.5 million and $6.7 million at December 31, 1996 and 1995,
respectively.
13. PURCHASED AND ORIGINATED SERVICING RIGHTS
Changes in purchased and originated servicing rights were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance................................ $ 18,428 $16,746 $ 9,966
Additions........................................ 10,970 7,340 8,781
Increase as a result of the FMAC acquisition..... -- 3,805 --
Bulk purchase of servicing....................... -- 757 5,983
Sales of servicing rights........................ (13,390) (6,234) (4,808)
Amortization--accelerated........................ -- (1,176) (313)
Amortization--scheduled.......................... (1,121) (2,810) (2,863)
-------- ------- -------
Ending balance................................... $ 14,887 $18,428 $16,746
======== ======= =======
</TABLE>
The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1996 and 1995 was $1.0 billion and $2.6 billion,
respectively.
82
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment..................................... $19,606 $17,295
Leasehold improvements..................................... 1,394 706
------- -------
21,000 18,001
Less accumulated depreciation and amortization............. (8,558) (6,632)
------- -------
$12,442 $11,369
======= =======
</TABLE>
15. DEPOSITS
Deposits of $100,000 and over totaled approximately $220.8 million, $286.8
million, and $382.3 million at December 31, 1996, 1995, and 1994,
respectively. Interest expense associated with certificates of deposit of
$100,000 and over was approximately $13.6 million, $15.4 million, and $16.8
million for the years ended December 31, 1996, 1995, and 1994, respectively.
16. BORROWINGS FROM IMPERIAL BANK
In November 1995, the Company renewed a $10 million line of credit with
Imperial Bank. At December 31, 1996 and 1995, $0 million and $5 million,
respectively, was outstanding, which accrues interest at the prime lending
rate. This line expired and was not renewed during 1996.
17. BORROWINGS FROM FEDERAL HOME LOAN BANK
SPTL is approved as a member of the Federal Home Loan Bank ("FHLB") to
borrow up to a maximum of 35% of the assets of SPTL. These borrowings must be
fully collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPTL's option. At December 31, 1996, all
of the outstanding borrowings from the Federal Home Loan Bank were scheduled
to mature within one year. The FHLB advances are secured by the investment in
stock of the FHLB and certain real estate loans with a carrying value of
$228.5 million and $275.0 million at December 31, 1996 and 1995. At December
31, 1996 and 1995 FHLB borrowings are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at year end...................................... $140,500 $190,000
Maximum outstanding at any month end..................... 338,000 435,000
Average balance during the year.......................... 188,765 292,000
Weighted average rate during the year.................... 6.10% 6.26%
Weighted average rate at year end........................ 6.30% 6.10%
</TABLE>
18. OTHER BORROWINGS
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company and its subsidiaries lending activities. At December 31,
1996, approximately $700 million of loans were pledged as collateral for other
borrowings. These lines of credit are short term and management believes these
lines will be renewed in the normal course of business. Certain covenants
exist in regards to these lines of credit with which the Company was in
compliance at December 31, 1996.
83
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ICII and its subsidiaries have various revolving warehouse lines of credit
available at December 31, 1996, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
PaineWebber (ICII)........................ 6.81% $ 200,000 $ 5,686
Banco Santander (FMAC).................... 7.63 50,000 16,229
First Boston (FMAC)....................... 7.31 200,000 48,773
Greenwich Capital Markets (FMAC).......... 7.36 unspecified 35,158
Lehman Brothers (SPFC).................... -- 200,000 --
Imperial Warehouse Lending Group (ICIFC).. 8.25 600,000 337,380
Core States (IBC)......................... 7.61 10,000 1,111
Conti (IBC)............................... 7.50 100,000 87,657
Morgan Stanley Mortgage Capital (SPFC).... 6.16 150,000 152,681
Imperial Warehouse Lending Group (ICII)... 8.00 20,000 5,077
Warehouse Lending Corporation of America
(ICII)................................... 7.94 20,000 4,600
------------ --------
7.55 $ 1,550,000 $694,352
============ ========
</TABLE>
ICII and its subsidiaries had various revolving warehouse lines of credit
available at December 31, 1995, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ---------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
DLJ (ICII).................................. 6.38% $ 400,000 $173,056
DLJ (SPFC).................................. 6.74 50,000 41,182
PaineWebber (ICII).......................... 6.40 200,000 30,402
Banco Santander (FMAC)...................... 7.94 25,000 22,668
Lehman Brothers (SPFC)...................... 5.48 200,000 54,949
Imperial Warehouse Lending Group (ICIFC).... 8.50 600,000 550,290
Warehouse Lending Corporation of America
(ICII)..................................... 8.19 20,000 3,268
---------- --------
7.72 $1,495,000 $875,815
========== ========
</TABLE>
19. BONDS
In December 1995, the Company, through a special purpose entity (SPE) issued
pass through certificates (the Bonds) secured by $101 million of franchise
mortgage loans to various investors. The debentures consist of three separate
classes, Class A, Class B and Class C, with principal balances at December 31,
1995 of approximately $92.6 million, $4.2 million and $4.2 million,
respectively. The Class C bonds are subordinate to Class B and both Class B
and C are subordinate to Class A. The Bonds have a weighted average loan rate
of 9.63%, a pass through rate of 8.59%, and stated maturity of 13 years. The
premium associated with the Bonds of $11 million is being amortized as an
adjustment to interest expense over the anticipated life of the Bonds. Due to
the Company's retained interest in the SPE and the disproportionate payments
on the pass through certificates, the Company accounted for this transaction
as a financing. In March 1996, the Company sold its interest in the SPE and
deconsolidated the SPE from the Company's consolidated balance sheet and
income statement. As a result of the sale, the Company recognized a $3.6
million gain on sale of loans.
84
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SENIOR NOTES
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes............................................... $90,000 $81,500
Unamortized discount....................................... (1,791) (1,028)
------- -------
Net balance, Senior Notes.................................. $88,209 $80,472
======= =======
</TABLE>
In January 1994, the Company issued $90.0 million of Senior Notes with a
stated interest rate of 9.75% which mature on January 15, 2004. In October
1994, the Company repurchased $8.5 million of the Senior Notes, recognizing a
pre-tax gain of $1.5 million, and recording an extraordinary gain, net of
taxes of $919,286. In March 1996, the Company sold the $8.5 million of Senior
Notes repurchased in 1994. At December 31, 1996 and 1995, $90.0 million and
$81.5 million of the Senior Notes were outstanding, respectively. The Senior
Notes may be redeemed after January 15, 1999 at the option of the Company
until maturity at a declining premium, plus accrued interest. The Senior Notes
are unsecured and rank pari passu with all other senior unsecured indebtedness
of the Company, but are effectively subordinated to the liabilities of
Southern Pacific Thrift and Loan Association, the Company's wholly-owned
subsidiary.
The Trust Indenture (the Indenture) for the Senior Notes includes provisions
which limit the ability of the Company to incur additional indebtedness or
issue certain stock of the Company, to make certain investments, engage in
certain transactions with affiliates, create restrictions on the ability of
subsidiaries to pay dividends or certain other distributions, create liens and
encumbrances, or allow its subsidiaries to issue certain classes of stock. As
of December 31, 1996, the Company was in compliance with the debt covenants
related to the Senior Notes.
Total interest expense on the Senior Notes for the years ended December 31,
1996 and 1995 was $8,602,344 and $8,380,115 respectively.
During December 1996, the Company announced that it commenced a cash tender
offer and consent solicitation for all $90 million principal amount of its
9.75% Senior Notes due 2004 at $1,040 per Senior Note. Subsequent to December
31, 1996, the Company successfully completed a 9.875% Senior Note offering due
2007, totaling $200.0 million. A portion of the proceeds from the offering
were used to repurchase $69.8 million of the outstanding 9.75% Senior Notes.
The remaining proceeds will be used to make capital contributions to
subsidiaries, strategic acquisitions, investments, and for general corporate
purposes. The effective interest rate on the tendered notes was approximately
10.8% after the amortization of original issue discount and deferred bond
issue costs. The effective interest rate on the new notes is approximately
10.4% after the amortization of deferred bond issue costs. The Company engaged
in the tender offer and new issuance in order to obtain a more favorable debt
covenant package, and to raise new capital to support its growing businesses.
85
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. CONVERTIBLE SUBORDINATE DEBENTURES
Convertible subordinate debentures at December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
SPFC convertible subordinate debentures, interest at 6.75%,
due semi-annually, principal due October 15, 2006........... $75,000
</TABLE>
The convertible subordinated debentures are convertible into 3,151,125 shares
of common stock of the Company's subsidiary, SPFC, at a conversion price of
$23.80 per share, at any time prior to maturity. Subordinated Debenture
interest is payable semi-annually. Debt issuance costs of $2.8 million
associated with the convertible subordinated debentures are being amortized
over ten years using the effective interest method.
Total interest expense on the convertible subordinated debentures for the
year ended December 31, 1996 was $887,093.
22. PREFERRED AND COMMON STOCK
The Company has authorized 8,000,000 shares of Preferred Stock. The Board has
the authority to issue the preferred stock in one or more series, and to fix
the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund terms,
any or all of which may be greater than the rights of the Common Stock.
During 1996, the Company issued an additional 2.4 million shares to the
public generating net proceeds of $59.2 million, which is net of expenses of
$891,000.
On October 22, 1996, the Company effected a 2-for-1 stock split to
shareholders of record as of October 15, 1996.
On February 26, 1996, the Company paid a stock dividend to shareholders of
record as of February 12, 1996. One new share of Common Stock was issued for
each, 10 shares currently held by shareholders.
On October 24, 1995, the Company effected a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
Per Share Information:
The weighted average number of shares including common stock equivalents was
38,699,954 in 1996, 34,458,268 in 1995, and 33,581,134 in 1994 for primary
income per share, and 38,974,834 in 1996, 35,121,662 in 1995, and 33,582,030 in
1994 for fully diluted income per share.
86
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. INCOME TAXES
The Company's income taxes for the years ended December 31, 1996, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $31,138 $ 7,803 $1,483
State.............................................. 12,210 2,452 524
------- ------- ------
Total current.................................... 43,348 10,255 2,007
------- ------- ------
Deferred:
Federal............................................ 16,009 1,846 2,079
State.............................................. 6,095 274 599
------- ------- ------
Total deferred................................... 22,104 2,120 2,678
------- ------- ------
Taxes credited (charged) to shareholders' equity..... 4,422 (2,231) --
------- ------- ------
Taxes on income before extraordinary item............ 69,874 10,144 4,685
Current taxes--extraordinary item.................... -- -- 619
------- ------- ------
Income taxes......................................... $69,874 $10,144 $5,304
======= ======= ======
</TABLE>
The Company's current income taxes payable totaled approximately $25.7
million and $5.5 million at December 31, 1996 and 1995, respectively.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax receivables:
Allowance for loan losses.............................. $ 4,365 $ 5,295
Unrealized gain on loans and securities................ 1,671 3,871
State taxes............................................ 5,677 --
Executive stock options................................ 548 738
Other.................................................. 1,309 299
-------- --------
Total................................................ 13,570 10,203
-------- --------
Valuation allowance.................................... -- --
-------- --------
Deferred tax receivable, net of valuation allowance.... 13,570 10,203
-------- --------
Deferred tax liabilities:
Investment in majority owned subsidiaries.............. (12,934) --
Purchased and originated servicing rights.............. (5,222) (5,809)
Gain on sale of servicing.............................. (8,934) (1,027)
Excess servicing gains................................. (6,162) (5,069)
Leases................................................. (3,930) (2,509)
Deferred loan fees..................................... (510) (1,902)
Depreciation........................................... (468) --
Debt Securities........................................ (3,473) --
Other.................................................. (1,522) (1,368)
-------- --------
Total................................................ (43,155) (17,684)
-------- --------
Net deferred tax liability............................... $(29,585) $ (7,481)
======== ========
</TABLE>
87
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks and future taxable
income, in making this assessment. Based upon the schedule of reversals,
future taxable income and available tax carrybacks, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets.
A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate..................... 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit............... 7.5 7.3 7.2
Other, net............................................... 1.8 (0.3) (0.7)
---- ---- ----
Effective income tax rate.................................. 44.3% 42.0% 41.5%
==== ==== ====
</TABLE>
24. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $305,000, $208,991, and $218,984 for the years ended
December 31, 1996, 1995 and 1994, respectively.
An additional Company contribution may be made at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions, on the first 4% of the employee's
deferrals. Discretionary contributions of $350,000, $200,000, and $200,000
were charged to operations in each of the years ending December 31, 1996 and
1995, and 1994.
Company matching contributions are made as of December 31st each year.
1992 STOCK OPTION PLAN
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,550,673 options were outstanding at December 31,
1996.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a
88
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
committee appointed by the Board, which determines the terms of options
granted, including the exercise price, the number of shares subject to the
option, and the option's exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the "Committee"). ISOs may be granted to the officers and key employees of
the Company or any of its subsidiaries. The exercise price for any option
granted under the 1996 Stock Option Plan may not be less than 100% (110% in
the case of ISOs granted to an employee who is deemed to own in excess of 10%
of the outstanding Common Stock) of the fair market value of the shares of
Common Stock at the time the option is granted. The purpose of the 1996 Stock
Option Plan is to provide a means of performance-based compensation in order
to attract and retain qualified personnel and to provide an incentive to those
whose job performance affects the Company. The effective date of the 1996
Stock Option Plan was June 21, 1996.
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 1,038,200 options
were outstanding at December 31, 1996.
If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market
89
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value equal to the aggregate exercise price of all shares to be purchased
including, in the case of the exercise of NQSOs, restricted stock subject to
an Award under the 1996 Stock Option Plan, (iii) by cancellation of
indebtedness owed by the Company to the optionholder, or (iv) by any
combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding, beginning of year.................. 1,637 1,758 1,233
Options granted......................................... 1,609 394 835
Options exercised....................................... (295) (323) (46)
Options canceled........................................ (362) (192) (264)
----- ----- -----
Options outstanding, end of year........................ 2,589 1,637 1,758
===== ===== =====
</TABLE>
There were 2,013,250 options available for future grants at December 31,
1996.
Information as to stock option activity and prices of shares is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE RANGE AVERAGE
SHARES PER SHARE OPTION PRICE
--------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Shares under option at:
December 31, 1996...................... 2,589 $2.09-$10.56 $8.58
December 31, 1995...................... 1,637 $2.09-$ 8.56 $2.94
December 31, 1994...................... 1,758 $2.09-$ 3.33 $2.45
Options exercised during the year:
December 31, 1996...................... 295 $2.09-$ 6.10 $2.61
December 31, 1995...................... 323 $2.09-$ 3.33 $2.55
December 31, 1994...................... 46 $2.09 $2.09
Options exercisable at:
December 31, 1996...................... 551 $2.09-$ 7.56 $2.47
December 31, 1995...................... 467 $2.09-$ 3.33 $2.24
December 31, 1994...................... 379 $2.09-$ 3.03 $2.24
</TABLE>
The stock option information presented in the above tables reflects the 2-
for-1 stock split and 1-for-10 stock dividend in 1996, 3-for-2 stock split
paid in 1995, the 1-for-10 stock dividend paid in 1993, and the 1-for-19 stock
dividend paid in 1992.
90
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plan. Had compensation
expense for the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1996 and 1995 consistent with the
provisions of SFAS 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income:
As reported.................................................. $75,984 $14,193
Pro forma.................................................... 74,733 14,089
Primary income per share:
As reported.................................................. $ 1.96 $ 0.41
Pro forma.................................................... 1.93 0.41
Fully diluted income per share:
As reported.................................................. 1.95 0.40
Pro forma.................................................... 1.90 0.40
</TABLE>
The weighted average fair value at date of grant of options granted during
1996 and 1995 was $6.22 and $3.09 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31,
------------
1996 1995
----- -----
<S> <C> <C>
Expected life (years)............................................. 3.40 3.43
Interest rate..................................................... 5.48% 5.14%
Volatility........................................................ 57.51 60.80
Dividend yield.................................................... 0.00% 0.00%
</TABLE>
25. EXECUTIVE COMPENSATION
Employment Agreements
On July 1, 1994, the Company entered into three year employment contracts
with three senior officers which provide for, in the aggregate, minimum annual
compensation in the aggregate of $800,000, subject to adjustment for
inflation, plus an annual bonus of up to 3.5% of the Company's pre tax profits
in excess of $10 million. The total compensation of the three senior officers
is limited in the aggregate to $2,350,000 annually. These amendments canceled
all previous employment agreements. Under these employment agreements, the
officers are entitled to receive bonuses approved by the Company's Board of
Directors based on performance and the attainment of defined Company goals.
Stock Options
On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997), they expire on
December 1, 2001 and are not covered by the Company's stock option plan.
91
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Compensation expense relating to these options has been recorded in the
Company's consolidated financial statements over a four year period ending
December 31, 1995 for an amount representing the difference between the
exercise price of the options and the market price of the Company's stock at
the grant date. The aggregate amount of compensation expense recognized on
these stock options since their grant date is $2,178,000.
The amount of compensation expense recorded for the years ended December 31,
1996, 1995, and 1994 related to the stock options was $0, $871,200, and
$435,600, respectively.
26. INTEREST RATE SWAPS
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities values and interest rates. The Company controls the credit risk of
its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
As a part of the SPTL securitization of $277.0 million of multi-family and
commercial mortgage loans, the Company delivered subordinate bonds of
approximately $22 million into a total rate of return swap with JP Morgan. The
provisions for the swap entitle the Company to receive the total return on the
subordinate bonds delivered in exchange for a floating payment of Libor plus a
spread of 1.95%. The termination date of the swap, September 30, 1997, could
be accelerated in the event the securities delivered into the swap decline in
value more than $3.0 million over a three month period. In the event of the
early termination of the swap, the Company would be required to pay a fee
representing 1.95% of the calculated value of the underlying securities over
the period from the accelerated termination date to September 30, 1997. The
remaining deposit associated with the swap was $3.7 million at December 31,
1996. The swap is an off balance sheet instrument.
27. COMMITMENTS AND CONTINGENCIES
Loan Servicing
As of December 31, 1996 and 1995 the Company was servicing loans for others,
directly and through sub-servicing arrangements, totaling approximately $2.1
billion and $4.6 billion, respectively.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $1.3 million and $36.1 million at December 31, 1996 and 1995,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPTL.
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of
mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties.
During the year ended December 31, 1996, the Company retained servicing
rights on $35.1 million of mortgage loans sold through traditional secondary
market channels and $1.3 billion on loans and leases sold through
securitizations. Additionally, the Company released servicing rights to the
purchasers on $627.0 million of mortgage loans sold. During the year ended
December 31, 1995, the Company retained servicing rights on $794.9 million of
mortgage loans sold, and released servicing rights to the purchasers on $1.1
billion of mortgage loans sold. During the year ended December 31, 1994, the
Company retained servicing rights on $3.7 billion of mortgage loans sold and
released servicing rights to the purchasers on $721.4 million.
92
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Commitments
As of December 31, 1996 and 1995, the Company had unfunded open loan
commitments (excluding ICIFC) amounting to $642.8 million and $93.7 million,
respectively, to fund mortgage loan applications in process subject to credit
approval. There is no exposure to credit loss in this type of commitment until
the loans are funded. Interest rate risk is mitigated by the use of forward
contracts to sell loans to investors.
ICIFC establishes mortgage loan purchase commitments (master commitments)
with sellers that, subject to certain conditions, entitle the seller to sell
and obligate ICIFC to purchase a specified dollar amount of non-conforming
mortgage loans over a period generally ranging from six months to one year.
The terms of each master commitment specify whether a seller may sell loans to
ICIFC on a mandatory, best efforts or optional basis, or a combination
thereof. Master commitments generally do not obligate ICIFC to purchase loans
at a specific price, but rather provide the seller with a future outlet for
the sale of its originated loans based on ICIFC's quoted prices at the time of
purchase.
As of December 31, 1996 and December 31, 1995, ICIFC had outstanding short
term master commitments with 68 and 18 sellers to purchase mortgage loans in
the aggregate principal amount of $826.5 million and $241.0 million over
periods ranging from six months to one year, of which $304.9 million and $35.7
million, respectively, had been purchased or committed to be purchased
pursuant to rate locks. These rate-locks were made pursuant to master
commitments, bulk rate-locks and other negotiated rate-locks. There is no
exposure to credit loss in this type of commitment until the loans are funded,
and interest rate risk associated with the short-term commitments is mitigated
by the use of forward contracts to sell loans to investors.
Forward Contracts
The Company sold mortgage-backed securities through forward delivery
contracts with major dealers in such securities, primarily through its former
mortgage banking operations. At December 31, 1996 and 1995, the Company had
$143.0 million and $279.2 million, respectively, in outstanding commitments to
sell mortgage loans through mortgage-backed securities. Included in the
outstanding commitments to sell mortgage loans through mortgage backed
securities are commitments relating to ICIFC of $141.0 million and $86.7
million for December 31, 1996 and 1995, respectively. These commitments allow
the Company to enter into mandatory commitments when the Company notifies the
investor of its intent to exercise a portion of the forward delivery
contracts.
The Company was obligated under mandatory commitments to deliver loans to
such investors at December 31, 1996 and 1995 in the amounts of $0 and $97.0
million, respectively.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market.
As of December 31, 1996, the Company had open positions of $183.7 million
related to the sales of United States Treasury securities in the forward
market. At December 31, 1996, the Company's unrealized loss on open positions
was $1.7 million.
93
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options
The Company may purchase put options or write covered call options to hedge
against adverse movements in the value of the loans held for sale portfolio.
The Company will realize a gain or loss upon the expiration or closing of
the option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option, or the cost
of the security for a purchased put or call option is adjusted by the amount
of premium received or paid.
The risk in writing a call option is that the Company gives up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in buying an option is that the Company pays a
premium whether or not the option is exercised.
The Company had $70.0 million and $20.0 million notional amount of written
call option contracts outstanding at December 31, 1996 and 1995, respectively.
The Company received $366,000 and $82,600 in premiums related to the options
outstanding at December 31, 1996 and 1995, respectively. There were no option
contracts exercised during the year.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997............................................................. $ 3,868
1998............................................................. 3,109
1999............................................................. 2,186
2000............................................................. 1,736
2001............................................................. 1,515
Thereafter....................................................... 443
-------
Total.......................................................... $12,857
=======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $4.2
million, $3.6 million, and $3.1 million, respectively.
Legal Proceedings
The predecessor entity to FMAC, and an officer of such entity and of FMAC,
among others, are named as defendants in De Wald et al. vs. Knyal et al. filed
on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. The Company
has not been named as a defendant in this lawsuit.
On September 6, 1996, a former employee filed suit against the Company in
Sanders vs. ICII, filed in the U.S. District Court for the Middle District of
Florida, alleging sexual harassment and sexual discrimination. The complaint
seeks compensatory damages, non-economic damages and punitive damages as a
result of the alleged misconduct. Discovery has only recently commenced, but
the Company believes the claims to be invalid.
The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., filed in Orange County Superior Court on March 5, 1997. The complaint
alleges breach of contract, breach of implied covenant of good
94
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
faith and fair dealing, negligent misrepresentation, fraud, conspiracy to
commit fraud, aiding and abetting fraud, contractual indemnity and
reimbursement, money had and received, and unjust enrichment arising from the
Company's sale of a group of loan production offices to plaintiffs. The
plaintiffs seek rescission, restitution and general, specific and/or
consequential damages, and also exemplary and punitive damages as relate to
the claims regarding fraud.
In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, the
plaintiff seeks damages from SPTL for alleged breach of written contract and
breach of fiduciary duty arsing out of a loan commitment agreement.
All of the above referenced actions are being actively defended.
The Company is involved in additional litigation arising in the normal
course of business. Management believes based in part upon the advice of legal
counsel, none of these proceedings will have a material effect on the
Company's financial condition or results of operations.
28. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement 107, "Disclosures about Fair Values of Financial
Instruments," (SFAS 107) requires disclosures of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Such instruments include
securities, loans receivable, time deposits and various off-balance sheet
items. Because no market exists for a portion of the Company's loans held for
investment and securitization related assets, fair value estimates are based
on judgments regarding credit risk, investor expectation of future economic
conditions, normal cost of administration and other risk characteristics,
including interest rate and prepayment risk. These estimates are subjective in
nature and involve uncertainties and matters of judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
In addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and interest bearing deposits: The carrying values reported in the
consolidated balance sheet approximate fair values due to the short-term
nature of the assets.
Investment Securities: The carrying value reported on the consolidated
balance sheet is the fair value, based on quoted market prices.
Investment in Federal Home Loan Bank stock: The carrying value reported in
the consolidated balance sheet approximates fair value.
Capitalized excess servicing fees receivable: The carrying value reported in
the consolidated balance sheet approximates fair value. The fair value was
estimated by discounting future cash flows using rates that an unaffiliated
third-party purchaser would require on instruments with similar terms and
remaining maturities.
Purchased and originated servicing rights: The carrying value reported in
the consolidated balance sheet approximates fair value.
95
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Retained interest in loan and lease securitizations: The carrying value
reported in the consolidated balance sheet approximates fair value. The fair
value was estimated by discounting future cash flows using rates that an
unaffiliated third-party purchaser would require on instruments with similar
terms and remaining maturities.
Interest-only and residual certificates: Fair value is determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates and loss experience.
Loans held for sale: Fair value of the Company's portfolio of loans held for
sale is based on forward delivery contract prices or quoted market prices.
Loans held for investment: The fair value of the loan portfolio is generally
estimated by discounting expected future cash flows at an estimated market
rate of interest. A market rate of interest is estimated based on the AAA
Corporate Bond Rate, adjusted for credit risk and the Company's cost to
administer such loans.
Expected future cash flows are estimated using maturity dates for performing
loans, with cash flows on non-performing loans estimated on an individual
basis. For non-performing and potential problem loans secured by real
property, estimated fair value has been determined on an individual basis,
considering the value of the collateral as determined by a current third party
appraisal and estimated foreclosure, holding and selling costs. For consumer
loans, market rates of interest are based on current market rates charged for
these loans.
Deposits: Fair values disclosed are estimated by discounting the expected
cash flows at current market rates over expected maturities.
Borrowings from Imperial Bank: The carrying value reported in the
consolidated balance sheet approximates fair value, due to the short-term
nature of the borrowing.
Borrowings from Federal Home Loan Bank: The carrying value reported in the
consolidated balance sheet approximates fair value, due to the relatively
short term maturities, and the variable interest rates on the borrowings.
Other borrowings: The carrying value reported in the consolidated balance
sheet approximates fair value, due to the variable interest rates on the
borrowings.
Bonds: The carrying value reported in the consolidated balance sheet
approximates fair value.
Senior Notes: Fair values of the Company's Senior Notes are based on quoted
market prices of the notes.
Convertible subordinated debentures: Fair values of SPFC's convertible
subordinated debentures are based on quoted market prices of the notes.
Off-balance sheet instruments: Fair values of the Company's mandatory
forward commitments and mortgage loan applications in process are based on
quoted market prices of the related loans. The fair value of the options
approximate the unamortized premium. Fair values of loan commitments to extend
credit are based on fees currently charged to enter into similar agreements.
Fair values of the Company's interest rate swaps are based on quoted market
prices.
96
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash............................ $ 74,247 $ 74,247 $ 39,166 $ 39,166
Interest bearing deposits....... 3,369 3,369 267,776 267,776
Investment in Federal Home Loan
Bank stock..................... 17,152 17,152 22,750 22,750
Investment securities........... 91,204 91,204 5,963 5,963
Loans held for sale............. 940,096 954,299 1,341,810 1,345,509
Loans held for investment, net.. 1,068,599 1,081,053 668,771 672,025
Purchased and originated
servicing rights............... 14,887 14,887 18,428 18,428
Capitalized excess servicing
fees receivable................ 23,142 23,142 33,181 33,181
Retained interest in loan and
lease securitizations.......... 42,640 42,640 14,251 14,251
Interest only and residual
certificates................... 87,017 87,017 10,840 10,840
LIABILITIES:
Deposits........................ $1,069,184 $1,069,624 $1,092,989 $1,095,287
Borrowings from Imperial Bank... -- -- 5,000 5,000
Borrowings from Federal Home
Loan Bank...................... 140,500 140,500 190,000 190,000
Other Borrowings................ 694,352 694,352 875,815 875,815
Bonds........................... -- -- 111,995 111,995
Senior Notes.................... 88,209 93,150 80,472 76,610
Convertible subordinated
debentures..................... 75,000 75,000 -- --
OFF BALANCE SHEET ITEMS:
Mortgage loan applications in
process........................ $ -- $ -- $ -- $ 1,708
Mandatory forward commitments... -- -- -- (930)
Options......................... 366 366 83 83
Loan commitments................ -- 866 -- 3,641
Interest rate swap.............. -- 1,166 -- --
Forward treasury contracts...... (1,700) (1,700) -- --
</TABLE>
97
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Gain on sale of loans.............. $21,711 $19,166 $28,640 $18,639
Net interest income................ 12,737 13,405 22,163 24,130
Gain (loss) on sale of servicing... 8,065 (257) -- (217)
Other revenues..................... 3,212 65,843 2,987 26,482
Provision for loan losses.......... 1,500 2,025 2,617 3,631
Other expenses..................... 27,168 20,652 24,924 26,305
Net income......................... 8,616 43,041 9,433 14,894
Income per share:
Primary.......................... $ 0.24 $ 1.11 $ 0.23 $ 0.38
Fully diluted.................... $ 0.24 $ 1.11 $ 0.23 $ 0.37
Year ended December 31, 1995
Gain on sale of loans.............. $ 6,229 $ 8,794 $14,929 $ 9,605
Net interest income................ 4,834 6,000 7,947 14,973
Gain on sale of servicing.......... 2,426 496 -- 656
Other revenues..................... 3,081 2,350 2,283 6,156
Provision for loan losses.......... 900 1,700 1,350 1,500
Other expenses..................... 12,283 12,808 16,384 19,705
Net income......................... 1,958 1,832 4,311 6,092
Income per share:
Primary.......................... $ 0.06 $ 0.06 $ 0.12 $ 0.17
Fully diluted.................... $ 0.06 $ 0.05 $ 0.12 $ 0.17
</TABLE>
30. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES
The following represents summarized financial information with respect to the
operations of SPTL, a significant wholly-owned subsidiary of ICII.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets................................... $1,384,008 $1,432,554 $1,367,130
Deposits....................................... 1,072,266 1,093,250 946,860
Borrowings from Federal Home Loan Bank......... 140,500 190,000 295,000
Equity......................................... 144,798 126,599 108,845
Interest income................................ 131,184 103,112 81,751
Interest expense............................... 73,141 70,819 52,961
Operating income............................... 15,149 17,790 10,215
Operating expense.............................. 21,846 13,942 15,597
Provision for loan losses...................... 8,938 5,450 5,150
Income before taxes............................ 42,408 30,691 18,259
Net income..................................... 24,399 17,753 10,534
</TABLE>
98
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents summarized consolidating financial information as
of and for the year ended December 31, 1996 and 1995 with respect to the
operations of ICII 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 two of the Company's wholly-owned
subsidiaries IBC and ICAI (the "Other Guarantor Subsidiaries"), and the
Company's 66 2/3% owned subsidiary, FMAC.
CONSOLIDATING BALANCE SHEET
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 2,594 163 -- 612 3,369
Investments 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
Accrued interest on
loans.................. 1,425 560 -- 11,862 -- 13,847
Premises and equipment,
net.................... 4,922 1,162 404 5,954 -- 12,442
Other real estate owned,
net.................... 3,508 -- -- 8,706 -- 12,214
Investment in
subsidiaries........... 269,651 -- -- -- (269,651) --
Goodwill................ -- 4,332 14,115 20,044 -- 38,491
Other assets............ 96,746 (11,372) (15,385) (36,855) (1,842) 31,292
-------- -------- -------- ---------- --------- ----------
Total assets........... $429,611 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639
======== ======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- -- 140,500 -- 140,500
Other borrowings........ 15,363 125,240 88,768 480,103 (15,122) 694,352
Senior notes............ 88,209 -- -- -- -- 88,209
Convertible subordinated
debentures............. -- -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- -- 9,787 54,936
Other liabilities....... 41,382 2,751 9,222 68,854 (13,259) 108,950
-------- -------- -------- ---------- --------- ----------
Total liabilities....... 190,103 127,991 97,990 1,836,723 (21,676) 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 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639
======== ======== ======== ========== ========= ==========
</TABLE>
99
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 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... $ (937) $18,671 $ 2,617 $ 67,419 $ 386 $ 88,156
------- ------- ------- -------- -------- --------
Interest income......... 14,877 16,130 3,811 177,833 (5,180) 207,471
Interest expense........ 16,696 14,489 1,901 112,692 (10,742) 135,036
------- ------- ------- -------- -------- --------
Net interest income..... (1,819) 1,641 1,910 65,141 5,562 72,435
Provision for loan
losses................. -- -- -- 9,625 148 9,773
------- ------- ------- -------- -------- --------
Net interest income
after provision for
loan loss............ (1,819) 1,641 1,910 55,516 5,414 62,662
------- ------- ------- -------- -------- --------
Loan servicing income... (3,706) 1,191 3,095 10,253 (9,153) 1,680
Gain (loss) on sale of
servicing rights....... 6,249 -- -- -- 1,342 7,591
Gain on sale of SPFC
stock.................. 82,690 -- -- -- -- 82,690
Dividends received from
subsidiaries........... 6,200 -- -- -- (6,200) --
Other income............ 741 63 3,214 6,099 4,037 14,154
------- ------- ------- -------- -------- --------
Total other income.... 92,174 1,254 6,309 16,352 (9,974) 106,115
------- ------- ------- -------- -------- --------
Total revenues........ 89,418 21,566 10,836 139,287 (4,174) 256,933
------- ------- ------- -------- -------- --------
EXPENSES:
Personnel expense....... 8,757 8,270 2,997 28,567 (236) 48,355
Amortization of PMSR's
and OMSR's............. 402 -- 106 613 -- 1,121
Occupancy expense....... 1,994 310 229 2,042 78 4,653
Data processing expense. 1,094 49 62 958 -- 2,163
Net expenses of other
real estate owned...... 4,969 -- -- 765 1,280 7,014
General, administrative
and other expense...... 13,652 3,613 3,583 14,264 631 35,743
------- ------- ------- -------- -------- --------
Total expenses........ 30,868 12,242 6,977 47,209 1,753 99,049
------- ------- ------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... 58,550 9,324 3,859 92,078 (5,927) 157,884
Income taxes............ 28,830 -- 1,606 39,135 303 69,874
------- ------- ------- -------- -------- --------
Income before minority
interest, deferred
inter-company expense
and extraordinary item. 29,720 9,324 2,253 52,943 (6,230) 88,010
Minority interest in of
consolidated
subsidiaries........... 12,026 -- -- -- -- 12,026
------- ------- ------- -------- -------- --------
Income before deferred
inter-company expense.. 17,694 9,324 2,253 52,943 (6,230) 75,984
Deferred inter-company
expense, net of income
taxes.................. (1,383) -- -- -- 1,383 --
Income before equity in
undistributed income of
subsidiaries........... 19,077 9,324 2,253 52,943 (7,613) 75,984
Equity in undistributed
income of subsidiaries. 56,907 -- -- -- (56,907) --
------- ------- ------- -------- -------- --------
Net income.............. $75,984 $ 9,324 $ 2,253 $ 52,943 $(64,520) $ 75,984
======= ======= ======= ======== ======== ========
</TABLE>
100
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 8,593 $ 526 $(1,937) $ 32,981 $ (997) $ 39,166
Interest bearing
deposits............... -- -- -- 267,776 -- 267,776
Investments in Federal
Home Loan Bank stock... -- -- -- 22,750 -- 22,750
Securities available for
sale, at market........ 5,963 -- -- -- -- 5,963
Loans held for sale..... 180,232 181,254 -- 1,129,576 (149,252) 1,341,810
Loans held for
investment, net........ 29,195 -- -- 541,390 98,186 668,771
Purchased and originated
servicing rights....... 13,718 -- 743 3,967 -- 18,428
Capitalized excess
servicing fees
receivable............. 7,259 -- -- 26,129 (207) 33,181
Retained interest in
loan and lease
securitizations........ 1,420 -- 220 10,377 2,234 14,251
Interest-only and
residual certificates.. -- -- -- 22,469 (11,629) 10,840
Accrued interest on
loans.................. 449 1,108 19 10,067 (1,479) 10,164
Premises and equipment,
net.................... 8,574 235 16 2,544 -- 11,369
Other real estate owned,
net.................... 2,419 -- -- 4,760 -- 7,179
Investment in
subsidiaries........... 135,316 -- -- -- (135,316) --
Goodwill................ -- 4,226 -- 16,024 96 20,346
Other assets............ 19,991 1,699 4,756 11,591 604 38,641
-------- -------- ------- ---------- --------- ----------
Total assets........... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635
======== ======== ======= ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits................ $ -- $ -- $ (450) $1,093,250 $ 189 $1,092,989
Borrowings from Imperial
Bank................... 5,000 -- -- -- -- 5,000
Borrowings from Federal
Home Loan Bank......... -- -- -- 190,000 -- 190,000
Other borrowings........ 206,726 69,637 -- 655,504 (56,052) 875,815
Bonds................... -- 111,995 -- -- -- 111,995
Senior notes............ 80,472 -- -- -- -- 80,472
Minority interest in
consolidated
subsidiaries........... 1,452 -- -- -- -- 1,452
Other liabilities....... 25,377 3,643 1,996 23,285 4,509 58,810
-------- -------- ------- ---------- --------- ----------
Total liabilities.... 319,027 185,275 1,546 1,962,039 (51,354) 2,416,533
-------- -------- ------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 1,015 (1,015) --
Common stock............ 51,981 4,432 1,000 81,251 (86,683) 51,981
Retained earnings
(accumulated deficit).. 38,910 (659) 1,271 58,096 (58,708) 38,910
Unrealized gain on
securities available
for sale............... 3,211 -- -- -- -- 3,211
-------- -------- ------- ---------- --------- ----------
Total shareholders'
equity................. 94,102 3,773 2,271 140,362 (146,406) 94,102
-------- -------- ------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635
======== ======== ======= ========== ========= ==========
</TABLE>
101
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<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... $ 12,999 $ -- $1,803 $ 36,051 $(11,296) $ 39,557
-------- ------ ------ -------- -------- --------
Interest income......... 15,677 1,929 76 108,666 3,134 129,482
Interest expense........ 20,900 1,690 17 76,018 (2,897) 95,728
-------- ------ ------ -------- -------- --------
Net interest income..... (5,223) 239 59 32,648 6,031 33,754
Provision for loan
losses................. -- -- -- 5,450 -- 5,450
-------- ------ ------ -------- -------- --------
Net interest income
after provision for
loan loss............ (5,223) 239 59 27,198 6,031 28,304
-------- ------ ------ -------- -------- --------
Loan servicing income... 14,007 318 27 6,352 (7,986) 12,718
Gain on sale of
servicing rights....... 4,889 31 -- 370 (1,712) 3,578
Other income............ (885) -- 2,465 2,676 (3,104) 1,152
-------- ------ ------ -------- -------- --------
Total other income.... 18,011 349 2,492 9,398 (12,802) 17,448
-------- ------ ------ -------- -------- --------
Total revenues........ 25,787 588 4,354 72,647 (18,067) 85,309
-------- ------ ------ -------- -------- --------
EXPENSES:
Personnel expense....... 20,281 356 1,606 12,433 (623) 34,053
Amortization of PMSR's
and OMSR's............. 3,986 -- -- 2,892 (2,892) 3,986
Occupancy expense....... 2,874 94 54 971 (89) 3,904
Data processing expense. 1,191 -- 1 358 (89) 1,461
Net expense of other
real estate owned...... 191 -- -- 1,706 16 1,913
General, administrative
and other expense...... 9,938 797 493 8,480 (3,845) 15,863
-------- ------ ------ -------- -------- --------
Total expenses........ 38,461 1,247 2,154 26,840 (7,522) 61,180
-------- ------ ------ -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... (12,674) (659) 2,200 45,807 (10,545) 24,129
Income taxes............ (5,443) -- 929 19,212 (4,554) 10,144
-------- ------ ------ -------- -------- --------
(Loss) income before
minority interest,
deferred inter-company
gains and extraordinary
item................... (7,231) (659) 1,271 26,595 (5,991) 13,985
Minority interest in
loss of consolidated
subsidiaries........... (208) -- -- -- -- (208)
-------- ------ ------ -------- -------- --------
(Loss) income before
deferred inter-company
gains.................. (7,023) (659) 1,271 26,595 (5,991) 14,193
Deferred inter-company
gains, net of income
taxes.................. 1,710 -- -- -- (1,710) --
(Loss) income before
equity in undistributed
income of subsidiaries. (8,733) (659) 1,271 26,595 (4,281) 14,193
Equity in undistributed
income of subsidiaries. 22,926 -- -- -- (22,926) --
-------- ------ ------ -------- -------- --------
Net income (loss)....... $ 14,193 $ (659) $1,271 $ 26,595 $(27,207) $ 14,193
======== ====== ====== ======== ======== ========
</TABLE>
102
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
31. SPTL REGULATORY MATTERS
In August 1989, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to
reform the regulation and supervision of financial institutions. Additionally
legislation was adopted in 1991 with the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for
Federal Deposit Insurance Commission ("FDIC") deposit insurance and for
expanded regulation of financial institutions. Specifically, FDICIA requires
the federal regulations to take prompt corrective action with respect to
depository institutions which do not meet the minimum capital requirements.
FDICIA established five capital ratio categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
A depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives
an unsatisfactory examination rating and may be reclassified to a lower
category by action based on other supervisory criteria. For an institution to
be well capitalized it must have a total risk-based capital ratio of at least
10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of
at least 5% and not be subject to any specific capital order or directive. At
December 31, 1996, SPTL was categorized as well capitalized.
Restrictions on Availability of Funds from SPTL
Under the California industrial loan law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift and loan's retained earnings, (ii)
any payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), or (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities). Subject to the above limitations, and according to SPTL's by-
laws, at December 31, 1996, all of SPTL's capital and surplus in excess of
$80.5 million is available for the payment of dividends.
Additionally, SPTL generally may not make any loan to, or hold an obligation
of, any of its directors or officers or any director or officer of its holding
company or affiliates, except in specified cases and subject to regulation by
the California Commissioner of Corporations. In addition, SPTL may not make
any loan to, or hold an obligation of, any of its shareholders or any
shareholder of its holding company or affiliates, except that this prohibition
does not apply to persons who own less than 10% of the stock of a holding
company or an affiliate that is listed on a national securities exchange.
Recent Development
The California Department of Corporations and the Federal Deposit Insurance
Commission ("FDIC") recently completed a joint examination of SPTL. As a
result of such examination, SPTL entered into a joint memorandum of
understanding with the FDIC and the California Department of Corporations. The
memorandum of understanding requires certain measures to be taken in the areas
of: (i) hiring and retention of management, (ii) adoption of systems to
monitor and control risk, (iii) correction of certain violations of law, (iv)
credit review and (v) enhancement of other operational policies. SPTL does not
believe that the memorandum of understanding will have a material adverse
effect on the Company.
103
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the event that SPTL fails to comply with the memorandum of understanding,
SPTL and its affiliates, officers and directors could be subject to various
enforcement actions, including cease and desist orders, criminal and civil
penalties, removal from office, termination of deposit insurance or the
revocation of SPTL's charter. Any such enforcement action could have a
material adverse effect on the Company. Management believes SPTL has complied
fully with the terms of the memorandum of understanding at December 31, 1996.
SPTL is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary-- actions by
regulators that, if undertaken, could have a direct material effect on SPTL's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, SPTL must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. SPTL's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require SPTL to maintain minimum amounts and ratios, set forth in the table
below, of total and Tier I capital to risk-weighted assets and Tier I capital
to average assets. Management believes, as of December 31, 1996, that SPTL
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized SPTL as well capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well capitalized SPTL must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The following table presents SPTL's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1996.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $144,798 13.50% $ 53,613 5.00% $ -- --
Risk-based Capital............... 145,018 10.87% 106,715 8.00% 133,393 10.00%
Risk-based Tier 1 Capital........ 129,497 9.71% 53,357 4.00% 80,036 6.00%
FDIC Leverage Ratio.............. 129,497 9.35% 55,397 4.00% 69,247 5.00%
</TABLE>
104
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
32. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Cash......................................................... $ 5,213 $ 8,593
Securities available for sale................................ 8,802 5,963
Loans held for sale.......................................... 4,839 180,232
Loans held for investment, net............................... 34,505 29,195
Premises and equipment, net.................................. 4,922 8,574
Other real estate owned, net................................. 3,508 2,419
Capitalized excess servicing fees receivable................. -- 7,259
Retained interest in loan and lease securitizations.......... -- 1,420
Investment in subsidiaries................................... 269,651 135,316
Purchased and originated servicing rights.................... -- 13,718
Accrued interest on loans.................................... 1,425 449
Other assets................................................. 96,746 19,991
-------- --------
Total assets............................................. $429,611 $413,129
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from Imperial Bank................................ $ -- $ 5,000
Other borrowings............................................. 15,363 206,726
Senior Notes................................................. 88,209 80,472
Minority interest in consolidated subsidiaries............... 45,149 1,452
Accrued interest payable..................................... 4,022 3,642
Income taxes payable......................................... 28,301 7,755
Other liabilities............................................ 9,059 13,980
-------- --------
Total liabilities............................................ 190,103 319,027
-------- --------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued
or outstanding............................................ -- --
Common stock, no par value, authorized 40,000,000 shares;
38,291,112 and 14,578,481 shares issued and outstanding at
December 31, 1996 and 1995, respectively.................. 145,521 51,981
Retained earnings.......................................... 88,977 38,910
Unrealized gain on securities available for sale, net...... 5,010 3,211
-------- --------
Total shareholders' equity............................... 239,508 94,102
-------- --------
Total liabilities and shareholders' equity............... $429,611 $413,129
======== ========
</TABLE>
105
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
(Loss) gain on sale of loans...................... $ (937) $12,999 $ (397)
------- ------- -------
Interest income................................... 14,877 15,677 1,626
Interest expense.................................. 16,696 20,900 9,319
------- ------- -------
Net interest expense............................ (1,819) (5,223) (7,693)
------- ------- -------
Loan servicing (expense) income................... (3,706) 14,007 13,155
Gain on sale of servicing rights.................. 6,249 4,889 30,028
Gains on sale of SPFC stock....................... 82,690 -- --
Dividends received from subsidiaries.............. 6,200 -- --
Other income (loss)............................... 741 (885) 708
------- ------- -------
Total other income.............................. 92,174 18,011 43,891
------- ------- -------
Total revenue..................................... 89,418 25,787 35,801
------- ------- -------
Expenses:
Personnel expense................................. 8,757 20,281 26,519
Occupancy expense................................. 1,994 2,874 2,884
Other expense..................................... 20,117 15,306 13,367
------- ------- -------
Total expenses.................................. 30,868 38,461 42,770
------- ------- -------
Income (loss) before income taxes, minority
interest, deferred inter-company gains and
extraordinary item............................... 58,550 (12,674) (6,969)
Income taxes...................................... 28,830 (5,443) (3,039)
------- ------- -------
Income (loss) before minority interest, deferred
inter-company gains and extraordinary item....... 29,720 (7,231) (3,930)
Minority interest in income (loss) of consolidated
subsidiaries..................................... 12,026 (208) --
Deferred inter-company (expense) income, net of
income taxes..................................... (1,383) 1,710 --
------- ------- -------
Income (loss) before extraordinary item........... 19,077 (8,733) (3,930)
Extraordinary item--repurchase of Senior Notes.... -- -- 919
------- ------- -------
Income (loss) before equity in undistributed
income of subsidiaries........................... 19,077 (8,733) (3,011)
Equity in undistributed income of subsidiaries.... 56,907 22,926 10,535
------- ------- -------
Net income...................................... $75,984 $14,193 $ 7,524
======= ======= =======
</TABLE>
106
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 50,521 $(273,961) $ 114,537
--------- --------- ---------
Cash flows from investing activities:
Proceeds from bulk sale of servicing
rights.................................... 31,799 12,815 26,899
Purchase of servicing rights............... -- (8,128) (14,478)
Proceeds from sale of other real estate
owned..................................... 2,953 -- --
Net change in loans held for investment.... (5,310) 51,784 (131)
Investment in subsidiaries................. -- -- (25,000)
Purchase of premises and equipment......... 809 (182) (4,949)
--------- --------- ---------
Net cash provided by (used in) investing
activities 30,251 56,289 (17,659)
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial
Bank...................................... (5,000) 5,000 (20,000)
Proceeds from issuance of Senior Notes..... -- -- 88,593
Cash used to repurchase Senior Notes....... -- -- (6,545)
Proceeds from resale of Senior Notes....... 7,615 -- --
Proceeds from issuance of common stock..... 59,228 -- --
Proceeds from exercise of stock options.... 1,671 826 96
Net change in other borrowings............. (191,363) 206,725 (147,611)
Net change in minority interest............ 43,697 1,452 --
--------- --------- ---------
Net cash (used in) provided by financing
activities (84,152) 214,003 (85,467)
--------- --------- ---------
Net change in cash........................... (3,380) (3,669) 11,410
Cash at beginning of year.................... 8,593 12,262 852
--------- --------- ---------
Cash at end of year.......................... $ 5,213 $ 8,593 $ 12,262
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the condensed statements of cash flows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................................. $ 16,315 $20,898 $5,679
Significant non-cash activities:
Loans transferred to OREO............................ $ 8,479 $ 2,419 --
Loans transferred from held for sale to held for
investment.......................................... 197,141 83,398 --
Servicing rights transferred from subsidiary......... -- 3,774 --
Unrealized gain on securities available for sale,
net................................................. 3,112 5,443 --
Contribution of fixed assets to ICIFC................ -- 525 --
</TABLE>
Sale of Residual Interests
Effective December 31, 1996, ICII sold $46.9 million of residual interests to
ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price.
This loan bears interest at a rate of 12% per annum, and is secured by the
residual interests.
107
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
33. SUBSEQUENT EVENTS
In the first quarter of 1997, the Company sold 370,000 shares of its common
stock investment in SPFC. This sale resulted in a reduction of the company's
ownership in SPFC to 49.4%. As such, beginning with the first quarter of 1997,
the Company will no longer consolidate SPFC in its consolidated financial
statements. The Company will report its investment in SPFC under the equity
method.
In the first quarter of 1997, the Company disposed of its investment in the
common stock of ICIFC. As a result of the disposition, beginning with the
first quarter of 1997, the Company will no longer consolidate ICIFC in its
consolidated financial statements.
108
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
H. Wayne Snavely(1)(2).. 55 Chairman of the Board, President and Chief Executive Officer
Kevin E. Villani........ 48 Executive Vice President and Chief Financial Officer
Irwin L. Gubman......... 54 General Counsel and Secretary
Paul B. Lasiter......... 30 Senior Vice President and Controller
Stephen J. Shugerman(1). 49 President of SPTL and a Director
Joseph R. Tomkinson(1).. 49 Director
Robert S. Muehlenbeck... 48 Director
G. Louis Graziadio, 46 Director
III(2).................
Perry A. Lerner(2)(3)... 52 Director
James Clayburn LaForce, 67 Director
Jr.(2)(3)..............
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
H. WAYNE SNAVELY has been Chairman of the Board, President and Chief
Executive Officer of the Company since December 1991 and President since
February 1996. From 1986 to February 1992, Mr. Snavely served as Executive
Vice President of Imperial Bancorp and Imperial Bank with direct management
responsibility for the following bank subsidiaries and divisions: Imperial
Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason & Company, Imperial
Ventures, Inc. and The Lewis Horwitz Organization. From 1983 through 1986, Mr.
Snavely was employed as Chief Financial Officer of Imperial Bancorp and
Imperial Bank. Mr. Snavely served as a director of Imperial Bank from 1975 to
1983 and currently serves as a director. Mr. Snavely is Chairman of the Board
of SPFC and ICMH.
KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of the Company since September 1995. From 1993 to 1996, Mr. Villani
was Associate Professor of Clinical Finance and Real Estate for the University
of Southern California. From 1985 to 1990, he was the Executive Vice President
and Chief Financial Officer for Imperial Corporation of America. From 1982 to
1985, he served in various senior executive capacities at the Federal Home
Loan Mortgage Corporation. From 1975 to 1982, he served as the Financial
Economist, The Director for the Division of Housing Finance Analysis and The
Deputy Assistant Secretary for the Office of Economic Affairs and Chief
Economist for the Department of Housing and Urban Development. From 1974 to
1975, he was an economist for the Federal Reserve Bank of Cleveland. Mr.
Villani has also served as a consultant to the World Bank and USAID on
banking, housing, finance, and privatization.
IRWIN L. GUBMAN HAS been the General Counsel and Secretary of ICII since
October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner
at Coudert Brothers serving in various capacities including syndicated
lending, structured finance, and regulatory matters. From December 1970 to
September 1991, Mr. Gubman served in various capacities at Bank of America,
most recently as Senior Vice President and Associate General Counsel. From
March 1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S.
Arms Control and Disarmament Agency. From September 1967 to March 1968, Mr.
Gubman was a Legal Advisor to the Government of Liberia.
109
<PAGE>
PAUL B. LASITER has been Senior Vice President and Controller of the Company
since November 1992. From June 1988 to November 1992, Mr. Lasiter was a
Supervising Senior Accountant for KPMG Peat Marwick, specializing in the
financial institutions industry. Mr. Lasiter is a Certified Public Accountant.
STEPHEN J. SHUGERMAN has been President of SPTL since June 1987 and has been
a Director of the Company since December 1991. From June 1985 to May 1987, Mr.
Shugerman was President of ATI Thrift & Loan Association, a privately owned
thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman has recently served as President of the
California Association of Thrift & Loan Companies. Mr. Shugerman is a director
of SPFC.
JOSEPH R. TOMKINSON has been a Director of the Company since December 1991.
Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive
Officer of ICMH since August 1995. Mr. Tomkinson served as President of the
Company from January 1992 to February 1996 and from 1986 to January 1992, he
was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of
the companies combined to become ICII in 1992. From 1984 to 1986, he was
employed as Executive Vice President of Loan Production for American Mortgage
Network, a privately owned mortgage bank.
ROBERT S. MUEHLENBECK has been a Director of the Company since December
1991. Mr. Muehlenbeck is also an Executive Vice President of Imperial Bank.
Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has
been involved in commercial and residential real estate development and
finance activities.
G. LOUIS GRAZIADIO, III has been a Director of the Company since February
1992. Mr. Graziadio has been Chairman of the Board and Chief Executive Officer
of Ginarra Holdings, Inc. (as well as predecessor and affiliated companies)
since 1979. Ginarra Holdings, Inc. is a privately held California corporation
engaged in a wide range of investment activities. Mr. Graziadio has been
actively involved, since 1972, in real estate development, construction and
home building. Mr. Graziadio is a Director of Imperial Bancorp and Imperial
Trust Company, an indirect subsidiary of Imperial Bancorp.
PERRY A. LERNER has been a Director of the Company since May 1992. Mr.
Lerner has been with the law firm of O'Melveny & Myers since 1982, having been
a partner with the firm since 1984. Mr. Lerner was an Attorney-Advisor of the
International Tax Counsel of the United States Treasury Department from 1973
to 1976.
JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May
1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson
School, University of California at Los Angeles. In addition, Mr. LaForce was
appointed in January 1991 to the position of Acting Dean of the Hong Kong
University of Science and Technology, Hong Kong.
Directors of the Company hold office until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed by and serve
at the discretion of the Board of Directors, subject to employment agreements,
where applicable. There are no family relationships between any directors or
officers of the Company. George L. Graziadio, Jr., the President, Chief
Executive Officer and the Chairman of the Board of Directors of Imperial
Bancorp ("Bancorp"), is the father of G. Louis Graziadio, III. The Graziadio
family and related entities are significant shareholders of Bancorp.
110
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information concerning the cash and non-cash
compensation earned and received by the Company's Chief Executive Officer and
its most highly compensated executive officers (the "Named Executive
Officers") whose salary and bonus during the fiscal year ended December 31,
1996 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS
POSITION YEAR SALARY BONUS COMPENSATION GRANTED
- ------------------ ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely.......... 1996 $300,000 $700,000 $ 28,564(1) 400,000(2)
President and 1995 300,000 252,603 32,960(1) --
Chief Executive Officer 1994 256,398 125,621 23,782(1) --
Kevin E. Villani.......... 1996 200,000 200,000 12,986(3) 84,000(2)
Executive Vice President 1995 59,103 25,000 2,295(3) 66,000(2)
and
Chief Financial Officer 1994 -- -- -- --
Paul B. Lasiter........... 1996 87,500 50,000 6,886(4) 20,000(2)
Senior Vice President and 1995 67,500 30,000 5,459(4) --
Controller 1994 60,000 5,000 4,998(4) 16,500(2)
Stephen J. Shugerman...... 1996 200,000 400,000 20,963(5) 100,000(2)
President of SPTL 1995 200,000 166,027 16,372(5) --
1994 166,500 81,531 16,702(5) --
Joseph R. Tomkinson(6).... 1996 -- 28,650 -- 50,000(2)
Former President(7) 1995 300,000 166,027 16,644(8) --
1994 256,398 101,480 20,182(8) --
William S. Ashmore(6)..... 1996 -- -- -- --
Former Executive Vice 1995 328,640 -- 122,033(9) --
President,
Secondary Marketing(10) 1994 328,640 -- 79,466(9) --
</TABLE>
- --------
(1) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the
Company of $18,000, 18,000 and $18,000, respectively, and (ii) aggregate
contributions paid by the Company of $10,564, $14,960 and $5,782
respectively, under employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
(3) In 1996 and 1995, consists of (i) a car allowance paid by the Company of
$6,000 and $1,773, respectively, and (ii) aggregate contributions paid by
the Company of $6,986 and $522, respectively, under employee benefit
plans.
(4) In 1996, 1995 and 1994, consists of $6,886, $5,459 and $4,998,
respectively, under employee benefit plans.
(5) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the
Company of $10,800, $10,800, and $10,800, respectively, and (ii)
aggregate contributions paid by the Company of $10,163, $5,572, $5,902,
respectively.
(6) All salaries and bonus paid were incurred by ICMH or its affiliates in
1996 other than amounts presented above.
(7) Mr. Tomkinson resigned as President of the Company in February 1996, but
remains a director.
(8) In 1995 and 1994, consists of (i) a car allowance paid by the Company of
$14,400 and $14,400, respectively, and (ii) aggregate contributions paid
by the Company of $2,244 and $5,782, respectively, under employee benefit
plan.
(9) In 1995 and 1994, consists of (i) commissions of $101,790 and $70,255,
respectively, based upon mortgage loan originations and sales, (ii) a car
allowance paid by the Company of $6,000 and $6,000, respectively, and
(iii) aggregate contributions paid by the Company of $14,243 and $3,211,
respectively under employee benefit plans.
(10) Mr. Ashmore resigned as Executive Vice President of Secondary Marketing
in February 1996.
111
<PAGE>
OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
EXERCISE PRICE APPRECIATION
1996 PERCENTAGE PRICE FOR OPTION TERM
OPTIONS OF TOTAL PER EXPIRATION ---------------------
NAME GRANTED GRANTS OPTION DATE 5% 10%
- ---- ------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Snavely........ 400,000 24.86% $13.6875 7/24/01 $1,512,642 $3,342,542
Kevin E. Villani........ 84,000 5.22% 10.5625 4/1/01 245,131 541,675
Paul B. Lasiter......... 20,000 1.24% 10.5625 4/1/01 58,364 128,970
Stephen J. Shugerman.... 100,000 6.21% 13.6875 7/24/01 378,160 835,636
Joseph R. Tomkinson..... 50,000 3.11% 13.6875 7/24/01 189,080 417,818
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF UNEXERCISED
UNEXERCISED SENIOR
OPTIONS AT FY- MANAGEMENT VALUE OF ALL
SHARES END UNDER THE OPTIONS AT UNEXERCISED IN-THE-
ACQUIRED OPTION PLAN FY-END MONEY OPTIONS AT FY-
ON VALUE EXERCISABLE/ EXERCISABLE/ END EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2) UNEXERCISABLE(3)
- ---- -------- ---------- ---------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........ 61,137 $1,408,885 415,285 917,052 $18,210,475/$3,838,983
Kevin E. Villani........ 13,200 183,500 --/136,800 --/-- --/ 1,557,299
Stephen J. Shugerman.... 300,000 4,305,651 61,137/115,285 158,524/-- 4,262,921/ 1,020,233
Paul B. Lasiter......... 14,190 170,463 3,300/ 37,160 --/-- 60,800/ 521,610
Joseph R. Tomkinson..... 750,000 8,850,157 76,422/ 50,000 167,052/-- 4,805,175/ 365,625
William S. Ashmore...... 7,640 101,469 --/ 7,640 --/-- --/ 144,444
</TABLE>
- --------
(1) For a description of the terms of such options, see "--Stock Option
Plans--1992 Stock Option Plan."
(2) For a description of the terms of such options, see "--Senior Management
Stock Options."
(3) Based on a price per share of $21.00, which was the price of a share of
Common Stock as quoted on the Nasdaq National Market at the close of
business on December 31, 1996
EMPLOYMENT AGREEMENTS
On January 1, 1992, Mr. Snavely entered into a five-year employment
agreement at an annual salary of $200,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Snavely's employment agreement was amended
to reflect an annual salary of $300,000, plus a bonus based on 1.5% of the
Company's pre-tax profits in excess of $10.0 million. Mr. Snavely's total
compensation may not exceed $1.0 million annually.
On January 1, 1992, Mr. Shugerman entered into a five-year employment
agreement with an annual salary of $125,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Shugerman's employment agreement was
amended to reflect an annual salary of $200,000, plus a bonus based on 1.0% of
the Company's pre-tax profits in excess of $10.0 million and the attainment of
defined Company goals. Mr. Shugerman's total compensation may not exceed
$600,000 annually.
Pursuant to the aforementioned employment agreements with Messrs. Snavely
and Shugerman, the Company is required to pay compensation to each, following
termination, as follows: (i) with cause: the Company shall only be obligated
to pay salary through the date on which termination occurs or (ii) without
cause: the Company is required to pay the base salary owed through the term of
the agreement plus a bonus equal to at least what was paid in the previous
period not to exceed 100% of current salary. The Company is negotiating new
employment arrangements with Messrs. Snavely and Shugerman.
112
<PAGE>
SENIOR MANAGEMENT STOCK OPTIONS
Effective January 1992, members of senior management of the Company received
ten year options to purchase shares of the Company's common stock (the "Common
Stock"). Such options are not covered by the Company's option plans described
below. The exercise price of these options is $0.88 per share for one-half of
the options, with the other half exercisable at $1.40 per share. These options
are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen
J. Shugerman were granted 917,053, 917,053 and 458,526 of such options,
respectively.
In April 1996, Mr. Tomkinson sold 750,000 shares of Common Stock he acquired
under the option agreement described above. In November 1996, Mr. Shugerman
sold 300,000 shares of Common Stock he acquired under the option agreement
described above.
The Company recognizes compensation expense with respect to the senior
management stock options because they were granted at less than the estimated
market value of the Company's Common Stock. The total compensation expense was
$2.2 million, all of which was recognized as of December 31, 1996. See Note 22
of Notes to Consolidated Financial Statements.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,550,673 options were outstanding at December 31,
1996.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards").
The 1996 Stock Option Plan is administered by a committee of directors
appointed by the Board of Directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any option granted under the 1996 Stock Option Plan may not
be less than 100% (110% in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of the outstanding Common Stock) of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the 1996 Stock Option Plan was June 21,
1996.
113
<PAGE>
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 1,038,200 options
were outstanding at December 31, 1996.
If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, or (iv) by any combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
PROFIT SHARING AND 401(k) PLAN
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $0.3 million, $0.2 million, and $0.2 million for the years
ended December 31, 1996, 1995, and 1994, respectively.
An additional Company contribution may be made, at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
114
<PAGE>
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. Discretionary contributions of $350,000, $200,000, and
$200,000 were charged to operations in 1996, 1995 and 1994, respectively.
Company matching contributions are made as of December 31st each year.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the full
extent permitted by law. The General Corporation Law of the State of
California permits a corporation to limit, under certain circumstances, a
director's liability for monetary damages in actions brought by or in the
right of the corporation. The Company's Articles of Incorporation also provide
for the elimination of the liability of directors for monetary damages to the
full extent permitted by law.
The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines, and settlement amounts incurred in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, as a director or officer
of any subsidiary of the Company, or as a director or officer of any other
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company has $10.0 million of directors' and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company as to which indemnification is sought, nor
is the Company aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in Item 2.
"Business--Legal Proceedings."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of
January 31, 1997, by (i) each director of the Company, (ii) each executive
officer whose salary exceeded $100,000 for the year ended December 31, 1996,
(iii) each person who is known to the Company to own beneficially more than 5%
of the Common Stock, and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES % OF TOTAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OUTSTANDING(2)
- ------------------- ------------------ --------------
<S> <C> <C>
Imperial Bank(3)............................. 9,396,106 23.5%
Wellington Management Co.(4)................. 3,151,072 7.9
H. Wayne Snavely(5).......................... 1,262,616 3.2
Joseph R. Tomkinson(6)....................... 144,422 0.4
Stephen J. Shugerman(7)...................... 223,483 0.6
G. Louis Graziadio, III(8)................... 91,733 0.2
Robert S. Muehlenbeck(9)..................... 67,507 0.2
Perry A. Lerner(9)........................... 64,437 0.2
J. Clayburn LaForce(9)....................... 61,137 0.2
Paul Lasiter(10)............................. 22,176 0.1
All Directors and Officers as a Group (11
persons)(11)................................ 1,937,511 4.8
</TABLE>
- --------
(1) Each of such persons may be reached through the Company at 23550
Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505,
telephone (310) 791-8020.
(2) Percentage ownership is based on 39,991,751 shares of Common Stock
outstanding as of January 31, 1997.
(3) Imperial Bank, headquartered in Los Angeles, California, is a California
chartered bank whose deposits are insured by the FDIC. The address of
Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of January 31, 1997. The shares are owned by various
investment advisory clients of Wellington Management Company (or of
Wellington Trust Company, National Association, WMC's wholly-owned
subsidiary), which is deemed a beneficial owner of the shares only by
virtue of the direct or indirect investment and/or voting discretion they
possess pursuant to the provisions of investment advisory agreements with
such clients.
(5) Includes 917,052 shares subject to stock options exercisable within 60
days of January 31, 1997.
(6) Includes 143,474 shares subject to stock options exercisable within 60
days of January 31, 1997. Mr. Tomkinson resigned as an officer of the
Company in February 1996 but remains a director.
(7) Includes 219,661 shares subject to stock options exercisable within 60
days of January 31, 1997.
(8) Includes 77,637 shares subject to stock options exercisable within 60
days of January 31, 1997.
(9) Includes 61,137 shares subject to stock options exercisable within 60
days of January 31, 1997.
(10) Includes 6,930 shares subject to stock options exercisable within 60 days
of January 31, 1997
(11) Includes 1,548,165 shares subject to stock options exercisable within 60
days of January 31, 1997.
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ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST
At December 31, 1996, Imperial Bank owned 9,396,106 shares of Common Stock,
or 24.5% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities and requires impermissible investments to be
disposed of before December 19, 1996. Imperial Bank acquired its interest in
the Company at its formation, which interest has been reduced by the Company's
sale of Common Stock to third parties, as well as through sales of stock by
Imperial Bank subsequent to the initial public offering of the Company. The
9.4 million shares of the Company's Common Stock held by Imperial Bank may be
subject to divestiture under FDICIA. Imperial Bank has requested approval from
the FDIC to retain its investment in the Company and the FDIC has extended the
FDICIA-imposed deadline pending a decision on Imperial Bank's application.
The regional office of the FDIC has acknowledged the request and requested
and received additional information on the Company, and has recommended to its
Washington, D.C. headquarters that Imperial Bank be allowed to retain its
stock ownership in the Company subject to certain conditions. The Federal
Reserve Bank of San Francisco has requested that Bancorp make an application
under Section 4 of the Bank Holding Company Act for approval for Imperial Bank
to retain the Company's stock. Bancorp has deferred any application pending
the results of the FDIC application.
Because Imperial Bank owns less than 50% of the outstanding shares of the
Company and the Company is operated as a company independent of Imperial Bank
and Bancorp, the Company believes that, in the event of an insolvency,
bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a
court, exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with either Imperial Bank or Bancorp.
Two directors of the Company also serve on the Board of Directors of
Imperial Bank or its parent, Imperial Bancorp. See Item 10. "Directors and
Executive Officers of the Registrant."
PAYMENT AND TERMINATION AGREEMENT
On January 1, 1992, Mr. Tomkinson entered into a five-year employment
agreement at an annual salary of $200,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary.
Effective July 1, 1994, Mr. Tomkinson's employment agreement was amended to
reflect an annual salary of $300,000, plus a bonus based on 1.0% of the
Company's pre-tax profits in excess of $10.0 million and the attainment of
defined Company goals. Mr. Tomkinson's total compensation may not exceed
$750,000 annually. Mr. Tomkinson resigned as an officer of the Company in
February 1996.
In February 1996, the Company entered into a Payment and Termination
Agreement with Mr. Tomkinson. Under the terms of this agreement, Mr. Tomkinson
was entitled to receive, as settlement for termination of Mr. Tomkinson's
employment with the Company on November 20, 1995 (the "Termination Date"), the
following: (i) the amount by which (A) the aggregate of all compensation Mr.
Tomkinson would have been entitled to receive under his employment agreement
with the Company from the Termination Date through the original termination
date of the employment agreement on December 31, 1996, exceeds (B) the
aggregate Mr. Tomkinson is entitled to receive from ICMH under his employment
agreement with ICMH during such period, (ii) all accrued but unpaid
compensation due Mr. Tomkinson under his employment agreement with the Company
through the Termination Date and (iii) the full and immediate vesting of all
stock options held by Mr. Tomkinson covering shares of the capital stock of
the Company. Mr. Tomkinson received $28,650 under this agreement for the year
ended December 31, 1996.
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BANK DEPOSITS
The Company had deposits (including escrow balances) with SPTL which were
approximately $4.5 million and $36.0 million at December 31, 1996 and 1995,
respectively.
BORROWING ARRANGEMENTS
In October 1995, Imperial Bank extended ICII a $10.0 million revolving line
of credit bearing interest at the prime rate (8.50% at December 31, 1995). All
amounts outstanding under this line were repaid in May 1996, and the line was
not renewed.
In September 1993, the Company obtained a $20.0 million revolving line of
credit from Imperial Bank, secured by all the assets of the Company. The line
of credit had an expiration date of March 31, 1994 and carried a rate of prime
plus 1% (prime was 6% at December 31, 1993).
At December 31, 1993, the Company had $20.0 million outstanding on the line
of credit. In January 1994, the Company repaid the Imperial Bank line of
credit in full and the security interest was released.
Additional or modified arrangements and transactions may be entered into by
the Company, Imperial Bank, and their respective subsidiaries, after the date
hereof. Any such future arrangements and transactions will be determined
through negotiation between the Company and Imperial Bank, and it is possible
that conflicts of interest will be involved. The Audit Committee of the Board
of Directors of the Company, consisting of directors independent of both
management and Imperial Bank, must independently approve all transactions by
and between the Company and Imperial Bank.
RELATIONSHIPS WITH SPFC
THE CONTRIBUTION TRANSACTION
In October 1994, ICII incorporated SPFC as part of a strategic decision to
form a separate subsidiary through which to operate SPTL's residential lending
division. To further this strategy, in December 1994, ICII made a capital
contribution of $250,000 to SPFC in exchange for 100% of its outstanding
capital stock, and in April 1995, ICII caused SPTL to contribute to SPFC
certain customer lists of SPTL's residential lending division relating to the
ongoing operations of such division. In addition, in April 1996 all employees
of SPTL's residential lending division became employees of SPFC. SPTL retained
all other assets and all liabilities related to the contributed operations
including all residual interests generated in connection with securitizations
effected by SPTL's residential lending division.
ARRANGEMENTS WITH ICII AND ITS AFFILIATES
The Company and SPFC have entered into agreements for the purpose of
defining their ongoing relationship. The agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's length negotiations between independent parties. It is the intention
of the Company and SPFC that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company or to SPFC as could
have been obtained from unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
the Company, SPFC and their respective affiliates. Any such future
arrangements and transactions will be determined through negotiations between
the Company and SPFC, and it is possible that conflicts of interest will
develop. The unaffiliated directors of SPFC, consisting of directors
independent of the Company and SPFC, must independently approve all
transactions between the Company and SPFC.
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The following is a summary of certain arrangements and transactions between
the Company and SPFC.
TAX AGREEMENT
The Company entered into an agreement (the "SPFC Tax Agreement") with SPFC
for the purposes of (i) providing for filing certain tax returns, (ii)
allocating certain tax liability and (iii) establishing procedures for certain
audits and contests of tax liabilities.
Under the SPFC Tax Agreement, ICII agreed to indemnify and hold SPFC
harmless from any tax liability attributable to periods ending on or before
June 1996 in excess of such taxes as SPFC has already paid or provided for.
For periods ending after June 1996, SPFC will pay its tax liability directly
to the appropriate taxing authorities. To the extent that (i) there are audit
adjustments that result in a tax detriment to SPFC or (ii) SPFC incurs losses
that are carried back to an earlier period and such adjustment described in
(i) or loss described in (ii) results in a tax benefit to ICII or its
affiliates, then ICII will pay to SPFC an amount equal to the tax benefit as
that benefit is realized. ICII also agreed to indemnify SPFC for any liability
arising out of the filing of federal consolidated returns by ICII or any
return filed with any state or local taxing authority. To the extent there are
audit adjustments that result in any tax detriment to ICII or any of its
affiliates with respect to any period ending on or before June 1996 and, as a
result thereof, SPFC for any taxable period after June 1996 realizes a tax
benefit, then SPFC shall pay to ICII the amount of such benefit at such time
or times as SPFC actually realizes such benefit.
ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before June 1996, although
ICII cannot compromise or settle any issue that increases SPFC's liability
without first obtaining the consent of SPFC. SPFC generally controls all other
audits and administrative and judicial proceedings.
SERVICES PROVIDED BY ICII
SPFC has been historically allocated expenses of various administrative
services provided to it by ICII. The costs of such services were not directly
attributable to a specific division or subsidiary and primarily included
general corporate overhead, such as accounting and cash management services,
human resources and other administrative functions. These expenses were
calculated as a pro rata share of certain administrative costs based on
relative number of employees and assets and liabilities of the division or
subsidiary, which management believed was a reasonable method of allocation.
The allocation of expenses for the year ended December 31, 1996 and 1995 were
approximately $713,000 and $256,000, respectively.
SPFC intends to provide by itself many of the services previously provided
by ICII. ICII currently provides to SPFC mortgage loan production software and
hardware and data communications management, the managing of the 401(k) plan
in which SPFC participates, and insurance coverage, including health
insurance.
OTHER ARRANGEMENTS
From the point of commencement of operations until March 1994, SPTL served
as the servicer of SPFC's loans. From March 1994 through September 1995, SPFC
subcontracted all of its servicing obligations under mortgage loans originated
or acquired on a servicing released basis to ICII pursuant to a servicing
agreement containing fees and other terms that were comparable to industry
standards.
In addition, ICII was the servicer of loans securitized by SPFC in 1994 and
1995 under the respective pooling and servicing agreements. Effective May 1,
1996 ICII transferred the servicing for all of SPFC's loans it serviced to
Advanta or subcontracted with Advanta to perform such servicing functions.
In February and March 1996, certain of ICII's conforming residential
mortgage origination offices were transferred to SPFC.
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In March 1996, SPFC entered into a $10.0 million revolving credit and term
loan agreement with SPTL. Advances under this agreement were collateralized by
the Company's interest-only and residual certificates (other than those
retained by SPTL pursuant to the Contribution Transaction) at an interest rate
of 2% above LIBOR. In April 1996, the loan was repaid and the agreement was
canceled.
During 1995, SPFC borrowed approximately $1.5 million from ICII, such sum
bearing interest at approximately 10.3% per annum. At June 18, 1996 the amount
owed to ICII was approximately $17.0 million. As of September 30, 1996, all
amounts owed to ICII had been repaid.
SPFC has entered into a registration rights agreement with ICII, pursuant to
which SPFC has agreed to register for sale under the Securities Act in the
future all of ICII's remaining shares of SPFC's common stock, subject to
certain conditions.
Lehman Commercial Paper, Inc. ("LCPI") CPI has agreed to make available
repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has
provided SPFC with these funding capabilities for its mortgage banking
operations, where SPFC can close loans in its name. The loan collateral is
held by an independent third-party custodian and SPFC has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is LIBOR plus 30 basis points. This line is
guaranteed by ICII and has an expiration date of April 1, 1997. As of December
31, 1996, SPFC had no outstanding balance with respect to this facility. ICII
does not intend to guarantee any other indebtedness of SPFC.
RELATIONSHIPS WITH ICMH
THE CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of ICMH's initial public stock
offering (the "Effective Date"), the Company contributed to ICIFC certain of
the operating assets and certain customer lists of the Company's mortgage
conduit operations including all of ICII's mortgage conduit operations'
commitments to purchase mortgage loans subject to rate locks from
correspondents (having a principal balance of $44.3 million at November 20,
1995), in exchange for shares representing 100% of the common stock and 100%
of the outstanding non-voting preferred stock of ICIFC.
Simultaneously, on the Effective Date, in exchange for 500,000 shares of
ICMH common stock, the Company (i) contributed to ICMH all of the outstanding
non-voting preferred stock of ICIFC, which represents 99% of the economic
interest in ICIFC, (ii) caused SPTL to contribute to ICMH certain of the
operating assets and certain customer lists of SPTL's warehouse lending
division and (iii) executed a non-compete agreement (the "Non-Compete
Agreement") and a right of first refusal agreement (the "Right of First
Refusal Agreement"), each having a term of two years from the Effective Date.
Of the 500,000 shares issued pursuant to the contribution, 450,000 shares
were issued to ICII and 50,000 shares were issued to SPTL. All of the
outstanding shares of common stock of ICIFC were retained by ICII. Lastly,
ICMH contributed all of the aforementioned operating assets of SPTL's
warehouse lending operations contributed to it by SPTL to IWLG in exchange for
shares representing 100% of the common stock of IWLG thereby forming it as a
wholly owned subsidiary. At November 20, 1995, the net tangible book value of
the assets to be contributed pursuant to the contribution was $525,000.
The Company and SPTL retained all other assets and liabilities related to
the contributed operations which at November 20, 1995 consisted mostly of
$11.7 million of PMSRs, $22.4 million of finance receivables and $26.6 million
in advances made by the Company and SPTL to fund mortgage conduit loan
acquisitions and to fund finance receivables, respectively.
Pursuant to the Non-Compete Agreement, the Company, except as set forth
below, and any 25% entity may not compete with ICMH's Warehouse Lending
Operations and may not establish a network of third party correspondent loan
originators or another end-investor in non-conforming mortgage loans. The
Company has also agreed that (i) in addition to any other remedy that may be
available to ICMH, it will sell all of the
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outstanding shares of common stock of ICIFC to be retained by the Company
pursuant to the contribution to any third party reasonably acceptable to ICMH
in the event that ICII or a 25% entity establishes a network of third party
correspondent loan originators during the term of the Non-Compete Agreement
and (ii) any sale by ICIFC of shares of its capital stock or sale or transfer
by the Company of any shares of the common stock of ICIFC which the Company
owns may only be made to a party reasonably acceptable to ICMH. Pursuant to
the Non-Compete Agreement, SPTL may continue to act as an end-investor in non-
conforming mortgage loans and SPFC may continue its business, which is
primarily to act as a wholesale originator and bulk purchaser of non-
conforming mortgage loans. Pursuant to the Right of First Refusal Agreement,
the Company will grant ICIFC a right of first refusal to purchase all non-
conforming mortgage loans that ICII or any 25% entity originates or acquires
and subsequently offers for sale and ICIFC will grant the Company, or any 25%
entity designated by the Company, a right of first refusal to purchase all
conforming mortgage loans that ICIFC acquires and subsequently offers for
sale.
OTHER ARRANGEMENTS AND TRANSACTIONS WITH ICMH
The Company and ICMH have entered into agreements for the purpose of
defining their ongoing relationships. These agreements have been developed in
the context of a parent/subsidiary relationship and therefore are not the
result of arm's-length negotiations between independent parties. It is the
intention of the Company and ICMH that such agreements and the transactions
provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements.
ICMH has entered into a sublease with the Company to lease a portion of its
facilities as ICMH's executive offices and administrative facilities at an
aggregate monthly rental of approximately $33,936. The sublease expires in
2002.
The following is a summary of certain arrangements and transactions between
and the Company and ICMH.
Tax Agreement
ICMH has entered into an agreement (the "ICMH Tax Agreement") effective as
of the Effective Date with the Company for the purposes of (i) providing for
filing certain tax returns, (ii) allocating certain tax liability and (iii)
establishing procedures for certain audits and contests of tax liability.
Under the ICMH Tax Agreement, the Company has agreed to indemnify and hold
ICMH harmless from any tax liability attributable to periods ending on or
before November 20, 1995 in excess of such taxes as ICMH has already paid or
provided for. For periods ending after the November 20, 1995, ICMH will pay
its tax liability directly to the appropriate taxing authorities.
To the extent (i) there are audit adjustments that result in a tax detriment
to ICMH or (ii) ICMH incurs losses that are carried back to an earlier year
and any such adjustment described in (i) or loss described in (ii) results in
a tax benefit to ICII or its affiliates, then the Company will pay to ICMH an
amount equal to the tax benefit as that benefit is realized. ICII will also
agree to indemnify ICMH for any liability associated with the contribution of
the preferred stock of ICIFC and certain operational assets of SPTL's
warehouse lending division or any liability arising out of the filing of a
federal consolidated return by the Company or any return filed with any state
or local taxing authority.
To the extent there are audit adjustments that result in any tax detriment
to the Company or any of its affiliates with respect to any period ending on
or before November 20, 1995, and, as a result thereof, ICMH for any taxable
period after the Effective Date realizes a tax benefit, then ICMH shall pay to
the Company the amount of such benefit at such time or times as ICMH actually
realizes such benefit.
ICII generally controls audits and administrative and judicial proceedings
with respect to periods ending on or before the November 20, 1995, although
ICII cannot compromise or settle any issue that increases ICMH's liability
without first obtaining the consent of ICMH. ICMH generally controls all other
audits and administrative and judicial proceedings.
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Services Agreement
ICIFC and IWLG have been historically allocated expenses of various
administrative services provided by ICII. The costs of such services were not
directly attributable to a specific division or subsidiary and primarily
included general corporate overhead, such as accounting and cash management
services, human resources and other administrative functions. These expenses
were calculated as a pro rata share of certain administrative costs based on
relative assets and liabilities of the division or subsidiary, which
management believed was a reasonable method of allocation. The allocations of
expenses for the years ended December 31, 1996, 1995 and 1994, $518,000,
$269,000 and $517,000, respectively, for ICIFC and IWLG combined.
ICMH and ICII have entered into a services agreement effective as of
November 20, 1995 (the "ICMH Services Agreement") under which ICII provides
various services to ICMH, including data processing, human resource
administration, general ledger accounting, check processing and payment of
accounts payable.
The Company charges fees for each of the services which it provides under
the ICMH Services Agreement based upon usage. The ICMH Services Agreement has
an initial term that ends on December 31, 1996 and is renewable annually
thereafter. ICMH may terminate the ICMH Services Agreement, in whole or in
part, upon one month's written notice. As of December 1, 1996, this agreement
was still in effect. As part of the services to be provided under the ICMH
Services Agreement, ICII provides ICMH with insurance coverage and self
insurance programs, including health insurance. The charge to ICMH for
coverage will be based upon a pro rata portion of the costs to the Company for
the various policies. The Company charges fees for each of the services which
it provides to entities affiliated with ICMH under the ICMH Services Agreement
based upon usage.
OTHER TRANSACTIONS
General
ICAI, a wholly-owned subsidiary of the Company, oversees the day-to-day
operations of ICMH, subject to the supervision of ICMH's Board of Directors,
pursuant to a management agreement (the "Management agreement") effective as
of November 20, 1995, for a current term which expired on January 31, 1997.
ICAI and ICMH are discussing a five-year extension to the Management Agreement
whereby amounts payable thereunder would be subordinated to a specified rate
of return payable to ICMH stockholders.
ICAI has been entitled to receive a per annum base management fee payable
monthly in arrears of an amount equal to (i) 3/8 of 1% of gross mortgage
assets of ICMH composed of other than agency certificates, conforming mortgage
loans or mortgage-backed securities secured by or representing interests in
conforming mortgage loans, plus (ii) 1/8 of 1% of the remainder of gross
mortgage assets of ICMH plus (iii) 1/5 of 1% of the average daily asset
balance of the outstanding amounts under IWLG's warehouse lending facilities.
The term "gross mortgage assets" means for any month the weighted average book
value of ICMH's Mortgage Assets (as defined in the Management Agreement),
before reserves for depreciation or bad debts or other similar noncash
reserves, computed at the end of such month. During the years ended December
31, 1996 and December 31, 1995, ICAI earned $2.0 million and $37,888 in
management fees, respectively.
ICAI has been entitled to receive as incentive compensation for each fiscal
quarter, an amount equal to 25% of the net income of ICMH, before deduction of
such incentive compensation, in excess of the amount that would produce an
annualized Return on Equity (as defined in the Management Agreement) equal to
the ten-year United States Treasury rate plus 2%. "Return on equity" is
calculated for any quarter by dividing ICMH's net income for the quarter by
its average net worth for the quarter. For such calculations, the "net income"
of ICMH means the income of ICMH determined in accordance with GAAP before
ICAI's incentive compensation, the deduction for dividends paid and any net
operating loss deductions arising from losses in prior periods. A deduction
for all of ICMH's interest expenses for borrowed money is also taken in
calculating net income. "Average net worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by ICMH, before deducting any underwriting discounts and
commissions and other expenses and costs relating to such offering, plus
ICMH's retained earnings (without taking into account any losses incurred in
prior periods) computed by taking the daily average of such values during such
period. The definition "return on
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equity" is only for purposes of calculating the incentive compensation
payable, and is not related to the actual distributions received by ICMH's
stockholders. The 25% incentive payment to ICAI is calculated quarterly in
arrears before any income distributions are made to stockholders for the
corresponding period. During the years ended December 31, 1996 and December
31, 1995, ICAI earned $1.3 million and zero, respectively, for ICAI's
incentive payment.
Pursuant to the Management Agreement, ICMH also pays all operating expenses
except those specifically required to be borne by ICAI under the Management
Agreement. The operating expenses generally required to be borne by ICAI
include the compensation and other employment costs of ICAI's officers in
their capacities as such and the cost of office space and out-of-pocket costs,
equipment and other personnel required for oversight of ICMH's operations.
The expenses that are paid by ICMH include issuance and transaction costs
incident to the acquisition, disposition and financing of investments, regular
legal and auditing fees and expenses of ICMH, the fees and expenses of ICMH's
Directors, premiums for directors' and officers' liability insurance, premiums
for fidelity and errors and omissions insurance, servicing and subservicing
expenses, the costs of printing and mailing proxies and reports to
stockholders, and the fees and expenses of ICMH's custodian and transfer
agent, if any. Reimbursements of expenses incurred by ICAI which are the
responsibility of ICMH are made monthly. During the year ended December 31,
1996 and December 31, 1995, there were no monies paid to ICAI as reimbursement
of expenses.
Purchase of Residual Interests
Effective December 31, 1996, the Company sold $46.9 million of residual
interests to ICIFC. In connection therewith, the Company lent ICIFC 100% of
the purchase price.
Bulk Mortgage Loan Purchases
In December 1995, ICIFC entered into a number of agreements with the Company
and SPTL to purchase bulk mortgage loan packages. All mortgage loan purchase
agreements were entered into under the following terms.
On December 5, 1995 and December 13, 1995, ICIFC purchased from the Company
bulk mortgage loan packages of 30-year fully amortized six-month adjustable
LIBOR and one-year adjustable United States Treasury Bill rate loans and 30-
and 15-year fixed rate second trust deed mortgages with servicing rights on
all mortgage loans released to ICIFC. The principal balances of the mortgages
at the time of purchase was $106.7 million and $66.2 million, respectively,
with a premium paid of $2.1 million and $1.6 million, respectively.
On December 29, 1995, ICIFC purchased from SPTL two bulk mortgage loan
packages of 30-year fully amortized six-month adjustable LIBOR and one-year
adjustable United States Treasury Bill rate loans. The principal balances of
the loans in the servicing released and servicing retained bulk package at the
time of purchase was $300.0 million and $28.5 million with premiums paid of
$3.4 million and $142,395, respectively.
Purchase of Mortgage-Backed Securities
On December 29, 1995, ICMH purchased, from SPTL, DLJ Mortgage Acceptance
Corp. Pass-Through Certificates Series 1995-4, Class B-1 and Class B-2 issued
August 29, 1995. These certificates consist primarily of a pool of certain
conventional, 11th District Cost of Funds adjustable rate, one-to-four family,
first lien mortgage loans, with terms to maturity of not more than 30 years.
The mortgage loans underlying the certificates were originated or acquired by
ICII. All of the mortgage loans are serviced by ICII in its capacity as master
servicer. ICMH purchased Class B-1 certificates having an initial certificate
principal balance of $4.8 million and the Class B-2 certificates having an
initial certificate principal balance of $2.2 million for a price of 78.54 or
123
<PAGE>
$4.8 million and for a price of 70.01 or $2.3 million, respectively, equating
to a discount of $1.0 million and $0.7 million, respectively. The Class B-1
certificates are single "B" rated mortgage securities and the Class B-2 are
double "BB" rated mortgage securities. There was no gain or loss recorded by
either party as a result of this transaction.
Purchase of Subordinated Lease Receivables
On December 29, 1995, ICMH purchased a subordinated interest in a lease
receivable securitization from IBC. The lease receivables underlying the
security were originated by IBC. ICMH purchased the subordinated lease
receivable based on the present value of estimated cash flows using a discount
rate of 12% which resulted in a purchase price of $8.4 million. The purchase
price was based upon a market discount rate as confirmed by an independent
third party. In March 1996, IBC repurchased the subordinated interest from
ICMH, and as of December 31, 1996, holds the subordinated interest as an
investment vehicle.
124
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.1+ Form of Indemnification Agreement for directors and officers.
10.2+ 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan
and form of Stock Option Agreement thereunder.
10.3+ Form of Employment Agreement dated effective as of January 1, 1992 by
and between Registrant and H. Wayne Snavely.
10.4+ Form of Employment Agreement dated effective as of January 1, 1992 by
and between Registrant and Joseph R. Tomkinson.
10.5+ Form of Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and H. Wayne Snavely.
10.6+ Form of Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and Joseph Tomkinson.
10.7+ Form of Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and Stephen Shugerman.
10.27** Asset Purchase Agreement among the Registrant, First Concord
Acceptance Corporation and Oren L. Benton, dated as of April 12,
1995, and amended as of May 25, 1995.
10.28** Stock Purchase Agreement among the Registrant, Coast Federal Bank,
Federal Savings Bank and CoastFed Business Credit Corporation dated
as of September 18, 1995.
10.29** Asset Purchase Agreement between the Registrant and Greenwich Capital
Financial Products, Inc. dated as of June 30, 1995.
10.30 Contribution Agreement among the Registrant, Imperial Credit Mortgage
Holdings, Inc. ("ICMH"), Southern Pacific Thrift and Loan
Association, ICI Funding Corporation ("ICIFC") and Imperial Warehouse
Lending Group, Inc. dated as of November 20, 1995.
10.31 Non-Competition Agreement between the Registrant and ICMH dated as of
November 20, 1995.
10.32 Right of First Refusal Agreement among the Registrant, ICMH and ICIFC
dated as of November 20, 1995.
10.33 Tax Agreement between the Registrant and ICMH dated as of November 20,
1995.
10.34 Services Agreement between the Registrant and ICMH dated as of
November 20, 1995.
10.35 Submanagement Agreement between the Registrant and Imperial Credit
Advisors, Inc. dated as of November 20, 1995.
11 Statement Regarding Computation of Earnings Per Share.
23.1.1 Independent auditors' consent.
</TABLE>
- --------
+ Incorporated by reference to, and all such Exhibits have the corresponding
Exhibit number filed as part of, the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
* Incorporated by reference to that Exhibit having the corresponding Exhibit
Number filed as part of the Registrant's Registration Statement on Form S-1
(File No. 33-60116) filed with the SEC on March 29, 1992.
** Incorporated by reference to the Exhibits filed as part of the Registrant's
Form 8-K filed with the SEC on December 15, 1995.
All schedules have been omitted because they are not applicable, not
required or because required information is included in the consolidated
financial statements or notes thereto.
125
<PAGE>
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not
applicable or the required information is shown in the body of this Form 10-K.
REPORTS ON FORM 8-K
In December 1996, the Company filed a Current Report on Form 8-K with the
Commission relating to the acquisition by Imperial Business Credit Inc, a
wholly-owned subsidiary of the Company, of (i) substantially all of the assets
of Avco Leasing Services, Inc. and (ii) all of the assets of Avco Financial
Services of Southern California, Inc., effective August 26, 1996 related to
its business of originating and servicing business equipment leases and agreed
to assume certain related liabilities in connection therewith from Avco
Financial Services, Inc. The purchase price for the assets was approximately
$95 million, excluding amounts deducted for the assumption of certain related
liabilities.
126
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ H. Wayne Snavely
___________________________________
H. Wayne Snavely
Chairman of the Board, President
and Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. Wayne Snavely Chairman of the Board, March 27, 1997
____________________________________ President and Chief
H. Wayne Snavely Executive Officer and
Director (Principal
Executive Officer)
/s/ Joseph R. Tomkinson Director March 27, 1997
____________________________________
Joseph R. Tomkinson
/s/ Kevin E. Villani Chief Financial Officer March 27, 1997
____________________________________ (Principal Financial
Kevin E. Villani Officer and Principal
Accounting Officer)
/s/ Stephen J Shugerman Director March 27, 1997
____________________________________
Stephen J. Shugerman
/s/ Robert S. Muehlenbeck Director March 27, 1997
____________________________________
Robert S. Muehlenbeck
/s/ G. Louis Graziadio, III Director March 27, 1997
____________________________________
G. Louis Graziadio, III
/s/ Perry A. Lerner Director March 27, 1997
____________________________________
Perry A. Lerner
/s/ James Clayburn LaForce, Jr. Director March 27, 1997
____________________________________
James Clayburn LaForce, Jr.
</TABLE>
127
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ------------
<C> <S> <C>
10.1+ Form of Indemnification Agreement for directors and
officers.
10.2+ 1992 Incentive Stock Option Plan and Nonstatutory Stock
Option Plan and form of Stock Option Agreement
thereunder.
10.3+ Form of Employment Agreement dated effective as of
January 1, 1992 by and between Registrant and H. Wayne
Snavely.
10.4+ Form of Employment Agreement dated effective as of
January 1, 1992 by and between Registrant and Joseph
R. Tomkinson.
10.5+ Form of Senior Management Stock Option Agreement dated
effective as of January 1, 1992 by and between
Registrant and H. Wayne Snavely.
10.6+ Form of Senior Management Stock Option Agreement dated
effective as of January 1, 1992 by and between
Registrant and Joseph Tomkinson.
10.7+ Form of Senior Management Stock Option Agreement dated
effective as of January 1, 1992 by and between
Registrant and Stephen Shugerman.
10.8+ Form of Tax Agreement as of January 1, 1992 by and
among Imperial Bancorp ("Bancorp"), Registrant and
SPTL.
10.9 Form of Services Agreement as of January 1, 1992 by and
among Imperial Bank, Bancorp and Registrant.
10.10+ Form of Contribution Agreement as of December 31, 1991
by and between Imperial Bank and Registrant.
10.11+ The Salary Investment Profit-Sharing and Employee Stock
Ownership Plans of Bancorp dated January 1, 1989
Restatement.
10.12+ Master Repurchase Agreement dated as of January 13,
1992 by and between Imperial Bank and Registrant.
10.13+ Master Commitment Agreement, as amended, by and between
Federal National Mortgage Association and Imperial
Bank Mortgage Network, Inc.
10.14+ Master Commitment Contract dated as of August 9, 1991,
by and between Federal Home Loan Mortgage Corporation
and Imperial Bank dba Imperial Bank Mortgage.
10.15+ Office Building Lease dated May 4, 1987, as amended.
10.16+ Form of Lease Agreement dated January 2, 1992, as
amended.
10.17+ Consulting Agreement as of November 1, 1991 by and
between Imperial Bank and Second Southern Corporation.
10.18+ Consulting Agreement as of November 1, 1991 by and
between Imperial Bank and Robert S. Muehlenbeck.
10.22+ Collateral Confirmation from Federal Home Loan Bank of
San Francisco dated March 27, 1992.
10.23+ Letter dated April 17, 1992 from Imperial Bank to the
Company regarding $3 million obligation.
10.24+ Appendices to Contribution Agreement.
10.25* Form of Agreement regarding Conduit Program, dated
March 15, 1993.
10.26 Purchase and Sale Agreement between the Registrant and
the Resolution Trust Company as conservator for
Western Federal Savings Bank, dated as of January 31,
1994.
10.27** Asset Purchase Agreement among the Registrant, First
Concord Acceptance Corporation and Oren L. Benton,
dated as of April 12, 1995, and amended as of May 25,
1995.
10.28** Stock Purchase Agreement among the Registrant, Coast
Federal Bank, Federal Savings Bank and CoastFed
Business Credit Corporation dated as of September 18,
1995.
10.29** Asset Purchase Agreement between the Registrant and
Greenwich Capital Financial Products, Inc. dated as of
June 30, 1995.
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ------------
<C> <S> <C>
10.30 Contribution Agreement among the Registrant, Imperial
Credit Mortgage Holdings, Inc. ("ICMH"), Southern
Pacific Thrift and Loan Association, ICI Funding
Corporation ("ICIFC") and Imperial Warehouse Lending
Group, Inc. dated as of November 20, 1995.
10.31 Non-Competition Agreement between the Registrant and
ICMH dated as of November 20, 1995.
10.32 Right of First Refusal Agreement among the Registrant,
ICMH and ICIFC dated as of November 20, 1995.
10.33 Tax Agreement between the Registrant and ICMH dated as
of November 20, 1995.
10.34 Services Agreement between the Registrant and ICMH
dated as of November 20, 1995.
10.35 Submanagement Agreement between the Registrant and
Imperial Credit Advisors, Inc. dated as of November
20, 1995.
11 Statement Regarding Computation of Earnings Per Share.
23.1.1 Independent auditors' consent.
27 Financial Data Schedule
</TABLE>
- --------
+ Incorporated by reference to, and all such Exhibits have the corresponding
Exhibit number filed as part of, the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
* Incorporated by reference to that Exhibit having the corresponding Exhibit
Number filed as part of the Registrant's Registration Statement on Form S-1
(File No. 33-60116) filed with the SEC on March 29, 1992.
** Incorporated by reference to the Exhibits filed as part of the Registrant's
Form 8-K filed with the SEC on December 15, 1995.
129
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT
INCOME PER SHARE)
<S> <C> <C> <C>
Primary earnings per share:
Net income........................................... $75,984 $14,193 $ 7,524
======= ======= =======
Weighted average number of shares outstanding........ 36,063 31,826 31,720
Net effect of dilutive stock options--Based on
treasury stock method using average market price.... 2,637 2,632 1,861
------- ------- -------
Total average shares............................... 38,700 34,458 33,581
======= ======= =======
Primary net income per share......................... $ 1.96 $ 0.41 $ 0.22
======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fully diluted earnings per share:
Net income........................................... $75,984 $14,193 $ 7,524
======= ======= =======
Weighted average number of shares outstanding........ 36,063 31,826 31,720
Net effect of dilutive stock options--Based on
treasury stock method using end of period market
price............................................... 2,912 3,296 1,862
------- ------- -------
Total average shares............................... 38,975 35,122 33,582
======= ======= =======
Fully diluted net income per share..................... $ 1.95 $ 0.40 $ 0.22
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Credit Industries, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 333-13805 and 333-15149) on Forms S-8 of Imperial Credit Industries,
Inc. of our report dated January 29, 1997, relating to the consolidated
balance sheets of Imperial Credit Industries and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996,
annual report on Form 10-K of Imperial Credit Industries, Inc. Our report
indicates that the Company adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights," during 1995.
KPMG Peat Marwick LLP
Los Angeles, California
April 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 74,247 39,166
<INT-BEARING-DEPOSITS> 3,369 267,776
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 25,180 0
<INVESTMENTS-HELD-FOR-SALE> 59,116 5,963
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 2,028,694 2,024,310
<ALLOWANCE> 19,999 13,729
<TOTAL-ASSETS> 2,470,639 2,510,635
<DEPOSITS> 1,069,184 1,092,989
<SHORT-TERM> 834,852 1,070,815
<LIABILITIES-OTHER> 163,886 60,062
<LONG-TERM> 163,209 192,467
0 0
0 0
<COMMON> 145,521 51,891
<OTHER-SE> 88,977 38,910
<TOTAL-LIABILITIES-AND-EQUITY> 2,470,639 2,510,635
<INTEREST-LOAN> 188,242 120,244
<INTEREST-INVEST> 10,807 6,630
<INTEREST-OTHER> 8,422 2,608
<INTEREST-TOTAL> 207,471 129,482
<INTEREST-DEPOSIT> 60,999 51,565
<INTEREST-EXPENSE> 135,036 95,728
<INTEREST-INCOME-NET> 72,435 33,754
<LOAN-LOSSES> 9,773 5,450
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 91,935 51,524
<INCOME-PRETAX> 157,884 24,129
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 75,984 14,193
<EPS-PRIMARY> 1.96 .41
<EPS-DILUTED> 1.95 .40
<YIELD-ACTUAL> 3.40 2.08
<LOANS-NON> 50,109 30,988
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 1,256 870
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 13,729 7,054
<CHARGE-OFFS> 8,326 3,106
<RECOVERIES> 323 11
<ALLOWANCE-CLOSE> 19,999 13,729
<ALLOWANCE-DOMESTIC> 19,999 13,729
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
