<PAGE>
=============================================================================
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, 1999
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, 1999
----- -----------------------------------
Common Stock, no par value 33,142,832
===========================================================================
<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, 1999 and December 31, 1998.................. 2
Consolidated Statements of Operations - Three and six months
ended June 30, 1999 and 1998.................................................... 3
Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998.... 4
Consolidated Statement of Changes in Shareholders' Equity
-- Six months ended June 30, 1999.................................................. 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17
-------------------------------------------------------------------------------------
Item 3. Qualitative and Quantitative Disclosures about Market Risk............................. 32
----------------------------------------------------------
</TABLE>
PART II -- OTHER INFORMATION
----------------------------
<TABLE>
<C> <S> <C>
Item 1. Legal Proceedings.................................................................. 33-34
Item 2. Changes in Securities.............................................................. 34
Item 3. Defaults Upon Senior Securities.................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders................................ 35
Item 5. Other Information.................................................................. 35
Item 6. Exhibit -- Statement Regarding Computation of Earnings Per Share................... 36
Signatures......................................................................... 37
</TABLE>
Forward Looking Statements
Certain statements contained herein are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended. These forward-looking statements may be identified by
reference to a future period(s) or by the use of forward-looking terminology,
such as "may," "will," "intend," "should," "expect," "anticipate," "estimate" or
"continue" or the negatives thereof or other comparable terminology. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements due to a variety of factors. These factors include
but are not limited to, the demand for our products; competitive factors in the
businesses in which we compete; adverse changes in the securities markets;
inflation and changes in the interest rate environment that reduce margins or
the fair value of financial instruments; changes in national, regional or local
business conditions or economic environments; government fiscal and monetary
policies, legislative or regulatory changes that affect our business; factors
inherent to the valuation and pricing of commercial loans, other factors
generally understood to affect the value of commercial loans; and the other
risks detailed in the Company's 8-K as filed with the Securities and Exchange
Commission (the "SEC"); periodic reports on Forms 10-Q, 8-K and 10-K and any
amendments with respect thereto filed with the SEC; and other filings made by
the Company with the SEC.
We wish 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 our company's financial performance and could cause our actual
results for future periods to differ materially from those anticipated or
projected.
We do 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)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Cash........................................................................... $ 57,550 $ 297,772
Interest bearing deposits...................................................... 54,682 1,415
Investment in Federal Home Loan Bank stock..................................... 6,774 4,657
Securities held for trading, at market......................................... 72,206 162,356
Securities available for sale, at market....................................... 75,804 68,410
Loans and leases held for sale................................................. 272,028 319,061
Loans held for investment, net................................................. 1,234,238 1,320,095
Servicing rights............................................................... 400 4,329
Retained interest in loan and lease securitizations............................ 25,667 27,011
Accrued interest receivable.................................................... 8,700 10,114
Premises and equipment, net.................................................... 10,987 11,664
Other real estate owned and other repossessed assets, net...................... 6,774 14,024
Goodwill....................................................................... 35,945 37,498
Equity interest in Franchise Mortgage Acceptance Company....................... 56,182 56,334
Other assets................................................................... 41,875 35,631
Net assets of discontinued operations.......................................... 44,805 46,812
---------- ----------
Total assets................................................................ $2,004,617 $2,417,183
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits....................................................................... $1,406,570 $1,711,328
Borrowings from Federal Home Loan Bank......................................... 30,000 20,000
Other borrowings............................................................... 1,220 102,270
Remarketed Par Securities...................................................... 70,000 70,000
Senior Notes................................................................... 219,883 219,858
Accrued interest payable....................................................... 21,027 25,421
Accrued income taxes payable................................................... 4,343 3,840
Minority interest in consolidated subsidiaries................................. 3,081 3,217
Other liabilities.............................................................. 30,437 27,728
---------- ----------
Total liabilities........................................................... 1,786,561 2,183,662
---------- ----------
Series B 11.5% Manditorily Redeemable Cumulative Preferred Stock, no par
value ($25 liquidation preference per share). Authorized 1,200,000 shares;
1,200,000 and none issued and outstanding at June 30, 1999 and
December 31, 1998, respectively............................................. 30,000 --
Shareholders' equity:
Preferred stock, 6,800,000 shares authorized; none issued or outstanding....... -- --
Common stock, no par value. Authorized 80,000,000 shares; 33,142,832
and 36,785,898 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively............................................. 97,453 129,609
Retained earnings.............................................................. 82,126 101,265
Shares held in deferred executive compensation plan............................ 6,639 3,833
Accumulated other comprehensive income (loss)-
unrealized gain (loss) on securities available for sale, net.................. 1,838 (1,186)
---------- ----------
Total shareholders' equity.................................................. 188,056 233,521
---------- ----------
Total liabilities and shareholders' equity.................................. $2,004,617 $2,417,183
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Interest on loans and leases............................................... $ 42,128 $52,431 $ 89,705 $ 97,416
Interest on investments.................................................... 6,018 4,561 13,063 10,438
Interest on other finance activities....................................... 603 1,567 2,545 3,662
-------- ------- -------- --------
Total interest income................................................... 48,749 58,559 105,313 111,516
Interest on deposits....................................................... 19,974 19,911 42,608 38,198
Interest on other borrowings............................................... 837 2,023 1,947 3,394
Interest on long term debt................................................. 7,570 7,555 15,139 15,109
-------- ------- -------- --------
Total interest expense.................................................. 28,381 29,489 59,694 56,701
-------- ------- -------- --------
Net interest income..................................................... 20,368 29,070 45,619 54,815
Provision for loan and lease losses........................................ 22,255 4,300 24,455 7,300
-------- ------- -------- --------
Net interest (expense) income after provision for loan and lease losses.... (1,887) 24,770 21,164 47,515
-------- ------- -------- --------
Gain on sale of loans and leases........................................... 801 3,273 3,761 8,845
Loan servicing income...................................................... 1,481 2,949 3,439 5,785
Gain on sale of securities................................................. 786 6 1,265 6
Equity in net income of Southern Pacific Funding Corporation............... -- 6,764 -- 12,739
Equity in net (loss) income of Franchise Mortgage Acceptance Company (2,013) 3,817 (53) 6,586
Investment banking and brokerage fees...................................... 5,606 6,433 11,910 10,968
Asset management fees...................................................... 3,000 1,576 6,009 2,780
Mark to market on securities and loans held for sale....................... (21,881) 1,439 (25,255) 1,535
Other income............................................................... 782 777 5,297 2,534
-------- ------- -------- --------
Total other income...................................................... (11,438) 27,034 6,373 51,778
-------- ------- -------- --------
Total net revenue.......................................................... (13,325) 51,804 27,537 99,293
-------- ------- -------- --------
Expenses:
Personnel expense.......................................................... 11,578 11,070 24,675 23,135
Commission expense......................................................... 2,623 2,511 5,589 4,678
Amortization of servicing rights........................................... 1,307 360 4,038 701
Occupancy expense.......................................................... 1,388 1,330 2,699 2,704
Net expense (income) of other real estate owned............................ 760 288 898 (71)
Professional services...................................................... 3,599 2,321 5,927 4,627
Telephone and other communications......................................... 948 665 1,932 1,158
Amortization of Goodwill................................................... 753 654 1,552 1,317
General and administrative expense......................................... 6,950 6,560 13,383 11,447
-------- ------- -------- --------
Total expenses.......................................................... 29,906 25,759 60,693 49,696
-------- ------- -------- --------
(Loss) income from continuing operations before income taxes and
minority interest........................................................ (43,231) 26,045 (33,156) 49,597
Income taxes............................................................... (17,177) 9,500 (13,984) 18,361
Minority interest in (loss) income of consolidated subsidiaries............ (153) 142 (33) 233
-------- ------- -------- --------
(Loss) income from continuing operations................................... (25,901) 16,403 (19,139) 31,003
Operating loss from discontinued operations of AMN, net of income taxes
of ($94,000) and ($1.2) million for the three and six months ended
June 30, 1998............................................................ -- (141) -- (1,841)
-------- ------- -------- --------
Net (loss) income....................................................... $(25,901) $16,262 $(19,139) $ 29,162
======== ======= ======== ========
Other Comprehensive income:
Other comprehensive income (loss), net................................... 1,883 (4,831) 3,024 (4,750)
-------- ------- -------- --------
Comprehensive (loss) income.............................................. $(24,018) $11,431 $(16,115) $ 24,412
======== ======= ======== ========
Basic income per share:
(Loss) income from continuing operations................................... $ (0.74) $ 0.42 $ (0.53) $ 0.80
Operating loss from discontinued operations, net of income taxes........... -- -- -- (0.05)
-------- ------- -------- --------
Net (loss) income per common share......................................... $ (0.74) $ 0.42 $ (0.53) $ 0.75
======== ======= ======== ========
Diluted income per share:
(Loss) income from continuing operations................................... $ (0.74) $ 0.40 $ (0.53) $ 0.76
Operating loss from discontinued operations, net of income taxes........... -- -- -- (0.05)
-------- ------- -------- --------
Net (loss) income per common share......................................... $ (0.74) $ 0.40 $ (0.53) $ 0.71
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
(Loss) income from continuing operations........................................................ $ (19,139) $ 31,003
Adjustments to reconcile (loss) income from continuing operations to net cash (used in)
provided by operating activities:
Cash used in discontinued operations.......................................................... (8,460) (13,650)
Provision for loan and lease losses........................................................... 24,455 7,300
Mark to market on securities and loans held for sale.......................................... 25,255 (1,535)
Depreciation.................................................................................. 2,241 1,590
Amortization of goodwill...................................................................... 1,552 1,317
Amortization of servicing rights.............................................................. 4,038 701
Accretion of discount......................................................................... (2,545) (3,662)
Gain on sale of loans and leases.............................................................. (3,761) (8,845)
Gains on sale of equity securities............................................................ (1,265) --
Equity in net earnings of SPFC................................................................ -- (12,739)
Equity in net earnings of FMC................................................................. 53 (6,586)
Loss on sale of OREO.......................................................................... 534 1,217
Writedowns (recovery) on OREO................................................................. 275 (1,481)
Originations of loans held for sale........................................................... (212,700) (341,300)
Sales and collections on loans held for sale.................................................. 238,694 338,978
Purchase of trading securities................................................................ (5,044) (20,503)
Sale of trading securities.................................................................... 95,299 79,751
Net change in accrued interest receivable..................................................... 1,414 (3,100)
Net change in retained interest in loan and lease securitizations............................. (3,127) (8,430)
Other, net.................................................................................... 6,571 13,752
--------- ---------
Net cash provided by operating activities....................................................... 144,340 53,778
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits.......................................... (53,267) 89,807
Purchases of securities available for sale.................................................... (13,222) (10,327)
Sale of securities available for sale......................................................... 4,875 --
Proceeds from sale of Impac Mortgage Holdings stock........................................... 7,686 --
Proceeds from sale of ICCMIC stock............................................................ 5,437 --
Purchase of stock in Federal Home Loan Bank................................................... (1,983) --
Redemption of stock in Federal Home Loan Bank................................................. -- 1,000
Decrease (increase) in loans held for investment.............................................. 58,263 (331,285)
Proceeds from sale of other real estate owned................................................. 5,767 4,109
Purchases of premises and equipment........................................................... (2,824) (2,189)
--------- ---------
Net cash provided by (used in) investing activities............................................. 10,732 (248,885)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits........................................................... (304,758) 358,783
Advances from Federal Home Loan Bank.......................................................... 30,000 44,500
Repayments of advances from Federal Home Loan Bank............................................ (20,000) (69,500)
Net change in other borrowings................................................................ (101,050) (25,588)
Proceeds from issuance of cumulative mandatorily redeemable preferred stock................... 30,000 --
Repurchase and retirement of common stock..................................................... (29,460) (6,946)
Net change in minority interest............................................................... (136) (246)
Proceeds from exercise of stock options....................................................... 110 729
--------- ---------
Net cash (used in) provided by financing activities............................................. (395,294) 301,732
--------- ---------
Net change in cash.............................................................................. (240,222) 106,625
Cash at beginning of period..................................................................... 297,772 45,379
--------- ---------
Cash at end of period........................................................................... $ 57,550 $ 152,004
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Shares held Unrealized
in deferred gain (loss) on
Number of executive securities Total
shares Common Retained compensation available Shareholders'
outstanding stock earnings plan for sale, net equity
------------ ---------- ---------- ---- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998................ 36,786 $129,609 $101,265 $3,833 $(1,186) $233,521
Exercise of stock options................. 39 110 -- -- -- 110
Repurchase and retirement of stock........ (3,682) (29,460) -- -- -- (29,460)
Purchase of stock held in deferred
executive compensation plan.............. -- (2,806) -- 2,806 -- --
Decrease in unrealized loss on
securities available for sale, net....... -- -- -- -- 3,024 3,024
Net loss for the six months ended
June 30, 1999............................ -- -- (19,139) -- -- (19,139)
------ -------- -------- ------ ------- --------
Balance, June 30, 1999.................... 33,143 $ 97,453 $ 82,126 $6,639 $ 1,838 $188,056
====== ======== ======== ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Imperial Credit Industries, Inc., was incorporated in 1991 in the State of
California. The consolidated financial statements include Imperial Credit
Industries, Inc. ("ICII"), and its wholly or majority owned consolidated
subsidiaries (collectively, the "Company"). The wholly-owned subsidiaries
include but are not limited to Southern Pacific Bank ("SPB"), Imperial Business
Credit Inc. ("IBC"), Imperial Credit Commercial Asset Management Corporation
("ICCAMC"), Statewide Documentation Services, Inc. ("SDI") and Imperial Credit
Asset Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a
majority owned consolidated subsidiary which is approximately 60% owned by the
Company and approximately 40% owned by ICG's management. The Company's
significant equity interest in a publicly traded company is Franchise Mortgage
Acceptance Company ("FMC") (Nasdaq Symbol: FMAX). FMC was a former consolidated
subsidiary of the Company. All material inter-company balances and transactions
with consolidated 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, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 1998.
In preparing the consolidated financial statements, we are 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 1999 presentation.
3. Net (Loss) Income Per Share Information
The following table reconciles the number of shares used in the
computations of basic and diluted (loss) income per share for the three and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the For the Six Month
Quarter ended June 30, period ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding during the
year used to compute basic (loss) income per share............. 35,004,334 38,752,018 35,905,949 38,747,417
Assumed common shares issued on exercise of stock
Options........................................................ -- 2,060,373 -- 2,052,063
---------- ---------- ---------- ----------
Number of common shares used to compute diluted (loss)
income per share............................................... 35,004,334 40,812,391 35,905,949 40,799,480
========== ========== ========== ==========
</TABLE>
4. Comprehensive Income
Our 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 (loss) income for the three and six months ended June
30, 1999 totaled $(24.0) million and $(16.1) million, as compared to income of
$11.4 million and $24.4 million for the same periods last year, respectively.
Accumulated other comprehensive income, consisting of the net unrealized gain on
securities available for sale at June 30, 1999 was $1.8 million as compared to
an unrealized loss of $2.8 million at June 30, 1998, respectively.
6
<PAGE>
5. Discontinued Operations
During the three months ended September 30, 1998, management decided to
cease operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a
disposal plan was formulated, whereby the daily operations of AMN were
terminated over a two month period.
The net assets of AMN's discontinued operations were as follows: (In thousands)
<TABLE>
<CAPTION>
At June 30, At December 31,
------------ ----------------
1999 1998
---- ----
<S> <C> <C>
Loans held for sale, net $ 9,483 $15,161
Securities held for sale 8,044 7,844
Retained interest in loan
securitizations 13,165 11,280
Income taxes receivable 11,641 10,725
Other assets 2,472 1,802
------- -------
Total AMN net assets $44,805 $46,812
======= =======
</TABLE>
During the second quarter ended June 30, 1999, AMN paid off its warehouse
line of credit with Greenwich Capital Financial. AMN's $9.2 million warehouse
line of credit is classified as other borrowings in the consolidated financial
statements at December 31, 1998.
Total non-performing AMN loans were $4.0 million as of June 30, 1999 as
compared to $4.6 million at December 31, 1998. AMN discontinued originating
loans during the third quarter of 1998. AMN originated $5.5 million and $8.1
million in sub-prime auto loans during the three and six months ended June 30,
1998.
6. Loan and Lease Commitments
At June 30, 1999, our consolidated lending commitments were as follows: (In
thousands)
<TABLE>
<CAPTION>
Commitment Funded Unfunded
Type of Lending Commitment Amount Amount Commitment
- -------------------------- ------ ------ ----------
<S> <C> <C> <C>
Loan and line commitments $2,497,823 $1,243,197 $1,254,626
Standby letters of credit 13,919 -- 13,919
Commercial letters of credit 442 -- 442
---------- ---------- ----------
$2,512,184 $1,243,197 $1,268,987
========== ========== ==========
</TABLE>
7. Loans Held for Sale
Loans held for sale consisted of the following at June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- ---------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to-four family................................................. $ 20,487 $ 71,189
Multi-family and commercial........................................ 194,450 143,763
-------- --------
214,937 214,952
Automobile loans...................................................... 28,806 64,337
Installment loans..................................................... 17,973 29,384
Leases................................................................ 10,312 10,388
-------- --------
$272,028 $319,061
======== ========
</TABLE>
7
<PAGE>
8. Business Segments
Business segment financial information is reported on the basis that is
used internally by management in making decisions related to resource allocation
and segment performance. The company's reportable segments are operated and
managed as strategic business units and are organized based on products and
services. Business units operated at different locations are aggregated for
reporting purposes when their products and services are similar. The Company's
operations are divided into ten business segments as follows:
1. Loan Participation and Investment Group
2. Coast Business Credit
3. PrinCap Mortgage Warehouse
4. Income Property Lending Division
5. Imperial Capital Group, LLC
6. Imperial Business Credit
7. De-emphasized/Discontinued/Exited Businesses
8. Equity Investments
9. Asset Management Activities
10. Other Core Operations
The following is a summary of our results of operations by business line
for the three and six months ended June 30, 1999 as compared to June 30, 1998.
<TABLE>
<CAPTION>
At or for the three months ended June 30,
-----------------------------------------
(In thousands)
--------------
Net
(Expense) Revenue
From Other
External Net Revenue Operating Units Net (Loss) Income Total Assets
-------------------- --------------------- -------------------- --------------
Business Line 1999 1998 1999 1998 1999 1998 1999 1998
- ------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coast Business Credit $ (130) $ 12,644 $ -- $ -- $ (3,148) $ 5,060 $ 663,984 $ 597,708
PrinCap Mortgage Warehouse (392) 2,541 -- -- (571) 1,194 153,756 183,930
Income Property Lending 2,229 2,731 -- -- 1 (72) 199,465 89,451
Imperial Business Credit 3,446 3,680 (322) (437) 244 305 46,051 50,564
Loan Participation and
Investment Group 889 3,571 -- -- 317 1,928 249,319 293,686
Imperial Capital Group, LLC 5,507 5,040 -- -- (275) 346 6,843 10,739
Asset Management Activities 2,774 1,596 (70) (68) 360 554 4,381 2,066
Other Core Operations (3,420) (1,711) (190) 1,155 (3,974) (2,211) 526,073 667,513
Equity Interests (1,188) 10,651 -- -- (748) 6,745 59,494 59,685
De-emphasized/Discontinued/
Exited Businesses (23,254) 10,061 582 (650) (18,276) 2,101 422,071 788,791
Eliminations 214 1,000 -- -- 169 453 (326,820) (329,507)
------- ------ ---- ----- ------- ------ --------- ---------
Net (loss) income from
continuing operations $ (13,325) $ 51,804 $ -- $ -- $ (25,901) $ 16,403 $ 2,004,617 $ 2,414,626
======= ====== ==== ===== ======= ====== ========= =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
At or for the Six months ended June 30,
---------------------------------------
(In thousands)
--------------
Net
(Expense) Revenue
From Other
External Net Revenue Operating Units Net (Loss) Income Total Assets
--------------------- ----------------- ----------------- -----------
Business Line 1999 1998 1999 1998 1999 1998 1999 1998
- ------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coast Business Credit $ 11,130 $ 21,417 $ -- $ -- $ 551 $ 7,784 $ 663,984 S 597,708
PrinCap Mortgage Warehouse 1,045 4,346 -- -- (61) 1,946 153,756 183,930
Income Property Lending 6,571 8,704 -- -- 1,072 1,938 199,465 89,451
Imperial Business Credit 4,402 7,930 (570) (863) (904) 825 46,051 50,564
Loan Participation and
Investment Group 3,901 4,741 -- -- 1,853 2,324 249,319 293,686
Imperial Capital Group, LLC 11,596 9,843 -- -- (140) 447 6,843 10,739
Asset Management Activities 5,599 3,072 (125) (34) 252 1,018 4,381 2,066
Other Core Operations (4,286) (2,158) 619 1,399 (5,354) (3,765) 526,073 667,513
Equity Interests 1,163 19,522 -- -- 570 12,261 59,494 59,685
De-emphasized/Discontinued/
Exited Businesses (13,369) 20,876 76 (502) (16,892) 5,776 422,071 788,791
Eliminations (215) 1,000 -- -- (86) 449 (326,820) (329,507)
------- ------ ---- ----- ------- ------ --------- ---------
Net income (loss) from
continuing operations $ 27,537 $ 99,293 $ -- $ -- $ (19,139) $ 31,003 $ 2,004,617 $ 2,414,626
======= ====== ==== ===== ======= ====== ========= =========
</TABLE>
We have outstanding inter-company subordinated debt to SPB of $35.0 million
and ICG of $6.1 million. All inter-company receivables and payables including
corresponding interest income and expense are eliminated in consolidation.
Additionally, our investments in subsidiaries and inter-company management fees
are included in eliminations.
The net income (loss) for each business line includes inter-company
allocations for administrative expenses including human resources, legal,
accounting, and insurance.
9. Share Repurchase Program and Deferred Executive Compensation Plan
On May 14, 1999, we entered into an agreement with our former parent
Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, we
repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00
per share or $29.5 million. The repurchase from Imperial Bank was financed
through the private issuance of $30.0 million Series B 11.50% Mandatorily
Redeemable Cumulative Preferred Stock to a group of independent investors. As of
July 31, 1999, we had repurchased and retired 4,253,414 shares of common stock
under our second share repurchase program at an average price of $7.83 per
share. The authorized share repurchase under the second repurchase program is
4,334,276 shares. Since beginning share repurchases in December of 1997, we have
repurchased under both the first and second share repurchase programs a total of
6,193,220 shares of common stock at an average price of $8.70 per share.
Our open market repurchases effected pursuant to our stock repurchase
programs were effected in compliance with Rule 10b-18 under the Securities
Exchange Act of 1934.
On July 1, 1998 we established a deferred executive compensation plan.
During the three months ended June 30, 1999, our management and directors
invested $602,000 with the plan's trustee who acquired 72,248 shares of common
stock at an average price of $8.24 per share. From the plan's inception through
July 31, 1999, our management and directors invested $6.9 million with the
plan's trustee who acquired 756,551 shares of common stock at an average price
of $9.05 per share. All shares acquired by the plan's trustee are acquired for
the benefit of the Company's participating management and directors.
10. Issuance of Preferred Stock
On June 30, 1999, we issued $30.0 million of Series B 11.5% Mandatorily
Redeemable Cumulative Preferred Stock, no par value ($25 liquidation preference
per share). The board authorized and issued 1,200,000 shares to a group of
independent investors. Since the preferred stock is mandatorily redeemable, it
has the characteristics of debt, whereby, accrual of dividend payments by ICII
will be accounted for as interest expense, in accordance with Generally Accepted
Accounting Principles. The stated coupon rate of the Series B Preferred Stock
escalates quarterly according to the following schedule: 14.5% for the first
quarter of 2000, 17.5% for the second quarter of 2000 and thereafter. The stated
coupon rate may also increase by an additional 3.0% above the rates previously
listed if we repurchase any of our 9.875%
9
<PAGE>
Senior Notes. The Series B Preferred Stock also carries a 3% redemption premium.
The proceeds from the Series B Preferred Stock issue were used to repurchase
3,682,536 shares of our common stock from Imperial Bank for $8.00 per share or
$29.5 million.
11. Recent Development
On July 23, 1999, we announced the signing of a definitive merger agreement
by which a wholly owned subsidiary of ours would acquire all of the outstanding
shares of ICCMIC (consisting of the 25,930,000 shares not already owned by us
and certain of our affiliates and subsidiaries) for a cash purchase price of
$11.50 per share. The merger agreement contemplates that ICCMIC will solicit and
explore alternative transactions which would provide its stockholders with a
more favorable alternative to the ICII merger during the 60 days following the
appointment of an appraisal firm to be engaged to appraise the value of our
management agreement with ICCMIC. During this 60-day period, ICCMIC may
terminate our merger agreement in favor of a superior proposal. In the event of
such a termination, ICCMIC will be obligated to reimburse us for certain of our
expenses incurred in connection with the proposed merger, not to exceed $2
million. The merger agreement is also subject to ICCMIC shareholder approval.
ICCMIC is a commercial mortgage real estate investment trust that has 28,500,000
outstanding common shares and total assets of approximately $702 million. We
sponsored and took ICCMIC public in October 1997. We currently own 2,570,000
shares of ICCMIC, or 9.0% of ICCMIC's outstanding common stock, and 100% of
ICCAMC, the company that manages ICCMIC's operations and assets.
10
<PAGE>
12. Consolidating Financial Information
The following represents condensed consolidating financial information as
of June 30, 1999 and December 31, 1998, and for the six months ended June 30,
1999 and 1998, with respect to the financial position, results of operations and
cash flows of our company and our wholly-owned and majority-owned subsidiaries.
On January 17, 1997, we sold $200 million of 9.875% Senior Notes due 2007. As of
June 30, 1999, the 9.875% Senior Notes are guaranteed by five of the Company's
wholly-owned subsidiaries, IBC, ICAI, ICCAMC, Imperial Credit Worldwide
("ICW") and AMN (the "Guarantor Subsidiaries"). As of June 30, 1999, the non-
guarantor subsidiaries are SPB, ICG and Imperial Credit Capital Trust I
("ICCTI"). Each of the guarantees is full and unconditional and joint and
several. The summarized consolidated financial information is presented in lieu
of separate financial statements and other related disclosures of the wholly-
owned subsidiary guarantors as we have determined that such information is not
material to investors. None of the subsidiary guarantors is restricted from
making distributions to our company.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash................................................... $ 31,078 $ (845) $ 28,747 $ (1,430) $ 57,550
Interest bearing deposits.............................. 11,754 -- 42,928 -- 54,682
Investment in Federal Home Loan Bank stock............. -- -- 6,774 -- 6,774
Trading and available for sale securities.............. 88,730 12,653 57,627 (11,000) 148,010
Loans and leases held for sale......................... 1,854 10,311 259,863 -- 272,028
Loans and leases held for investment, net.............. 53,763 1,920 1,213,555 (35,000) 1,234,238
Equity interest in FMC................................. 56,182 -- -- -- 56,182
Servicing rights....................................... -- 400 -- -- 400
Retained interest in loan and lease securitizations.... -- 25,667 -- -- 25,667
Investment in subsidiaries............................. 263,799 -- -- (263,799) --
Goodwill............................................... -- 16,232 19,713 -- 35,945
Net assets of discontinued operations.................. 50,810 (6,005) -- -- 44,805
Other assets........................................... (10,195) 54,913 25,543 (1,925) 68,336
-------- -------- ---------- --------- ----------
Total assets......................................... $547,775 $115,246 $1,654,750 $(313,154) $2,004,617
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits............................................... $ -- $ -- $1,408,000 $ (1,430) $1,406,570
Borrowings from FHLB................................... -- -- 30,000 -- 30,000
Other borrowings....................................... 1,220 8,032 36,925 (44,957) 1,220
Remarketed Par Securities.............................. 72,165 (2,165) -- -- 70,000
Senior notes........................................... 219,883 -- -- -- 219,883
Minority interest in consolidated subsidiaries......... (628) 2,300 90 1,319 3,081
Other liabilities...................................... 37,079 11,954 (1,385) 8,159 55,807
-------- -------- ---------- --------- ----------
Total liabilities.................................... 329,719 20,121 1,473,630 (36,909) 1,786,561
-------- -------- ---------- --------- ----------
Series B 11.5% Mandatorily Redeemable Cumulative
Preferred Stock........................................ 30,000 -- -- -- 30,000
Shareholders' equity:
Preferred stock........................................ -- 13,000 -- (13,000) --
Common stock........................................... 97,453 118,729 114,134 (232,863) 97,453
Retained earnings...................................... 82,126 (43,261) 67,161 (23,900) 82,126
Shares held in executive deferred compensation plan.... 6,639 6,639 -- (6,639) 6,639
Accumulated other comprehensive income (loss).......... 1,838 18 (175) 157 1,838
-------- -------- ---------- --------- ----------
Total shareholders' equity........................... 188,056 95,125 181,120 (276,245) 188,056
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity........... $547,775 $115,246 $1,654,750 $(313,154) $2,004,617
======== ======== ========== ========= ==========
</TABLE>
11
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash.................................................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
Interest bearing deposits............................... 2,281 423 (1,289) -- 1,415
Investment in Federal Home Loan Bank stock.............. -- -- 4,657 -- 4,657
Trading and available for sale securities............... 118,622 8,421 113,723 (10,000) 230,766
Loans and leases held for sale.......................... 1,698 33,160 284,203 -- 319,061
Loans and leases held for investment, net............... 45,029 7,467 1,302,599 (35,000) 1,320,095
Equity interest in FMC.................................. 56,334 -- -- -- 56,334
Servicing rights........................................ -- 365 3,964 -- 4,329
Retained interest in loan and lease securitizations..... -- 27,011 -- -- 27,011
Investment in subsidiaries.............................. 276,863 -- -- (276,863) --
Goodwill................................................ -- 16,959 20,539 -- 37,498
Net assets of discontinued operations................... 43,624 3,188 -- -- 46,812
Other assets............................................ 32,248 12,200 28,910 (1,925) 71,433
-------- -------- ---------- --------- ----------
Total assets.......................................... $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits................................................ $ -- $ -- $1,713,765 $ (2,437) $1,711,328
Borrowings from FHLB.................................... -- -- 20,000 -- 20,000
Other borrowings........................................ 20,481 15,097 103,617 (36,925) 102,270
Remarketed Par Securities............................... 72,165 (2,165) -- -- 70,000
Senior notes............................................ 219,858 -- -- -- 219,858
Minority interest in consolidated subsidiaries.......... (628) 2,109 133 1,603 3,217
Other liabilities....................................... 34,526 7,253 15,210 -- 56,989
-------- -------- ---------- --------- ----------
Total liabilities..................................... 346,402 22,294 1,852,725 (37,759) 2,183,662
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......................................... -- 12,000 -- (12,000) --
Common stock............................................ 129,609 135,279 114,258 (249,537) 129,609
Retained earnings....................................... 101,265 (63,487) 86,582 (23,095) 101,265
Shares held in deferred executive compensation plan..... 3,833 3,833 -- (3,833) 3,833
Accumulated other comprehensive loss.................... (1,186) -- -- -- (1,186)
-------- -------- ---------- --------- ----------
Total shareholders' equity............................ 233,521 87,625 200,840 (288,465) 233,521
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity............ $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
</TABLE>
12
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
Revenue:
<S> <C> <C> <C> <C> <C>
Interest income........................................ $ 9,469 $ 5,978 $ 92,010 $(2,144) $105,313
Interest expense....................................... 15,282 907 45,649 (2,144) 59,694
-------- ------- -------- ------- --------
Net interest income.................................... (5,813) 5,071 46,361 -- 45,619
Provision for loan and lease losses.................... 250 375 23,830 -- 24,455
-------- ------- -------- ------- --------
Net interest (expense) income after provision for
Loan and lease losses.............................. (6,063) 4,696 22,531 -- 21,164
-------- ------- -------- ------- --------
Gain on sale of loans and leases....................... 19 2,094 1,648 -- 3,761
Loan servicing (expense) income........................ (57) 1,868 1,628 -- 3,439
Investment banking and brokerage fees.................. -- -- 11,910 -- 11,910
Asset management fees.................................. -- 6,009 -- -- 6,009
Gain (loss) on sale of securities...................... 1,343 137 -- (215) 1,265
Mark to market on securities and loans held for sale... 87 (1,942) (23,400) -- (25,255)
Equity in net loss of FMC.............................. (53) -- -- -- (53)
Dividends received from subsidiaries................... 2,007 -- -- (2,007) --
Other income........................................... 1,230 969 3,098 -- 5,297
-------- ------- -------- ------- --------
Total other income................................... 4,576 9,135 (5,116) (2,222) 6,373
-------- ------- -------- ------- --------
Total net revenue................................. (1,487) 13,831 17,415 (2,222) 27,537
-------- ------- -------- ------- --------
Expenses:
Personnel and commission expense....................... 645 7,582 22,037 -- 30,264
Amortization of servicing rights....................... -- 74 3,964 -- 4,038
Occupancy expense...................................... 303 451 1,945 -- 2,699
Net (income) expense of other real estate owned........ (27) 653 272 -- 898
Professional services.................................. 2,024 1,259 2,644 -- 5,927
Telephone and other communications..................... 61 333 1,538 -- 1,932
Amortization of goodwill............................... -- 727 825 -- 1,552
General and administrative expense..................... 1,307 1,743 10,333 -- 13,383
-------- ------- -------- ------- --------
Total expenses....................................... 4,313 12,822 43,558 -- 60,693
-------- ------- -------- ------- --------
(Loss) income before income taxes, minority interest,
and equity in undistributed income of subsidiaries.... (5,800) 1,009 (26,143) (2,222) (33,156)
Income taxes........................................... (3,929) 332 (10,300) (87) (13,984)
Minority interest in income (loss) of
Consolidated subsidiaries............................. 81 50 (18) (146) (33)
-------- ------- -------- ------- --------
(Loss) income before equity in undistributed
income of subsidiaries................................ (1,952) 627 (15,825) (1,989) (19,139)
Equity in undistributed (loss) income of consolidated
Subsidiaries.......................................... (17,187) -- -- 17,187 --
-------- ------- -------- ------- --------
Net (loss) income.................................... $(19,139) $ 627 $(15,825) $15,198 $(19,139)
======== ======= ======== ======= ========
</TABLE>
13
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ -------------
(In thousands)
Revenue:
<S> <C> <C> <C> <C> <C>
Interest income........................................... $14,879 $ 6,501 $92,365 $ (2,229) $111,516
Interest expense.......................................... 14,882 271 43,777 (2,229) 56,701
------- ------- ------- -------- --------
Net interest (expense) income............................. (3) 6,230 48,588 -- 54,815
Provision for loan and lease losses....................... -- 300 7,000 -- 7,300
------- ------- ------- -------- --------
Net interest (expense) income after provision for
loan and lease losses................................. (3) 5,930 41,588 -- 47,515
------- ------- ------- -------- --------
Gain on sale of loans and leases.......................... 46 3,072 5,727 -- 8,845
Loan servicing (expense) income........................... (279) 2,714 3,350 -- 5,785
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
Mark to market on securities and loans held for sale...... (580) -- 1,115 1,000 1,535
Gain on sale of securities................................ 6 -- -- -- 6
Other income.............................................. 151 775 1,608 -- 2,534
------- ------- ------- -------- --------
Total other income...................................... 18,669 9,341 22,768 1,000 51,778
------- ------- ------- -------- --------
Total revenues....................................... 18,666 15,271 64,356 1,000 99,293
------- ------- ------- -------- --------
Expenses:
Personnel and commission expense.......................... 2,115 4,925 20,773 -- 27,813
Amortization of servicing rights.......................... -- -- 701 -- 701
Occupancy expense......................................... 610 301 1,793 -- 2,704
Net (income) expense of other real estate owned........... (538) 790 (323) -- (71)
Professional services..................................... 1,496 581 2,550 -- 4,627
Telephone and other communications........................ 156 247 755 -- 1,158
Amortization of goodwill.................................. -- 475 842 -- 1,317
General, administrative and other expense................. 1,400 1,667 8,380 -- 11,447
------- ------- ------- -------- --------
Total expenses.......................................... 5,239 8,986 35,471 -- 49,696
------- ------- ------- -------- --------
Income from continuing operations before income taxes,
minority interest, and equity in undistributed
income of subsidiaries................................ 13,427 6,285 28,885 1,000 49,597
Income taxes.............................................. 3,364 2,697 11,878 422 18,361
Minority interest in (loss) income of
consolidated subsidiaries................................ -- (106) 55 284 233
------- ------- ------- -------- --------
Income from continuing operations before equity in
undistributed income of subsidiaries..................... 10,063 3,694 16,952 294 31,003
Equity in undistributed income (loss) of subsidiaries..... 19,099 -- -- (19,099) --
------- ------- ------- -------- --------
Income (loss) from continuing operations.................. 29,162 3,694 16,952 (18,805) 31,003
Loss from discontinued operations......................... -- (1,841) -- -- (1,841)
------- ------- ------- -------- --------
Net income.............................................. $29,162 $ 1,853 $16,952 $(18,805) $ 29,162
======= ======= ======= ======== ========
</TABLE>
14
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
<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............................................. $ 61,713 $(16,977) $ 94,929 $ 4,675 $ 144,340
-------- -------- --------- ------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits............... (9,473) 423 (44,700) 483 (53,267)
Sales of securities available for sale................ 4,875 -- -- -- 4,875
Purchase of securities available for sale............. (1,000) -- (13,222) 1,000 (13,222)
Proceeds from sale of IMH stock....................... -- 7,686 -- -- 7,686
Proceeds from sale of ICCMIC stock.................... -- 5,437 -- -- 5,437
Net change in loans held for investment............... (9,679) 3,962 63,591 389 58,263
Net change in investment in subsidiaries.............. (2,031) -- -- 2,031 --
Other, net............................................ (484) 3,673 (1,866) (363) 960
-------- -------- --------- ------- ---------
Net cash (used in) provided by investing activities..... (17,792) 21,181 3,803 3,540 10,732
-------- -------- --------- ------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits................... -- -- (305,765) 1,007 (304,758)
Repayments of advances from Federal Home
Loan Bank........................................... -- -- 30,000 -- 30,000
Advances from the Federal Home Loan Bank.............. -- -- (20,000) -- (20,000)
Net change in other borrowings........................ (19,261) (7,065) (66,692) (8,032) (101,050)
Proceeds from issuance of Preferred Stock 30,000 -- -- -- 30,000
Repurchase and retirement of common stock............. (29,460) -- -- -- (29,460)
Other, net............................................ 2,654 1,291 (3,787) (184) (26)
-------- -------- --------- ------- ---------
Net cash (used in) provided by financing activities..... (16,067) (5,774) (366,244) (7,209) (395,294)
-------- -------- --------- ------- ---------
Net change in cash.................................... 27,854 (1,570) (267,512) 1,006 (240,222)
Cash at beginning of period........................... 3,224 725 296,259 (2,436) 297,772
-------- -------- --------- ------- ---------
Cash at end of period................................. $ 31,078 $ (845) $ 28,747 $(1,430) $ 57,550
======== ======== ========= ======= =========
</TABLE>
15
<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) $(27,375) $ 99,993 $(10,299) $ 53,778
-------- -------- --------- -------- ---------
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 14,058 (348,207) (3,570) (331,285)
Net change in investment in Subsidiaries.............. (12,127) -- -- 12,127 --
Other, net............................................ (1,219) (123) (147) 300 (1,189)
-------- -------- --------- -------- ---------
Net cash provided by (used in) investing activities.... 5,125 17,051 (279,950) 8,889 (248,885)
-------- -------- --------- -------- ---------
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)
Repurchase and 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) 2,147 104,016 10,095 106,625
Cash at beginning of period........................... 13,229 1,450 43,318 (12,618) 45,379
-------- -------- --------- -------- ---------
Cash at end of period................................. $ 3,596 $ 3,597 $ 147,334 $ (2,523) $ 152,004
======== ======== ========= ======== =========
</TABLE>
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Organization
Imperial Credit Industries, Inc, was incorporated in 1986 in the State of
California, and had consolidated assets of $2.0 billion as of June 30, 1999. We
are a diversified commercial lending, financial services and investment holding
company. Our headquarters are located in Torrance, California. Our principal
business activities are primarily conducted through our wholly and majority
owned subsidiaries including Southern Pacific Bank ("SPB"), Imperial Business
Credit Inc. ("IBC"), Imperial Credit Commercial Asset Management Corporation
("ICCAMC"), Statewide Documentation Inc. ("SDI") and Imperial Credit Asset
Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a majority
owned consolidated subsidiary of which we own approximately 60%, and ICG's
management owns approximately 40%. Our significant equity interest in a publicly
traded company is Franchise Mortgage Acceptance Company ("FMC") (Nasdaq Symbol:
FMAX). FMC was a former consolidated subsidiary of ours. Our core businesses
originate loans and leases funded primarily by FDIC insured deposits. Our
business strategy currently emphasizes:
[_] holding the majority of the loans and leases that we originate for
investment, except for certain multifamily and commercial real estate loans
originated by SPB and leases originated by IBC for sale,
[_] investing in and managing businesses in high margin niche segments of the
financial services industry,
[_] maintaining conservative, disciplined underwriting and credit risk
management,
[_] originating loans and leases on a wholesale basis, where possible,
[_] managing and advising investment funds,
[_] providing investment banking and broker/dealer services to middle market
companies and private individuals, and
[_] maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
We diversified our business lines to include investment products and asset
management services in order to reduce our sole dependency on residential and
commercial mortgage lending. We now operate as a diversified commercial lending,
financial services and investment holding company providing financial services
products in the following sectors: business lending, asset management services
and investment banking and brokerage services.
Results of Operations
We reported a net loss for the quarter ended June 30, 1999 of $25.9 million
or $0.74 diluted net loss per share as compared to net income of $16.3 million
or $0.40 diluted net income per share for the same period last year. The net
loss for the six months ended June 30, 1999 was $19.1 million or $0.53 diluted
net loss per share as compared to net income of $29.2 million or $0.71 diluted
net income per share for the same period last year.
The losses for the three and six months ended June 30, 1999 primarily
relate to the acceleration of our exit from non-core businesses and increased
provisions for loan losses. The three months ended June 30, 1999 were negatively
impacted by the following:
. Net after tax mark-to-market charges on SPB's sub-prime auto loan portfolio
of $13.0 million or $0.37 per diluted share. We have committed to sell
$29.3 million of our remaining $39.5 million of sub-prime auto loans. After
the sale, scheduled to close in August 1999, the remaining balance of our
sub-prime auto loan portfolio will be approximately $10.2 million.
. A net after tax increase in the provision for loan losses of $10.8 million
or $0.31 per diluted share as compared to the same period of the prior
year. The increase primarily resulted from an increase in non-accrual loans
and charge-offs from SPB's Loan Participation and Investment Group
("LPIG"), and Coast Business Credit ("CBC") divisions. As a result of the
increased loan loss provision, we have increased our allowance for loan
losses from $24.9 million or 1.85% of loans held for investment at December
31, 1999 to $31.3 million or 2.48% of loans held for investment at June 30,
1999.
. Net after tax losses of $3.1 million or $0.09 per diluted share relating to
our exit from the multifamily and commercial real estate loan servicing for
others operations at SPB. Going forward, we expect to save $2.5 million
annually from the exit of this business.
17
<PAGE>
. In conjunction with the proposed merger with Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") Nasdaq Symbol: ICMI, and in accordance
with certain representations and warranties on previously sold loans to
ICCMIC, we repurchased performing multifamily and commercial real estate
loans aggregating $41.9 million from ICCMIC. The net after tax loss from
these repurchases was $893,000 or $0.03 per diluted share from the
repurchase of multifamily and commercial real estate loans from ICCMIC.
Additionally, the net loss for the quarter ended June 30, 1999 includes our
equity pick up of FMC's net losses of $2.0 million as compared to net income of
$3.8 million for the quarter ended June 30, 1998.
Net income for the three and six months ended June 30, 1999 did not include
any operating loss from the discontinued operations of Auto Marketing Network,
Inc, ("AMN"). Net income for the same periods last year included operating
losses of $141,000 or $0.00 diluted net loss per share and $1.8 million or $0.05
diluted net loss per share, respectively.
Our total expenses increased by $4.1 million to $29.9 million for the three
months ended June 30, 1999 as compared to $25.8 million for the same period last
year. Our total expenses for the six months ended June 30, 1999 were $60.7
million as compared to $49.7 million for the same period last year. Our
personnel and commission expenses increased primarily at ICG. Our amortization
of servicing rights increased due to our decision to exit the multifamily and
commercial real estate loan servicing operations of SPB. Our professional
services increased primarily due to increased legal fees and costs in connection
with the ICCMIC acquisition and the pending class action lawsuits filed against
our company, management, and directors in 1998.
CORE BUSINESSES
The following table reflects average loans and leases outstanding and the
average yields earned on our core business units for the three and six months
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the three month period ended June 30,
-----------------------------------------
(Dollars in thousands)
----------------------
Average Loans and
Leases
Outstanding Average Yield
----------- -------------
Business Line 1999 1998 1999 1998
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Coast Business Credit $620,933 $541,786 13.36% 13.77%
PrinCap Mortgage Warehouse 138,166 157,892 7.98 10.51
Income Property Lending 202,970 122,881 8.80 8.63
Imperial Business Credit 8,850 11,906 11.40 17.30
Loan Participation and
Investment Group 239,612 273,676 7.79 8.53
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
For the six month period ended June 30,
---------------------------------------
(Dollars in thousands)
----------------------
Average Loans and
Leases
Outstanding Average Yield
----------- -------------
Business Line 1999 1998 1999 1998
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Coast Business Credit $616,441 $517,410 13.57% 13.10%
PrinCap Mortgage Warehouse 146,079 144,333 8.11 10.31
Income Property Lending 189,674 107,571 8.75 9.21
Imperial Business Credit 8,635 13,058 11.00 15.91
Loan Participation and
Investment Group 234,562 245,906 7.82 8.36
</TABLE>
Our largest subsidiary is SPB, a $1.6 billion industrial loan company,
which operates four of our core businesses, CBC, an asset based lender; the
Income Property Lending Division ("IPL"), a multifamily and commercial loan
originator; and LPIG, an investor in syndicated bank loan participations. SPB
also owns a mortgage lending subsidiary, PrinCap, which provides warehouse loans
to third party residential mortgage loan originators. Each of these businesses
is primarily funded by the FDIC insured deposits of SPB.
Coast Business Credit ("CBC")
CBC's net revenues were ($130,000) for the three months ended June 30, 1999
as compared to $12.6 million for the same period last year. CBC's net loss for
the three months ended June 30, 1999 was $3.1 million as compared to net income
of $5.1 million for the same period last year. Net revenues include a provision
for loan losses of $14.7 million for the three months ended June 30, 1999 and a
recovery of loans previously charged off of $508,000 for the three months ended
June 30, 1998. Net revenues and net income decreased to $11.1 million and
$551,000 for the six months ended June 30, 1999 as compared to $21.4 million and
$7.8 million for the same period last year. Net revenues include a provision for
loan losses of $18.3 million for the six months ended June 30, 1999 and a
recovery of loans previously charged off of $417,000 for the six months ended
June 30, 1998. The decrease in CBC's net revenues and net income for the three
and six months ended was primarily associated with the increase in provision for
loan losses, partially offset by an increase in CBC's average outstanding loan
balance and corresponding net interest income. CBC has been able to increase its
average loans outstanding as a result of geographic expansion across the United
States, and by offering its customers extended loan commitment periods. CBC
increased its average loans outstanding for the three and six months ended June
30, 1999 to $620.9 million and $616.4 million as compared to $541.8 million and
$517.4 million for the same periods last year, respectively.
As a result of the increase in CBC's average loans outstanding, CBC's net
interest income increased $2.1 million to $13.0 million during the three months
ended June 30, 1999 from $10.9 million for the same period last year. Net
interest income has increased to $25.9 million during the six months ended June
30, 1999 from $19.1 million for the same period last year. The yield on CBC's
loans for the three months ended June 30, 1999 decreased primarily as a result
of an increase in non-accrual loans partially offset by increased fees earned on
loan prepayments.
CBC also earned other income in the form of loan administration and audit
fees charged to its customers. CBC earned other income totaling $1.6 million and
$3.6 million during the three and six months ended June 30, 1999 as compared
$1.2 million and $1.9 million for the same periods last year, respectively.
CBC's total expenses increased to $5.1 million for the three months ended
June 30, 1999 from $4.7 million for the same period of last year. CBC's
personnel expense increased by $538,000 to $3.3 million from $2.8 million for
the same period last year, and all other expenses for the three months ended
June 30, 1999 decreased by $86,000 to $1.8 million from $1.9 million for the
same period last year. CBC's total expenses increased to $10.2 million for the
six months ended June 30, 1999 from $9.0 million for the same period of last
year. Personnel expense increased by $953,000 to $6.4 million for the six months
ended June 30, 1999 as compared to $5.5 million for the same period last year,
all other expenses increased by $200,000 to $3.7 million from $3.5 million for
the same period last year, respectively. These increases were primarily the
result of CBC's continued geographic expansion into several major metropolitan
areas of the United States over the course of 1998 and 1999.
19
<PAGE>
At June 30, 1999, CBC's non-accrual loans were $17.5 million as compared
$6.6 million at March 31, 1999, $1.1 million at December 31, 1998, and none for
at June 30, 1998. At June 30, 1999, $3.1 million in CBC's loans were 90 days
delinquent and accruing interest. CBC incurred net charge-offs of non-accrual
loans of $13.1 million during the six months ended June 30, 1999 and $0 during
the six months ended June 30, 1998. Non-performing loans at CBC are
collateralized by accounts receivable and inventory.
PrinCap Mortgage Warehouse, Inc. ("PrinCap")
PrinCap's net revenues were ($392,000) for the three months ended June 30,
1999 as compared to $2.5 million for the three months ended June 30, 1998.
PrinCap's net loss for the three months ended June 30, 1999 was $571,000 as
compared to net income of $1.2 million for the same period last year. Net
revenues include a provision for loan losses of $1.9 million for the three
months ended June 30, 1999 and a provision for loan losses of $155,000 for the
three months ended June 30, 1998. PrinCap's net revenues and net loss were $1.0
million and $61,000 for the six months ended June 30, 1999 as compared to net
revenues and net income of $4.3 million and $1.9 million for the same period
last year. Net revenues include a provision for loan losses of $2.0 million for
the six months ended June 30, 1999 and a provision for loan losses of $88,000
for the six months ended June 30, 1998.
Net interest income was $1.1 million and $2.1 million for the three and six
months ended June 30, 1999 as compared to $2.0 million and $3.2 million for the
same periods last year. Net interest income was negatively impacted by decreases
in the prime rate during third and fourth quarters of 1998 that carried over
into the first six months of 1999, a decrease in the average outstanding average
balance of loans outstanding, and an increase in non-accrual loans. PrinCap
earned other income consisting of loan fees charged to its customers of $493,000
and $969,000 for the three and six months ended June 30, 1999 as compared to
$726,000 and $1.2 million for the same periods last year.
PrinCap's total expenses were $557,000 and $655,000 for the three months
ended June 30, 1999 and 1998; primarily composed of $239,000 and $215,000 in
personnel expense, $114,000 in amortization of goodwill, and $86,000 and
$198,000 in general and administrative expenses, respectively. Total expenses
were $1.2 million for the six months ended June 30, 1999 and 1998; primarily
composed of $524,000 and $528,000 in personnel expense, $227,000 in amortization
of goodwill, and $170,000 and $262,000 in general and administrative expenses,
respectively.
At June 30, 1999, PrinCap had non-accrual loans of $9.1 million as compared
to $9.3 million at March 31, 1999, $4.1 million at December 31, 1998, and $0 at
June 30, 1998. PrinCap incurred net charge-offs of non-accrual loans of $700,000
during the six months ended June 30, 1999 and $0 during the six months ended
June 30, 1998. PrinCap's non-performing loans are collateralized by mortgage
loans on single family residences.
Income Property Lending ("IPL")
IPL's net revenues and net income decreased to $2.2 million and $1,000 for
the three months ended June 30, 1999 as compared to net revenues and net loss of
$2.7 million and $72,000 for the same period last year. The decrease in revenues
for the three months ended June 30, 1999 as compared to the same period last
year primarily resulted from a net loss on sale of loans, partially offset by
increased interest income earned on higher average outstanding balances of
income property loans. IPL incurred a net loss on sale of loans during the three
months ended June 30, 1999 as a result of the repurchase of $41.9 million of
performing multifamily and commercial real estate loans from ICCMIC and others.
The repurchases resulted in a pre tax loss of $1.8 million during the three
months ended June 30, 1999. Net revenues and net income decreased to $6.6
million and $1.1 million for the six months ended June 30, 1999 as compared to
net revenues and net income of $8.7 million and $1.9 million for the same period
last year. Net revenues include a recovery of the loan loss allowance of $12,000
for the six months ended June 30, 1999 and a recovery of the loan loss allowance
of $456,000 for the six months ended June 30, 1998. The loss incurred from the
loan repurchase described above constitutes the majority of the decline in net
revenues and net income for the six months ended June 30, 1999 as compared to
June 30, 1998.
IPL originated $56.1 million of loans for the three months ended June 30,
1999 as compared to $106.9 million of loans for the same period last year.
Excluding the loss from the repurchase of loans during the three months ended
June 30, 1999, IPL sold $59.8 million of its loans generating a gain on sale of
$1.3 million, or 2.1% of the principal balance of loans sold. IPL sold $93.4
million of its loans for the three months ended June 30, 1998, generating a gain
on sale of $3.8 million, or 4.3% of the principal balance of loans sold. Gain on
sale of loan revenues as a percentage IPL's loans sold
20
<PAGE>
decreased in the three months ended June 30, 1999 as compared to the same period
last year due to decreased interest margins resulting from increased competition
by other financial institutions.
IPL originated $151.5 million of loans for the six months ended June 30,
1999 as compared to $171.6 million of loans for the same period last year.
Excluding the loss from the repurchase of loans during the six months ended June
30, 1999, IPL sold $153.0 million of its loans generating a gain on sale of $3.1
million, or 2.0% of the principal balance of loans sold. IPL sold $189.2 million
of its loans during the six months ended June 30, 1998, generating a gain on
sale of $5.7 million, or 3.0% of the principal balance of loans sold.
IPL's net interest income for the three months ended June 30, 1999,
increased $1.8 million to $2.2 million as compared to $401,000 for the same
period last year primarily as a result of an increased average balance of
outstanding loans, and an increase in loan yield. IPL also earned other income
from servicing loans that it sold to other companies and charged various fees to
its borrowers. IPL earned total other revenues of $239,000 and $393,000 during
the three months ended June 30, 1999 and 1998, respectively.
IPL's net interest income for the six months ended June 30, 1999, increased
$2.8 million to $4.6 million as compared to $1.8 million for the same period
last year primarily as a result of an increased average balance of outstanding
loans, partially offset by a decrease in loan yield.. IPL earned total other
revenues of $454,000 and $768,000 during the six months ended June 30, 1999 and
1998, respectively.
IPL's total expenses decreased by $616,000 to $2.2 million for the three
months ended June 30, 1999 as compared to $2.8 million for the same period last
year. For the three months ended June 30, 1999, personnel costs increased by
$88,000 to $1.7 million, and all other expenses decreased by approximately
$700,000. Total expenses decreased to $4.7 million for the six months ended June
30, 1999 from $5.6 million for the same period of last year. Personnel expense
increased by $262,000 to $3.4 million for the six months ended June 30, 1999 as
compared to $3.2 million for the same period last year, all other expenses
decreased by $1.1 million to $1.3 million from $2.4 million for the same period
last year, respectively. Personnel costs increased primarily as a result of
increased activity in IPL's loan originations and the discontinuation of its
servicing operations. Total expenses decreased as a result of lower general and
administrative expenses.
At June 30, 1999, IPL's non-accrual loans were $1.3 million or 1.72% of its
outstanding loan portfolio, as compared to $1.3 million or 0.8% of its
outstanding loan portfolio at March 31, 1999, $866,000 or 0.6% of its
outstanding loan portfolio at December 31, 1998, and $4.1 or 5.1% or its
outstanding loan portfolio at June 30, 1998.
Imperial Business Credit ("IBC")
IBC's total net revenues decreased to $3.1 million and $3.8 million for the
three and six months ended June 30, 1999 as compared $3.6 million and $7.1
million for the same periods last year, respectively. IBC's net income (loss)
decreased to $244,000 and ($904,000) for the three and six months ended June 30,
1999 as compared $305,000 and $825,000 for the same periods last year,
respectively. IBC's net revenues and net income decreased for the three months
ended June 30, 1999 as compared to the three months ended June 30, 1998 due to a
decrease in the average outstanding balance of leases held for sale, and a
corresponding decrease in net interest income. IBC's net revenues and net income
decreased for the six months ended June 30, 1999 as compared to the six months
ended June 30, 1998 primarily due to a $2.2 million write down of IBC's retained
interest in lease securitizations, and securities held for sale in the first
quarter of 1999.
IBC originated $30.2 million and $60.1 million of leases for the three and
six months ended June 30, 1999, as compared to $26.6 million and $61.7 million
for the same periods last year, respectively. IBC securitized leases of $30.3
million and $60.5 million during the three and six months ended June 30, 1999
generating gain on sale revenue of $1.2 million and $2.2 million, or 3.8% and
3.6% of the principal balance securitized. For the three months and six months
ended June 30, 1998, IBC securitized leases of $31.2 million and $66.7 million,
generating gain on sale revenue of $1.1 million and $2.7 million, or 3.6% and
4.0% of the principal balance securitized.
Currently, all of IBC's leases are initially funded with a warehouse line
of credit from SPB, and then permanently funded through a term securitization
facility. IBC's net interest income decreased $450,000 to $430,000 during the
three months ended June 30, 1999 as compared to $880,000 for the
21
<PAGE>
same period last year. IBC's net interest income decreased $723,000 to $798,000
during the six months ended June 30, 1999 as compared to $1.5 million for the
same period last year. The decrease in IBC's net interest income primarily
resulted from a decrease in the average balance and yield on outstanding leases
held for sale for the three and six months ended June 30, 1999 as compared to
the same periods last year.
IBC also earned other income from servicing leases sold into its
securitization facility of $1.1 million and $2.3 million for the three and six
months ended June 30, 1999, as compared to $1.2 million and $2.4 million for the
same periods last year, respectively. IBC earned other income of $459,000 and
$807,000 for the three and six months ended June 30, 1999 as compared to
$806,000 and $718,000 for the same periods last year.
IBC's total expenses were $2.7 million and $5.4 million for the three and
six months ended June 30, 1999 as compared to $2.8 million and $5.8 million for
the same periods last year, respectively. The major components of IBC's expenses
for the three months ended June 30, 1999 and 1998 were personnel expense of $1.3
million and $1.5 million, professional services of $300,000 and $130,000, and
general and administrative expenses of $469,000 and $683,000, respectively. The
major components of IBC's expenses for the six months ended June 30, 1999 and
1998 were personnel expense of $2.9 million and $3.1 million, professional
services of $482,000 and $345,000, and general and administrative expenses of
$889,000 and $1.3 million, respectively.
At June 30, 1999, IBC's non-performing leases were $86,000 as compared to
$76,000 at March 31, 1999, $669,000 at December 31, 1998, and $572,000 at June
30, 1998.
Loan Participation and Investment Group ("LPIG")
LPIG's total net revenues and net income decreased to $889,000 and $317,000
for the three months ended June 30, 1999 as compared to $3.6 million and $1.9
million for the same period last year, respectively. Net revenues include a
provision for loan losses of $2.2 million for the three months ended June 30,
1999 and a net recovery of $487,000 for the three months ended June 30, 1998.
LPIG's net interest income was $2.4 million for the three months ended June 30,
1999 and 1998. For the three months ended June 30, 1999 and 1998, LPIG earned
other income, which consisted primarily of loan fees, of $698,000 and $720,000,
respectively. Total net revenues and net income decreased to $3.9 million and
$1.9 million for the six months ended June 30, 1999 as compared to $4.7 million
and $2.3 million for the same period last year, respectively. Net revenues
include a provision for loan losses of $2.2 million for the six months ended
June 30, 1999 and a net recovery of $114,000 for the six months ended June 30,
1998.
Net interest income increased $842,000 to $4.3 million for the six months
ended June 30, 1999 as compared to $3.5 million for the same period last year.
For the six months ended June 30, 1999 and 1998, LPIG earned other income, which
consisted primarily of loan fees, of $1.8 million and $1.1 million,
respectively. LPIG's net revenues and net income decreased in both the three and
six months ended June 30, 1999 as compared to the same periods last year as a
result of a significant increase in the provision for loan losses during the
three months ended June 30, 1999. The increase in the provision for loan losses
occurred as a result of an increase in non-accrual loans.
Total expenses of LPIG decreased to $361,000 for the three months ended
June 30, 1999 as compared to $526,000 for the same period last year. The major
components of LPIG's expenses for the three months ended June 30, 1999 and 1998
were personnel expense of $193,000 and $169,000, professional services of
$46,000 and $63,000 and general and administrative expense of $68,000 and
$217,000, respectively. Total expenses decreased to $693,000 for the six months
ended June 30, 1999 from $1.0 million for the same period of last year.
Personnel expense decreased by $81,000 to $388,000 for the six months ended June
30, 1999 as compared to $469,000 for the same period last year, all other
expenses decreased by $267,000 to $305,000 from $572,000 for the same period
last year, respectively. The decrease in total expenses at LPIG for the three
and six months ended June 30, 1999 is consistent with our decision to let the
exiting loan portfolio payoff.
At June 30, 1999, LPIG's non-performing loans increased to $10.0 million as
compared to $0 at March 31, 1999, $0 at December 31, 1998, and $0 at June 30,
1998. LPIG's non-accrual loans at June 30, 1999 consisted of one loan, currently
undergoing restructuring. LPIG has provided $2.5 million for potential losses
from the restructuring or ultimate liquidation of this loan.
22
<PAGE>
As mentioned above, we have made the decision to let LPIG's existing
balance of loans run-off. We are not originating any new commitments for LPIG at
this time. While until recently, LPIG has earned a reasonable risk-adjusted
return, we believe that the capital that is currently being deployed at SPB to
support LPIG's business could be more profitably used in CBC's, PrinCap's, and
IPL's businesses. As such, we anticipate that the current outstanding balance of
LPIG's loans will decrease over time as this portfolio runs-off. We do expect to
expand our investments in LPIG type loan products through off-balance sheet
financing instruments such as total rate of return swaps or collateralized loan
obligation funds.
Imperial Capital Group ("ICG")
ICG's net revenues were $5.5 million and $11.6 million for the three and
six months ended June 30, 1999 as compared to $5.0 million and $9.8 million for
the same period last year. During the second quarter of 1999, ICG did not raise
any debt or equity securities for their corporate clients through private
placements. In the three and six months ended June 30, 1998, ICG raised gross
proceeds for their clients of $2.5 million and $3.7 million, respectively.
ICG's total expenses increased by $1.5 million to $6.1 million for the
three months ended June 30, 1999 as compared to $4.6 million for the same period
last year. ICG's total expenses increased primarily due to increased brokerage
commissions from increased trading activities as compared to the same period
last year. The significant components of ICG's total expenses for the three
months ended June 30, 1999 and 1998 were personnel expense of $1.9 million and
$1.6 million, commission expense of $1.8 million and $1.5 million, telephone and
other communications expense of $361,000 and $88,000, and general and
administrative expense of $1.3 million and $850,000, respectively.
ICG's total expenses were $11.9 million for the six months ended June 30,
1999 as compared to $9.1 million for the same period last year. The significant
components of ICG's total expenses for the six months ended June 30, 1999 and
1998 were personnel and commission expense of $7.6 million and $6.0 million,
telephone and other communications expense of $708,000 and $152,000, and general
and administrative expense of $2.3 million and $1.7 million, respectively.
Asset Management Activities ("AMA")
AMA increased net revenues by $1.2 million to $2.7 million for the three
months ended June 30, 1999 as compared to $1.5 million for the same period last
year. AMA revenues increased primarily due to growth in our assets under
management which increased to $1.3 billion at June 30, 1999 as compared to
$824.0 million at June 30, 1998. AMA net revenues were $5.6 million for the six
months ended June 30, 1999 as compared to $3.1 million for the same period last
year. We manage a commercial mortgage and equity REIT, a collateralized loan
obligation fund, and two leveraged bank debt hedge funds.
Total expenses from AMA activities increased by $1.5 million to $2.1
million for the three months ended June 30, 1999 as compared to $653,000 for the
same period last year. The increase in AMA expenses was primarily due to
increased personnel expense of $1.5 million for the three months ended June 30,
1999 as compared to $595,000 for the same period last year. The increase in
personnel expenses primarily relates to increased management activities due to
growth in the balance of assets under management in 1999 as compared to 1998.
Total expenses from AMA activities were $5.0 million for the six months
ended June 30, 1999 as compared to $1.4 million for the same period last year.
The increase in AMA expenses was primarily due to increased personnel expense of
$4.0 million for the six months ended June 30, 1999 as compared to $1.3 million
for the same period last year.
Other Core Operations ("OCO")
For the three months ended June 30, 1999, net revenues of OCO were ($3.6)
million and net loss was $4.0 million, as compared to ($519,000) of net revenues
and a loss of $2.2 million for the same period last year. OCO includes those
areas of business we conduct at our holding company and our support operations.
Such areas include but are not limited to interest and dividend income from
parent company loans and equity investments, interest expense on our long-term
debt, mark-to-market charges on the securities we invested in at our holding
company, and the costs of our support functions. We provide support to our
subsidiaries through executive management oversight and advice, accounting and
legal services, merger and acquisitions advice, human resources administration,
office services, and management information systems support.
During the three months ended June 30, 1999, we sold 500,000 shares of
ICCMIC for a gain on sale of securities totaling $562,000. As of June 30, 1999,
we owned 9.0% of ICCMIC's outstanding common stock and 100% of the company that
manages ICCMIC's assets.
For the three months ended June 30, 1999 and 1998, OCO earned interest and
dividend income of $4.2 million and $6.2 million and incurred interest expense
of $7.6 million and $7.5 million, respectively. Total expenses of OCO
23
<PAGE>
increased $2.5 million to $5.5 million for the three months ended June 30, 1999
as compared to $3.0 million for the same period of the previous year. The
increase was primarily due to higher professional service expenses of $2.0
million for the three months ended June 30, 1999 as compared to $990,000 for the
same period last year, and increased general and administrative expenses of $1.9
million for the three months ended June 30, 1999 as compared to $118,000 for the
same period last year. During the three months ended June 30, 1999, amortization
of servicing rights increased by $896,000 to $1.3 million as compared to
$360,000 for the same period last year.
For the six months ended June 30, 1999, net revenues of OCO were ($3.7)
million and net loss was $5.4 million, as compared to ($759,000) of net revenues
and a loss of $3.8 million for the same period last year. For the six months
ended June 30, 1999 and 1998, OCO earned interest and dividend income of $8.8
million and $13.5 million and incurred interest expense of $15.2 million and
$14.8 million, respectively. Total expenses of OCO were $5.6 million for the six
months ended June 30, 1999 as compared to $5.2 million for the same period of
the previous year. Professional service expenses were $2.3 million for the six
months ended June 30, 1999 as compared to $1.5 million for the same period last
year, and general and administrative expenses were $906,000 for the six months
ended June 30, 1999 as compared to $560,000 for the same period last year.
NON CORE BUSINESSES
We also operate "non-core" businesses, which consist of businesses that
we've decided to de-emphasize in the future. We group these businesses into the
following categories:
[_] Equity interests-- Represents our equity investments in other publicly
traded companies. At June 30, 1999, we owned an equity interest of 38.3% in
FMC. This segment's source of revenue is our common stock ownership
percentage in the equity interests' reported net income or loss in addition
to our gains on sales of the equity interests stock, or write-downs from
the impairment of the equity interest;
[_] De-emphasized/Discontinued/Exited Businesses-- represents our business
units we decided to either de-emphasize, discontinue, or exit. We decided
to de-emphasize, discontinue or exit these business lines because they were
not meeting our expectations for a variety of reasons. These reasons
included: significant credit losses, insufficient loan production volumes,
inadequate gross profit margins, and risks associated with international
lending operations. We include the following significant operations in
Exited Businesses: Auto Lending, Alternative Residential Mortgage, and
Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our
residential loan production business in Argentina. Exited Businesses also
includes our former mortgage banking operations, certain problem loan or
securities portfolios, SPB's income property servicing operations, and any
loan portfolios at SPB from businesses which are no longer originating new
loans. Exited Businesses' principal sources of net revenue are interest
earned on mortgage and consumer loans and mark to market valuations on loan
portfolios. Exited Businesses' principal expenses are interest expense
allocations incurred from deposits and inter-company borrowings, and
general and administrative expenses.
Our exit from these non-core businesses will allow our management to focus
on our core business lines that have proven to be our most profitable
businesses.
Equity Interests
Equity interests include our portion of the net income or loss of FMC and
Southern Pacific Funding Corporation ("SPFC"). Equity interests generated
equity in the net loss of FMC of $2.0 million and $53,000 for the three and six
months ended June 30, 1999, as compared to equity in the net income of $3.8
million and $6.6 million for the same periods last year, respectively. On
October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under
Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon.
As a result of SPFC declaring Chapter 11 bankruptcy and the corresponding
decline in its common stock to below one dollar per share, and subsequently
being de-listed from the New York Stock Exchange, we wrote-off our total
investment in and loan to SPFC. During the three and six months ended June 30,
1999 and 1998, equity in the net income of SPFC was $0 and $0 and $6.8 million
and $12.7 million, respectively.
Equity Interest in Franchise Mortgage Acceptance Company ("FMC")
On March 11, 1999, FMC and Bay View Capital Corporation ("Bay View")
announced that they have executed a definitive merger agreement providing for
the merger of FMC with Bay View. This agreement would also include selling our
38.3% ownership in FMC to Bay View. In accordance with the terms of the
definitive agreement, Bay View will acquire all of the common stock of FMC for
consideration valued at approximately $309.0 million. Each share of FMC common
stock will be entitled to receive, at the election of the holder, either $10.25
in cash, or .5125 shares of Bay View's common stock. FMC shareholder elections
are subject to the aggregate number of shares of FMC common stock to be
exchanged for Bay View's common stock being equal to 60% of the number of shares
of FMC common stock outstanding immediately prior to closing the transaction and
no FMC shareholder owning more than 9.9% of Bay View's common stock, on a pro
forma basis. The transaction is expected to close during the third quarter of
1999, subject to approval by both Bay View's and FMC's shareholders and subject
to necessary regulatory approvals. As of June 30, 1999, our book value in FMC
was $5.10 per common share. Based on our book value of FMC's stock at June 30,
1999, the estimated pre-tax gain on sale of our 38.3% common stock ownership in
FMC to Bay View would be approximately $56.8 million.
De-emphasized/Discontinued/Exited Businesses (the "Exited Businesses")
24
<PAGE>
The Exited Businesses' net revenues were $22.7 million for the three months
ended June 30, 1999 as compared to $9.4 million for the same period last year,
primarily resulting from an increase in mark to market of the auto loan
portfolio and a decline in net interest income. The decrease in net interest
income was primarily attributable to lower average outstanding balances of loans
and securities from our Exited Businesses for the three months ended June 30,
1999 as compared to the same period last year.
The following table reflects the ending outstanding balances of the loans
from our Exited Businesses:
<TABLE>
<CAPTION>
Loans and Leases
Outstanding at June 30,
-----------------------
Exited Business Line 1999 1998
-------------------- ---- ----
<S> <C> <C>
Auto Lending Division of SPB $ 39,522 $191,140
Alternative Residential Mortgage Division of SPB 11,747 14,434
Consumer Lending Division of SPB 18,840 44,274
Credito Imperial Argentina ---- 17,849
Other exited loan portfolios 140,374 247,777
</TABLE>
The net outstanding loans from the discontinued operations of AMN were $9.5
million and $25.4 million at June 30, 1999 and 1998, respectively.
We have committed to sell $29.3 million of our remaining $39.5 million of
sub-prime auto loans. After the sale, scheduled to close in August 1999, the
remaining balance of the sub-prime auto loan portfolio will be approximately
$10.2 million. In connection with the committed sale, and increased auto loan
delinquencies and charge-offs, we wrote-down the carrying value of SPB's held
for sale auto loan portfolio to the committed sales price. The write-downs of
SPB's auto loan portfolio totaled $21.7 million for the three months ended June
30, 1999, and $24.8 million for the six months ended June 30, 1999.
Total expenses at our Exited Businesses were $7.7 million for the three
months ended June 30, 1999 as compared to $6.1 million for the same period last
year. The increase in total expenses of $1.5 million was primarily due to
increased amortization of servicing rights and general and administrative
expenses related to exiting the loan servicing business unit at SPB partially
offset by decreased personnel expenses.
The Exited Businesses' net revenues were ($13.3) million for the six months
ended June 30, 1999 as compared to $20.4 million for the same period last year,
primarily resulting from an increase in mark to market of the auto loan
portfolio and a decline in net interest. Total expenses at our Exited Businesses
were $15.9 million for the six months ended June 30, 1999 as compared to $11.3
million for the same period last year. The increase in total expenses of $4.6
million was primarily due to increased amortization of servicing rights and
professional services expenses at our Exited Businesses.
During the three months and six months ended June 30, 1999, we sold 908,810
shares and 487,700 shares of Impac Mortgage Holdings, Inc. ("IMH") stock
resulting in a gain of $224,000 and $703,000, respectively. At June 30, 1999,
we owned 490,600 shares of IMH common stock representing approximately 2.2% of
IMH's outstanding shares. All of the remaining shares of IMH we owned were sold
in July 1999 for approximately $5.50 per share.
25
<PAGE>
RECENT DEVELOPMENT
On July 23, 1999, we announced a definitive merger agreement by which we
would acquire all of the outstanding shares of ICCMIC (consisting of the
25,930,000 shares not already owned by us and certain of our affiliates and
subsidiaries) for a cash purchase price of $11.50 per share. The merger
agreement contemplates that ICCMIC will solicit and explore alternative
transactions which would provide its stockholders with a more favorable
alternative to the ICII merger during the 60 days following the appointment of
an appraisal firm to be engaged to appraise the value of our management
agreement with ICCMIC. During this 60-day period, ICCMIC may terminate our
merger agreement in favor of a superior proposal. In the event of such a
termination, ICCMIC will be obligated to reimburse us for certain of our
expenses incurred in connection with the proposed merger, not to exceed $2
million. ICCMIC is a commercial mortgage real estate investment trust that has
28,500,000 outstanding common shares and total assets of approximately $702
million. We sponsored and took ICCMIC public in October 1997. We directly own
2,570,000 shares of ICCMIC, or 9.0% of ICCMIC's outstanding common stock, and
100% of ICCAMC, the company that manages ICCMIC's operations and assets.
FUNDING
Our liquidity requirements are met primarily by SPB deposits and to a much
lesser extent warehouse lines and loan securitizations or sales. Business
operations conducted through the divisions of SPB are primarily financed through
FDIC insured deposits, Federal Home Loan Bank borrowings, and capital
contributions.
Southern Pacific Bank Deposits
SPB is an FDIC insured industrial bank which is regulated by the California
Department of Financial Institutions and the FDIC. See "--Regulatory Matters"
for a more detailed description of regulations governing SPB.
At June 30, 1999 and December 31, 1998, SPB had total deposits of
approximately $1.4 billion and $1.7 billion, respectively. SPB solicits both
individual and institutional depositors for new accounts through print
advertisements and computerized referral networks. SPB currently maintains two
deposit gathering facilities in Southern California. At these facilities,
tellers provide banking services to customers such as accepting deposits and
making withdrawals. Generally, SPB's certificates of deposit are offered for
terms of one to 12 months.
SPB has historically increased its deposits as necessary so that deposits
together with its cash, liquid assets, Federal Home Loan Bank borrowings and
warehouse borrowings, have been sufficient to provide funds for all of SPB's
lending activities. We track, on a daily basis, all new loan applications and,
based on historical closing statistics, estimate expected fundings. Cash
management systems at SPB allow it to anticipate both fundings and sales and
adjust deposit levels and short-term investments against the demands of our
lending activities. We believe that SPB's local marketing strategies and its
use of domestic money markets have allowed it to acquire new deposits at levels
consistent with management's financial targets.
As an additional source of funds, SPB was approved in 1991 to become a
member of the Federal Home Loan Bank. Currently, SPB is approved for borrowings
from the Federal Home Loan Bank pursuant to a secured line of credit that is
automatically adjusted subject to applicable regulations and available pledged
collateral. At June 30, 1999, $30.0 million was outstanding bearing an average
interest rate of 5.11%.
26
<PAGE>
Repurchase and Warehouse Facilities
We use repurchase facilities and warehouse lines of credit in order to fund
certain loan and lease originations and purchases. As of June 30, 1999, we had
the following warehouse lines and notes payable:
<TABLE>
<CAPTION>
Interest Index
-------- -----
Rate Commitment Outstanding (basis points) Expiration Date
---- ---------- ----------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other notes payable (ICII)............. 8.00% ------ 1,220 Fixed rate None
---------- ------
Total................................ $ - $1,220
========== ======
</TABLE>
Securitization Transactions and Loan Sales
During the quarter ended June 30, 1999, we sold $59.8 million of income
property loans, $3.3 million of loan participations and securitized $30.3
million of equipment leases, generating gains (losses) of $1.3 million,
$(19,000) and $1.3 million, respectively. During the quarter ended June 30,
1998, we sold $93.4 million of income property loans and securitized $31.2
million of equipment leases generating gains of $1.9 million and $1.1 million,
respectively.
For the six months ended June 30, 1999, we sold $153.0 million of income
property loans, $21.8 million of loan participations and securitized $60.5
million of equipment leases, generating gains (losses) of $3.1 million,
$(154,000) and $2.2 million, respectively. During the six months ended June 30,
1998, we sold $190.0 million of income property loans and securitized $66.7
million of equipment leases generating gains of $5.7 million and $2.7 million,
respectively.
ASSET QUALITY
Non-Performing Assets, Non-Accrual Loans and Leases and Allowance for Loan and
Lease Losses
Our non-performing assets and non-accrual loans and leases increased to $72.1
million and $65.1 million at June 30, 1999 from $54.1 million and $39.5 million
at December 31, 1998, respectively. The increase in non-accrual loans primarily
relates to the CBC, PrinCap, and LPIG portfolios. The non-performing loan at
LPIG consists of one credit, which is collateralized by a senior secured debt
agreement. The non-performing loans at CBC are collateralized by accounts
receivable and inventory. The non-performing loans at PrinCap are collateralized
by recently funded senior residential mortgage loans.
During the quarter ended June 30, 1999, CBC charged-off $13.1 million of
outstanding asset based loans. Based on CBC's historical collection experience,
CBC expects to recover at least half of the charged-off amounts over the course
of the next six to 18 months. The increase in CBC's non-accrual loans and
charge-offs results from recent regulatory guidance that prevents CBC from
considering the liquidation of certain intangible assets of its customers in
determining a loan's accrual status or if necessary, the required charge-off
amount. The effect of this guidance resulted in CBC reserving for, and charging
off gross amounts of outstanding problem loans as opposed to CBC's previous
practice of reserving for, and if necessary, ultimately charging off the net
deficiency amount of problem loans. The total $17.5 million balance of CBC's
non-accrual loans consist of loans which have incurred a partial charge off.
Although the remaining $17.5 million balance of these loans is fully
collateralized and the loans may be current as to payment status, due to the
partial charge-off taken on these loans, SPB's regulators have classified these
loans as non-accrual at June 30, 1999. We are currently restructuring these
loans. Upon the completion of this restructuring, and based on past and
prospective performance, the loans could be removed from non-accrual status.
The allowance for loan and lease losses to non-accrual loans and leases
decreased to 48.35% at June 30, 1999 as compared to 65.11% at December 31,
1998.
Excluding CBC's non-accrual loans, the ratio of the allowance for loan losses
to non-accrual loans was 66.14% at June 30, 1999. The ratio of the allowance for
loan and lease losses to total loans held for investment increased to 2.48% at
June 30, 1999 from 1.85% at December 31, 1998.
As a result of the increased level of non-accrual loans and charge-offs
described above, the provision for loan and lease losses for the three and six
months ended June 30, 1999 increased to $22.3 million and $24.5 million as
compared to $4.3 million and $7.3 million for the same periods of the prior
year, respectively.
27
<PAGE>
We periodically review the allowance for loan and lease losses in connection
with the overall loan and lease portfolio. We believe 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.
Activity in our allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Beginning balance as of December 31, 1998 and 1997........................... $ 24,881 $26,954
Provision for loan and lease losses.......................................... 24,455 7,300
-------- -------
49,336 34,254
-------- -------
Loans charged off:
Single family residential.................................................... (1,916) (1,157)
Multifamily and commercial mortgage.......................................... (2,159) (28)
Asset based loans............................................................ (13,100) --
Leases....................................................................... (1,211) (830)
Consumer loans............................................................... (763) (9,866)
-------- -------
Total........................................................................ (19,149) (11,881)
-------- -------
Recoveries on loans previously charged off:
Single family residential.................................................... -- 143
Multifamily and commercial mortgage.......................................... 566 178
Leases....................................................................... 520 648
Consumer..................................................................... 74 321
-------- -------
Total........................................................................ 1,160 1,290
-------- -------
Net charge-offs.............................................................. (17,989) (10,591)
-------- -------
Balance as of June 30, 1999 and 1998......................................... $ 31,347 $23,663
-------- -------
Loan loss allowance at AMN as of June 30, 1999 and 1998...................... 105 3,608
-------- -------
$ 31,452 $27,271
======== =======
Loan loss allowance to non accrual loans..................................... 48.35% 42.68%
</TABLE>
The balance of the allowance for loan and lease losses for AMN at June 30,
1999 and December 31, 1998 was $105,000 and $857,000, respectively.
Non-performing Assets ("NPA")
Our NPA's consist of non-accruing loans, OREO and repossessed property. Total
NPA's were $72.1 million as of June 30, 1999 as compared to $54.1 million at
December 31, 1998. Total NPA's as a percentage of loans, OREO and repossessed
assets were 5.64% at June 30, 1999, as compared to 3.94% at December 31, 1998.
The increase in NPA's as a percentage of loans, OREO and repossessed assets was
mainly attributable to increases in non-accrual loans at CBC, LPIG and PrinCap.
28
<PAGE>
The following table sets forth the amount of non-performing assets
attributable to our core lending activities and our Exited Businesses.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Core Lending Exited Core Lending Exited
Activities Businesses Activities Businesses
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
- ------------------
IPL........................... $ 1,294 $ -- $ 866 $ --
PrinCap....................... 9,113 -- 4,141 --
CBC........................... 17,500 -- 1,117 --
IBC........................... 86 -- 669 --
LPIG.......................... 10,200 -- 1,117 --
One to four family............ -- 18,976 -- 18,576
Consumer loans................ -- 322 -- 253
Auto loans.................... -- 3,980 -- 5,476
Other commercial.............. -- 2,811 -- 8,431
--------- -------- ---------- --------
Total non-accrual loans........ 38,965 26,089 6,793 32,736
--------- -------- ---------- --------
OREO:
- -----
IPL........................... 617 -- 853 --
One to four family............ -- 3,235 -- 7,180
Other commercial.............. -- 1,073 -- 651
--------- -------- ---------- --------
Total OREO..................... 617 4,308 853 7,831
--------- -------- ---------- --------
Repossessed property:
- ---------------------
IBC........................... 829 -- 702 --
Auto Lending.................. -- 1,311 -- 5,169
--------- -------- ---------- --------
Total repossessed property..... 829 1,311 702 5,169
--------- -------- ---------- --------
Total NPAs..................... $ 40,411 $ 31,708 $ 8,348 $ 45,736
--------- -------- ========== ========
Total loans, OREO and
repossessed property.......... $1,341,579 $223,958 $1,310,283 $395,010
Total NPA's as a percentage of
loans, OREO and repossessed
property...................... 3.01% 14.16% 0.64% 11.58%
</TABLE>
Excludes non-accrual loans held for sale which we carry at the lower of cost or
market.
There were $3.1 million in asset based loans at CBC over 90 days past due
accruing interest at June 30, 1999 as compared to $0 at December 31, 1998. On an
ongoing basis, we monitor the loan portfolio and evaluate the adequacy of the
allowance for loan and lease losses. In determining the adequacy of the
allowance for loan and lease losses, we consider 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 us to be uncollectable are charged to the allowance for loan
and lease losses. Recoveries on loans and leases 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 us based
upon our evaluation of the known and inherent risks in the loan portfolio.
Future additions to the allowance for loan and lease losses may be necessary.
29
<PAGE>
Loans held for investment consisted of the following at June 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to-four family.......................................... $ 105,051 $ 125,616
Multi-Family................................................ 53,937 56,229
Commercial.................................................. 15,340 25,677
---------- ----------
174,328 207,522
Leases...................................................... 1,839 1,048
Consumer and auto loans..................................... 11,583 26,511
Franchise loans............................................. 24,728 50,520
Asset based loans........................................... 647,390 633,299
Loan participations......................................... 230,331 222,106
Mortgage warehouse lines.................................... 137,092 181,001
Commercial.................................................. 49,565 34,509
---------- ----------
Total..................................................... 1,276,856 1,356,516
Loans in process............................................ (3,047) (5,636)
Unamortized premium......................................... 1,864 3,109
Deferred loan fees.......................................... (10,088) (9,014)
---------- ----------
Total net loans........................................... 1,265,585 1,344,975
Allowance for loan and lease losses......................... (31,347) (24,880)
---------- ----------
Total..................................................... $1,234,238 $1,320,095
========== ==========
Allowance for loan and lease losses
to net loans and leases................................... 2.48% 1.85%
</TABLE>
Our loans held for investment are primarily comprised of asset based loans to
middle market companies mainly in California, participations in commercial loan
syndications, first and second lien mortgages secured by income producing and
residential real property in California, leases secured by equipment, and loans
to experienced franchisees of nationally recognized restaurant concepts.
Outstanding asset based loans increased at June 30, 1999 as compared to December
31, 1998. In the fourth quarter of 1998, we temporarily curtailed loan
production at CBC in order to insure that SPB would meet well-capitalized
regulatory requirements. The effects of the temporary loan production
curtailment carried over into the first quarter of 1999 as a significant number
of loans in CBC's production pipeline did not fund as anticipated. Since
December 31, 1998, the temporary loan production curtailments have been lifted.
As such, we expect CBC's outstanding loans to continue to increase over the
course of 1999. Outstanding mortgage warehouse lines decreased at June 30, 1999
as compared to December 31, 1998 primarily due to the pay off of existing loan
commitments.
PREPARATION FOR THE YEAR 2000
Since we filed our annual report on Form 10-K for the year ended December 31,
1998 with the United States Securities and Exchange Commission, we have
continued to implement our Year 2000 preparedness project as outlined in our
Annual Report on Form 10-K for the year ended December 31, 1998. Additionally,
there have been no significant changes to our estimated cost of implementing our
plan.
30
<PAGE>
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) FDIC Risk-based Capital and Tier 1 Capital regulations and (ii) the FDIC
Leverage ratio regulation as of June 30, 1999.
<TABLE>
<CAPTION>
Minimum
Minimum Well Capitalized
Actual Requirement Requirement
------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital.......... 208,518 10.67% 156,296 8.00% 195,370 10.00%
Risk-based Tier 1 Capital... 149,064 7.62% 78,148 4.00% 116,142 6.00%
FDIC Leverage Ratio......... 149,064 8.74% 78,148 4.00% 97,685 5.00%
</TABLE>
MOU Compliance Update
We responded to the FDIC's criticisms in their May 1998 information systems
MOU, by retaining an internationally-recognized independent accounting firm to
conduct a general ledger account reconciliation project in order to identify,
trace and resolve all outstanding unreconciled general ledger items on SPB's
books and records. Work on this reconciliation project was substantially
completed by December 31, 1998. In consultation with the independent accounting
firm, SPB has developed and implemented new policies and procedures which are
designed to improve the efficiency and timeliness of general ledger
reconciliation tasks and related financial accounting matters. SPB continues to
reconcile all general ledger accounts on a timely basis.
Further, SPB, under the direction of its board of directors, has developed
and implemented a Y2K readiness plan and budget, with specific deadlines and
action steps. SPB believes it is currently in compliance in all material
respects with FDIC minimum Y2K readiness requirements and guidelines. SPB has
addressed, or is addressing, the other items of concern described in the
FDIC/DFI examination and referenced in the MOU.
In the first quarter of 1999, SPB received an interim satisfactory rating
from the FDIC related to SPB's Y2K preparedness and contingency planning.
LIQUIDITY AND CAPITAL RESOURCES
We have an ongoing need for capital to finance our lending activities. This
need is expected to increase as the volume of our loan and lease originations
and acquisitions increases. Our primary cash requirements include the funding of
(i) loan and lease originations and acquisitions, (ii) points and expenses paid
in connection with the acquisition of wholesale loans, (iii) ongoing
administrative and other operating expenses (iv) the costs of our warehouse
credit and repurchase facilities with certain financial institutions, (v)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold and (vi) fees and expenses incurred in connection
with our securitization programs. We have financed our lending activities
through deposits or borrowings at SPB, warehouse lines of credit and repurchase
facilities with financial institutions, equity and debt offerings in the capital
markets and securitizations. We believe that such sources will be sufficient to
fund our liquidity requirements for the foreseeable future. There can be no
assurance that we will have access to the capital markets in the future or that
financing will be available to satisfy our operating and debt
31
<PAGE>
service requirements or to fund our future growth. SPB obtains the liquidity
necessary to fund its investing activities through deposits and, if necessary
through borrowings under lines of credit and from the FHLB.
At June 30, 1999 and 1998, SPB had maximum FHLB borrowings available equal
to $33.9 million and $23.0 million, respectively. These borrowings must be fully
collateralized by qualifying mortgage loans and may be in the form of overnight
funds or term borrowings at SPB's option. The highest balance of FHLB advances
outstanding during the quarter ended June 30, 1999 was $30.0 million, with an
average outstanding balance of $9.2 million. The outstanding balance of FHLB
advances was $30.0 million at June 30, 1999. The FHLB advances are secured by
certain real estate loans with a carrying value of $51.4 million and $51.9
million at June 30, 1999 and December 31, 1998, respectively. As of June 30,
1999, SPB's deposit portfolio which consists primarily of certificate accounts
decreased approximately $304.8 million to $1.4 billion from $1.7 billion at
December 31, 1998. SPB has the capability to acquire new deposits through its
local marketing strategies as well as domestic money markets. Additionally, SPB
maintains liquidity in the form of cash and interest-bearing deposits with
financial institutions. SPB tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected fundings.
Cash management systems at SPB allow SPB to anticipate both funding and sales
and adjust deposit levels and short-term investments against the demands of
SPB's lending activities.
We generate liquidity at our holding company from a variety of sources,
including interest income from loans and investments, income tax payments
received from our subsidiaries, dividends from subsidiary earnings, dividends
from common stock holdings in publicly traded companies, and sales of non-core
assets. As discussed in our annual report on Form 10-K, an industrial bank may
declare dividends only in accordance with California Industrial Banking Law,
which results in statutory limitations on the payment of dividends.
Our holding company's primary cash requirements include income tax payments
and interest payments on outstanding debt obligations. We also use available
cash to make loans to our operating companies and investments in subsidiaries
and asset management vehicles.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
----------------------------------------------------------
There have been no material changes to the quantitative and qualitative
disclosures about market risk included in our annual report on Form 10-K for the
year ended December 31, 1998.
32
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Our company and one of our directors are defendants in Judy L. Resnick v.
Imperial Credit Industries, Inc., et al originally filed on January 14, 1998, in
Los Angeles Superior Court, which was ordered removed to arbitration. The
complaint alleges conspiracies by the defendants to defraud, interfere with
advantageous business relationships, defame, and breach the implied covenant of
good faith and fair dealing arising out of Imperial Capital Group's acquisition
of substantially all of the assets of Dabney/Resnick/Imperial.
On March 27, 1998, the Los Angeles Superior Court ordered this case to
binding arbitration before the National Association of Securities Dealers, Inc.
("NASD"). In June 1998, Resnick filed a Statement of Claim with the NASD,
alleging causes of action for fraud, interference with advantageous business and
contractual relationships, breach of the covenant of good faith and fair
dealing, defamation and breach of fiduciary duty, all of which relate to
Resnick's employment and compensation. Resnick is seeking damages in excess of
$6.0 million. In July 1998, our company and the other defendants filed an answer
and counterclaim seeking recovery from Resnick. Binding arbitration commenced in
April 1999 and will resume in September 1999.
Following the October 1, 1998 filing for protection under Chapter 11 of the
U.S. Bankruptcy Code by Southern Pacific Funding Corporation, lawsuits were
filed in the U.S. District Courts for the District of Oregon, the Eastern
District of New York, the Eastern District of Wisconsin, and the Central
District of California setting forth purported class-action complaints relating
to alleged violations of the Federal securities laws in connection with
securities filings and public statements made by Southern Pacific Funding
Corporation with respect to its business during various periods specified in the
respective complaints that range from October 9, 1997 to October 1, 1998. The
initial suits claimed to have been filed on behalf of shareholders, noteholders
and bondholders of Southern Pacific Funding Corporation, and name, among the
other defendants, our company and our chairman who also served as chairman of
Southern Pacific Funding Corporation during the period referred to in the
lawsuits. The lawsuits generally alleged, among other things, that the market
prices of Southern Pacific Funding Corporation's securities were artificially
inflated due to the failure to mark down the value of its residual securities,
unduly positive statements in Southern Pacific Funding Corporation's filings
with the Securities and Exchange Commission and in its press releases, failure
to properly reflect increased levels of prepayments on Southern Pacific Funding
Corporation loans and actual prepayment and default rates on its loans.
On January 29, 1999, plaintiffs, after dismissing each of the above
complaints, filed a consolidated complaint, In re Southern Pacific Funding
Corporation Securities Litigation, Case No. CV98-1239-MA, in the U.S. District
Court for the District of Oregon. The consolidated class action complaint
alleges, on behalf of all plaintiffs that had previously filed actions against
the defendants, that the defendants deceived the investing public regarding the
business, financial condition and performance of Southern Pacific Funding
Corporation, artificially inflated and maintained the market price of that
company's notes and common stock and caused plaintiffs and members of the class
to purchase the securities at artificially inflated prices. Plaintiffs allege
that, to further the unlawful scheme, defendants issued or caused to be issued a
series of false and misleading public statements which operated as a fraud and
deceit upon the market for the securities. Defendants moved to dismiss the
complaint. In April 1999, the Court issued an order granting defendants' motion
in part and denying it in part. On May 4, 1999, plaintiffs filed a second
consolidated complaint alleging claims under sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. On May 18, 1999, defendants moved to dismiss
portions of plaintiffs' second consolidated complaint. On May 19, 1999, the
Court granted defendants' motion to dismiss in part. After further briefing, the
Court issued a further order on June 4, 1999, denying the remainder of
defendants' motion to dismiss. On June 21, 1999, defendants answered and alleged
affirmative defenses to the portions of the second consolidated complaint
remaining after the motion to dismiss had been decided.
On May 21, 1999, plaintiffs moved to certify a class of persons who
purchased Southern Pacific's shares or bonds during the period October 9, 1997
through October 1, 1998. On June 6, 1999, defendants responded and opposed
certification of a class of bondholders and the inclusion of shareholders
purchasing after September 14, 1999. Following further briefing, the Court
entered an order on July 21, 1999, granting plaintiffs' motion for class
certification. On August 2, 1999, defendants filed an application with the
United States Court of Appeals for the Ninth Circuit requesting permission to
appeal the district court's order granting class certification. That application
is pending.
33
<PAGE>
Between November and December 1998, four alleged class action complaints
were filed in the U.S. District Court for the Central District of California
alleging a common course of conduct by defendants Imperial Credit Industries,
Inc., and its officers H. Wayne Snavely, Kevin E. Villani and Brad S. Plantiko,
among others in violation of Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934 and related Rule 10b-5 during the class period of January
29, 1998 to September 14, 1998. The actions allege that defendants made false
and misleading statements and omitted to reveal the truth concerning the value
of Imperial Credit Industries, Inc.'s investment in Southern Pacific Funding
Corporation, resulting in an artificial inflation of Imperial Credit Industries,
Inc.'s stock price. These alleged class actions are: Mortensen v. Snavely, et
al, Case No. 98-8842DT; Prentice Securities v. ICII, et al, Case No. 98-C-1092;
Steward v. Snavely, et al, Case No. 98-9856SWL; and Rosenstein, et al v.
Snavely, et al, Case No. 98-9978WJR. Motions to consolidate all of these alleged
class action lawsuits in the U.S. District Court for the Central District of
California along with a motion to appoint lead counsel were granted on February
22, 1999. On June 21, 1999, defendants moved to dismiss all four of the
securities class action complaints. The matter was fully briefed and the Court
held a hearing on July 26, 1999. The Court granted defendants' motions to
dismiss with respect to all four complaints, with leave to amend. Plaintiffs
have not yet filed an amended complaint.
We are a defendant in Steadfast Insurance Company v. Auto Marketing
Network, Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in
the Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking
damages in the amount of $27 million allegedly resulting from the fraudulent
inducement to enter into, and the subsequent breach of a Motor Vehicle
Collateral Enhancement insurance policy. In May 1998, we filed a counterclaim
against the plaintiff for $54 million in damages based on the allegation that
the underlying claim was filed in bad faith. In January 1999, the court entered
a preliminary injunction which enjoins us from transferring assets of Auto
Marketing Network, Inc., in amounts that would cause the total assets of Auto
Marketing Network to be less than $20 million in value. The injunction has been
appealed and the parties are presently engaged in pretrial discovery.
We are a defendant along with Imperial Credit Commercial Mortgage
Investment Corp. ("ICMI") and its directors, which includes two of our
directors, in a putative class action lawsuit filed on July 22, 1999 by Riviera-
Enid, a Florida limited partnership, in Los Angeles Superior Court, Case No.
BC213902. The complaint alleges that the proposed merger between a subsidiary of
ours and ICMI constitutes a breach of fiduciary duty by the defendants in that,
allegedly, the merger price is unfair to stockholders, the merger price is less
than the liquidation value of ICMI's assets and the termination fee for the
management contract is excessive. The complaint also alleges that certain of the
directors have conflicts of interest because of their affiliation with us and
that the merger will benefit us at the expense of ICMI's other stockholders. The
complaint seeks certification of a class of all stockholders of ICMI whose stock
will be acquired in connection with the merger and seeks injunctive relief that
would, if granted, prevent the completion of the proposed merger. The complaint
also seeks damages in an unspecified amount and other relief. The defendants
believe the material allegations of the complaint are without merit.
We continue to vigorously defend all of the above lawsuits.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
34
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 1999 Annual Meeting of Stockholders was held on July 28, 1999.
PROPOSAL 1. Election of Board of Directors to serve for the ensuing year
FOR WITHHELD
---------- ---------
H.Wayne Snavely 29,354,446 1,390,164
Kevin Villani 29,354,446 1,390,164
Stephan J. Shugerman 29,354,446 1,390,164
James Clayburn La Force Jr 29,457,603 1,287,007
Perry Lerner 29,457,603 1,287,007
Robert Muehlenbeck 29,391,703 1,352,907
PROPOSAL 2. To consider and act upon a proposal to ratify the appointment of
KPMG LLP as our independent accountants for the year ending
December 31, 1999.
FOR AGAINST ABSTAIN
---------- ------- -------
29,928,653 812,076 3,881
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The registrant filed the following report on Form 8-K dated May 17, 1999.
On May 17, 1999, we announced the purchase of 3,682,536 shares of our
common stock at $8.00 per share from our former parent, Imperial Bank, a
subsidiary of Imperial Bancorp (NYSE:IMP).
On May 17, 1999, we documented to shareholders in our company the risks
associated with ownership of ICII common stock.
On July 22, 1999, we reported that an all cash acquisition offer valuing
Imperial Credit Commercial Mortgage Investment Corporation at $11.50 per share
was unanimously recommended by a committee of ICCMIC's independent directors and
approved by the board, and the Board of Directors of our company.
35
<PAGE>
Item 6
Imperial Credit Industries, Inc.
Statement Regarding Computation Of Earnings (Loss) Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(Loss) income from continuing operations $(25,901) $16,403 $(19,139) $31,003
Loss from discontinued of AMN, net of income taxes -- (141) -- (1,841)
-------- ------- -------- -------
Net (loss) income $(25,901) $16,262 $(19,139) $29,162
======== ======= ======== =======
Weighted -average common shares outstanding used to
compute basic income per share 35,004 38,752 35,906 38,747
Assumed common shares issued on exercise of stock options -- 2,060 -- 2,052
-------- ------- -------- -------
Number of common shares used to compute diluted income
Per share 35,004 40,812 35,906 40,799
======== ======= ======== =======
Basic earnings per share:
- -------------------------
(Loss) income from continuing operations $ (0.74) $ 0.42 $ (0.53) $ 0.80
Loss from discontinued operations of AMN, net of income taxes -- -- -- (0.05)
-------- ------- -------- -------
Net (loss) income per common share $ (0.74) $ 0.42 $ (0.53) $ 0.75
======== ======= ======== =======
Diluted earnings per share:
- ---------------------------
(Loss) income from continuing operations $ (0.74) $ 0.40 $ (0.53) $ 0.76
Loss from discontinued operations of AMN, net of income taxes -- -- -- (0.05)
-------- ------- -------- -------
Net (loss) income per common share $ (0.74) $ 0.40 $ (0.53) $ 0.71
======== ======= ======== =======
</TABLE>
36
<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, 1999 By: /s/ Brad S. Plantiko
---------------------------------------------------
Brad S. Plantiko
Executive Vice President -Chief Financial Officer
37
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number
- --------------
27.1 Financial data schedule for June 30, 1999
27.2 Financial data schedule for June 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 57,550
<INT-BEARING-DEPOSITS> 54,682
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 72,206
<INVESTMENTS-HELD-FOR-SALE> 75,804
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,537,613
<ALLOWANCE> 31,347
<TOTAL-ASSETS> 2,004,617
<DEPOSITS> 1,406,570
<SHORT-TERM> 31,220
<LIABILITIES-OTHER> 58,888
<LONG-TERM> 289,883
30,000
0
<COMMON> 97,453
<OTHER-SE> 88,765
<TOTAL-LIABILITIES-AND-EQUITY> 2,004,617
<INTEREST-LOAN> 89,705
<INTEREST-INVEST> 13,063
<INTEREST-OTHER> 2,545
<INTEREST-TOTAL> 105,313
<INTEREST-DEPOSIT> 42,608
<INTEREST-EXPENSE> 59,694
<INTEREST-INCOME-NET> 45,619
<LOAN-LOSSES> 24,455
<SECURITIES-GAINS> 1,265
<EXPENSE-OTHER> 60,660
<INCOME-PRETAX> (33,156)
<INCOME-PRE-EXTRAORDINARY> (19,139)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,139)
<EPS-BASIC> (.53)
<EPS-DILUTED> (.53)
<YIELD-ACTUAL> 0
<LOANS-NON> 65,054
<LOANS-PAST> 3,079
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,881
<CHARGE-OFFS> 19,149
<RECOVERIES> 1,160
<ALLOWANCE-CLOSE> 31,347
<ALLOWANCE-DOMESTIC> 31,347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</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> 152,004
<INT-BEARING-DEPOSITS> 13,931
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 70,529
<INVESTMENTS-HELD-FOR-SALE> 103,971
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,764,509
<ALLOWANCE> 23,663
<TOTAL-ASSETS> 2,414,627
<DEPOSITS> 1,514,805
<SHORT-TERM> 139,253
<LIABILITIES-OTHER> 127,328
<LONG-TERM> 289,835
0
0
<COMMON> 142,168
<OTHER-SE> 204,060
<TOTAL-LIABILITIES-AND-EQUITY> 2,414,627
<INTEREST-LOAN> 97,416
<INTEREST-INVEST> 10,438
<INTEREST-OTHER> 3,662
<INTEREST-TOTAL> 111,516
<INTEREST-DEPOSIT> 38,198
<INTEREST-EXPENSE> 56,701
<INTEREST-INCOME-NET> 54,815
<LOAN-LOSSES> 7,300
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 49,929
<INCOME-PRETAX> 49,597
<INCOME-PRE-EXTRAORDINARY> 29,162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,162
<EPS-BASIC> .75
<EPS-DILUTED> .71
<YIELD-ACTUAL> 0
<LOANS-NON> 63,890
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,954
<CHARGE-OFFS> 11,881
<RECOVERIES> 1,290
<ALLOWANCE-CLOSE> 23,663
<ALLOWANCE-DOMESTIC> 23,663
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
