<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110
TORRANCE, CALIFORNIA 90505
(310) 791-8020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AT AUGUST 1, 1997
----- ------------------------------------
<S> <C>
Common Stock, no par value 38,694,236
</TABLE>
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets--June 30, 1997 and December 31,
1996......................................................... 2
Consolidated Statements of Income--Three and six months ended
June 30, 1997 and 1996....................................... 3
Consolidated Statements of Cash Flows--Six months ended June
30, 1997 and 1996............................................ 4
Consolidated Statement of Changes in Shareholders' Equity--Six
months ended June 30, 1997................................... 5
Notes to Consolidated Financial Statements.................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 12
PART II--OTHER INFORMATION
ITEMS 1-5 NOT APPLICABLE
ITEM 6. EXHIBIT--STATEMENT REGARDING COMPUTATION OF EARNINGS PER
SHARE......................................................... 28
SIGNATURES.................................................... 29
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
------
Cash................................................... $ 20,550 $ 74,247
Interest bearing deposits.............................. 241,285 3,369
Investment in Federal Home Loan Bank stock............. 8,713 17,152
Trading securities, at market.......................... 37,408 25,180
Securities available for sale, at market............... 45,134 59,116
Securities held for investment......................... 2,647 --
Loans held for sale.................................... 573,965 940,096
Loans held for investment, net......................... 1,120,066 1,068,599
Purchased and originated servicing rights.............. 6,504 14,887
Capitalized excess servicing fees receivable........... -- 23,142
Retained interest in loan and lease securitizations.... 34,327 49,548
Interest-only and residual certificates................ -- 87,017
Accrued interest receivable............................ 13,489 13,847
Premises and equipment, net............................ 9,404 12,442
Other real estate owned, net........................... 16,954 12,214
Goodwill............................................... 47,683 38,491
Investment in Southern Pacific Funding Corporation..... 54,941 --
Other assets........................................... 44,666 31,292
---------- ----------
Total assets....................................... $2,277,736 $2,470,639
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits............................................... $1,260,991 $1,069,184
Borrowings from Federal Home Loan Bank................. -- 140,500
Other borrowings....................................... 358,129 694,352
Remarketed Par Securities.............................. 70,000 --
Senior Notes........................................... 219,792 88,209
Convertible subordinated debentures.................... -- 75,000
Accrued interest payable............................... 22,542 14,034
Accrued income taxes payable........................... 32,815 55,327
Minority interest in consolidated subsidiaries......... 6,048 54,936
Other liabilities...................................... 43,389 39,589
---------- ----------
Total liabilities...................................... 2,013,706 2,231,131
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding............................... -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,693,876 and 38,291,112 shares issued and
outstanding at June 30, 1997 and December 31, 1996,
respectively........................................ 147,208 145,521
Retained earnings.................................... 110,087 88,977
Unrealized gain on securities available for sale,
net................................................. 6,735 5,010
---------- ----------
Total shareholders' equity......................... 264,030 239,508
---------- ----------
Total liabilities and shareholders' equity......... $2,277,736 $2,470,639
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases........... $28,558 $19,166 $37,224 $40,877
Interest on loans.......................... 53,512 43,089 96,442 88,282
Interest on investments.................... 1,129 204 6,754 2,389
Interest on other finance activities....... 734 1,067 1,391 3,209
------- ------- ------- -------
Total interest income.................... 55,375 44,360 104,587 93,880
Interest expense........................... 31,652 30,955 60,056 67,738
------- ------- ------- -------
Net interest income...................... 23,723 13,405 44,531 26,142
Provision for loan and lease losses........ 5,736 2,025 8,606 3,525
------- ------- ------- -------
Net interest income after provision for
loan and lease losses..................... 17,987 11,380 35,925 22,617
------- ------- ------- -------
Loan servicing income (expense)............ 2,170 (448) 3,450 1,562
(Loss) gain on sale of servicing rights.... -- (257) -- 7,808
Gains on sale of Southern Pacific Funding
Corporation stock......................... -- 62,007 4,306 62,007
Loss on sale of securities................. -- -- (403) --
Equity in net income of Southern Pacific
Funding Corporation....................... 6,678 -- 12,931 --
Other income............................... 2,112 4,284 4,367 5,485
------- ------- ------- -------
Total other income....................... 10,960 65,586 24,651 76,862
------- ------- ------- -------
Total revenue.......................... 57,505 96,132 97,800 140,356
------- ------- ------- -------
EXPENSES:
Personnel expense.......................... 12,433 10,967 23,104 23,402
Amortization of PMSR's and OMSR's.......... 206 114 225 832
Occupancy expense.......................... 983 950 1,890 2,270
Data processing expense.................... 378 575 805 930
Net expenses of other real estate owned.... 3,480 1,218 4,237 3,986
Professional services...................... 3,615 2,535 6,203 3,681
FDIC insurance premiums.................... -- -- -- 45
Telephone and other communications......... 754 619 1,183 1,525
Restructuring provision--
Exit from mortgage banking operations.... -- -- -- 3,800
General and administrative expense......... 7,215 3,674 12,551 7,349
------- ------- ------- -------
Total expenses......................... 29,064 20,652 50,198 47,820
------- ------- ------- -------
Income before income taxes, minority
interest and extraordinary item........... 28,441 75,480 47,602 92,536
Income taxes............................... 9,866 30,868 17,843 37,769
Minority interest in income of consolidated
subsidiaries.............................. 4,502 1,571 4,654 3,110
------- ------- ------- -------
Income before extraordinary item........... 14,073 43,041 25,105 51,657
------- ------- ------- -------
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes..................................... -- -- (3,995) --
------- ------- ------- -------
Net income................................. $14,073 $43,041 $21,110 $51,657
PRIMARY AND FULLY DILUTED INCOME PER SHARE:
Income before extraordinary item........... $ 0.35 $ 1.11 $ 0.62 $ 1.39
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes..................................... -- -- (0.10) --
------- ------- ------- -------
Net income per common share................ $ 0.35 $ 1.11 $ 0.52 $ 1.39
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................. $ 21,110 $ 51,657
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses........ 8,606 3,525
Restructuring provision--exit from mortgage
banking operations........................ 3,800
Depreciation............................... 2,278 1,958
Amortization............................... 1,722 1,735
Accretion of discount...................... (1,391) (3,209)
Gain on sale of Southern Pacific Funding
Corporation stock......................... (6,151) (62,007)
Gain on sale of servicing rights........... -- (7,808)
Gain on sale of loans and leases........... (37,224) (40,877)
Equity in net earnings of Southern Pacific
Funding Corp.............................. (12,931) --
Loss on sale of OREO....................... 3,384 1,988
Writedowns on other real estate owned...... 147 2,088
Net change in retained interest in loan and
lease securitizations..................... 15,221 --
Net change in loans held for sale.......... 402,164 399,897
Net change in interest only and residual
certificates.............................. 87,017 --
Net change in securities held for
investment................................ (2,647) --
Net change in capitalized excess servicing. 23,142 --
Net change in trading securities........... (12,228) --
Net change in other assets................. 3,688 (18,857)
Net change in other liabilities............ 1,974 23,430
--------- ---------
Net cash provided by operating activities... 497,881 357,320
--------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits.... (237,916) 137,300
Purchase of servicing rights............... -- (4,500)
Proceeds from sale of servicing rights..... -- 19,097
Proceeds from sale of other real estate
owned..................................... 1,027 3,249
Purchase of securities available for sale.. -- (154,777)
Sale of securities available for sale...... 15,176 242,238
Net change in loans held for investment.... (68,180) (85,021)
Purchases of premises and equipment........ (3,130) (2,759)
Net change in investment in Southern
Pacific Funding Corporation............... (42,010) --
Proceeds from sale of SPFC stock........... 6,151 36,362
Sales of Federal Home Loan Bank stock...... 8,439 --
Cash utilized for acquisitions............. (14,699) --
--------- ---------
Net cash provided (used in) by investing
activities................................. (335,142) 191,189
--------- ---------
Cash flows from financing activities:
Net change in deposits..................... 191,807 (103,765)
Advances from Federal Home Loan Bank....... 30,000 470,000
Repayments of advances from Federal Home
Loan Bank................................. (170,500) (365,000)
Net change in convertible subordinated
debentures................................ (75,000) --
Net change in other borrowings............. (335,994) (465,848)
Proceeds from offering of Senior Notes due
2007...................................... 194,500 --
Repayment of Senior Notes due 2004......... (73,241) --
Proceeds from offering of Remarketed Par
Securities................................ 70,000 --
Repayment of bonds......................... -- (111,995)
Net change in minority interest............ (48,888) 37,509
Issuance of common stock................... -- 59,229
Proceeds from resale of Senior Notes....... -- 7,615
Proceeds from exercise of stock options.... 880 1,358
--------- ---------
Net cash used in financing activities....... (216,436) (470,897)
--------- ---------
Net change in cash.......................... (53,697) 77,612
Cash at beginning of year................... 74,247 39,166
--------- ---------
Cash at end of period....................... $ 20,550 $ 116,778
========= =========
Supplemental disclosure of cash flow
information:
Income taxes paid during the period........ $ 11,977 $ 8,468
Interest paid during the period............ 51,548 67,413
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508
Exercise of stock
options................ 403 880 -- -- 880
Tax benefit from
exercise of stock
options................ -- 807 -- -- 807
Net change in unrealized
gain on securities
available for sale..... -- -- -- 1,725 1,725
Net income for period... -- -- 21,110 -- 21,110
------ -------- -------- ------ --------
Balance, June 30, 1997.. 38,694 $147,208 $110,087 $6,735 $264,030
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc. (the "Company" or "ICII"), incorporated in
1986 in the State of California, is 23.9% owned by Imperial Bank. Since its
initial capitalization in 1991 by Imperial Bank, the Company has transformed
itself from a full service mortgage banking operation to a diversified
commercial and consumer finance holding company.
The consolidated financial statements include ICII, its wholly owned
subsidiaries and a majority owned consolidated subsidiary (collectively the
"Company"). The wholly owned operating subsidiaries include Southern Pacific
Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc. ("IBC"),
Imperial Credit Advisors, Inc. ("ICAI") and Auto Marketing Network, Inc.
("AMN"). The majority-owned consolidated subsidiary is Franchise Mortgage
Acceptance Company, LLC ("FMAC"). FMAC is owned two-thirds by the Company and
one-third by the President of FMAC. The Company also has a 47.0% ownership
interest in Southern Pacific Funding Corporation ("SPFC") (NYSE: SFC). The
Company accounts for this investment using the equity method of accounting.
All material intercompany balances and transactions have been eliminated.
2. DECONSOLIDATION OF SOUTHERN PACIFIC FUNDING CORPORATION AND ICI FUNDING
CORPORATION
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of Southern Pacific Funding Corporation ("SPFC") reducing its
ownership of SPFC from 51.2% at December 31, 1996 to 49.4% at March 31, 1997.
Therefore, the results of SPFC operations are now accounted for in the
Company's financial statements under the equity method of accounting. The
equity investment in SPFC is carried at cost adjusted for equity in SPFC's
undistributed earnings.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation (ICIFC), a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings ("ICMH"). At December 31, 1996,
ICII owned 100% of the common stock of ICIFC which represented a 1% economic
interest since ICMH (AMEX symbol: IMH) a former subsidiary and now a separate
publicly held mortgage real estate investment trust, owned all of the nonvoting
preferred stock of ICIFC, which gave ICMH a 99% economic interest in ICIFC. The
Company's disposal of its remaining economic interest in ICIFC concluded its
exit from the mortgage banking business.
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses
for the periods presented. Actual results could differ significantly from
those estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 1997 presentation.
4. NET INCOME PER SHARE INFORMATION
Net income per common share is computed based on the weighted average number
of shares outstanding during the periods presented plus common stock
equivalents deemed to be dilutive. Common stock equivalents deemed to be
dilutive were calculated based on the average price per share during the
periods presented for
6
<PAGE>
primary net income per share and based on the ending stock price per share, if
greater than the average stock price per share, for fully diluted net income
per share for the periods presented. The number of shares used in the
computations give retroactive effect to stock dividends and stock splits for
all periods presented.
The weighted average number of shares including common stock equivalents for
the three months ended June 30, 1997 and 1996 was 40,789,101 and 38,904,088
for fully diluted income per share, respectively. The weighted average number
of shares including common stock equivalents for the six months ended June 30,
1997 and 1996 was 40,781,613 and 37,176,202 for fully diluted income per
share, respectively.
The weighted average number of shares including common stock equivalents for
the three months ended June 30, 1997 and 1996 was 40,622,579 and 38,846,540
for primary income per share, respectively. The weighted average number of
shares including common stock equivalents for the six months ended June 30,
1997 and 1996 was 40,768,917 and 37,055,292 for primary income per share,
respectively.
5. LOANS HELD FOR SALE
Loans held for sale consisted of the following at June 30, 1997 and December
31, 1996: (In thousands)
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1997 1996
----------- ---------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.............................. $ 6,970 $452,533
Multi-family................................... 118,894 186,391
Commercial..................................... 87,554 109,469
-------- --------
213,418 748,393
Leases........................................... 24,723 8,547
Auto............................................. 127,811 --
Commercial loans................................. 208,013 183,156
-------- --------
$573,965 $940,096
======== ========
</TABLE>
6. REMARKETED PAR SECURITIES
During the second quarter, Imperial Credit Capital Trust I ("ICCTI"), a
subsidiary of the Company organized for the sole purpose of issuing trust
securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES")
due June 14, 2002. These securities can be redeemed at par upon their maturity
or remarketed as 30 year capital instruments at the Company's option. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering will be used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
7. SUBSEQUENT EVENTS
On August 1, 1997, the Company announced that Imperial Credit Commercial
Mortgage Investment Corporation ("ICCMIC"), a Maryland corporation that has
elected to be treated as a Real Estate Investment Trust, has filed a
registration statement with the Securities and Exchange Commission covering a
proposed initial public offering of 20,000,000 shares of common stock. All of
the shares are being offered by ICCMIC. The net proceeds will be primarily
used to purchase initial investments. ICCMIC intends to invest primarily in
performing multifamily and commercial loans and in mortgage backed securities.
The offering is expected to close in the fourth quarter of 1997.
During July and August of 1997, the Company sold 500,000 shares of SPFC
common stock at an average price per share of $15.11, generating net proceeds
of $7.6 million and resulting in a gain of approximately $5 million. This sale
reduces the Company's ownership in SPFC stock to 47.0% from 49.4% at March 31,
1997.
7
<PAGE>
During August 1997, the Company announced that it proposes to make an
initial public offering of its subsidiary, FMAC. A registration statement
relating to the proposed public offering has not yet been filed with the
United States Securities and Exchange Commission. The terms of the securities
offered and the amount of the offering have not been disclosed. The offering
is expected to close in the fourth quarter of 1997.
8. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS
The following represents summarized consolidating financial information as
of June 30, 1997 and December 31, 1996, and for the six months ended June 30,
1997 and for 1996, with respect to the financial position and operations of
the Company and its wholly-owned and majority-owned subsidiaries. On January
17, 1997, the Company sold $200 million of 9 7/8% senior notes due 2007. The
senior notes are guaranteed by three of the Company's wholly-owned
subsidiaries, IBC, ICAI, and AMN (the "Other Guarantor Subsidiaries"), and the
Company's 66 2/3% owned subsidiary, FMAC. The non-guarantor subsidiaries are
SPTL and ICCTI. Each of the guarantees is full and unconditional and joint and
several. The summarized consolidated financial information is presented in
lieu of separate financial statements and other related disclosures of the
wholly-owned subsidiary guarantors as management has determined that such
information is not material to investors. FMAC has filed a Form 10-Q with the
SEC as of and for the quarter ended June 30, 1997. None of the subsidiary
guarantors are restricted from making distributions to the Company.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ (591) $ 15 $ 4,960 $ 16,166 $ -- $ 20,550
Interest bearing
deposits............... 112,354 2,667 264 126,000 -- 241,285
Investments in Federal
Home Loan Bank stock... -- -- -- 8,713 -- 8,713
Investment and trading
securities............. 33,866 2,581 1,023 46,928 791 85,189
Loans held for sale..... 6,970 207,789 152,534 206,448 224 573,965
Loans held for
investment, net........ 110,719 -- 17,276 1,040,146 (48,075) 1,120,066
Purchased and originated
servicing rights....... -- -- 412 6,092 -- 6,504
Retained interest in
loan and lease
securitizations........ -- 7,002 27,325 -- -- 34,327
Investment in
subsidiaries........... 233,494 -- -- -- (178,553) 54,941
Goodwill................ -- 4,571 28,368 14,744 -- 47,683
Other assets............ 63,562 8,106 (122) 24,670 (11,703) 84,513
-------- -------- -------- ---------- --------- ----------
Total assets........... $560,374 $232,731 $232,040 $1,489,907 $(237,316) $2,277,736
======== ======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits................ $ (5,606) $ -- $ -- $1,266,597 $ -- $1,260,991
Other borrowings........ -- 206,797 161,818 36,050 (46,536) 358,129
Remarketed Par
Securities............. 72,165 -- -- (2,165) -- 70,000
Senior notes............ 219,792 -- -- -- -- 219,792
Minority interest in
consolidated
subsidiaries........... 749 -- -- -- 5,299 6,048
Other liabilities....... 37,065 3,836 34,168 36,252 (12,575) 98,746
-------- -------- -------- ---------- --------- ----------
Total liabilities...... 324,165 210,633 195,986 1,336,734 (53,812) 2,013,706
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Common stock............ 147,208 5,792 29,224 82,617 (117,633) 147,208
Retained earnings....... 83,314 16,306 6,566 70,556 (66,655) 110,087
Unrealized gain on
securities available
for sale............... 5,687 -- 264 -- 784 6,735
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity................ 236,209 22,098 36,054 153,173 (183,504) 264,030
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity.. $560,374 $232,731 $232,040 $1,489,907 $(237,316) $2,277,736
======== ======== ======== ========== ========= ==========
</TABLE>
8
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
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
Investment in
subsidiaries........... 269,651 -- -- -- (269,651) --
Goodwill................ -- 4,332 14,115 20,044 -- 38,491
Other assets............ 106,601 8,078 (14,981) (10,333) (19,570) 69,795
-------- -------- -------- ---------- --------- ----------
Total assets.......... $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
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........ 15,363 143,139 88,768 480,103 (33,021) 694,352
Senior notes............ 88,209 -- -- -- -- 88,209
Convertible subordinated
debentures............. -- -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- -- 9,787 54,936
Other liabilities....... 41,382 2,580 9,222 68,854 (13,088) 108,950
-------- -------- -------- ---------- --------- ----------
Total liabilities....... 190,103 145,719 97,990 1,836,723 (39,404) 2,231,131
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 9,143 (9,143) --
Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521
Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 -- 185 -- (185) 5,010
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity............... 239,508 14,457 25,211 239,883 (279,551) 239,508
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
</TABLE>
9
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain (loss) on sale of
loans and leases....... $(2,159) $20,033 $6,402 $12,770 $ 178 $37,224
------- ------- ------ ------- ------- -------
Interest income......... 11,271 10,767 13,017 73,750 (4,218) 104,587
Interest expense........ 10,971 9,394 4,512 39,397 (4,218) 60,056
------- ------- ------ ------- ------- -------
Net interest income..... 300 1,373 8,505 34,353 -- 44,531
Provision for loan
losses................. -- -- 2,981 5,625 -- 8,606
------- ------- ------ ------- ------- -------
Net interest income
after Provision for
loan loss............ 300 1,373 5,524 28,728 -- 35,925
------- ------- ------ ------- ------- -------
Loan servicing income
(expense).............. (1,756) 1,376 2,734 1,096 -- 3,450
Gain on sale of SPFC
stock.................. 4,306 -- -- -- -- 4,306
Equity in net income
SPFC................... 12,931 -- -- -- -- 12,931
Other income (expense).. (1,204) -- 3,771 1,800 (403) 3,964
------- ------- ------ ------- ------- -------
Total other income.... 14,277 1,376 6,505 2,896 (403) 24,651
------- ------- ------ ------- ------- -------
Total revenues...... 12,418 22,782 18,431 44,394 (225) 97,800
------- ------- ------ ------- ------- -------
EXPENSES:
Personnel expense....... 1,216 4,665 6,740 10,483 -- 23,104
Amortization of PMSR's
and OMSR's............. -- -- 225 -- -- 225
Occupancy expense....... 510 277 281 822 -- 1,890
Data processing expense. 287 44 167 307 -- 805
Net expenses of other
real estate owned...... 2,652 -- -- 1,585 -- 4,237
Professional services... 2,226 1,176 696 2,105 -- 6,203
General, administrative
and other expense...... 2,674 2,657 5,045 3,583 (225) 13,734
------- ------- ------ ------- ------- -------
Total expenses........ 9,565 8,819 13,154 18,885 (225) 50,198
------- ------- ------ ------- ------- -------
Income before income
taxes, minority
interest, and
extraordinary item..... 2,853 13,963 5,277 25,509 -- 47,602
Income taxes............ 4,848 -- 2,236 10,759 -- 17,843
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 4,654 4,654
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- -- (3,995)
------- ------- ------ ------- ------- -------
Net income (loss)....... $(5,990) $13,963 $3,041 $14,750 $(4,654) $21,110
======= ======= ====== ======= ======= =======
</TABLE>
10
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans
and leases............. $ 2,164 $12,520 $ 899 $25,052 $ 242 $40,877
------- ------- ------ ------- ------- -------
Interest income......... 7,462 1,257 12 86,084 (935) 93,880
Interest expense........ 10,861 955 317 55,711 (106) 67,738
------- ------- ------ ------- ------- -------
Net interest income
(expense).............. (3,399) 302 (305) 30,373 (829) 26,142
Provision for loan
losses................. -- -- -- 3,525 -- 3,525
------- ------- ------ ------- ------- -------
Net interest income
(expense) after
Provision for loan
loss................. (3,399) 302 (305) 26,848 (829) 22,617
------- ------- ------ ------- ------- -------
Loan servicing income
(expense).............. (863) 649 1,600 176 -- 1,562
Gain on sale of
servicing rights....... 6,466 -- -- -- 1,342 7,808
Gain on sale of SPFC
stock.................. 62,007 -- -- -- -- 62,007
Other income (expense).. 1,211 63 2,394 2,446 (629) 5,485
------- ------- ------ ------- ------- -------
Total other income.... 68,821 712 3,994 2,622 713 76,862
------- ------- ------ ------- ------- -------
Total revenues...... 67,586 13,534 4,588 54,522 126 140,356
------- ------- ------ ------- ------- -------
EXPENSES:
Personnel expense....... 5,487 3,901 1,749 12,938 (673) 23,402
Amortization of PMSR's
and OMSR's............. 401 -- 69 110 252 832
Occupancy expense....... 1,330 122 88 730 -- 2,270
Data processing expense. 502 -- 1 427 -- 930
Net expenses of other
real estate owned...... 2,904 -- -- 1,082 -- 3,986
Professional services... 1,830 602 216 860 173 3,681
General, administrative
and other expense...... 7,274 1,146 (205) 5,095 (591) 12,719
------- ------- ------ ------- ------- -------
Total expenses........ 19,728 5,771 1,918 21,242 (839) 47,820
------- ------- ------ ------- ------- -------
Income before income
taxes and minority
interest............... 47,858 7,763 2,670 33,280 965 92,536
Income taxes............ 22,181 -- 1,126 13,805 657 37,769
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 3,110 3,110
------- ------- ------ ------- ------- -------
Net income (loss)....... $25,677 $ 7,763 $1,544 $19,475 $(2,802) $51,657
======= ======= ====== ======= ======= =======
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.3 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 four wholly owned subsidiaries; 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 leasing to small businesses, Imperial Credit Advisors, Inc.
("ICAI"), a management advisory services company overseeing the investment
activities of a real estate investment trust and Auto Marketing Network, Inc.
("AMN"), a subprime auto lender engaged in financing the purchase of new and
used motor vehicles. The Company is the majority owner of a subsidiary,
Franchise Mortgage Acceptance Company, LLC ("FMAC"), a franchise lending
company specializing in lending to business franchisees. In addition, the
Company owns 47.0% of the outstanding common stock of Southern Pacific Funding
Corporation ("SPFC"), a company engaged in sub-prime residential mortgage
lending (NYSE symbol: SFC).
DECONSOLIDATION OF SUBSIDIARIES
During the first quarter ended March 31, 1997, the Company reduced its
common stock ownership in Southern Pacific Funding Corporation ("SPFC") from
51.2% at December 31, 1996 to 49.4% at March 31, 1997. As a result, commencing
with the three months ended March 31, 1997, SPFC's financial statements are no
longer consolidated with those of ICII. Under Generally Accepted Accounting
Principles ("GAAP"), when a subsidiary's ownership percentage is reduced to
below 50%, consolidation is no longer required. Accordingly, the Company's
investment in SPFC is reflected in the Company's statement of condition as a
separate line item entitled "Investment in Southern Pacific Funding
Corporation" and in the statement of income as "Equity in net income of
Southern Pacific Funding Corporation." The income from SPFC will represent the
Company's percentage ownership in SPFC's net income. For the three months and
six months ended June 30, 1997, the equity in net income of SPFC was $6.7
million and $12.9 million, respectively.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation "ICIFC," a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings, Inc. ("ICMH"). At December
31, 1996, ICII owned 100% of the common stock of ICIFC which represented a 1%
economic interest since ICMH (AMEX symbol: IMH) a former subsidiary and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in
ICIFC. The Company's disposal of its remaining economic interest in ICIFC
concludes its exit from the mortgage banking business.
FRANCHISE LENDING
For the three and six months ended June 30, 1997, FMAC originated or
acquired $143.9 million and $304.4 million of franchise loans as compared to
$107.0 million and $208.2 million for the same period last year. For the three
and six months ended June 30, 1997 and 1996 loan securitizations totaled
$158.6 million and $167.4 million, respectively. At June 30, 1997, FMAC had
total assets of $232.7 million. FMAC's total revenues for the three and six
months ended June 30, 1997 were $21.5 million and $22.8 million as compared to
$6.5 million and $13.5 million for the same period last year, respectively.
FMAC's net income for the three and six months ended June 30, 1997 were $16.8
million and $14.0 million as compared to $4.2 million and $7.8 million for the
same period last year, respectively.
BUSINESS FINANCE LENDING
Imperial Business Credit. IBC leases business equipment including copying,
data processing, communication, printing and manufacturing equipment
exclusively to business users. IBC's lease originations totaled $34.4 million
and $64.5 million for the three and six months ended June 30, 1997 as compared
to
12
<PAGE>
$19.2 million and $33.6 million for the same period last year. IBC securitized
$17.6 million and $115.5 million of leases during the three and six months
ended June 30, 1997 as compared to $27.8 million and $47.0 million for the
same period last year.
At June 30, 1997, IBC had total assets of $60.0 million. IBC's total
revenues for the three months and six months ended June 30, 1997 were $2.1
million and $11.0 million as compared to $1.8 million and $2.7 million for the
same period last year, respectively. IBC's net (loss) income for the three and
six months ended June 30, 1997 was ($135,000) and $3.2 million as compared to
$466,000 and $660,000 for the same period last year, respectively.
Coast Business Credit. CBC, a division of SPTL, is an asset-based lender
specializing in lending to middle market manufacturing and high-technology
businesses. At June 30, 1997, CBC's loan portfolio represented lending
relationships with approximately 125 customers, with an average total loan per
customer of $3.0 million. 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 Baltimore, Boston, Minneapolis, Atlanta, Portland, Chicago and Seattle. At
June 30, 1997 and December 31, 1996, CBC had outstanding loans totaling $378.6
million and $288.5 million, of which $138.5 million and $115.6 million were
outstanding to technology companies, respectively. CBC had open unused
commitments of $270.5 million at June 30, 1997.
Loan Participation and Investment Group. LPIG was formed by SPTL in
September 1995 to invest in and purchase syndicated commercial loan
participations in the secondary market originated by commercial banks. At June
30, 1997, loan participations held in the LPIG portfolio ranged in size from
approximately $800,000 to approximately $17.5 million, as compared to
approximately $1.7 million to $10.0 million at June 30, 1996, respectively. As
of June 30, 1997, LPIG committed to fund approximately $350.2 million of
senior secured loan participation commitments. Loans outstanding under LPIG's
participation commitments at June 30, 1997 totaled $194.8 million.
Auto Lend Group. Auto Lend was formed by SPTL in September 1996 to finance
automobile dealership inventories. SPTL believes that Auto Lend's products
offer synergistic opportunities, when offered in connection with the Company's
sub-prime auto lending operations, to provide car dealers a complete financing
package. As of June 30, 1997, Auto Lend had total loan commitments of $45.6
million of which $13.5 million of loans were outstanding.
COMMERCIAL MORTGAGE LENDING
Income Property Lending Division
For the three and six months ended June 30, 1997, the Income Property
Lending Division ("IPLD") of SPTL, funded approximately $72.2 million and
$148.1 million in loans as compared to $56.4 million and $121.7 million for
the same period last year.
CONSUMER LENDING
Auto Lending Division
The Auto Lending Division ("ALD"), a division of SPTL, originated $23.4
million and $39.7 million in sub-prime auto loans during the three and six
months ended June 30, 1997, as compared to $5.4 million and $13.4 million, for
the same period last year, respectively. ALD currently originates sub-prime
auto loans through three Northern California retail offices and is expanding
its activities to Central California and areas outside California.
13
<PAGE>
Auto Marketing Network
On March 14, 1997, ICII acquired for $750,000 all of the outstanding shares
of Auto Marketing Network, Inc. ("AMN") of Boca Raton, Florida, a sub prime
auto lender. AMN is a nationally recognized specialty finance company engaged
in financing the purchase of new and used motor vehicles. ICII also advanced
AMN $11.5 million to repay amounts owed pursuant to operating lines of credit
and for working capital purposes. The acquisition was recorded using the
purchase method of accounting. Goodwill of approximately $14.7 million was
recorded. The acquisition of AMN is consistent with the Company's general
financing strategy: the loans AMN originates will be pooled and securitized
for sale in the secondary market. For the quarter ending June 30, 1997 and
since the date of acquisition through June 30, 1997, AMN originated $77.8
million and $93.9 million in sub prime auto loans. The Company expects to
complete its first securitization of AMN originated loans in the third quarter
of 1997.
Home Improvement Loans and Other Consumer Credit
During the three months and six months ended June 30, 1997, the Consumer
Credit Division ("CCD") of SPTL originated $6.0 million and $10.0 million in
loans as compared to $5.5 million and $9.4 million for the same period last
year.
SECURITIZATION TRANSACTIONS
During the three and six months ended June 30, 1997, the Company completed
loan and lease securitizations totaling $379.3 million and $477.2 million. The
Company has retained interests in loan and lease securitizations representing
the excess of the total amount of loans sold in the securitization over the
amounts represented by interests in the securities sold to investors. The
retained interests in the loan and lease securitizations totaled $34.3 million
and $49.5 million at June 30, 1997 and December 31, 1996, respectively. At
June 30, 1997 and December 31, 1996, the Company's consolidated balance sheet
reflected Capitalized Excess Servicing Fees Receivable of $0 and $23.1
million, respectively. At June 30, 1997 and December 31, 1996, the Company's
consolidated balance sheet reflected Interest Only and Residual Certificates
of $0 and $87.0 million, respectively. The decline in Capitalized Excess
Servicing Fees Receivable and Interest Only and Residual Certificates resulted
from the deconsolidation of SPFC and ICIFC.
SERVICING RIGHTS
When the Company purchases servicing rights from others, or loans which
include the associated servicing rights, the price paid for the servicing
rights, net of amortization based on assumed prepayment rates, is included on
the consolidated balance sheet as "Purchased and Originated Servicing Rights",
("PMSR's" and "OMSR's"). At June 30, 1997, PMSR's and OMSR's outstanding were
$6.5 million, consisting of $6.1 million at SPTL and $400,000 at ICAI. At
December 31, 1996, PMSR's and OMSR's were $14.9 million, consisting of $5.5
million at SPTL, $600,000 at ICAI and $8.8 million at ICIFC.
FUNDING
Lines of Credit
Until 1995, apart from equity and debt offerings in the capital markets, the
Company's primary sources of financing were warehouse lines of credit and
deposits at SPTL. Typically, ICII consolidated entities other than SPTL would
borrow funds under their warehouse lines in connection with their wholesale
loan originations and purchases, while SPTL used its deposits and borrowings
from the Federal Home Loan Bank of San Francisco ("FHLB") to finance its
lending activities. In connection with its diversification strategy, the
Company believes that lower cost financing is available through credit lines,
repurchase facilities, whole loan sales and securitization programs.
14
<PAGE>
The Company continues to rely on FDIC insured deposits generated by SPTL and
third party warehouse lines of credit and securitizations. At June 30, 1997,
SPTL had total deposits of approximately $1.3 billion (excluding deposits of
$5.6 million ICII maintained with SPTL).
ICII's subsidiaries had various revolving warehouse lines of credit
available at June 30, 1997, as follows: (In thousands)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
RATE COMMITMENT OUTSTANDING INDEX
-------- ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 6.88% $210,000 $146,577 Libor+125bp's
Banco Santander (FMAC).. 7.29% 50,000 16,560 Libor+160bp's
Sanwa Bank (FMAC)....... 7.50% 15,000 12,092 Eurodollars+200bp's
CS First Boston (FMAC).. 7.29% 300,000 167,900 Libor+160bp's
CoreStates Bank, N.A.
(IBC).................. 8.67% 15,000 15,000 Libor+230bp's
-------- --------
$590,000 $358,129
======== ========
</TABLE>
15
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1996
Income for the three months and six months ended June 30, 1997 before
extraordinary items was $14.1 million and $25.1 million or $0.35 and $0.62 per
share, as compared to $43.0 million and $51.7 million or $1.11 and $1.39 per
share for the same periods last year, respectively.
Net income for the three months ending June 30, 1997 was $14.1 million or
$0.35 per share. Net income including a $4.0 million extraordinary item
representing a loss on the early retirement of debt for the six months ending
June 30, 1997 was $21.1 million or $0.52 per share. There were no
extraordinary items for the same periods last year.
EXTRAORDINARY ITEM
During the first quarter 1997, the Company successfully issued $200.0
million of 9.875% Senior Notes due 2007. A portion of the proceeds from the
offering were used to repurchase $69.8 million of the existing outstanding
9.75% Senior Notes, due 2004. As a result, the Company recorded an
extraordinary item relating to the early retirement of debt of ($4.0) million
or ($0.10) per share for the first quarter. The Company expects to utilize the
remaining proceeds for capital contributions to subsidiaries, strategic
acquisitions, investments, and for general corporate purposes.
REMARKETED PAR SECURITIES
During the second quarter, Imperial Credit Capital Trust I, a subsidiary of
the Company organized for the sole purpose of issuing trust securities, issued
$70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002.
These securities can be redeemed at par upon their maturity or remarketed as
30 year capital instruments at the Company's option. Under current tax law,
the interest payments on these securities are tax-deductible. The proceeds
from the offering will be used for capital contributions to subsidiaries,
strategic acquisitions, investments and general corporate purposes.
RETURN ON EQUITY
Return on equity ("ROE") based on the Company's core net income (defined as
net income excluding gain on sale of SPFC stock, gain on sale of servicing
rights, the restructuring provision for the Company's exit from the mortgage
banking business, and the extraordinary item, net of income taxes, relating to
the early retirement of debt) was 22.0% and 14.9% for the three months and six
months ending June 30, 1997, as compared to ROE of 19.0 % and 20.1% for the
same periods last year. The Company's strong capital position provides it with
excellent opportunities to reduce risk and improve corporate performance and
profitability in the future through investments, acquisitions, or other
capital redeployment opportunities.
DECONSOLIDATION OF SUBSIDIARIES
During the first quarter ending March 31, 1997, the Company reduced its
ownership percentage in SPFC from 51.2% at December 31, 1996 to 49.4% at March
31, 1997. As a result, commencing with the three months ended March 31, 1997,
the financial statements of SPFC are no longer be consolidated with those of
ICII. The income from SPFC will be accounted for by the equity method of
accounting in accordance with Generally Accepted Accounting Principles. For
the three months and six months ended June 30, 1997, the equity in net income
of SPFC was $6.7 million and $12.9 million respectively.
In addition, the Company disposed of its common stock interest in ICI
Funding Corporation ("ICIFC"), a company engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings, Inc. ("ICMH")
16
<PAGE>
(AMEX symbol: IMH). As a result, commencing with the three months ended March
31, 1997, the financial statements of ICIFC are no longer consolidated with
those of ICII. The Company's disposal of its remaining economic interest in
ICIFC concludes its exit from the conforming residential mortgage banking
business.
As a result of the deconsolidation of SPFC and ICIFC; gain on sale of loans,
net interest income, other income and, general and administrative expenses are
not comparable to the prior period. Therefore, the following income statements
presents gain on sale of loans, net-interest income, other income and general
and administrative expenses for the Company as if SPFC had been accounted for
as an equity investment and ICII's common stock interest in ICIFC had been
disposed of for all periods presented.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- ------------------
1997 1996 1997 1996
------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on sale of loans and leases........... $28,558 $ 4,378 $ 37,224 $ 15,478
Interest income............................ 55,375 35,844 104,587 71,101
Interest expense........................... 31,652 22,827 60,056 46,895
------- ------- -------- --------
Net interest income...................... 23,723 13,017 44,531 24,206
Provision for loan and lease losses...... 5,736 2,025 8,606 3,525
------- ------- -------- --------
Net interest income after provision for
loan and lease losses..................... 17,987 10,992 35,925 20,681
Other income:
Loan servicing income (expense).......... 2,170 (820) 3,450 1,233
(Loss) gain on sale of Servicing rights.. -- (257) -- 8,065
Gain on sale of SPFC stock............... -- 62,007 4,306 62,007
Loss on sale of investment............... -- -- (403) --
Equity in net/pretax income of SPFC...... 6,678 9,648 12,931 16,497
Other income............................. 2,112 4,278 4,367 5,225
------- ------- -------- --------
Total other income......................... 10,960 74,856 24,651 93,027
------- ------- -------- --------
Total revenue.............................. 57,505 90,226 97,800 129,186
------- ------- -------- --------
Expenses:
Personnel expense........................ 12,433 6,926 23,104 16,478
Amortization of PMSR's and OMSR's........ 206 (247) 225 471
Occupancy expense........................ 983 892 1,890 1,995
Data processing expense.................. 378 322 805 670
Net expenses of other real estate owned.. 3,480 1,218 4,237 3,986
General and Administrative expense....... 11,584 5,791 19,937 14,131
------- ------- -------- --------
Total expenses............................. 29,064 14,902 50,198 37,731
------- ------- -------- --------
Income before income taxes, minority
interest and extraordinary item........... 28,441 75,324 47,602 91,455
Income taxes............................... 9,866 30,794 17,843 37,312
Minority interest in income of consolidated
subsidiaries.............................. 4,502 1,489 4,654 2,486
------- ------- -------- --------
Income before extraordinary item......... 14,073 43,041 25,105 51,657
Extraordinary item--Loss on early
extinguishment of debt, net............... -- -- (3,995) --
------- ------- -------- --------
Net income............................... $14,073 $43,041 $ 21,110 $ 51,657
======= ======= ======== ========
</TABLE>
17
<PAGE>
REVENUES
Total revenues for the Company during the second quarter ended June 30, 1997
were $57.5 million as compared to $96.1 million reported for the same period
in 1996. Excluding the gains on the sale of SPFC stock for the second quarter
ending June 30, 1996 total revenues increased by 69% to $57.5 million as
compared to $34.1 million for the same period last year. Total revenues for
the six months ended June 30, 1997 were $97.8 million, as compared to
$140.4 million for the same period last year. Excluding the gains on the sale
of SPFC stock for the six month periods ended June 30, 1997 and 1996, total
revenues increased by 19% to $93.5 million from $78.3 million, respectively.
Gain on Sale of Loan & Leases
Gain on sale of loans and leases increased $9.4 million to $28.6 million
during the second quarter of 1997 from $19.2 million for the same period last
year. The increase in gain on sale of loans and leases was primarily
attributable to increased volume and profitability on loans securitized by
SPTL and FMAC, partially offset by the deconsolidation of SPFC and ICIFC.
Gain on sale of loans decreased $3.7 million to $37.2 million for the six
months ended June 30, 1997 from $40.9 million for the same period last year,
primarily as a result of the deconsolidation of SPFC and ICIFC.
Loan and Lease Originations
During the second quarter ending June 30, 1997, the Company originated
$347.5 million in loans and leases as compared to $377.8 million for the same
period last year. The decrease in originations for the quarter ending June 30,
1997 as compared to the same period last year resulted from the
deconsolidation of SPFC and the inclusion of ICII's loan originations prior to
the Company's exit from the mortgage banking business during the quarter ended
March 31, 1996. Excluding SPFC's and ICII's loan originations from the same
period last year, originations would have increased $142.1 million when
comparing the second quarter 1997 to the same period last year.
Total loan originations for the six months ended June 30, 1997 and 1996 were
$623.3 million and $940.6 million, respectively. Excluding SPFC's and ICII's
loan originations from the same period last year, originations would have
increased $237.3 million when comparing the six months ending June 30, 1997 to
the same period last year.
During the second quarter ending June 30, 1997, the Company originated
loans/leases at SPTL, IBC, FMAC, AMN and ICII of $101.6 million, $34.4
million, $133.7 million, $77.8 million and none, as compared to $78.8 million,
$19.2 million, $107.4 million, none and $12.8 million, respectively, for the
same period last year. For the six months ending June 30, 1997, the Company
originated loans/leases at SPTL, IBC, FMAC, AMN and ICII of $197.8 million,
$64.5 million, $267.1 million, $93.9 million and none, as compared to $144.5
million, $33.6 million, $207.9 million, none and $310.1 million, respectively,
for the same period last year.
Interest Income and Expense
Interest income increased $11.0 million to $55.4 million for the second
quarter of 1997 from $44.4 million for the same period last year. For the six
months ended June 30, 1997, interest income increased $10.7 million to $104.6
million from $93.9 million for the same period last year. The increase in
interest income was primarily attributable to the increase in yield and
average outstanding balances on interest earning assets, partially offset by
the deconsolidation of SPFC and ICIFC in 1997. Excluding interest income for
SPFC and ICIFC from the second quarter and six months ended June 30, 1996,
interest income would have increased by $19.5 million and $33.5 million for
the second quarter and six months ended June 30, 1997, respectively, when
compared to the same periods last year.
18
<PAGE>
Interest expense increased $697,000 to $31.7 million for the second quarter
of 1997 from $31.0 million for the same period last year. For the six months
ended June 30, 1997, interest expense decreased $7.6 million to $60.1 million
from $67.7 million for the same period last year. Excluding interest expense
for SPFC and ICIFC from the second quarter and six months ended June 30, 1996,
interest expense would have increased by $8.8 million and $13.2 million for
the second quarter and six months ended June 30, 1997, respectively, as
compared to the same periods last year. This increase in interest expense
primarily resulted from higher borrowing costs as a result of the Company's
newly issued Senior Notes and Remarketed Par Securities, as well as from
increased outstanding average balances of deposits and warehouse lines.
NET INTEREST INCOME AND MARGIN
Net interest income continued to improve for the second quarter of 1997. Net
interest income increased by $10.3 million to $23.7 million for the second
quarter of 1997 from $13.4 million for the same period last year. For the six
months ended June 30, 1997, net interest income increased $18.4 million to
$44.5 million from $26.1 million for the same period last year. Excluding net
interest income for SPFC and ICIFC from the second quarter and six months
ended June 30, 1996, net interest income would have increased by $10.7 million
and $20.3 million, respectively, for the quarter and six months ended June 30,
1997 as compared to the same periods last year.
Net interest margin at SPTL was 4.37% for the second quarter of 1997, an
increase of 22 basis points as compared to 4.15% for the same period last
year. For the six months ended June 30, 1997 net interest margin was 4.29%, an
increase of 41 basis points as compared to 3.88% for the same period last
year. The improvement in net interest margin is primarily the result of the
Company's efforts to originate higher yielding loan and lease products.
SALE OF SPFC STOCK
For the quarter ended June 30, 1997, there were no sales of SPFC common
stock. During the six months ended June 30, 1997, the Company sold 370,000
shares of common stock in SPFC, generating cash proceeds of $6.2 million. As a
result of the sale, the Company recorded a pre tax gain of $4.3 million.
OTHER INCOME ITEMS
Loan servicing income totaled $2.2 million for the second quarter of 1997 as
compared to an expense of $448,000 for the same period last year. The increase
in loan servicing income was primarily attributable to an increase in the
outstanding performing balance of loans and leases serviced for others at
Franchise Mortgage Acceptance Company, LLC, Imperial Business Credit, Inc.,
and Southern Pacific Thrift and Loan Association.
Other income, which includes REIT management fees, totaled $2.1 million
during the second quarter of 1997 as compared to $4.3 million for the same
period in 1996. Other income decreased during the second quarter of 1997 as a
result of a gain on the disposition of ICMH stock totaling $1.1 million during
the second quarter of 1996, and the deconsolidation of SPFC and ICIFC in 1997.
For the six months ended June 30, 1997 REIT management fees totaled $2.8
million as compared to $1.2 million for the same period last year. The REIT
management fee results from the Company's advisory contract with Imperial
Credit Mortgage Holdings, Inc ("ICMH") (AMEX:IMH).
EXPENSES
Total expenses for the Company during the quarter ended June 30, 1997 were
$29.1 million, an increase of $8.4 million from the $20.7 million reported for
the same period in 1996. For the six months ended June 30, 1997 total expenses
were $50.2 million, an increase of $2.4 million from the $47.8 million
reported for the same period last year. Excluding total expenses for SPFC and
ICIFC from the second quarter and six months ending June 30, 1996, total
expenses increased by $14.2 million and $12.5 million when compared to the
second quarter and six months ending June 30, 1997, respectively.
19
<PAGE>
Total expenses increased primarily due to an increase in OREO expenses from
properties foreclosed on related to the former mortgage banking operations
exited in 1996. Expenses also increased due to the expansion of operations at
the Company's new business lines and subsidiaries, including Auto Marketing
Network ("AMN"), acquired in the first quarter of 1997.
Personnel expenses increased to $12.4 million for the three months ended
June 30, 1997 as compared to $11.0 million for the same period of the previous
year. Excluding personnel expenses for SPFC and ICIFC from the three months
ended June 30, 1996, personnel expense increased to $12.4 million from $6.9
million for the quarter ending June 30, 1997. The increase in personnel
expense excluding SPFC and ICIFC results from the Company's acquisition and
expansion activities throughout 1996 and during the first six months of 1997.
For the six months ended June 30, 1997, personnel expenses remained
essentially the same at $23.1 million as compared to $23.4 million primarily
due to the Company's expansion activities offset by the deconsolidation of
SPFC and ICIFC.
Amortization of PMSR's and OMSR's increased to $206,000 for the three months
ended June 30, 1997 as compared to $114,000 for the same period last year. The
increase primarily resulted from an increase in prepayment rates on the
underlying mortgage loan portfolio partially offset by the deconsolidation of
SPFC and ICIFC. For the six months ended June 30, 1997 amortization of PMSR's
and OMSR's decreased to $225,000 as compared to $832,000 for the same period
last year. The decrease was primarily the result of the deconsolidation of
SPFC and ICIFC.
Occupancy expense remained relatively constant at $983,000 for the three
months ended June 30, 1997 as compared to $950,000 for the same period of the
previous year. The increase in occupancy expense was primarily attributable to
the Company's acquisition and expansion activities throughout 1996 and during
the first six months of 1997 partially offset by the the deconsolidation of
SPFC and ICIFC. For the six months ended June 30, 1997 occupancy expense
decreased to $1.9 million as compared to $2.3 million for the same period last
year primarily due to the deconsolidation of SPFC and ICIFC.
Net expenses of OREO increased to $3.5 million for the three months ended
June 30, 1997 as compared to $1.2 million for the same period last year. Net
expenses of OREO increased primarily due to an increase in OREO expenses from
properties foreclosed on related to the conforming mortgage banking operations
exited in 1996. For the six months ended June 30, 1997 and 1996, net expenses
of OREO were $4.2 million and $4.0 million, respectively.
In the prior year's six months ending June 30, 1996, the Company recorded a
$3.8 million restructuring charge representing the costs anticipated to be
incurred in connection with the Company's exit from the conforming mortgage
business. For the three and six month periods ended June 30, 1997, there were
no additional restructuring charges required.
All other general and administrative expenses, including Federal Deposit
Insurance Corporation ("FDIC") insurance premiums, data processing,
professional services, and telephone and other communications expense,
increased to $12.0 million for the three months ended June 30, 1997 as
compared to $7.4 million for the same period last year. For the six months
ended June 30, 1997 and 1996 these expenses were $20.7 million and $13.5
million, respectively. Excluding SPFC and ICIFC for the second quarter and six
months ending June 30, 1996, such expenses were $6.4 million and $11.0 million
in the prior year. The overall increase in general and administrative expenses
was primarily attributable to the Company's acquisition and expansion
activities throughout 1996 and during the first six months of 1997.
ASSET QUALITY
Loan Loss Provision and Nonaccrual Loans and Leases
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. The provision for loan and lease losses increased $3.7 million to
20
<PAGE>
$5.7 million for the second quarter of 1997 from $2.0 million for the same
period last year. The increase in the provision for loan and lease losses for
the second quarter of 1997 was primarily the result of the continuing change
in the composition of the Company's investment loan portfolio to higher
yielding loan products. Nonaccrual loans and leases as of June 30, 1997 and
December 31, 1996 were $48.3 million and $50.1 million or 4.21% and 4.60% of
gross loans held for investment, respectively.
The balance of nonaccrual loans relating to the former mortgage banking
operations included $16.0 million and $19.9 million of loans for June 30, 1997
and December 31, 1996, respectively. The Company periodically reviews the
allowance for loan and lease losses in connection with the overall loan and
lease portfolio. Based on the Company's charge-off experience and relatively
stable nonaccrual loans the Company believes the current balance of the
allowance for loan and lease losses is sufficient in relation to the amount of
known and inherent risk in the loan and lease portfolio.
The Company's activity in the allowance for loan and lease losses was as
follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
BEGINNING BALANCE AS OF DECEMBER 31, 1996 AND 1995............ $19,999 $13,729
Provision for loan and lease losses........................... 8,606 3,525
Business acquisitions......................................... 4,864 --
Lease sales................................................... (900) --
Deconsolidation of ICIFC...................................... (687) --
------- -------
31,882 17,254
------- -------
LOANS CHARGED OFF:
Mortgage...................................................... (1,826) (1,157)
Multifamily................................................... (420) (973)
Commercial.................................................... (780) (249)
Leases........................................................ (3,567) (548)
Consumer...................................................... (1,376) (434)
------- -------
Total......................................................... (7,969) (3,361)
------- -------
RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF:
Mortgage...................................................... 50 25
Leases........................................................ 425 --
Consumer...................................................... 132 33
------- -------
Total......................................................... 607 58
------- -------
Net charge-offs............................................... (7,362) (3,303)
------- -------
ENDING BALANCE AS OF JUNE 30, 1997 AND 1996................... $24,520 $13,951
======= =======
</TABLE>
21
<PAGE>
Loans held for investment consisted of the following at June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4.......................... $ 305,768 $ 375,476
Multi-Family............................... 18,547 2,527
Commercial................................. 2,640 11,011
---------- ----------
326,955 389,014
Leases....................................... 11,733 99,717
Installment loans............................ 105,634 34,248
Franchise loans.............................. 102,012 115,910
Asset based loans............................ 372,544 288,528
Commercial................................... 237,687 173,932
---------- ----------
Total.................................... 1,156,565 1,101,349
Unearned income.............................. (3,272) (6,336)
Deferred loan fees........................... (8,707) (6,415)
---------- ----------
Total.................................... 1,144,586 1,088,598
Allowance for loan losses.................... (24,520) (19,999)
---------- ----------
Total.................................... $1,120,066 $1,068,599
========== ==========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real property
in California, leases secured by equipment, asset based loans to middle market
companies mainly in California, and loans to experienced franchisees of
nationally recognized restaurant concepts. As a result, the loan portfolio has
a high concentration in the same geographic region. Although the Company has a
diversified portfolio, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the economy of California.
22
<PAGE>
The following table sets forth the amount of non-performing assets
attributable to the Company's former mortgage banking operations and to all of
its other lending activities.
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
---------------------- ----------------------
FORMER FORMER
ALL OTHER MORTGAGE ALL OTHER MORTGAGE
LENDING BANKING LENDING BANKING
ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans:
One to four family............... $ 20,966 $16,000 $ 24,711 $19,928
Commercial property.............. 3,911 -- 3,052 --
Multi-family property............ 4,360 -- 1,421 --
Leases and installment........... 3,075 -- 997 --
--------- ------- --------- -------
Total nonaccrual loans............. 32,312 16,000 30,181 19,928
--------- ------- --------- -------
Other real estate owned:
One to four family............... 8,987 4,906 6,639 3,508
Commercial property.............. 2,753 -- 1,200 --
Multi-family property............ 309 -- 867 --
--------- ------- --------- -------
Total other real estate owned...... 12,049 4,906 8,706 3,508
Loans with modified terms:
One to four family............... -- -- 800 --
Commercial property.............. -- -- 456 --
Multi-family property............ -- -- -- --
--------- ------- --------- -------
Total loans with modified terms.... -- -- 1,256 --
Total non performing assets........ $ 44,361 $20,906 $ 40,143 $23,436
========= ======= ========= =======
Total loans and OREO............... 1,716,973 34,312 2,015,031 40,955
Total NPA's as a percentage of
Loans and OREO.................... 2.58% 60.93% 1.99% 57.22%
</TABLE>
There are no loans over 90 days past due accruing interest at June 30, 1997
or December 31, 1996.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan losses, management considers such factors
as historical loan loss experience, underlying collateral values, evaluations
made by bank regulatory authorities, assessment of economic conditions and
other appropriate data to identify the risks in the loan portfolio.
Loans deemed by management to be uncollectible are charged to the allowance
for loan and lease losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by
management based upon its evaluation of the known and inherent risks in the
loan portfolio. Future additions to the allowance for loan losses may be
necessary.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting
Principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Inflation affects the Company primarily through its effect on
interest rates,
23
<PAGE>
since interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. During periods of increasing
interest rates, demand for loans and a borrower's ability to qualify for
mortgage financing in a purchase transaction may be adversely affected. During
periods of decreasing interest rates, borrowers are more likely to refinance
their existing loans which may negatively impact the Company's investments.
REGULATORY MATTERS
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 and (iii) the FDIC Leverage Ratio as of June 30, 1997.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(IN THOUSANDS EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $151,001 11.92% $ 63,330 5.00% $ -- -- %
Risk-based Capital............... 188,261 12.68% 118,807 8.00% 148,509 10.00%
Risk-based Tier 1 Capital........ 136,257 9.17% 59,404 4.00% 89,105 6.00%
FDIC Leverage Ratio.............. 136,257 9.07% 60,096 4.00% 75,120 5.00%
</TABLE>
On September 30, 1996 SPTL entered into a Memorandum of Understanding with
the FDIC and the Department of Corporations. This agreement requires that SPTL
shall (i) have and retain qualified management, (ii) adopt and implement
comprehensive risk management policies, programs and systems, (iii) take all
reasonable and good faith steps to ensure future compliance with all
applicable laws and regulations, (iv) develop a credit review program, (v)
update the lending, investments and audit policies, and (vi) provide quarterly
progress reports to the FDIC and the Department of Corporations. This
agreement will remain in effect until terminated by the FDIC and the
Department of Corporations. As of June 30, 1997, SPTL's Management believes
that it has implemented the major portion of the terms and conditions of the
agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from the need for the
Company to fund mortgage loans originated for purposes of sale or investment.
In addition, the Company, as a loan servicer, requires funding to make
advances of delinquent principal and interest payments and escrow balances,
and as basic working capital.
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses, (vi) interest and principal payments under ICII's $70 million
principal amount of Remarketed Par Securities and $220 million principal
amount of Senior Notes due 2004 and 2007 (the "Notes") and (vii) the costs of
the Company's warehouse credit and repurchase facilities with certain
financial institutions. The Company has financed its activities through
repurchase facilities, warehouse lines of credit from financial institutions,
including SPTL, public offerings of capital stock of ICII and SPFC, the
issuance of the Notes and Remarketed Par Securities, the issuance of convertible
securities, and securitizations. The Company believes that such sources will
be sufficient to fund the Company's liquidity requirements for the foreseeable
future. Any future financing may involve the issuance of additional Common
Stock or other securities, including securities convertible into or
exercisable for Common Stock.
24
<PAGE>
The Company is dependent upon its ability to access warehouse credit and
repurchase facilities, in addition to its ability to continue to pool and sell
loans and leases in the secondary market, in order to fund new originations.
The Company has warehouse lines of credit and repurchase facilities under
which it had available an aggregate of approximately $231.8 million in
financing at June 30, 1997. The Company expects to be able to maintain
existing warehouse lines of credit and repurchase facilities (or to obtain
replacement or additional financing) as current arrangements expire or become
fully utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is unable to
arrange new warehouse lines of credit and repurchase facilities, the Company
may have to curtail its loan origination and purchasing activities, which
could have a material adverse effect on the Company's operations and financial
position.
SPTL obtains the necessary liquidity to fund its own lending activities
through deposits and, if necessary through borrowings from the FHLB. At June
30, 1997 and December 31, 1996, SPTL had available lines of credit from the
FHLB equal to $63.9 million and $212.7 million, respectively. The FHLB
advances are secured by the investment in stock of FHLB and certain real
estate loans with a carrying value of $238.5 million and $228.5 million at
June 30, 1997 and December 31, 1996, respectively. The highest FHLB advance
outstanding during the quarter ending June 30, 1997 was $79.5 million, with an
average outstanding balance of $78.1 million. There were no outstanding
balances of FHLB advances on June 30, 1997. Since December 31, 1991, SPTL has
increased its deposits as necessary so that deposits, together with cash,
liquid assets and FHLB borrowings have been sufficient to provide the funding
for its loans held for sale and investment. As of June 30, 1997, SPTL's
deposit portfolio which consists primarily of certificate accounts increased
approximately $209 million to $1.3 billion from $1.1 billion 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. SPTL 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.
During the second quarter, Imperial Credit Capital Trust I, a subsidiary of
the Company organized for the sole purpose of issuing trust securities, issued
$70.0 million of 10.25% Remarketed Par Securities ("ROPES") due June 14, 2002.
These securities can be redeemed at par upon their maturity or remarketed as
30 year capital instruments at the Company's option. Under current tax law,
the interest payments on these securities are tax-deductible. The proceeds
from the offering will be used for capital contributions to subsidiaries,
strategic acquisitions, investments and general corporate purposes.
During the first quarter of 1997, the Company completed 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. In January 1997, the Company
successfully completed a 9.875% Senior Notes 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 subsidiaries, strategic
acquisitions, investments, and for general corporate purposes. The effective
interest rate on the tendered notes was approximately 10.8% after 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.
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
25
<PAGE>
undeveloped and may be more susceptible to market fluctuations or other
adverse changes than more developed capital markets. Finally, any delay in the
sale of a loan or lease pool could cause the Company's earnings to fluctuate
from quarter to quarter.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied to some extent on monoline insurance companies
to provide guarantees on outstanding senior interests in the trusts to which
such loans and leases are sold to enable it to obtain an "AAA/Aaa" rating for
such interests. Any unwillingness of the monoline insurance companies to
guarantee the senior interests in the Company's loan or lease pools could have
a material adverse effect on the Company's financial position and results of
operations.
The Company believes that the liquidity available at ICII and its
subsidiaries, will provide the capacity to adequately fund the Company's
lending activities. Under applicable regulations, dividends and loans from
SPTL to ICII and its other subsidiaries are subject to various limitations.
Since December 31, 1992, ICII's liquidity needs have included $51 million to
make capital contributions to SPTL. The combination of cash from operations,
including servicing sales, and the net proceeds received by the Company from
its Remarketed Par Securities and Senior Note offerings have allowed the
Company to meet its required liquidity needs for 1996 and 1997. These
available sources, in addition to the proceeds received from the Company's
secondary stock offering in April, 1996 and the completion of the Company's
offering of SPFC stock in June, 1996 have allowed the Company to meet its
capital resource needs for at least the next 12 months.
ISSUANCE OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings per
Share" ("APB 15") and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held common
stock or potential common stock. SFAS 128 will replace the presentation of
primary EPS with a presentation of basic EPS, and fully diluted EPS with diluted
EPS. SFAS 128 will also require dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator of the diluted EPS computation. This
statement shall be effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company has determined that this statement will have no
significant impact on the financial position, or results of operations, or
income per share for 1997.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). This statement requires disclosures about
capital structures that had been included in a number of previously existing
separate statements and opinions. SFAS 129 requires an entity to explain, in
summary form within the financial statements, pertinent rights and privileges of
the various securities outstanding such as; dividend and liquidation
preferences, participation rights, call prices and dates, conversion or exercise
prices or rates and pertinent dates, sinking fund requirements, unusual voting
rights and significant terms of contracts to issue additional shares. An entity
is also to disclose within the financial statements the number of shares issued
upon conversion, exercise, or satisfaction of required conditions during at
least the most recent annual period. In addition, with respect to preferred
stock, an entity is to disclose within the financial statements; liquidation
preferences of the stock, the aggregate or per share amounts at which preferred
stock may be called or subject to redemption and the aggregate and per-share
amount of arrearages in cumulative preferred dividends. This statement shall be
effective for the financial statements for both interim and annual periods
ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as
26
<PAGE>
other financial statements. This statement stipulates that comprehensive
income reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from nonowner sources.
Comprehensive income will thus represent the sum of net income and
comprehensive income, although SFAS 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated balance of
other comprehensive income is required to be displayed separately from
retained earnings and additional paid in capital in the statement of financial
condition. This statement is effective for the fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. At this time the
Company has determined that this Statement will have no significant impact on
its financial position or results of operations for 1997.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that selected information
about those operating segments be reported in interim financial statements. This
statement supersedes SFAS 14 "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 requires that all public enterprises report financial
and descriptive information about its reportable operating segments. Operating
segments are defined as components regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years should be restated. Management is in the process of
determining the impact, if any, this statement will have on the Company.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendment expands existing disclosures
requirements to include quantitative and qualitative information about market
risk inherent in market risk sensitive instruments. The required quantitative
and qualitative information should be disclosed outside the financial
statements and related notes thereto. The enhanced accounting policy
disclosure requirements are effective for the quarter ended June 30, 1997. As
the Company believes that the derivative financial instrument disclosure
contained within the notes to the financial statements of the 1996 Form 10-K
substantially conform with the accounting policy requirements of these
amendments, no further interim period disclosure has been provided. The rule
amendments that required expanded disclosure of quantitative and qualitative
information about market risk are effective with the 1997 Form 10-K.
SUBSEQUENT EVENTS
On August 1, 1997, the Company has announced that Imperial Credit Commercial
Mortgage Investment Corporation ("ICCMIC"), a Maryland corporation that has
elected to be treated as a Real Estate Investment Trust, has filed a
registration statement with the Securities and Exchange Commission covering a
proposed initial public offering of 20,000,000 shares of common stock. All of
the shares are being offered by ICCMIC. The net proceeds will be primarily
used to purchase initial investments. ICCMIC intends to invest primarily in
performing multifamily and commercial loans and in mortgage backed securities.
The offering is expected to close in the fourth quarter of 1997.
During July and August 1997, the Company sold 500,000 shares of SPFC common
stock at an average price per share of $15.11, resulting in a gain on sale of
approximately $5 million. This sale reduces the Company's ownership in SPFC
stock to 47.0% from 49.4% at March 31, 1997.
During August 1997, the Company announced that it proposes to make an
initial public offering of its subsidiary, FMAC. A registration statement
relating to the proposed public offering has not yet been filed with the
United States Securities and Exchange Commission. The terms of the securities
offered and the amount of the offering have not been disclosed. The offering
is expected to close in the fourth quarter of 1997.
27
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBIT--11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
QUARTER ENDED QUARTER ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before
extraordinary items.... $14,073 $43,041 $25,105 $51,657
------- ------- ------- -------
Extraordinary item Early
extinguishment of debt,
net of income taxes.... -- -- (3,995) --
------- ------- ------- -------
Net income.............. $14,073 $43,041 $21,110 $51,657
======= ======= ======= =======
Average number of shares
outstanding............ 38,508 36,106 38,464 34,117
Net effect of dilutive
stock options-based on
treasury stock method
using average market
price.................. 2,115 2,741 2,305 2,938
------- ------- ------- -------
Total average shares.... 40,623 38,847 40,769 37,055
======= ======= ======= =======
PRIMARY EARNINGS PER
SHARE:
Income before
extraordinary item..... $ 0.35 $ 1.11 $ 0.62 $ 1.39
Extraordinary item- Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (0.10) --
------- ------- ------- -------
Net income per share.... $ 0.35 $ 1.11 $ 0.52 $ 1.39
======= ======= ======= =======
FULLY DILUTED EARNINGS
PER SHARE:
Income before
extraordinary item..... $14,073 $43,041 $25,105 $51,657
Extraordinary item-Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (3,995) --
------- ------- ------- -------
Net Income.............. $14,073 $43,041 $21,110 $51,657
======= ======= ======= =======
Average number of shares
outstanding............ 38,508 36,106 38,464 34,117
Net effect of dilutive
stock options-based on
treasury stock method
using ending market
price.................. 2,281 2,798 2,318 3,059
------- ------- ------- -------
Total average shares.... 40,789 38,904 40,782 37,176
======= ======= ======= =======
FULLY DILUTED EARNINGS
PER SHARE:
Income before
extraordinary item..... $ 0.35 $ 1.11 $ 0.62 $ 1.39
Extraordinary item Loss
on early extinguishment
of debt, net of income
taxes.................. -- -- (0.10) --
------- ------- ------- -------
Net Income.............. $ 0.35 $ 1.11 $ 0.52 $ 1.39
======= ======= ======= =======
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Imperial Credit Industries, Inc.
Date: August 14, 1997 By: /s/ Kevin Villani
__________________________________
Kevin Villani
Executive Vice President and CFO
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,550
<INT-BEARING-DEPOSITS> 241,285
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 37,408
<INVESTMENTS-HELD-FOR-SALE> 45,134
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,694,031
<ALLOWANCE> 24,520
<TOTAL-ASSETS> 2,277,736
<DEPOSITS> 1,260,991
<SHORT-TERM> 358,129
<LIABILITIES-OTHER> 104,794
<LONG-TERM> 289,792
0
0
<COMMON> 147,208
<OTHER-SE> 110,087
<TOTAL-LIABILITIES-AND-EQUITY> 2,277,736
<INTEREST-LOAN> 96,442
<INTEREST-INVEST> 6,754
<INTEREST-OTHER> 1,391
<INTEREST-TOTAL> 104,587
<INTEREST-DEPOSIT> 34,084
<INTEREST-EXPENSE> 60,056
<INTEREST-INCOME-NET> 44,531
<LOAN-LOSSES> 8,606
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 54,852
<INCOME-PRETAX> 47,602
<INCOME-PRE-EXTRAORDINARY> 25,105
<EXTRAORDINARY> (3,995)
<CHANGES> 0
<NET-INCOME> 21,110
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 4.29
<LOANS-NON> 48,312
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,999
<CHARGE-OFFS> 7,969
<RECOVERIES> 607
<ALLOWANCE-CLOSE> 24,520
<ALLOWANCE-DOMESTIC> 24,520
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
