<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, 1998
COMMISSION FILE NUMBER: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
---------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110
TORRANCE, CALIFORNIA 90505
(310) 791-8020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
CLASS SHARES OUTSTANDING AT JULY 31, 1998
----- -----------------------------------
Common Stock, no par value 38,897,473
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
-------------------- ----
<C> <S> <C>
Consolidated Balance Sheets--June 30, 1998 and December 31, 1997..................... 2
Consolidated Statements of Income - Three and six months ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997...... 4
Consolidated Statement of Changes in Shareholders' Equity
-- Six months ended June 30, 1998.................................................... 5
Notes to Consolidated Financial Statements........................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 14
-------------------------------------------------------------------------------------
</TABLE>
PART II -- OTHER INFORMATION
----------------------------
<TABLE>
<C> <S> <C>
ITEM 1. Legal Proceedings.................................................................... 31
ITEM 2. Changes in Securities................................................................ 31
ITEM 3. Defaults Upon Senior Securities...................................................... 31
ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 31
ITEM 5. Other information.................................................................... 31-32
ITEM 6. Exhibit -- Statement Regarding Computation of Earnings Per Share..................... 33
Signatures........................................................................... 34
</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,
---------- ------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash...................................................................... $ 155,306 $ 50,597
Interest bearing deposits................................................. 13,931 103,738
Investment in Federal Home Loan Bank stock................................ 4,795 5,646
Securities held for trading, at market.................................... 70,529 120,904
Securities available for sale, at market.................................. 111,242 107,727
Loans and leases held for sale............................................ 178,860 162,571
Loans and leases held for investment, net................................. 1,587,485 1,266,718
Purchased and originated servicing rights................................. 5,114 4,731
Retained interest in loan and lease securitizations....................... 53,216 43,105
Accrued interest receivable............................................... 13,009 9,132
Premises and equipment, net............................................... 9,693 9,513
Other real estate owned, net.............................................. 7,322 10,905
Goodwill.................................................................. 34,290 35,607
Investment in Southern Pacific Funding Corporation........................ 78,042 65,303
Investment in Franchise Mortgage Acceptance Company....................... 59,685 53,099
Other assets.............................................................. 33,043 52,798
---------- ----------
Total assets........................................................... $2,415,562 $2,102,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................................. $1,514,805 $1,156,022
Borrowings from Federal Home Loan Bank.................................... 20,000 45,000
Other borrowings.......................................................... 119,253 144,841
Remarketed Par Securities................................................. 70,000 70,000
Senior Notes.............................................................. 219,835 219,813
Accrued interest payable.................................................. 22,972 21,484
Accrued income taxes payable.............................................. 67,540 60,528
Minority interest in consolidated subsidiaries............................ 2,928 3,174
Other liabilities......................................................... 34,824 57,299
---------- ----------
Total liabilities...................................................... 2,072,157 1,778,161
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued or outstanding.. -- --
Common stock, no par value. Authorized 80,000,000 shares; 38,619,351
and 38,791,439 shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively........................................ 142,169 147,109
Retained earnings......................................................... 204,060 174,898
Accumulated other comprehensive income:
unrealized (loss) gain on securities available for sale, net........ (2,824) 1,926
---------- ----------
Total shareholders' equity............................................. 343,405 323,933
---------- ----------
Total liabilities and shareholders' equity............................. $2,415,562 $2,102,094
========== ==========
</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 ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans and leases..................................... $ 3,273 $28,558 $ 8,845 $ 37,224
------- ------- -------- --------
Interest on loans and leases......................................... 53,128 53,512 98,664 96,442
Interest on investments.............................................. 4,063 1,129 9,035 6,754
Interest on other finance activities................................. 2,673 734 5,804 1,391
------- ------- -------- --------
Total interest income............................................. 59,864 55,375 113,503 104,587
Interest on deposits................................................. 19,911 17,082 38,198 34,084
Interest on other borrowings......................................... 2,385 8,486 4,139 15,104
Interest on long term debt........................................... 7,555 6,084 15,109 10,868
------- ------- -------- --------
Total interest expense............................................ 29,851 31,652 57,446 60,056
------- ------- -------- --------
Net interest income............................................... 30,013 23,723 56,057 44,531
Provision for loan and lease losses.................................. 3,450 5,736 7,300 8,606
------- ------- -------- --------
Net interest income after provision for loan and lease losses........ 26,563 17,987 48,757 35,925
------- ------- -------- --------
Loan servicing income................................................ 4,055 2,170 8,083 3,450
Gain (loss) on sale of securities.................................... 6 -- 6 (403)
Equity in net income of Southern Pacific Funding Corporation......... 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage Acceptance Company........ 3,817 -- 6,586 --
Investment banking fees.............................................. 6,433 -- 10,968 --
Asset management fees................................................ 1,575 1,237 2,780 2,816
Gain on sale of Southern Pacific Funding Corporation stock........... -- -- -- 4,306
Other income......................................................... 2,226 875 4,374 1,551
------- ------- -------- --------
Total other income................................................ 24,876 10,960 45,536 24,651
------- ------- -------- --------
Total revenue........................................................ 54,712 57,505 103,138 97,800
------- ------- -------- --------
Expenses:
Personnel expense.................................................... 15,519 12,433 31,773 23,104
Amortization of servicing rights..................................... 360 206 701 225
Occupancy expense.................................................... 1,482 983 3,028 1,890
Data processing expense.............................................. 410 378 903 805
Net expense (income) of other real estate owned...................... 288 3,480 (71) 4,237
Professional services................................................ 2,534 3,615 5,289 6,203
FDIC insurance premiums.............................................. 321 -- 321 --
Telephone and other communications................................... 867 754 1,624 1,183
Amortization of Goodwill............................................. 654 897 1,317 1,497
General and administrative expense................................... 6,513 6,318 11,673 11,054
------- ------- -------- --------
Total expenses.................................................... 28,948 29,064 56,558 50,198
------- ------- -------- --------
Income before income taxes, minority interest and
extraordinary item................................................. 25,764 28,441 46,580 47,602
Income taxes......................................................... 9,360 9,866 17,184 17,843
Minority interest in income of consolidated subsidiaries............. 142 4,502 234 4,654
------- ------- -------- --------
Income before extraordinary item..................................... 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early extinguishment of
debt, net of income taxes.......................................... -- -- -- (3,995)
------- ------- -------- --------
Net income........................................................ $16,262 $14,073 $ 29,162 $ 21,110
======= ======= ======== ========
Basic income per share:
Income before extraordinary item..................................... $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item--Loss on early extinguishment of
debt, net of income taxes.......................................... -- -- -- (0.10)
------- ------- -------- --------
Net Income per common share.......................................... $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======== ========
Diluted income per share:
Income before extraordinary item..................................... $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item--Loss on early extinguishment of debt, net of
income taxes....................................................... -- -- -- (0.10)
------- ------- -------- --------
Net Income per common share.......................................... $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income...................................................................................... $ 29,162 $ 21,110
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan and lease losses........................................................... 7,300 8,606
Depreciation.................................................................................. 1,899 2,278
Amortization of goodwill...................................................................... 1,317 1,497
Amortization of servicing rights.............................................................. 701 225
Accretion of discount......................................................................... (5,804) (1,391)
Gain on sale of loans and leases.............................................................. (8,845) (37,224)
Gains on sale of SPFC stock................................................................... -- (4,306)
Equity in net earnings of SPFC................................................................ (12,739) (12,931)
Equity in net earnings of FMC................................................................. (6,586) --
Loss on sale of OREO.......................................................................... 1,217 3,384
(Recovery) writedowns on OREO................................................................. (1,481) 147
Originations of loans held for sale........................................................... (349,400) (655,900)
Sales and collections on loans held for sale.................................................. 341,956 1,059,255
Purchase of trading securities................................................................ (20,503) (15,786)
Sale of trading securities.................................................................... 79,751 --
Net change in securities held for investment.................................................. -- (2,647)
Net change in accrued interest receivable..................................................... (3,877) 358
Net change in retained interest in loan and lease securitizations............................. (4,307) (6,382)
Net change in other assets.................................................................... 23,542 (11,264)
Net change in other liabilities............................................................... (24,507) 19,342
--------- ----------
Net cash provided by operating activities....................................................... 48,796 368,371
--------- ----------
Cash flows from investing activities:
Net change in interest bearing deposits....................................................... 89,807 (237,916)
Proceeds from sale of other real estate owned................................................. 4,109 1,027
Sales of securities available for sale........................................................ -- 15,176
Net change in loans held for investment....................................................... (328,329) (68,180)
Purchases of securities available for sale.................................................... (10,327) --
Purchases of premises and equipment........................................................... (2,079) (3,130)
Proceeds from sale of SPFC stock.............................................................. -- 6,151
Purchase of stock in Federal Home Loan Bank................................................... -- (1,985)
Redemption of stock in Federal Home Loan Bank................................................. 1,000 10,900
Cash utilized for acquisitions................................................................ -- (750)
--------- ----------
Net cash (used in) provided by investing activities............................................. (245,819) (278,707)
--------- ----------
Cash flows from financing activities:
Net increase in deposits...................................................................... 358,783 191,807
Advances from Federal Home Loan Bank.......................................................... 44,500 30,000
Repayments of advances from Federal Home Loan Bank............................................ (69,500) (170,500)
Net change in other borrowings................................................................ (25,588) (335,994)
Proceeds from issuance of Senior Notes due 2007............................................... -- 194,500
Proceeds from offering of Remarketed Par Securities........................................... -- 68,075
Repayments of Senior Notes due 2004........................................................... -- (73,241)
Retirement of common stock.................................................................... (6,946) --
Net change in minority interest............................................................... (246) (48,888)
Proceeds from exercise of stock options....................................................... 729 880
--------- ----------
Net cash provided by (used in) financing activities............................................. 301,732 (143,361)
--------- ----------
Net change in cash.............................................................................. 104,709 (53,697)
Cash at beginning of period..................................................................... 50,597 74,247
--------- ----------
Cash at end of period........................................................................... $ 155,306 $ 20,550
========= ==========
</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 (LOSS) ON
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- ----- -------- ------------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997................... 38,791 $147,109 $174,898 $ 1,926 $323,933
Exercise of stock options.................... 181 721 -- -- 721
Retirement of stock.......................... (353) (6,938) -- -- (6,938)
Tax benefit from exercise of stock options... -- 1,277 -- -- 1,277
Decrease in unrealized gain on
securities available for sale, net.......... -- -- -- (4,750) (4,750)
Net income for the six months ended
June 30, 1998............................... -- -- 29,162 -- 29,162
------ -------- -------- ------- --------
Balance, June 30, 1998....................... 38,619 $142,169 $204,060 $(2,824) $343,405
====== ======== ======== ======= ========
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.1% owned by Imperial Bank. In 1991 Imperial Bank recapitalized
the Company to conduct a full service mortgage banking operation, from which it
has diversified beginning in 1995. The consolidated financial statements include
Imperial Credit Industries, Inc. ("ICII"), its significant wholly-owned
operating subsidiaries, significant majority-owned operating subsidiaries and
significant equity investments in two publicly traded companies (collectively
the "Company"). The significant wholly-owned subsidiaries include Southern
Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit
Advisors, Inc. ("ICAI"), Imperial Credit Commercial Asset Management
Corporation, ("ICCAMC"), Auto Marketing Network, Inc. ("AMN"), Imperial Credit
Worldwide Ltd. ("ICW") and Statewide Documentation, Inc. ("SDI"). The
significant operating majority owned consolidated subsidiary is Imperial Capital
Group, LLC ("ICG") which is 60% owned by the Company and 40% owned by ICG's
management. The significant equity investments in publicly traded companies are
Southern Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC, and Franchise
Mortgage Acceptance Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC
were former consolidated subsidiaries of the Company. The Company manages
through its ICCAMC subsidiary, an 8.9% equity ownership interest in a commercial
REIT, Imperial Credit Commercial Mortgage Investment Corporation (Nasdaq:ICMI).
The Company also owns Imperial Credit Capital Trust I ("ICCT1"), a subsidiary of
the Company organized for the sole purpose of issuing the $70.0 million of
10.25% Remarketed Par securities. All material intercompany balances and
transactions with consolidated subsidiaries and unconsolidated subsidiaries have
been eliminated.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. 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, 1997.
In preparing the consolidated 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 1998 presentation.
3. NET INCOME PER SHARE INFORMATION
The following table reconciles the number of shares used in the
computations of basic and diluted income per share for the second quarter and
year to date periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS
QUARTER ENDED JUNE 30, PERIOD ENDED JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding during the
year used to compute basic income per share.................... 38,752,018 38,508,484 38,747,417 38,463,568
Assumed common shares issued on exercise of stock
options........................................................ 2,060,373 2,114,095 2,052,063 2,305,349
---------- ---------- ---------- ----------
Number of common shares used to compute diluted income
per share...................................................... 40,812,391 40,622,579 40,799,480 40,768,917
========== ========== ========== ==========
</TABLE>
6
<PAGE>
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company's comprehensive income is
comprised of net income plus the change in the unrealized gain (loss) on
securities available for sale, net for all periods reported. Comprehensive
income for the three and six months ended June 30, 1998 totaled $11.4 million
and $24.4 million, as compared to $15.9 million and $22.8 million for the same
periods last year, respectively. Accumulated other comprehensive income (loss),
consisting of the unrealized (loss) gain on securities available for sale at
June 30, 1998 and December 31, 1997 totaled ($2.8) million and $1.9 million
respectively.
5. ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a foreign-
currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is in the process of determining the impact, if any, this statement
will have on the Company.
6. LOANS AND LEASES HELD FOR SALE
Loans and leases held for sale consisted of the following at June 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
----------- ---------------
1998 1997
---- ----
<S> <C> <C>
(IN THOUSANDS)
Loans secured by real estate:
Single family 1-4...................... $ 30,102 $ 13,169
Multi-family........................... 110,284 68,294
-------- --------
140,386 81,463
Automobile loans.......................... 14,224 9,102
Leases.................................... 9,816 13,561
Commercial loans.......................... 14,434 58,445
-------- --------
$178,860 $162,571
======== ========
</TABLE>
7. LOAN AND LEASE COMMITMENTS
At June 30, 1998, the Company's consolidated lending commitments were as
follows: (In thousands)
<TABLE>
<CAPTION>
COMMITMENT
TYPE OF LENDING COMMITMENT AMOUNT
- -------------------------- ------
<S> <C>
Loan and unused line commitments $ 994,020
Standby letters of credit 3,184
Lease Financing 20,600
----------
$1,017,804
==========
</TABLE>
7
<PAGE>
8. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS
The following represents summarized consolidating financial information as
of June 30, 1998 and December 31, 1997, and for the six months ended June 30,
1998 and 1997, with respect to the financial position, results of operations and
cash flows of the Company and its wholly-owned and majority-owned subsidiaries.
On January 17, 1997, the Company sold $200 million of 9.875% Senior Notes due
2007. As of June 30, 1998, the 9.875% Senior Notes are guaranteed by five of the
Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, ICW and AMN (the
"Guarantor Subsidiaries"). As of June 30, 1998, the non-guarantor subsidiaries
are SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30,
1997. 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. None of the subsidiary guarantors is restricted from
making distributions to the Company.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash...................................................... $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
Interest bearing deposits................................. 9,881 550 3,500 -- 13,931
Investment in Federal Home Loan Bank stock................ -- -- 4,795 -- 4,795
Securities available for sale and trading................. 138,967 22,979 19,825 -- 181,771
Loans and leases held for sale............................ 12,252 41,890 124,718 -- 178,860
Loans and leases held for investment, net................. 72,226 11,705 1,538,554 (35,000) 1,587,485
Investment in SPFC........................................ 78,042 -- -- -- 78,042
Investment in FMC......................................... 59,685 -- -- -- 59,685
Purchased and originated servicing rights................. -- -- 5,114 -- 5,114
Retained interest in loan and lease securitizations....... -- 53,216 -- -- 53,216
Investment in subsidiaries................................ 312,771 -- -- (312,771) --
Goodwill.................................................. -- 12,753 21,537 -- 34,290
Other assets.............................................. 47,390 (5,660) 22,262 (925) 63,067
-------- -------- ---------- --------- ----------
Total assets............................................ $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
-------- -------- ---------- --------- ----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits.................................................. $ -- $ (33) $1,517,361 $ (2,523) $1,514,805
Other borrowings.......................................... -- 23,253 152,925 (36,925) 139,253
Remarketed Par Securities................................. 72,165 (2,165) -- -- 70,000
Senior notes.............................................. 219,835 -- -- -- 219,835
Minority interest in consolidated subsidiaries............ 946 (86) 167 1,901 2,928
Other liabilities......................................... 98,459 14,065 20,474 (7,662) 125,336
-------- -------- ---------- --------- ----------
Total liabilities....................................... 391,405 35,034 1,690,927 (45,209) 2,072,157
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock........................................... -- 12,000 -- (12,000) --
Common stock.............................................. 142,169 135,389 100,739 (236,128) 142,169
Retained earnings......................................... 204,060 (38,091) 95,973 (57,882) 204,060
Unrealized (loss) on securities available for sale........ (2,824) -- -- -- (2,824)
-------- -------- ---------- --------- ----------
Total shareholders' equity.............................. 343,405 109,298 196,712 (306,010) 343,405
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity.............. $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
-------- -------- ---------- --------- ----------
</TABLE>
8
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash...................................................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
Interest bearing deposits................................. 31,390 1,149 71,199 -- 103,738
Investment in Federal Home Loan Bank stock................ -- -- 5,646 -- 5,646
Securities available for sale and trading................. 107,671 21,031 99,929 -- 228,631
Loans and leases held for sale............................ 12,138 23,694 126,739 -- 162,571
Loans and leases held for investment, net................. 78,922 44,941 1,197,430 (54,575) 1,266,718
Investment in SPFC........................................ 65,303 -- -- -- 65,303
Purchased and originated servicing rights................. -- -- 4,731 -- 4,731
Investment in FMC......................................... 53,099 -- -- -- 53,099
Retained interest in loan and lease securitizations....... -- 43,105 -- -- 43,105
Investment in subsidiaries................................ 281,454 -- -- (281,454) --
Goodwill.................................................. -- 13,229 22,378 -- 35,607
Other assets.............................................. 59,911 (1,104) 26,473 (2,932) 82,348
-------- -------- ---------- --------- ----------
Total assets............................................ $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits.................................................. $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings.......................................... -- 30,250 196,528 (36,937) 189,841
Remarketed Par Securities................................. 72,165 -- (2,165) -- 70,000
Senior notes.............................................. 219,813 -- -- -- 219,813
Minority interest in consolidated subsidiaries............ 946 20 111 2,097 3,174
Other liabilities......................................... 86,260 7,327 45,095 629 139,311
-------- -------- ---------- --------- ----------
Total liabilities....................................... 379,184 37,597 1,429,409 (68,029) 1,778,161
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock........................................... -- 12,000 -- (12,000) --
Common stock.............................................. 147,109 125,139 89,342 (214,481) 147,109
Retained earnings......................................... 174,898 (22,023) 79,092 (57,069) 174,898
Unrealized gain on securities available for sale.......... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders' equity.............................. 323,933 115,116 168,434 (283,550) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity.............. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
</TABLE>
9
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases.......................... $ 46 $ 3,072 $ 5,727 $ -- $ 8,845
------- ------- ------- --------
Interest income........................................... 14,879 8,488 92,365 (2,229) 113,503
Interest expense.......................................... 14,882 1,016 43,777 (2,229) 57,446
------- ------- ------- -------- --------
Net interest (expense) income............................. (3) 7,472 48,588 -- 56,057
Provision for loan and lease losses....................... -- 300 7,000 -- 7,300
------- ------- ------- -------- --------
Net interest (expense) income after provision for loan
and lease losses...................................... (3) 7,172 41,588 -- 48,757
------- ------- ------- -------- --------
Loan servicing (expense) income........................... (279) 5,011 3,351 -- 8,083
Investment banking fees................................... -- -- 10,968 -- 10,968
Asset management fees..................................... -- 2,780 -- -- 2,780
Equity in net income of SPFC.............................. 12,739 -- -- -- 12,739
Equity in net income of FMC............................... 6,586 -- -- -- 6,586
Other (expense) income.................................... (424) 1,079 2,725 1,000 4,380
------- ------- ------- -------- --------
Total other income...................................... 18,622 8,870 17,044 1,000 45,536
------- ------- ------- -------- --------
Total revenues....................................... 18,665 19,114 64,359 1,000 103,138
------- ------- ------- -------- --------
EXPENSES:
Personnel expense......................................... 2,115 8,885 20,773 -- 31,773
Amortization of servicing rights.......................... -- -- 701 -- 701
Occupancy expense......................................... 610 626 1,792 -- 3,028
Data processing expense................................... 251 142 510 -- 903
Net (income) expense of other real estate owned........... (539) 791 (323) -- (71)
Professional services..................................... 1,496 1,243 2,550 -- 5,289
Telephone and other communications........................ 156 713 755 -- 1,624
Amortization of goodwill.................................. -- 475 842 -- 1,317
General, administrative and other expense................. 1,149 2,976 7,869 -- 11,994
------- ------- ------- -------- --------
Total expenses.......................................... 5,238 15,851 35,469 -- 56,558
------- ------- ------- -------- --------
Income before income taxes, minority interest and
extraordinary item....................................... 13,427 3,263 28,890 1,000 46,580
Income taxes.............................................. 3,364 1,520 11,877 423 17,184
------- ------- ------- -------- --------
Income before minority interest and extraordinary item.... 10,063 1,743 17,013 577 29,396
Minority interest in (loss) income of
consolidated subsidiaries................................ -- (106) 56 284 234
------- ------- ------- -------- --------
Income before equity in undistributed
income of subsidiaries and extraordinary item............ 10,063 1,849 16,957 293 29,162
Equity in undistributed income of subsidiaries............ 19,099 -- -- (19,099) --
------- ------- ------- -------- --------
Net income.............................................. $29,162 $ 1,849 $16,957 $(18,806) $ 29,162
======= ======= ======= ======== ========
</TABLE>
10
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of loans and leases................... $(2,159) $ 6,402 $32,803 $ 178 $ 37,224
------- ------- ------- -------- --------
Interest income........................................... 11,271 13,017 84,517 (4,218) 104,587
Interest expense.......................................... 10,971 4,512 48,791 (4,218) 60,056
------- ------- ------- -------- --------
Net interest income....................................... 300 8,505 35,726 -- 44,531
Provision for loan and lease losses....................... -- 2,981 5,625 -- 8,606
------- ------- ------- -------- --------
Net interest income after Provision for loan
and lease losses...................................... 300 5,524 30,101 -- 35,925
------- ------- ------- -------- --------
Loan servicing (expense) income........................... (1,756) 2,734 2,472 3,450
Asset management fees..................................... -- 2,816 -- -- 2,816
Gain on sale of SPFC stock................................ 4,306 -- -- -- 4,306
Equity in net income of SPFC.............................. 12,931 -- -- -- 12,931
Other (expense) income.................................... (1,204) 955 1,800 (403) 1,148
------- ------- ------- -------- --------
Total other income...................................... 14,277 6,505 4,272 (403) 24,651
------- ------- ------- -------- --------
Total revenues....................................... 12,418 18,431 67,176 (225) 97,800
------- ------- ------- -------- --------
EXPENSES:
Personnel expense......................................... 1,216 6,740 15,148 -- 23,104
Amortization of servicing rights.......................... -- 225 -- -- 225
Occupancy expense......................................... 510 281 1,099 -- 1,890
Data processing expense................................... 287 167 351 -- 805
Net expense of other real estate owned.................... 2,652 -- 1,585 -- 4,237
Professional services..................................... 2,226 696 3,281 -- 6,203
Telephone and other communications........................ 110 418 655 -- 1,183
Amortization of goodwill.................................. -- 772 725 -- 1,497
General, administrative and other expense................. 2,564 3,855 4,860 (225) 11,054
------- ------- ------- -------- --------
Total expenses.......................................... 9,565 13,154 27,704 (225) 50,198
------- ------- ------- -------- --------
Income before income taxes, minority interest, deferred
inter-company expense and extraordinary item............. 2,853 5,277 39,472 -- 47,602
Income taxes.............................................. 4,848 2,236 10,759 -- 17,843
------- ------- ------- -------- --------
(Loss) income before minority interest and
extraordinary item....................................... (1,995) 3,041 28,713 -- 29,759
Minority interest in income of consolidated subsidiaries.. -- -- -- 4,654 4,654
------- ------- ------- -------- --------
(Loss) income before equity in undistributed
income of subsidiaries and extraordinary item............ (1,995) 3,041 28,713 (4,654) 25,105
Equity in undistributed income of subsidiaries............ 27,100 -- -- (27,100) --
Extraordinary item--Loss on early extinguishment of
debt, net of income taxes............................... (3,995) -- -- -- (3,995)
------- ------- ------- -------- --------
Net (loss) income....................................... $21,110 $ 3,041 $28,713 $(31,754) $ 21,110
======= ======= ======= ======== ========
</TABLE>
11
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION> NON-
----------
GUARANTOR GUARANTOR
--------- ---------
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities............................................. $ (8,541) $(34,389) $ 99,993 $ (8,267) $ 48,796
-------- -------- --------- -------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits............... 21,509 566 67,700 32 89,807
Purchase of securities available for sale............. (10,327) -- -- -- (10,327)
Proceeds from sale of OREO............................ 855 2,550 704 -- 4,109
Net change in loans held for investment............... 6,434 19,156 (348,207) (5,712) (328,329)
Net change in investment in Subsidiaries.............. (12,127) -- -- 12,127 --
Other, net............................................ (1,219) (123) (147) 410 (1,079)
-------- -------- --------- -------- ---------
Net cash provided by (used in) investing activities.... 5,125 22,149 (279,950) 6,857 (245,819)
-------- -------- --------- -------- ---------
Cash flows from financing activities:
Net increase in deposits.............................. -- -- 327,520 31,263 358,783
Advances from Federal Home Loan Bank.................. -- -- 44,500 -- 44,500
Repayments of advances from Federal Home
Loan Bank........................................... -- -- (69,500) -- (69,500)
Net change in other borrowings........................ -- 12,577 (18,603) (19,562) (25,588)
Retirement of common stock............................ (6,946) -- -- -- (6,946)
Other, net............................................ 729 (106) 56 (196) 483
-------- -------- --------- -------- ---------
Net cash (used in) provided by financing activities..... (6,217) 12,471 283,973 11,505 301,732
-------- -------- --------- -------- ---------
Net change in cash.................................... (9,633) 231 104,016 10,095 104,709
Cash at beginning of period........................... 13,229 6,668 43,318 (12,618) 50,597
-------- -------- --------- -------- ---------
Cash at end of period................................. $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
======== ======== ========= ======== =========
</TABLE>
12
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION> NON-
----
GUARANTOR GUARANTOR
--------- ---------
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities............................................. $ 13,552 $(141,381) $ 498,690 $ (2,490) $ 368,371
--------- --------- --------- -------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits............... (112,354) (101) (125,559) 98 (237,916)
Net change in loans held for investment............... (76,881) (16,140) (102,067) 126,908 (68,180)
Proceeds from sale of SPFC stock...................... 6,151 -- -- -- 6,151
Redemption of Federal Home Loan Bank stock............ -- -- 10,900 -- 10,900
Cash utilized for acquisitions........................ (750) -- -- -- (750)
Net change in investment in Subsidiaries.............. 45,652 -- -- (45,652) --
Other, net............................................ (6,018) 81,049 17,925 (81,868) 11,088
--------- --------- --------- -------- ---------
Net cash (used in) provided by investing activities..... (144,200) 64,808 (198,801) (514) (278,707)
--------- --------- --------- -------- ---------
Cash flows from financing activities:
Net change in deposits................................ -- -- 194,331 (2,524) 191,807
Advances from Federal Home Loan Bank.................. -- -- 30,000 -- 30,000
Repayments of advances from Federal Home
Loan Bank........................................... -- -- (170,500) -- (170,500)
Net change in other borrowings........................ (15,363) 72,809 (391,059) (2,381) (335,994)
Proceeds from offering of Senior Notes................ 194,500 -- -- -- 194,500
Repurchase of Senior Notes............................ (73,241) -- -- -- (73,241)
Proceeds from offering of Remarketed Par Securities... 68,075 -- -- -- 68,075
Net change in minority interest....................... (44,400) -- -- (4,488) (48,888)
Other, net............................................ 880 750 (14,920) 14,170 880
--------- --------- --------- -------- ---------
Net cash provided by (used in) financing activities..... 130,451 73,559 (352,148) 4,777 (143,361)
--------- --------- --------- -------- ---------
Net change in cash.................................... (197) (3,014) (52,259) 1,773 (53,697)
Cash at beginning of period........................... 5,213 7,973 64,755 (3,694) 74,247
--------- --------- --------- -------- ---------
Cash at end of period................................. $ 5,016 $ 4,959 $ 12,496 $ (1,921) $ 20,550
========= ========= ========= ======== =========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with consolidated
assets of $2.4 billion as of June 30, 1998, is a diversified commercial and
consumer lending, financial services and investment holding company, organized
in 1986 with its headquarters located in Torrance, California. Its principal
business activities consist of the operation of five significant wholly owned
operating subsidiaries: Southern Pacific Bank ("SPB"), Imperial Business Credit
Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Imperial Credit
Commercial Asset Management Corporation ("ICCAMC") and Imperial Credit
Worldwide, Ltd. ("ICW"), one significant majority owned consolidated operating
subsidiary, Imperial Capital Group, LLC ("ICG") and significant equity
investments in two publicly traded companies, Southern Pacific Funding
Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage Acceptance Company
("FMC") Nasdaq: Symbol: FMAX.
STRATEGIC FOCUS AND ACQUISITIONS
Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. In 1995, the Company began to diversify
away from the conforming residential mortgage lending business, and began to
focus on selected lending businesses, including non-conforming residential
mortgage banking, franchise mortgage lending, sub-prime mortgage banking, sub-
prime auto lending, commercial mortgage banking, business lending and consumer
lending. During 1996 and 1997, the Company successfully completed initial
public offerings of the sub-prime mortgage banking and franchise lending
subsidiaries into SPFC and FMC, respectively. As of June 30, 1998, the Company
owns 47.0% and 38.4%, respectively, of SPFC's and FMC's common stock as
investments accounted for under the equity method, respectively.
The Company's loans and leases by sector consist primarily of the following:
asset based lending, commercial mortgage banking and income producing property
loans; business lending--equipment leasing, asset-based lending, and
participation in syndicated commercial lending; consumer loans--sub-prime auto
loans and Title I home improvement loans. The Company solicits loans and leases
from brokers on a wholesale and portfolio basis and originates loans directly
from borrowers. The majority of the Company's loans and leases, other than those
held by SPB for investment, are sold in secondary markets through
securitizations and whole loan sales.
In March 1997, the Company acquired all the outstanding common stock of AMN, a
sub-prime auto lender engaged in the financing of new and used motor vehicles on
a national basis. The acquisition was recorded using the purchase method of
accounting. The purchase price was allocated to the net assets acquired based on
their fair value and goodwill of approximately $20.8 million was recorded. Since
the March 1997 acquisition date, AMN posted operating losses and experienced
significant increases in non-performing assets, loan charge-offs and loan loss
provisions. In December 1997, the Company developed revised operating
projections which indicated that the goodwill resulting from the AMN acquisition
was not recoverable. Accordingly, the remaining goodwill balance of $20.1
million was written off during the fourth quarter of 1997. See "--Subsequent
Event"--describing AMN's discontinued operations disclosure.
In July 1997, the Company formed ICG, which, together with its subsidiaries
Imperial Capital, LLC ("IC") and Imperial Asset Management, LLC ("IAM"), to
offer individual and institutional investors financial products and services.
IC is a registered broker/dealer with the United States Securities and Exchange
Commission and is a member of the National Association of Securities Dealers,
Inc.. IC provides investment opportunities and research to individual and
institutional investors, raises private and public capital for middle market
companies, and trades debt, equity and asset backed securities. IAM is an
investment advisor registered with the United States Securities and Exchange
Commission, and provides investment management services to high net worth
individuals and institutional clients. ICG is a subsidiary which the Company
controls through its 60% voting and equity ownership interest.
14
<PAGE>
During the fourth quarter of 1997, the Company formed ICCAMC, a wholly-owned
subsidiary, to oversee the day to day operations of Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") (Nasdaq: ICMI), a real estate investment
trust investing primarily in performing multi-family and commercial real estate
loans, mortgage-backed securities and real property investments. In October
1997, ICCMIC completed its initial public offering and sold approximately 34.5
million shares of common stock at $15.00 per share resulting in net proceeds of
approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC
common stock in the offering and an additional 100,000 shares in December 1997.
As of June 30, 1998, the Company owned 8.9% of the common stock of ICCMIC.
During the second quarter ended June 30, 1998, the Company formed and began
managing an investment hedge fund, Cambria Investment Partnership I, LP. At
June 30, 1998, Cambria had assets under management of $113.1 million.
The Company now operates as a diversified commercial and consumer lending,
financial services and investment holding company providing financial services
products in the following sectors: business finance lending, commercial mortgage
and consumer lending, investment products and asset management services.
The Company's core business has remained consistent in that it originates
loans and leases funded primarily by deposits, warehouse lines of credit,
repurchase facilities, securitizations and whole loan sales in the secondary
market. The Company's business strategy emphasizes:
. Investing in and managing businesses in niche segments of the financial
services industry.
. Conservative, disciplined underwriting and credit risk management.
. Loan and lease originations, where possible, on a wholesale basis.
. Securitization or sale in the secondary market of substantially all of the
Company's loans and leases, other than those held by SPB for investment.
. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
The Company diversified its business lines into investment products and asset
management services by focusing on the creation and acquisition of additional
businesses in the financial services industry in order to reduce its dependency
on residential and commercial mortgage lending. When acquiring new businesses or
targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth and
profitability and to reduce the risks associated with operating the newly
acquired entity. The Company intends to retain a significant equity investment
in acquired companies to provide a source of future earnings and cash flow for
the Company.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the "Year 2000" problem
concerning existing computer systems. The Year 2000 problem affects every
computer and subsystem the Company operates, both in-house and from independent
servicers and vendors. The issue is whether the Company's computer systems will
properly recognize the "00" date when the year changes to 2000. Computer
systems that do not properly recognize the "00" date could generate erroneous
data or cause a computer system to fail.
The Company is utilizing both internal and external resources to correct,
reprogram and test the computer systems for the Year 2000 compliance. It is
anticipated that all reprogramming changes will be completed and installed by
December 31, 1998, allowing adequate time for testing all data from the
Company's in-house, independent servicers and vendor computer systems through
March 31,1999. Management has assessed the Year 2000 compliance costs and does
not believe such costs will have a material effect on the Company's consolidated
financial statements.
15
<PAGE>
BUSINESS FINANCE LENDING
COMMERCIAL EQUIPMENT LEASING
IBC's lease originations totaled $26.6 million and $61.7 million for the three
and six months ended June 30, 1998 as compared to $34.4 million and $64.5
million for the same period last year. IBC securitized $31.2 million and $66.7
million of leases during the three and six months ended June 30, 1998 as
compared to $17.6 million and $115.5 million of leases for the same periods last
year.
ASSET BASED LENDING
At June 30, 1998, the Coast Business Credit ("CBC") loan portfolio represented
lending relationships with approximately 165 customers, with an average total
loan per customer of $3.6 million. During 1997, CBC executed an expansion plan
which has increased its customer base outside of California. CBC now operates
four loan production centers in California and additional loan production
centers in Atlanta, Baltimore, Boston, Chicago, Cleveland, Detroit, Minneapolis,
Phoenix, Portland, Providence, and Seattle. At June 30, 1998 and December 31,
1997, CBC had outstanding loans totaling $586.8 million and $484.8 million, of
which $184.2 million and $201.8 million were outstanding to technology
companies, respectively. CBC had open unused commitments of $405.4 million at
June 30, 1998. As of June 30, 1998, CBC had total loan commitments of $992.2
million.
LOAN PARTICIPATION AND INVESTMENT GROUP ("LPIG")
At June 30, 1998, loan participations held by the LPIG division of SPB ranged
in size from approximately $420,000 to approximately $16 million, as compared to
approximately $800,000 to $17.5 million at June 30, 1997, respectively. As of
June 30, 1998, LPIG committed to fund approximately $674.0 million of senior
secured loan participation commitments. Loans outstanding under LPIG's
participation commitments at June 30, 1998 totaled $292.5 million.
AUTO LEND GROUP
Auto Lend had $73.8 million of commitments and $17.4 million of loans
outstanding at June 30, 1998. SPB believes that Auto Lend's products offer
synergistic opportunities, when offered in connection with SPB's sub-prime auto
lending program, to provide car dealers a complete financing package. See
"Consumer Lending, Sub-prime Auto Lending."
COMMERCIAL MORTGAGE LENDING
INCOME PROPERTY LENDING DIVISION ("IPLD")
For the three months and six months ended June 30, 1998, the IPLD division of
SPB funded approximately $106.9 million and $171.6 million in loans, as compared
to $72.2 million and $148.1 million in loans for the same periods last year,
respectively.
CONSUMER LENDING
SUB-PRIME AUTO LENDING
SPB's Auto Lending Division originated $40.7 million and $73.2 million in sub-
prime auto loans during the three and six months ended June 30, 1998 as compared
to $23.4 million and $39.7 million, for the same periods last year,
respectively. The Company currently originates sub-prime auto loans through
three Northern California retail offices.
AMN originated $5.5 million and $8.1 million in sub-prime auto loans during
the three and six months ended June 30, 1998, as compared to $77.8 million and
$93.9 million, for the same periods last year, respectively. AMN had total
assets of $61.7 million at June 30, 1998. Total revenues for the three and six
months ended June 30, 1998 were $2.9 million and $3.8 million as compared to
$3.3 million and $4.4 million for the three months ended June 30, 1997 and the
period from the acquisition date of March 15, 1997 to June 30, 1997,
respectively. For the three and six months ended June 30, 1998, AMN's net losses
were $142,000 and $1.8 million as compared to net losses of $1.1 million and
$765,000 for the three months ended June 30, 1997 and the period from the
acquisition date of March 15, 1997 to June 30, 1997, respectively. See
"--Subsequent Event"--describing AMN's discontinued operations disclosure.
16
<PAGE>
HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT
During the three and six months ended June 30, 1998, SPB's Consumer Credit
Division originated $12.5 million and $18.0 million in loans as compared to $6.0
million and $10.0 million for the same periods last year, respectively.
PRINCAP MORTGAGE WAREHOUSE
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap
Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage Warehouse,
Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a purchase,
and the purchase price of $123.7 million was allocated to the net assets
acquired based on their fair value resulting in goodwill of $6.8 million.
PrinCap's primary business is residential mortgage warehouse lending to medium-
sized brokers and mortgage bankers on a national basis. At June 30, 1998 and
December 31, 1997, PrinCap had total commitments and outstanding loans of $207.1
million and $175.0 million, and $124.6 million and $122.5 million, respectively.
ASSET MANAGEMENT, INVESTMENT PRODUCTS AND OTHER ACTIVITIES
The Company conducts asset management, investment and other advisory services
through its ICCAMC, ICG and ICAI subsidiaries and has substantial equity
investments in SPFC, a publicly traded sub-prime residential mortgage lender,
FMC, a publicly traded specialty commercial finance company, Imperial Credit
Commercial Mortgage Investment Corp. ("ICCMIC"), a publicly traded REIT engaged
in commercial mortgage lending activities, and ICW, a holding company for
international finance activities.
IMPERIAL CREDIT COMMERCIAL ASSET MANAGEMENT CORPORATION
ICCAMC was formed in the third quarter of 1997 to oversee the day-to-day
operations of ICCMIC pursuant to a management agreement. For the three months
and six months ended June 30, 1998, ICCAMC earned $1.3 million and $2.5 million,
respectively, in management fees from ICCMIC.
The Company also earned management fees of $263,000 from the Cambria
Investment Partnership I, LP., a newly formed hedge fund managed by the Company.
At June 30, 1998, Cambria had assets under management of $113.1 million.
IMPERIAL CAPITAL GROUP, LLC
ICG is a subsidiary which the Company controls through its 60% voting and
equity ownership interest. ICG was formed in July 1997. ICG, together with its
subsidiaries IC and IAM, offer individual and institutional investors financial
products and services. IAM is an investment advisor registered with the United
States Securities and Exchange Commission, and provides investment management
services to high net worth individuals and institutional clients.
For the three and six months ended June 30, 1998, ICG generated $6.4 million
and $11.0 million in investment banking revenues as compared to none for the
same periods last year.
SOUTHERN PACIFIC FUNDING CORPORATION
SPFC is a publicly traded sub-prime mortgage banking company which originates,
purchases and sells high yielding, single family sub-prime mortgage loans.
Substantially all of SPFC's loans are secured by first or second mortgages on
owner occupied single family residences. The majority of the originated and
purchased loans are made to borrowers who do not qualify for or are unwilling to
obtain financing from conventional mortgage sources. As of June 30, 1998, ICII
owned 9,742,500 shares of SPFC common stock, representing 47.0% of the
outstanding common stock of SPFC, which, commencing with the three months ended
March 31, 1997, is reflected on the Company's consolidated balance sheet as
"Investment in Southern Pacific Funding Corporation" and is accounted for
pursuant to the equity method of accounting.
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage.
17
<PAGE>
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, the Company had no
loans outstanding to SPFC.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
FMC is a publicly traded specialty commercial finance company engaged in the
business of originating and servicing loans and equipment leases to small
businesses, with a primary focus on established national and regional franchise
concepts. More recently, FMC has expanded its focus to include retail energy
licensees (service stations, convenience stores, truck stops, car washes and
quick lube businesses), funeral homes, cemeteries and golf operating businesses
(golf courses and golf practice facilities). FMC originates long-term fixed and
variable rate loan and lease products and sells such loans and leases either
through securitizations or whole loan sales to institutional purchasers on a
servicing retained basis. FMC also periodically makes equity investments or
receives contingent equity compensation as part of its core lending and leasing
business. In March 1998, FMC purchased Bankers Mutual, an originator of
multifamily income property loans.
During the fourth quarter of 1997, FMC completed an initial public offering of
its common stock pursuant to which ICII was a selling stockholder. As a result
of the Company's participation in the public offering, the Company's percentage
ownership of FMC was reduced to 38.4% from 66.7%.
Consequently, commencing with the quarter ended December 31, 1997, the
financial statements of FMC are no longer consolidated with those of ICII. As
of June 30, 1998, ICII owned 11,023,492 shares of FMC common stock. ICII's
investment in FMC is reflected on the Company's consolidated balance sheet as
"Investment in Franchise Mortgage Acceptance Company" and is accounted for
pursuant to the equity method of accounting. Equity in the net income of FMC
for the three and six months ended June 30, 1998 was $3.8 million and $6.6
million, respectively, as compared to none for the same periods last year.
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
In October 1997, the Company completed a public offering of the common stock
of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans, mortgage-backed securities and real property investments. The Company
owned 3,070,000 shares or 8.9% of the outstanding common stock of ICCMIC as of
June 30, 1998.
IMPAC MORTGAGE HOLDINGS, INC.
Pursuant to a termination agreement entered into in December of 1997, related
to the management agreement between ICAI and IMH, the Company received 2,009,310
shares of IMH common stock and certain securitization-related assets.
Additionally, the Company agreed to cancel its note receivable from ICI Funding
Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac
Funding Corporation and is the origination unit of IMH. The Company owned 8.4%
of the outstanding common stock of IMH as of June 30, 1998.
IMPERIAL CREDIT WORLDWIDE, LTD.
ICW is a holding company for the Company's international finance activities
and is a majority owner of Credito Imperial Argentina, a mortgage banking
company conducting residential mortgage business in Argentina. ICW originated
$10.1 million and $16.8 million in residential loans for the second quarter and
six months ended June 30, 1998, respectively, as compared to $0 for the same
periods last year.
IMPERIAL CREDIT ADVISORS, INC.
ICAI provides capital markets, portfolio management and research services to
the Company's subsidiaries and affiliates. Prior to December 1997, ICAI oversaw
the day-to-day operations of IMH pursuant to a management agreement. The asset
management fees earned of $1.2 million and $2.8 million, for the three months
and six months ended June 30, 1997, respectively, were solely related to ICAI
providing REIT management services for Impac Mortgage Holdings, Inc. ("IMH").
For the three and six months ended June 30, 1998, ICAI did not earn asset
management fees. The asset management fees earned for the prior periods were
solely related to Imperial Credit Advisors, Inc ("ICAI") which provided REIT
management services for Impac Mortgage Holdings, Inc. ("IMH") until December
1997.
18
<PAGE>
SECURITIZATION TRANSACTIONS AND LOAN SALES
During the quarter ended June 30, 1998, the Company sold $93.4 million of
commercial and multifamily loans to ICCMIC and securitized $31.2 million of
leases originated by Imperial Business Credit, Inc. ("IBC"), generating gains of
$1.9 million and $1.1 million, respectively.
During the quarter ended June 30, 1997, the Company securitized $379.3 million
of loans and leases originated by SPB's income property division, FMC and IBC.
Excluding loans securitized by FMC, the Company securitized $220.7 million of
loans and leases for the quarter ended June 30, 1997.
The decrease in securitization transactions is consistent with the Company's
objective of becoming less reliant on gain on sale as a source of revenue. Gain
on sale of loans and leases decreased to $3.3 million and $8.8 million during
the second quarter and six months ending June 30, 1998, respectively, from $28.6
million and $37.2 million for the same periods last year. The decrease in gain
on sale of loans and leases was primarily attributable to the deconsolidation of
FMC. Gain on sale of loans and leases decreased to 6% and 9% of total revenues
during the quarter and six months ended June 30, 1998, as compared to 50% and
38% for the same periods last year, respectively.
During the six months ended June 30, 1998, the Company completed loan and
lease securitizations totaling $66.7 million as compared to $477.2 million for
the same periods last year. During the six months ended June 30, 1998, the
Company through its SPB subsidiary sold $190.0 million in multi family and
commercial mortgages to ICCMIC as compared to $0 for the same period last year.
The Company has retained interests in loan and lease securitizations
representing the excess of the total amount of loans sold in the securitization
over the amounts represented by interests in the security sold to investors.
The retained interests in the loan and lease securitizations were $53.2 million
and $43.1 million at June 30, 1998 and December 31, 1997, respectively. The
increase in retained interests in the loan and lease securitizations were
primarily attributable to lease securitizations at IBC during the six months
ended June 30, 1998.
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 at ICII
and deposits with SPB. Typically, ICII would borrow funds under its warehouse
lines in connection with its wholesale loan originations and purchases, while
SPB used its deposits and borrowings from the Federal Home Loan Bank of San
Francisco ("FHLB") to finance its lending activities.
In connection with its diversification strategy, the Company believes that
lower cost financing is available through credit lines, repurchase facilities,
whole loan sales and securitization programs established by IBC and SPB.
The Company continues to rely on FDIC insured deposits generated by SPB and
third party warehouse lines of credit and securitizations. At June 30, 1998,
SPB had total deposits of approximately $1.5 billion (excluding deposits of ICII
maintained with SPB).
ICII and its subsidiaries had various revolving warehouse lines of credit
available at June 30, 1998, as follows:
<TABLE>
<CAPTION>
INTEREST INDEX
-------- -----
RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
---------- ----------- ----------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital Financial (AMN)...... 7.00% $100,000 $ 15,997 Libor plus 135 March 9, 1999
Core States (IBC)...................... 7.86% 30,000 7,256 Libor plus 220 October 6, 1998
Morgan Stanley (SPB)................... 6.16% 200,000 96,000 Libor plus 50 October 1, 1998
-------- --------
$330,000 $119,253
======== ========
</TABLE>
19
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1997
The Company's consolidated net income for the three and six months ended June
30, 1998 increased to $16.3 million and $29.2 million or $0.40 and $0.71 diluted
income per share as compared to $14.1 million and $21.1 million or $0.35 and
$0.52 diluted income per share for the same period last year. Net income for
the first six months of 1997 includes an extraordinary item of $4.0 million or
$0.10 per diluted share representing a loss on the Company's early retirement of
debt. Basic consolidated net income per share for the three and six months
ended June 30, 1998 was $0.42 and $0.75 per basic share as compared to $0.37 and
$0.55 per basic share for the same period last year. The increase in net income
for the three months ending June 30, 1998 is primarily attributable to an
increase in net interest income, loan servicing income, investment banking fees,
partially offset by a decrease in the Company's equity ownership in FMC's
earnings. The Company's ownership in FMC's common stock as of June 30, 1998 was
38.4% as compared to 66.7% for the same period last year.
The increase in net income for the six months ending June 30, 1998 is
primarily attributable to an increase in net interest income, loan servicing
income, investment banking fees, equity in the earnings of FMC, and lower
provision for loan and lease losses, partially offset by increases in total
expenses related to continued growth and increased activities at the Company's
new business lines of Imperial Capital Group, LLC, and Imperial Credit
Commercial Asset Management Corporation.
RETURN ON EQUITY
Return on equity ("ROE") was 19.2% and 17.5% for the three months and six
months ending June 30, 1998, as compared to ROE of 22.0% 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 opportunistic acquisitions and future
capital redeployment opportunities.
20
<PAGE>
DECONSOLIDATION OF FMC
During the fourth quarter of 1997, the Company reduced its ownership
percentage in FMC from 66.7% to 38.4% through an initial public offering of FMC
common stock. The income from FMC is accounted for by the equity method of
accounting beginning with the quarter ended December 31, 1997. For the three and
six months ended June 30, 1998, the equity in net income of FMC was $3.8 million
and $6.6 million, respectively. As a result of the deconsolidation of FMC,
gain on sale of loans, net interest income, other income and, general and
administrative expenses are not comparable to the prior year. Therefore, the
following income statements present gain on sale of loans, net-interest income,
other income and general and administrative expenses for the Company as if FMC
had been accounted for as an equity investment for all periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases.................................. $ 3,273 $ 8,737 $ 8,845 $17,013
------- ------- -------- -------
Interest income................................................... 59,864 49,421 113,503 95,291
Interest expense.................................................. 29,851 26,428 57,446 52,133
------- ------- -------- -------
Net interest income............................................ 30,013 22,993 56,057 43,158
Provision for loan and lease losses............................... 3,450 5,736 7,300 8,606
------- ------- -------- -------
Net interest income after provision for loan and lease losses..... 26,563 17,257 48,757 34,552
------- ------- -------- -------
Other income:
Loan servicing income........................................... 4,055 1,434 8,083 2,074
Equity in net income of Southern Pacific Funding Corp........... 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage Acceptance Company...
3,817 11,170 6,586 9,310
Investment banking fees......................................... 6,433 -- 10,968 --
Management fees................................................. 1,575 1,238 2,780 2,816
Gain on sale of Southern Pacific Funding Corporation stock...... -- -- -- 4,306
Other income.................................................... 2,232 874 4,380 1,550
------- ------- -------- -------
Total other income................................................ 24,876 21,394 45,536 32,987
------- ------- -------- -------
Total revenue..................................................... 54,712 47,388 103,138 84,552
------- ------- -------- -------
EXPENSES:
Personnel expense................................................. 15,519 10,366 31,773 18,439
Amortization of servicing rights.................................. 360 206 701 225
Occupancy expense................................................. 1,482 822 3,028 1,613
Data processing expense........................................... 410 342 903 762
Net (income) expenses of other real estate owned.................. 288 3,480 (71) 4,237
General, administrative and other expense......................... 10,889 9,315 20,224 16,329
------- ------- -------- -------
Total expenses................................................. 28,948 24,531 56,558 41,605
------- ------- -------- -------
Income before income taxes, minority interest and extraordinary
item............................................................. 25,764 22,857 46,580 42,947
Income taxes...................................................... 9,360 8,784 17,184 17,842
Minority interest in income of consolidated subsidiaries.......... 142 -- 234 --
------- ------- -------- -------
Income before extraordinary item.................................. 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early extinguishment of debt, net of -- -- -- (3,995)
income taxes.................................................... ------- ------- -------- -------
Net income..................................................... $16,262 $14,073 $ 29,162 $21,110
======= ======= ======== =======
</TABLE>
21
<PAGE>
REVENUES
GENERAL
Total revenues for the Company during the second quarter ended June 30, 1998
were $54.7 million as compared to $57.5 million reported for the same period in
1997. After adjusting the three months ended June 30, 1997 as if the
deconsolidation of FMC occurred on January 1, 1997, total revenues increased by
15% to $54.7 million as compared to $47.4 million for the same period last year.
Total revenues for the six months ended June 30, 1998 were $103.1 million, as
compared to $97.8 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
adjusting the six months ended June 30, 1997 as if the deconsolidation of FMC
occurred on January 1, 1997, total revenues increased by 29% to $103.1 million
from $80.2 million, respectively.
GAIN ON SALE/LOAN & LEASE SECURITIZATION AND SALES
Consistent with the Company's objective of becoming less reliant on gain on
sale as a source of revenue, gain on sale of loans and leases decreased $25.3
million to $3.3 million during the second quarter of 1998 from $28.6 million for
the same period last year. Gain on sale of loans and leases consists primarily
of gains recorded upon the sale of loans and leases, net of associated expenses,
and to a lesser extent, fees received on the origination of loans, and fees
received for commitments to fund loans. Gain on sale of loans decreased $28.4
million to $8.8 million for the six months ended June 30, 1997 from $37.2
million for the same period last year, primarily as a result of the
deconsolidation of FMC and lower volume of securitizations at SPB.
During the three and six months ended June 30, 1998, the Company sold $93.4
million and $190.0 million of commercial and multifamily loans to ICCMIC, and
securitized $31.2 million and $66.7 million of leases originated by IBC,
generating gains of $1.9 million and $5.7 million, and $1.1 million and $2.7
million, respectively.
During the three and six months ended June 30, 1997, the Company securitized
$379.3 million and $477.2 million of loans and leases. Excluding loans
securitized by FMC, the Company securitized $220.7 million of loans and leases
for the quarter ended June 30, 1997.
TOTAL INTEREST INCOME
For the three and six months ended June 30, 1998, total interest income
increased to $59.9 million and $113.5 million, respectively, from $55.4 million
and $104.6 million for the same periods last year. The increase in total
interest income is primarily attributable to increases in yield as well as the
outstanding average balance on interest-earning assets. The increase in the
average yield on interest-earning assets in 1998 is primarily attributable to
increases in the average yields on loans held for investment and sale reflecting
a more diversified and higher-yielding mix of loan products relative to 1997.
The comparison of total interest income for the three months ended June 30, 1998
and 1997 is also impacted by the deconsolidation of FMC. Excluding FMC's
interest income for the three and six months ended June 30, 1997, total interest
income would have been $49.4 million and $95.3 million as compared to the
consolidated interest income of $55.4 million and $104.6 million for the three
and six months ended June 30, 1998, respectively.
TOTAL INTEREST EXPENSE
For the three months and six months ended June 30, 1998, total interest
expense decreased to $29.9 million and $57.4, respectively, million as compared
to $31.7 million and $60.1 million for the same periods last year. The decrease
in interest expense was attributable to a decrease in other borrowings resulting
from the deconsolidation of FMC, which was partially offset by increases in
interest on deposits and long term debt. The increase in interest on deposits
and long term debt was attributable to the increase in deposits at SPB in 1998
and the interest expense related to the issuance of $70 million of Remarketed
Par Securities in June of 1997. Excluding FMC's interest expense for the three
and six months ended June 30, 1997, total interest expense would have been $26.4
million and $52.1 million as compared to the consolidated interest expense of
$29.9 million and $57.4 million for the three and six months ended June 30,
1998, respectively.
22
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $3.5 million and $7.3 million for
the three and six months ended June 30, 1998, respectively, as compared to $5.7
million and $8.6 million for the same periods last year. The decrease in the
loan and lease loss provision for the three and six months ended June 30, 1998
was primarily the result of the decrease in both nonaccrual loans and net
charge-offs to average loans held for investment. At June 30, 1998, nonaccrual
loans declined to $63.9 million as compared to $70.6 million at December 31,
1997 or 3.9% and 5.4% of gross loans held for investment, respectively.
Additionally, excluding net charge-offs of $13.7 million and $102,000 at AMN for
the six months ended June 30, 1998 and 1997, net charge-offs were $4.3 million
and $7.3 million, respectively.
LOAN SERVICING INCOME
Loan servicing income for the three and six months ended June 30, 1998 was
$4.1 million and $8.1 million, respectively, as compared to $2.2 million and
$3.5 million for the same periods last year. The increase in loan servicing
income was primarily attributable to a decrease in servicing related expenses
associated with the Company's former residential mortgage banking loan portfolio
and an increase in the average outstanding balance of loans and leases serviced
for others at SPB, IBC and AMN.
EQUITY IN NET INCOME OF SPFC
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage. At June 30, 1997 and 1998, the Company's ownership percentage in
SPFC was 47.0%. The Company accounts for its investment in SPFC using the
equity method.
EQUITY IN NET INCOME OF FMC
Equity in the net income of FMC for the three and six months ended June 30,
1998 was $3.8 million and $6.6 million, respectively, as compared to $0 for the
same periods last year, which represents the Company's share of FMC's net income
based on the Company's ownership percentage. The increase in the equity in net
income of FMC is due to the difference in accounting methods used for the
Company's investment in FMC at June 30, 1998 and 1997. At June 30, 1998, the
Company's ownership percentage in FMC was 38.4%, and accordingly, the Company
accounted for its investment in FMC using the equity method. During the first
quarter and six months ended June 30, 1997, FMC was a 66.67% owned consolidated
subsidiary of the Company, which contributed pre-tax earnings to the Company of
$11.2 million and $9.3 million, respectively.
INVESTMENT BANKING FEES
Investment banking fees were $6.4 million and $11.0 million for the three and
six months ended June 30, 1998, respectively, compared to $0 for the same
periods last year. During the fourth quarter of 1997, the Company capitalized a
new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. The investment banking fees consist of fees
related to equity, debt offerings and brokerage commissions.
GAIN ON SALE OF SPFC STOCK
During the three and six months ended June 30, 1998, the Company did not sell
any shares of its common stock ownership in SPFC. During the first quarter of
1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share
generating net proceeds of $6.2 million and a gain of $4.3 million.
EXPENSES
Total expenses for the Company during the second quarter of 1998 were $28.9
million as compared to $29.1 million for the same period last year. For the six
months ending June 30, 1998 total expenses were $56.6 million as compared to
$50.2 million reported for the same period last year. Excluding the expenses of
the FMC deconsolidation, expenses for the three and six month periods ended June
30, 1997 were $24.5 million and $41.6 million, respectively.
23
<PAGE>
The increase in total expenses for the three and six months periods ended June
30, 1998 was attributable to continued growth and increased activities at the
Company's new business lines including Imperial Capital Group, LLC, and Imperial
Credit Commercial Asset Management Corporation. Total expenses from ICG and from
the Company's other startup asset management operations were $5.3 million and
$10.1 million for the three and six months ended June 30, 1998 as compared to
none for the same periods last year.
PERSONNEL EXPENSE
Personnel expense increased to $15.5 million and $31.8 million for the three
and six months ended June 30, 1998, respectively, as compared to $12.4 million
and $23.1 million for the same periods of the previous year. This increase was
primarily the result of growth and increased activities at the Company's new
business lines, including ICG, ICW and ICCAMC.
AMORTIZATION OF SERVICING RIGHTS
Amortization of servicing rights increased to $360,000 and $701,000 for the
three and six months ended June 30, 1998 as compared to $206,000 and $225,000
for the same periods last year. The increase was primarily the result of an
increased balance of servicing rights retained from recent loan sales and
securitizations at SPB.
OCCUPANCY EXPENSE
Occupancy expense increased to $1.5 million and $3.0 million for the three and
six months ended June 30, 1998, respectively, as compared to $983,000 and $1.9
million for the same periods of the previous year. The increase is primarily
attributable to the Company's acquisition and expansion activities throughout
1997 and during the first six months of 1998.
NET INCOME/EXPENSES OF OTHER REAL ESTATE OWNED
During the second quarter of 1998 expenses from OREO operations were $288,000
as compared to $3.5 million for the same period last year. For the six months
ended June 30, 1998, the Company generated income of $71,000 as compared to
expenses of $4.2 million. The decrease in expenses primarily resulted from a
lower level of losses and write-downs related to the sale of properties from the
Company's former mortgage banking operations.
OTHER EXPENSES
All other expenses (including data processing, professional services, FDIC
insurance premiums, telephone and other communications, amortization of goodwill
and general and administrative expense) for the three and six months ended June
30, 1998 totaled $11.3 million and $21.1 million, respectively, as compared to
$12.0 million and $20.7 million for the same periods last year. The
comparison of other expenses for the first quarter 1998 and 1997 is also
impacted by the deconsolidation of FMC. Excluding FMC's total other expenses for
the three and six months ended June 30, 1997, other expenses would have been
$9.7 million and $17.1 million, respectively, as compared to the consolidated
total expenses of $11.3 million and $21.1 million. This increase reflects the
Company's acquisition and expansion activities.
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES
The Company's minority interest in income of consolidated subsidiaries was
$142,000 and $234,000 for the three and six months ended June 30, 1998,
respectively, as compared to $4.5 million and $4.7 million for the same periods
last year. The minority interest in income of consolidated subsidiaries for the
three and six months ended June 30, 1998 is attributable to the Company's 60%
ownership in ICG. The minority interest in income of consolidated subsidiaries
for the same period last year was attributable to the Company's 66.7% ownership
in FMC. The comparison of the Company's minority interest in income of
consolidated subsidiaries for the three and six months ended June 30, 1998 and
1997 is impacted by the deconsolidation of FMC. Excluding the Company's minority
interest in income of FMC for the three and six months ended June 30, 1997,
total minority interest in income of consolidated subsidiaries would have been
$0 when compared to $142,000 and $234,000 for the current periods presented.
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT
During the first quarter of 1997, the Company successfully completed a $200.0
million offering of 9.875% Senior Notes due 2007. A portion of the proceeds from
the offering were used to repurchase $69.8 million of 9.75% Senior Notes due
2004 for which the Company recorded an extraordinary after-tax charge of $4.0
million.
24
<PAGE>
The Company engaged in the new issuance in order to obtain a more favorable
debt covenant package and to raise new capital to support its growing
businesses.
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 was $3.5 million and $7.3 million for
the second quarter and six months ended June 30, 1998, respectively, as compared
to $5.7 million and $8.6 million for the same periods last year. The decrease in
the loan and lease loss provision for the second quarter of 1998 was primarily
the result of the decrease in nonaccrual loans. Nonaccrual loans and leases as
of June 30, 1998 decreased to $63.9 million from $70.6 million at December 31,
1997, or 3.9% and 5.4% of gross loans held for investment, respectively.
The balance of nonaccrual loans relating to the former mortgage banking
operations included $5.9 million and $6.9 million of loans at June 30, 1998 and
December 31, 1997, 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
balance of nonaccrual loans, management believes the current balance of the
allowance for loan and lease losses is sufficient in relation to the amount of
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,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
(IN THOUSANDS)
Beginning balance as of December 31, 1997 and 1996........................... $ 38,047 $19,999
Provision for loan and lease losses.......................................... 7,300 8,606
Business acquisitions and bulk loan purchases................................ -- 4,864
Sale of Leases............................................................... -- (900)
Deconsolidation of ICIFC..................................................... -- (687)
-------- -------
45,347 31,882
-------- -------
LOANS CHARGED OFF:
Mortgage..................................................................... (1,157) (1,826)
Multifamily.................................................................. -- (420)
Commercial................................................................... (28) (780)
Leases....................................................................... (830) (3,567)
AMN auto loans............................................................... (13,716) (102)
Other consumer............................................................... (3,635) (1,274)
-------- -------
Total........................................................................ (19,366) (7,969)
-------- -------
Recoveries on loans previously charged off:
Mortgage..................................................................... 143 50
Multifamily.................................................................. 142 --
Commercial................................................................... 36 --
Leases....................................................................... 648 425
Consumer..................................................................... 321 132
-------- -------
Total........................................................................ 1,290 607
-------- -------
Net charge-offs.............................................................. (18,076) (7,362)
-------- -------
Ending balance as of June 30, 1998 and 1997.................................. $ 27,271 $24,520
======== =======
</TABLE>
Net charge-offs increased to $18.1 million for the six month period ended
June 30, 1998 as compared to $7.4 million for the same period last year. The
increase was primarily related to charge-offs of auto and consumer loans at AMN
and SPB. Excluding net charge-offs of AMN loans, total net charge-offs
decreased to $4.4 million for the six months ended June 30, 1998 as compared to
$7.3 million for the same period last year. See "--Subsequent Event--describing
AMN's discontinued operations disclosure.
25
<PAGE>
Loans held for investment consisted of the following at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4........................................... $ 169,325 $ 244,588
Multi-Family................................................ 43,265 17,261
Commercial.................................................. 7,158 1,085
---------- ----------
219,748 262,934
Leases...................................................... 4,446 7,745
Installment loans........................................... 244,218 129,595
Auto Marketing Network, Inc. auto loans..................... 14,883 25,324
Franchise loans............................................. 67,042 62,219
Asset based loans........................................... 586,754 484,832
Loan participations......................................... 292,517 196,339
Mortgage warehouse lines.................................... 174,953 122,488
Commercial.................................................. 32,244 26,055
---------- ----------
Total..................................................... 1,636,805 1,317,531
Unearned income............................................. (13,322) (7,850)
Deferred loan fees.......................................... (8,727) (4,916)
---------- ----------
Total..................................................... 1,614,756 1,304,765
Allowance for loan and lease losses......................... (27,271) (38,047)
---------- ----------
Total..................................................... $1,587,485 $1,266,718
========== ==========
</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, participations in commercial loan syndications
and loans to experienced franchisees of nationally recognized restaurant
concepts. The increase in loans held for investment was primarily attributable
to loan originations at SPB's Coast Business Credit, Loan Participation and
Investment Group, and Consumer Credit divisions. Additionally, SPB's
acquisition of PrinCap Mortgage Warehouse Inc. during the fourth quarter of 1997
contributed to the increase in loans held for investment.
The Company's allowance for loan and lease losses decreased to $27.3 million
as compared to $38.0 million at December 31, 1997. The allowance for loan and
lease losses as a percentage to non-accruing loans was 42.7% at June 30, 1998 as
compared to 53.9% at December 31, 1997. The decrease was primarily attributable
to net charge-offs of AMN loans and a decrease in non-accrual loans during the
six months ended June 30, 1998.
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.
NONPERFORMING ASSETS ("NPA")
The Company's NPA's consist of non-accruing loans, OREO and repossessed
property. Total NPA's were $72.4 million as of June 30, 1998 as compared to
$90.5 million at December 31, 1997. Total NPA's as a percentage of loans, OREO
and repossessed assets were 3.97% at June 30, 1998, as compared to 6.04% at
December 31, 1997. The Company's NPA's as a percentage of loans, OREO and
repossessed assets at AMN, former mortgage banking operations and all other
lending activities were 2.97%, 24.13% and 43.31% at June 30, 1998, as compared
to 3.52%, 52.51% and 69.88% at December 31, 1997. The decrease in NPA's as a
percentage of loans, OREO and repossessed assets was mainly attributable to loan
charges-offs and sales of OREO properties during the six months ended June 30,
1998.
26
<PAGE>
The following table sets forth the amount of non performing assets
attributable to the Company's other lending activities, former mortgage banking
operations and AMN.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------------------------------------------------------- ------------------------------
FORMER AUTO FORMER AUTO
------------- ------------- -------------- ------------- --------------
ALL OTHER MORTGAGE MARKETING ALL OTHER MORTGAGE MARKETING
------------- ------------- -------------- ------------- ------------- --------------
LENDING BANKING NETWORK, INC LENDING BANKING NETWORK, INC.
------------- ------------- -------------- ------------- ------------- --------------
ACTIVITIES OPERATIONS OPERATIONS ACTIVITIES OPERATIONS OPERATIONS
------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Nonaccrual loans:
One to four family....... $ 24,897 $ 5,852 $ -- $ 27,573 $ 6,874 $ --
Commercial property...... 8,552 -- -- 5,058 -- --
Multi-family property.... 2,417 -- -- 1,837 -- --
Leases and installment... 10,196 -- 11,976 6,608 -- 22,681
---------- ------- ------- ---------- ------- -------
Total nonaccrual loans.... 46,062 5,852 11,976 41,076 6,874 22,681
---------- ------- ------- ---------- ------- -------
OREO:
One to four family....... 5,702 1,080 -- 2,552 5,774 --
Commercial property...... 540 -- -- 2,526 -- --
Multi-family property.... -- -- -- 53 -- --
---------- ------- ------- ---------- ------- -------
Total OREO................ 6,242 1,080 -- 5,131 5,774 --
---------- ------- ------- ---------- ------- -------
Repossessed property:
Equipment held for sale.. 47 -- -- 4,437 -- --
Repossessed vehicles..... -- -- 1,114 -- -- 4,563
---------- ------- ------- ---------- ------- -------
Total repossessed property 47 -- -- 4,437 -- --
---------- ------- ------- ---------- ------- -------
Total NPAs................ $ 52,351 $ 6,932 $13,090 $ 50,644 $12,648 $27,244
========== ======= ======= ========== ======= =======
Total loans, OREO and
repossessed property..... $1,765,194 $28,733 $30,221 $1,436,932 $24,087 $38,989
Total NPA's as a
percentage of loans,
OREO and repossessed
property................. 2.97% 24.13% 43.31% 3.52% 52.51% 69.88%
</TABLE>
There are no loans over 90 days past due accruing interest at June 30, 1998 or
December 31, 1997, respectively.
On an ongoing basis, management monitors the loan portfolio and evaluates the
adequacy of the allowance for loan and lease losses. In determining the adequacy
of the allowance for loan and lease losses, management considers such factors as
historical loan loss experience, underlying collateral values, evaluations made
by bank regulatory authorities, assessment of economic conditions and other
appropriate data to identify the risks in the loan portfolio.
Loans deemed by management to be uncollectible are charged to the allowance
for loan and lease losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by
management based upon its evaluation of the known and inherent risks in the loan
portfolio. Future additions to the allowance for loan and lease losses may be
necessary.
TOTAL RATE OF RETURN SWAPS
The Company has entered into total rate of return swap contracts for
investment purposes with various investment bank counterparties, the provisions
of which entitle the Company to receive the total return on various commercial
loans in exchange for a floating payment of one month LIBOR plus a spread. As of
June 30, 1998, the Company is party to total rate of return swap contracts with
a total notional amount of $292.7 million, under which the Company was obligated
to pay one month LIBOR plus a weighted average spread of 1.83%. The weighted
average remaining life of these contracts was 36.1 months as of June 30, 1998.
These contracts are off-balance sheet instruments. For the three and six months
ended June 30, 1998, the Company recognized $1.1 million and $2.1 million,
respectively, of interest income on total return swaps as compared to $294,000
and $739,000 for the same periods last year.
27
<PAGE>
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Inflation affects the
Company primarily through its effect on interest rates, since interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. During periods of increasing interest rates, demand for loans
and a borrower's ability to qualify for mortgage financing in a purchase
transaction may be adversely affected. During periods of decreasing interest
rates borrowers are more likely to refinance their existing loans, which may
negatively impact the Company's investments in securitization related assets and
interest-only securities.
REGULATORY MATTERS
SPB'S CAPITAL RATIOS
The following table presents SPB's actual capital ratios and the corresponding
minimum and well capitalized capital ratio requirements under the (i) California
Leverage limitation, (ii) FDIC Risk-based Capital and Tier 1 Capital regulations
and (iii) the FDIC Leverage ratio regulation as of June 30, 1998.
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL 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... $173,338 11.42% $ 75,868 5.00% $ -- --%
Risk-based Capital............... 211,987 10.24% 165,490 8.00% 206,863 10.00%
Risk-based Tier 1 Capital........ 153,247 7.40% 82,745 4.00% 124,118 6.00%
FDIC Leverage Ratio.............. 153,247 9.09% 67,383 4.00% 84,229 5.00%
</TABLE>
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 and (vi) the costs of the Company's
warehouse credit and repurchase facilities with certain financial institutions.
The Company has financed its activities through warehouse lines of credit and
repurchase facilities with financial institutions, equity and debt offerings in
the capital markets, deposits or borrowings at SPB, dividends from SPB, and
securitizations. The Company believes that such sources will be sufficient to
fund the Company's liquidity requirements for the foreseeable future. There can
be no assurance that the Company will have access to the capital markets in the
future or that financing will be available to satisfy the Company's operating
and debt service requirements or to fund its future growth. The ability of SPB
to dividend funds to the Company is subject to regulatory restrictions.
SPB obtains the necessary liquidity to fund its own lending activities through
deposits and, if necessary through borrowings from the FHLB. At June 30, 1998
and December 31, 1997, SPB had available lines of credit from the FHLB equal to
$23.0 million and $45.8 million, respectively. The FHLB advances are secured by
the investment in stock of FHLB and certain real estate loans with a carrying
value of $67.0 million and $228.5 million at June 30, 1998 and December 31,
1997, respectively. The highest FHLB advance outstanding during the quarter
ending June 30, 1998 was $34.5 million, with an average outstanding balance of
$24.7 million. The outstanding balance of FHLB advances was $20.0 million at
June 30, 1998. Since December 31, 1991, SPB has increased its deposits as
necessary so that deposits, together with cash, liquid assets and FHLB
borrowings have been sufficient to provide the funding for its loans held for
sale and investment. SPB's deposit portfolio which consists mostly of
certificate accounts increased to $1.5 billion as of June 30, 1998 as compared
to $1.2 billion at December 31, 1997.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected fundings.
Cash management systems at SPB allow SPB to anticipate both funding and sales
and adjust deposit levels and short-term investments against the demands of the
Company's lending activities. SPB also has a $200.0 warehouse line of credit
available from Morgan Stanley, with a balance outstanding of $96.0 million at
June 30, 1998
In addition to warehouse lines of credit and SPB borrowings, the Company has
also accessed the capital markets to fund its operations. In the second quarter
of 1992, the Company completed its initial public offering of 8,750,211 shares,
raising net proceeds of $15.9 million. In April 1996, the Company completed a
stock offering of 4,879,808 shares of its common stock at $13.00 per share
generating net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of
said notes. As of December 31, 1995, the Company was not in compliance with
certain debt covenants related to these notes. Subsequent to December 31, 1995,
these defaults were corrected. In March 1996, the Company reissued the $8.5
million of the notes which it purchased in October 1994. At December 31, 1996,
$90.0 million of these notes were outstanding.
In January 1997, the Company issued $200.0 million principal amount of the
9.875% Senior Notes and used a portion of the proceeds to purchase approximately
$69.8 million of the 9.75% Senior Notes. The Company contributed $35.0 million
of the proceeds to SPB in the form of subordinated indebtedness.
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which the Company was a selling shareholder. SPFC and the Company
received net proceeds from such offering of approximately $53.8 million and
$35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million of
convertible subordinated notes due 2006 and (ii) the Company sold 1.0 million
shares of SPFC common stock held by the Company for net proceeds of
approximately $28.0 million.
29
<PAGE>
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, resulting in a gain of $4.3 million, reducing its ownership of SPFC
from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the
results of SPFC operations are now accounted for in the Company's financial
statements under the equity method of accounting. During the third quarter
ending September 30, 1997, the Company sold an additional 500,000 shares of SPFC
common stock, generating net proceeds of $7.6 million and resulting in a gain of
$5.2 million, further reducing its ownership percentage to 47.0%. As of December
31, 1997, the Company's ownership in SPFC common stock was 47.0%, excluding
shares issuable upon exercise of options granted or to be granted pursuant to
SPFC's stock option plans and shares issuable upon conversion of the $75.0
million of convertible subordinated notes, mentioned above.
During the second quarter of 1997, ICII issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
During the fourth quarter of 1997, FMC completed an initial public offering of
its common stock pursuant to which ICII was a selling stockholder. FMC and ICII
and another selling stockholder received net proceeds from such offering of
approximately $114.3 million, $59.7 million and $18.5 million, respectively. As
of December 31, 1997, the Company's ownership percentage in FMC was 38.4%.
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, there were no loans
outstanding to SPFC.
SUBSEQUENT EVENTS
On July 31, 1998, the Company announced AMN's decision to discontinue its auto
lending operations. As of June 30, 1998, AMN's operations reflected a net loss
of $1.8 million. AMN's near term activities will be limited to the disposition
of the remaining loans and residual interests in securitizations effected with
previously originated loans. Effective as of August 1, 1998, AMN and ICII
retained an unrelated third party to perform all of the AMN auto loan servicing
and collection obligations. Management anticipates that the bulk of the
discontinued assets, consisting of the loans and residual interests in
securitizations, will be sold within one year.
The Company will take an after-tax charge of $7.1 million for the quarter
ending September 30, 1998 related to the discontinuation of AMN's operations.
Additionally, AMN will be recording a $1.5 million net operating loss for the
month of July 1998.
AMN's revenue, expenses, and net income (loss) were as follows: (In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $2,908 $3,345 $3,845 $4,424
Expenses 3,190 4,979 6,865 5,740
Net income (loss) (142) (1,084) (1,843) (766)
</TABLE>
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation, Inc.("SDI"),
a company providing loan documentation preparation, loan closing, notary and
recording services and marketing of insurance products, for 236,302 shares of
ICII common stock.
The Company granted the former holders of the SDI capital stock certain
registration rights covering the ICII Shares. The acquisition will be recorded
using the purchase method of accounting. The purchase price was allocated to the
net assets acquired based on their fair value and goodwill of approximately $4.7
million will be recorded. In connection with this transaction, Paul Lipson, the
President of SDI and one of the former holders of the SDI capital stock, entered
into a three year employment contract with ICII to be President and Chief
Executive Officer of SDI.
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
Belch v. Imperial Credit Industries, Inc., San Diego County Superior Court
Case No. 718817.
On April 22, 1998, the Company was served with an alleged class action
complaint filed in the Superior Court of San Diego County, California by
plaintiff Michael Belch. Plaintiff seeks to represent a class of individuals
who, since March 1994, requested, obtained and were charged fees for both loan
payoff statements and corporate, recording and other fees incurred in the early
repayment of mortgage loans where the borrowers were obtaining refinancing from
other lenders. The complaint alleges, on behalf of the purported class, that
the fees charged were unauthorized, oppressive, unreasonable or in violation of
applicable statute and seeks monetary damages according to proof. The case
involves the discontinued mortgage banking operations of the Company. The
Company is actively defending this case.
Fortune Mortgage, etc., et. al. v. Imperial Credit Industries, Inc., Imperial
Credit Mortgage Holdings, Inc., ICI Funding Corp., Imperial Warehouse Lending
Group, Inc. William Ashmore, Edward Pollard, Wayne Snavely, and Joseph
Tomkinson, Orange County Superior Court Case No. 776153
Reference is made to the discussion of the above-referenced legal proceedings
contained in the Company's Form 10-K for the year ended December 31, 1997 under
Part I, Item 3,"Legal Proceedings." The lawsuit was resolved in June 1998. The
terms of the resolution are confidential, however, such resolution will not have
a material impact on the Company's financial position or results of operations.
ITEM 2. Changes in Securities
---------------------
None
ITEM 3. Defaults in securities
----------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 1998 Annual Meeting of Stockholders was held on June 24, 1998.
PROPOSAL 1. Election of Board of Directors to serve for the ensuing year
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
H.Wayne Snavely 31,713,737 589,666
Kevin Villani 31,713,539 589,864
Stephan J. Shugerman 31,713,737 589,666
G. Louis Graziadio, III 31,713,737 589,666
James Clayburn La Force Jr 31,713,737 589,666
Perry Lerner 31,713,737 589,666
Robert Muehlenbeck 31,713,737 589,666
Joseph Tomkinson 31,710,082 589,321
</TABLE>
PROPOSAL 2. To consider and act upon a proposal to ratify the appointment of
KPMG Peat Marwick LLP as the independent accountants of the Company
for the year ending December 31, 1998
FOR AGAINST ABSTAIN
--- ------- -------
32,288,145 11,308 3,950
PROPOSAL 3. To approve the Executive Performance Compensation Plan
FOR AGAINST ABSTAIN
--- ------- -------
32,170,548 116,141 16,714
ITEM 5. Other Information
-----------------
None
31
<PAGE>
PART II. OTHER INFORMATION - CONTINUED
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
The registrant filed the following report on Form 8-K dated August 14,
1998.
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation,
Inc., ("SDI"), a company providing loan documentation preparation, loan
closing, national notary and recording services and marketing of
insurance products, for 236,302 shares of ICII common stock (the "ICII
Shares"). The Company granted the former holders of the SDI capital
stock certain registration rights covering the ICII Shares. The
acquisition will be recorded using the purchase method of accounting.
The purchase price was allocated to the net assets acquired based on
their fair value and goodwill of approximately $4.7 million will be
recorded. In connection with this transaction, Paul Lipson, the
President of SDI and one of the former holders of the SDI capital
stock, entered into a three year employment contract with ICII to be
President and Chief Executive Officer of SDI.
On July 31, 1998, Imperial Credit Industries, Inc. (the "Company" and
"ICII") announced that the operations of its wholly owned subsidiary,
Auto Marketing Network, Inc. ("AMN") were being discontinued. AMN's
near term activities will be limited to the disposition of the
remaining loans and residual interests in securitizations effected with
previously originated loans. Effective as of August 1, 1998, AMN and
ICII retained an unrelated third party to perform all of the AMN auto
loan servicing and collection obligations. Management anticipates that
the bulk of the discontinued assets, consisting of the loans and
residual interests in securitizations, will be sold within one year.
The Company will take an after-tax charge of $7.1 million for the
quarter ending September 30, 1998 related to the discontinuation of
AMN's operations. Additionally, AMN will be recording a $1.5 million
net operating loss for the month of July 1998.
32
<PAGE>
ITEM 6 EXHIBIT-11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary items $16,262 $14,073 $29,162 $25,105
------- ------- ------- -------
Extraordinary item Early extinguishment of debt,
net of income taxes -- -- -- (3,995)
------- ------- ------- -------
Net income $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
Weighted -average common shares outstanding used to compute
basic income per share 38,752 38,509 38,747 38,464
Assumed common shares issued on exercise of stock options 2,060 2,114 2,052 2,305
------- ------- ------- -------
Number of common shares used to compute diluted income
per share 40,812 40,623 40,799 40,769
======= ======= ======= =======
BASIC EARNINGS PER SHARE:
- -------------------------
Income before extraordinary item $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item- Loss on early extinguishment of debt,
net of income taxes -- -- -- (0.10)
------- ------- ------- -------
Net income per common share $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
- ---------------------------
Income before extraordinary item $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item -- Loss on early extinguishment of debt,
net of income taxes -- -- -- (0.10)
------- ------- ------- -------
Net income per common share $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======= =======
</TABLE>
33
<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, 1998 By: /s/ Kevin E. Villani
--------------------
Kevin E. Villani
Executive Vice President-Finance
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<C> <S>
11 Statement regarding computation of earnings per share.
27.1 Financial data schedule for June 30, 1998.
27.2 Financial data schedules for June 30, 1996 and 1997.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 155,306
<INT-BEARING-DEPOSITS> 13,931
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 70,529
<INVESTMENTS-HELD-FOR-SALE> 111,242
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,793,616
<ALLOWANCE> 27,271
<TOTAL-ASSETS> 2,415,562
<DEPOSITS> 1,514,805
<SHORT-TERM> 139,253
<LIABILITIES-OTHER> 128,264
<LONG-TERM> 289,835
0
0
<COMMON> 142,169
<OTHER-SE> 204,060
<TOTAL-LIABILITIES-AND-EQUITY> 2,415,562
<INTEREST-LOAN> 98,664
<INTEREST-INVEST> 9,035
<INTEREST-OTHER> 5,804
<INTEREST-TOTAL> 113,503
<INTEREST-DEPOSIT> 38,198
<INTEREST-EXPENSE> 57,446
<INTEREST-INCOME-NET> 56,057
<LOAN-LOSSES> 7,300
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 56,792
<INCOME-PRETAX> 46,580
<INCOME-PRE-EXTRAORDINARY> 46,580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,162
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 0
<LOANS-NON> 63,890
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 38,047
<CHARGE-OFFS> 19,366
<RECOVERIES> 1,290
<ALLOWANCE-CLOSE> 27,271
<ALLOWANCE-DOMESTIC> 27,271
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 20,550 116,778
<INT-BEARING-DEPOSITS> 241,285 45,881
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 37,408 0
<INVESTMENTS-HELD-FOR-SALE> 45,134 6,596
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,718,551 1,747,210
<ALLOWANCE> 24,520 13,951
<TOTAL-ASSETS> 2,277,736 2,121,039
<DEPOSITS> 1,260,991 989,224
<SHORT-TERM> 358,129 709,967
<LIABILITIES-OTHER> 104,794 122,895
<LONG-TERM> 289,792 88,189
0 0
0 0
<COMMON> 147,208 142,892
<OTHER-SE> 110,087 64,650
<TOTAL-LIABILITIES-AND-EQUITY> 2,277,736 2,121,039
<INTEREST-LOAN> 96,442 88,282
<INTEREST-INVEST> 6,754 2,389
<INTEREST-OTHER> 1,391 3,209
<INTEREST-TOTAL> 104,587 93,880
<INTEREST-DEPOSIT> 34,084 30,010
<INTEREST-EXPENSE> 60,056 67,738
<INTEREST-INCOME-NET> 44,531 26,142
<LOAN-LOSSES> 8,606 3,525
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 54,852 50,930
<INCOME-PRETAX> 25,105 92,536
<INCOME-PRE-EXTRAORDINARY> 25,105 92,536
<EXTRAORDINARY> (3,995) 0
<CHANGES> 0 0
<NET-INCOME> 21,110 51,657
<EPS-PRIMARY> 0.55<F1> 1.46<F1>
<EPS-DILUTED> 0.52<F1> 1.35<F1>
<YIELD-ACTUAL> 4.29 3.88
<LOANS-NON> 48,312 43,266
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 1,314
<ALLOWANCE-OPEN> 19,999 13,729
<CHARGE-OFFS> 7,969 3,361
<RECOVERIES> 607 58
<ALLOWANCE-CLOSE> 24,520 13,951
<ALLOWANCE-DOMESTIC> 24,520 13,951
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
<FN>
<F1>RESTATE JUNE 30, 1997 AND 1996 FINANCIAL DATA SCHEDULE PER FAS 128.
</FN>
</TABLE>
